CRECI Property Valuation Methods 3

Question 1

In the discounted cash flow (DCF) method, the discount rate used should reflect:

Accepted Answer

The investor's required rate of return including risk

Answer

The discount rate in DCF represents the investor's required total return, incorporating risk, opportunity cost, and market expectations.

Question 2

When extracting a capitalization rate from comparable sales, the appraiser divides:

Accepted Answer

Net operating income by sale price

Answer

Market-extracted cap rates are derived by dividing a comparable property's stabilized NOI by its confirmed sale price.

Question 3

Functional obsolescence caused by a feature that was once desirable but is now outdated is called:

Accepted Answer

Superadequacy

Answer

A superadequacy is an excess feature that no longer adds commensurate value, representing a form of functional obsolescence.

Question 4

In the income approach, potential gross income (PGI) is best defined as:

Accepted Answer

Maximum income a property could generate if fully leased at market rates

Answer

PGI represents the total income a property would generate at 100% occupancy with all units leased at market rents.

Question 5

Under the cost approach, the land value must be estimated separately because:

Accepted Answer

Land is not depreciable and must be valued as if vacant

Answer

Land is considered non-depreciating and must be valued independently, typically via the sales comparison method applied to vacant land sales.

(CRECI) Commercial Real Estate Certification Institute Practice Test