SAEE Income Approach and Capitalization Flashcards

Which income capitalization approach is most appropriate for properties with complex, changing income streams?

Answer: Yield capitalization (DCF)

Yield capitalization (DCF) is preferred when income is expected to change significantly over the holding period, as it discounts each year's cash flow separately.

What is the equity dividend rate (cash-on-cash return)?

Answer: Pre-tax cash flow divided by equity investment

The equity dividend rate equals before-tax cash flow (NOI minus debt service) divided by the equity investment, measuring cash return on equity invested.

What is the mortgage constant in income property analysis?

Answer: The ratio of annual debt service to the original loan amount

The mortgage constant (loan constant) equals annual debt service divided by the original principal, representing the annual payment per dollar of loan.

In the income approach, what are fixed operating expenses?

Answer: Expenses that do not vary with occupancy level, such as property taxes

Fixed expenses remain constant regardless of occupancy, including property taxes, insurance, and sometimes management fees structured as flat amounts.

What market-derived data is most important for developing a capitalization rate using the market extraction method?

Answer: Sale prices and NOI from comparable properties

Market extraction derives cap rates by dividing the NOI of recently sold comparable properties by their sale prices, reflecting actual investor behavior.

What does the term 'stabilized NOI' mean in the income approach?

Answer: NOI adjusted to reflect typical occupancy and expenses at market conditions

Stabilized NOI reflects what the property would generate under typical market conditions, adjusting for any temporary vacancies, above/below-market leases, or unusual expenses.