SAEE SAEE Income Approach and Capitalization 2

Question 1

What is Effective Gross Income (EGI)?

Accepted Answer

Potential gross income minus vacancy and collection loss

Answer

EGI equals potential gross income (PGI) minus an allowance for vacancy and collection losses.

Question 2

In income property appraisal, what are capital reserves (replacement reserves)?

Accepted Answer

Annual allowances set aside to replace short-lived building components

Answer

Capital reserves are annual allowances for replacing short-lived items like roofing, HVAC, and appliances to avoid large one-time expense distortions.

Question 3

What does a higher overall capitalization rate generally indicate about a property?

Accepted Answer

Higher perceived investment risk

Answer

A higher cap rate typically indicates greater perceived risk or lower growth expectations, resulting in a lower property value for the same income level.

Question 4

What is the band-of-investment method used for?

Accepted Answer

Developing an overall capitalization rate from mortgage and equity components

Answer

The band-of-investment method derives the overall cap rate by weighting mortgage constant and equity dividend rate by their respective loan-to-value ratios.

Question 5

In a Discounted Cash Flow analysis, what is the terminal (reversion) value?

Accepted Answer

The estimated proceeds from property sale at the end of the holding period

Answer

The terminal/reversion value is the estimated net proceeds from selling the property at the end of the projection period, typically estimated by capitalizing the following year's NOI.

SAEE Test Practice Test

SAEE Test Practice Test

SAEE SAEE Income Approach and Capitalization 2