Income Approach Flashcards
7 cards from real CGA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Income Approach flashcards as text
The 'land residual technique' under the income approach is used primarily when which condition exists?
Answer: The value of the improvements is known but land value is unknown
The land residual technique attributes income to the building first (based on its known value), then capitalizes the remaining income to derive land value.
In discounted cash flow analysis, the selection of an appropriate holding period is important because it affects which element of value?
Answer: Both the projected cash flows and the terminal reversion value
The holding period determines how many years of cash flow are discounted and when the reversion (resale) proceeds are received, both of which affect the value conclusion.
What is the primary limitation of the gross rent multiplier (GRM) technique compared to direct capitalization?
Answer: It does not account for operating expenses, making it less precise
GRM uses gross rent without deducting expenses, so properties with different expense ratios may appear comparable when they are not.
An income property's net operating income is expected to increase at a constant annual rate. Which capitalization formula accounts for this growth?
Answer: Gordon Growth Model (constant growth capitalization rate: R = Y - g)
The Gordon Growth Model adjusts the discount rate by subtracting the constant growth rate (g) to derive a capitalization rate that reflects perpetual income growth.
A sale-leaseback transaction can complicate the income approach because the lease terms may reflect which condition?
Answer: Atypical financing or motivations that do not represent market rent
Sale-leaseback rents are often negotiated as part of a financing arrangement rather than at arm's length, potentially diverging from true market rent.
Under USPAP and general appraisal practice, when must an appraiser disclose extraordinary assumptions used in the income approach?
Answer: In the report whenever they significantly affect the value conclusion
USPAP requires appraisers to clearly disclose any extraordinary assumptions that, if false, could alter the value conclusion, regardless of assignment type.
When appraising a property with above-market (excess) contract rent, how is the excess rent component typically treated in the income approach?
Answer: Capitalized at a higher rate than market rent due to its greater risk of non-renewal
Excess rent is more vulnerable to loss at lease expiration, so appraisers typically apply a higher (riskier) capitalization rate to that component than to the durable market rent stream.