COS Financial Analysis for Properties 2 — Questions and Answers
Question 1: A property's Effective Gross Income (EGI) is calculated by taking Potential Gross Income and:
- Adding vacancy loss and credit loss
- Subtracting vacancy loss and adding miscellaneous income (Correct answer)
- Subtracting operating expenses
- Adding debt service payments
Correct answer: Subtracting vacancy loss and adding miscellaneous income
EGI = Potential Gross Income − vacancy and credit losses + miscellaneous income (e.g., laundry, parking).
Question 2: Which ratio measures how many times Net Operating Income covers the annual debt service?
- Loan-to-Value Ratio
- Debt Coverage Ratio (Correct answer)
- Break-Even Ratio
- Operating Expense Ratio
Correct answer: Debt Coverage Ratio
The Debt Coverage Ratio (DCR) = NOI ÷ Annual Debt Service; lenders typically require a minimum of 1.20–1.25.
Question 3: If a property has a Net Operating Income of $90,000 and is valued at $900,000, its capitalization rate is:
- 1%
- 10% (Correct answer)
- 9%
- 0.1%
Correct answer: 10%
Cap Rate = NOI ÷ Value = $90,000 ÷ $900,000 = 10%.
Question 4: The Break-Even Occupancy Rate is best described as the occupancy level at which:
- Net Operating Income equals zero
- Gross income equals total expenses including debt service (Correct answer)
- Vacancy equals physical vacancy
- Capital reserves are fully funded
Correct answer: Gross income equals total expenses including debt service
Break-Even Occupancy = (Operating Expenses + Debt Service) ÷ Potential Gross Income, showing when revenue covers all costs.
Question 5: A replacement reserve fund is established primarily to:
- Pay monthly mortgage installments
- Cover recurring operating expenses like utilities
- Fund future major capital replacements such as roofs and HVAC (Correct answer)
- Reimburse security deposits to tenants
Correct answer: Fund future major capital replacements such as roofs and HVAC
Replacement reserves set aside funds annually to pay for long-lived capital items when they reach end of life.
Question 6: Which financial statement summarizes a property's revenues, expenses, and net income over a specific period?
- Balance Sheet
- Cash Flow Statement
- Income and Expense Statement (Pro Forma) (Correct answer)
- Rent Roll
Correct answer: Income and Expense Statement (Pro Forma)
The Income and Expense Statement (or Pro Forma) reports revenues and operating expenses to arrive at NOI for a given period.
Question 7: When underwriting an affordable housing property, HUD requires that the Operating Expense Ratio (OER) generally stay within what approximate range?
- 10–20%
- 25–35%
- 35–55% (Correct answer)
- 60–75%
Correct answer: 35–55%
HUD guidelines typically expect OERs for affordable multifamily properties to fall between approximately 35% and 55% of EGI.
COS Financial Analysis for Properties 2
A property's Effective Gross Income (EGI) is calculated by taking Potential Gross Income and: