SAEE Income Approach and Capitalization Flashcards

An appraiser is valuing a small retail strip center with an NOI of $180,000 and a market cap rate of 7.5%. What is the indicated value?

Answer: $2,400,000

$180,000 / 0.075 = $2,400,000.

Which of the following expenses is typically EXCLUDED from the calculation of Net Operating Income?

Answer: Mortgage debt service

Debt service (mortgage payments) is a financing cost excluded from NOI, which reflects operating performance only.

A property has a potential gross income of $200,000, a vacancy and collection loss of 5%, and operating expenses of $70,000. What is the NOI?

Answer: $120,000

EGI = $200,000 × 0.95 = $190,000; NOI = $190,000 − $70,000 = $120,000.

The equity dividend rate (cash-on-cash return) measures the relationship between:

Answer: Pre-tax cash flow and equity investment

The equity dividend rate equals before-tax cash flow divided by the equity investment.

In the band-of-investment method, the overall capitalization rate is derived from:

Answer: Weighted contributions of mortgage and equity components

Band of investment weights the mortgage constant by the loan-to-value ratio and the equity dividend rate by the equity ratio.

An appraiser adjusts the overall cap rate upward when compared to a market extraction. This adjustment most likely reflects:

Answer: Higher perceived risk for the subject property

A higher cap rate implies greater risk or lower desirability, which reduces value for a given NOI.

Which technique converts a single year's stabilized income into a value indication using a divisor?

Answer: Direct capitalization

Direct capitalization divides a single stabilized NOI by an overall capitalization rate to produce a value estimate.