CGA Financial Analysis & Reporting 2 — Questions and Answers
Question 1: An appraiser is analyzing a retail property's income statement. Which adjustment is most critical when converting accounting net income to Net Operating Income (NOI)?
- Add back depreciation and remove mortgage interest (Correct answer)
- Subtract capital expenditures and add loan proceeds
- Remove income taxes and add amortization
- Deduct reserves for replacement and add owner salary
Correct answer: Add back depreciation and remove mortgage interest
NOI excludes financing costs (mortgage interest) and non-cash accounting charges (depreciation) to reflect property-level operating performance.
Question 2: A property has Potential Gross Income of $500,000, vacancy and collection loss of 8%, and operating expenses of $180,000. What is the NOI?
- $280,000 (Correct answer)
- $320,000
- $460,000
- $500,000
Correct answer: $280,000
Effective Gross Income = $500,000 × 0.92 = $460,000; NOI = $460,000 − $180,000 = $280,000.
Question 3: Which ratio measures a property's ability to service debt from its operating income?
- Debt Coverage Ratio (Correct answer)
- Loan-to-Value Ratio
- Break-Even Ratio
- Equity Dividend Rate
Correct answer: Debt Coverage Ratio
The Debt Coverage Ratio (DCR) equals NOI divided by annual debt service, indicating how many times income covers the mortgage payment.
Question 4: When preparing a reconstructed operating statement, which item would a general appraiser EXCLUDE from operating expenses?
- Mortgage principal and interest payments (Correct answer)
- Property management fees
- Real estate taxes
- Insurance premiums
Correct answer: Mortgage principal and interest payments
Debt service (mortgage payments) is a financing cost, not an operating expense, and is excluded from the reconstructed operating statement.
Question 5: A net lease requires the tenant to pay base rent plus taxes, insurance, and maintenance. What financial reporting advantage does this structure provide to an appraiser?
- Expenses are predictable and landlord expense exposure is minimal (Correct answer)
- Gross revenue figures are more stable than modified gross leases
- Vacancy loss is eliminated because tenants cannot default
- Depreciation recapture is avoided at sale
Correct answer: Expenses are predictable and landlord expense exposure is minimal
In a net lease, operating expense risk shifts to the tenant, making the landlord's net cash flow more predictable and easier to analyze.
Question 6: Which financial statement provides the most direct input for income capitalization in a property appraisal?
- Reconstructed operating statement showing stabilized NOI (Correct answer)
- Balance sheet listing total assets and liabilities
- Cash flow statement showing financing activities
- Tax return reporting depreciation deductions
Correct answer: Reconstructed operating statement showing stabilized NOI
The reconstructed operating statement normalizes income and expenses to a stabilized level, providing the NOI used in capitalization.
Question 7: An operating expense ratio (OER) of 55% for an apartment complex most likely indicates:
- Expenses consume 55% of Effective Gross Income (Correct answer)
- Net income equals 55% of Potential Gross Income
- Debt service is 55% of total operating income
- Vacancy loss is 55% of scheduled rent
Correct answer: Expenses consume 55% of Effective Gross Income
OER = Total Operating Expenses ÷ EGI × 100, so 55% means over half of collected income is consumed by operating costs.
CGA Financial Analysis & Reporting 2
An appraiser is analyzing a retail property's income statement.
Which adjustment is most critical when converting accounting net income to Net Operating Income (NOI)?