CGA Income Approach 2 — Questions and Answers
Question 1: A property generates $120,000 in potential gross income and experiences a 5% vacancy and collection loss. What is the effective gross income?
- $114,000 (Correct answer)
- $120,000
- $6,000
- $126,000
Correct answer: $114,000
EGI = PGI minus vacancy and collection loss: $120,000 × (1 - 0.05) = $114,000.
Question 2: Which expense is typically NOT deducted from effective gross income when calculating net operating income?
- Mortgage debt service (Correct answer)
- Property taxes
- Insurance premiums
- Management fees
Correct answer: Mortgage debt service
Debt service (mortgage payments) is a financing cost, not an operating expense, so it is excluded from the NOI calculation.
Question 3: The Gross Income Multiplier (GIM) technique divides the sale price of a comparable property by which income figure?
- Potential gross income (Correct answer)
- Net operating income
- Effective gross income
- Cash flow before taxes
Correct answer: Potential gross income
GIM = Sale Price ÷ Potential Gross Income, making PGI the denominator in this simple multiplier approach.
Question 4: An appraiser is valuing an apartment building using the direct capitalization method. The NOI is $80,000 and the cap rate is 8%. What is the indicated value?
- $1,000,000 (Correct answer)
- $800,000
- $640,000
- $1,200,000
Correct answer: $1,000,000
Value = NOI ÷ Cap Rate = $80,000 ÷ 0.08 = $1,000,000.
Question 5: In a discounted cash flow analysis, the terminal value at the end of the holding period is typically estimated using which method?
- Direct capitalization of the reversion year's NOI (Correct answer)
- Summing all remaining annual cash flows
- Applying a gross rent multiplier to final year income
- Using the original purchase price adjusted for inflation
Correct answer: Direct capitalization of the reversion year's NOI
The reversion (terminal) value is most commonly estimated by capitalizing the projected NOI in the year after the holding period ends.
Question 6: Which of the following best describes 'economic rent' in the context of the income approach?
- The market rent a property would command in an open, competitive market (Correct answer)
- The rent currently specified in an existing lease
- The rent the owner charges family members
- The rent paid during a below-market lease
Correct answer: The market rent a property would command in an open, competitive market
Economic rent (market rent) reflects what the property would earn if leased at current market conditions, regardless of contract rent.
Question 7: When using the band of investment method to derive an overall capitalization rate, which two components are weighted and combined?
- Mortgage constant and equity dividend rate (Correct answer)
- Cap rate and discount rate
- Vacancy rate and expense ratio
- GIM and GRM
Correct answer: Mortgage constant and equity dividend rate
Band of investment weights the mortgage constant (debt portion) and equity dividend rate (equity portion) by their respective loan-to-value ratios.
CGA Income Approach 2
A property generates $120,000 in potential gross income and experiences a 5% vacancy and collection loss.
What is the effective gross income?