SAEE Income Approach and Capitalization 2 — Questions and Answers
Question 1: Effective gross income (EGI) is best defined as:
- Potential gross income minus vacancy and collection loss (Correct answer)
- NOI plus operating expenses
- Total rent collected plus reimbursements
- Scheduled rent minus debt service
Correct answer: Potential gross income minus vacancy and collection loss
EGI = Potential Gross Income − Vacancy and Collection Loss, representing anticipated actual income from the property.
Question 2: Which technique divides value into land and building components and capitalizes each at a different rate?
- Land residual technique (Correct answer)
- Building residual technique
- Property residual technique
- Band-of-investment technique
Correct answer: Land residual technique
The land residual technique attributes known building value, calculates building income, and capitalizes remaining income attributable to land.
Question 3: A capitalization rate derived from comparable sales is called a(n):
- Overall rate (OAR) (Correct answer)
- Equity dividend rate
- Mortgage constant
- Discount rate
Correct answer: Overall rate (OAR)
The overall capitalization rate (OAR) is extracted from market sales by dividing NOI by sale price of comparable properties.
Question 4: In discounted cash flow analysis, what does the terminal value represent?
- The projected resale price at the end of the holding period (Correct answer)
- The total rental income over the hold period
- The property's current assessed value
- The outstanding mortgage balance at sale
Correct answer: The projected resale price at the end of the holding period
The terminal (reversion) value is the anticipated resale proceeds at the end of the investment holding period.
Question 5: The band-of-investment technique derives a cap rate by weighting:
- Mortgage and equity components by their proportions of total value (Correct answer)
- Land and building rates by their value contributions
- Income and expense ratios by market percentages
- Physical and functional depreciation by age
Correct answer: Mortgage and equity components by their proportions of total value
Band-of-investment creates a composite cap rate by weighting the mortgage constant and equity dividend rate by their respective loan-to-value and equity ratios.
Question 6: Vacancy and collection loss is typically expressed as a percentage of:
- Potential gross income (Correct answer)
- Net operating income
- Effective gross income
- Total operating expenses
Correct answer: Potential gross income
Vacancy and collection loss is expressed as a percentage of potential gross income to estimate the income lost to unleased space and uncollected rent.
SAEE Income Approach and Capitalization 2
Effective gross income (EGI) is best defined as: