SAEE Income Approach and Capitalization 4 — Questions and Answers
Question 1: A property generates a potential gross income of $120,000 with a 10% vacancy and credit loss allowance. What is the effective gross income?
- $108,000 (Correct answer)
- $110,000
- $112,000
- $120,000
Correct answer: $108,000
Effective gross income = $120,000 × (1 - 0.10) = $108,000.
Question 2: Which capitalization method is MOST appropriate when a property's income stream is expected to change significantly over the holding period?
- Direct capitalization
- Yield capitalization (DCF) (Correct answer)
- Gross rent multiplier
- Band-of-investment
Correct answer: Yield capitalization (DCF)
Yield capitalization (DCF) explicitly models changing income streams over a projection period.
Question 3: An appraiser uses a 9% overall capitalization rate on a property with a $54,000 NOI. What is the indicated value?
- $486,000
- $600,000 (Correct answer)
- $540,000
- $594,000
Correct answer: $600,000
Value = NOI ÷ Cap Rate = $54,000 ÷ 0.09 = $600,000.
Question 4: The mortgage constant (Rm) in the band-of-investment technique represents:
- The loan-to-value ratio
- The annual debt service per dollar of loan (Correct answer)
- The equity dividend rate
- The effective interest rate only
Correct answer: The annual debt service per dollar of loan
The mortgage constant is the ratio of annual debt service to the original loan amount.
Question 5: A property has an NOI of $80,000, debt service of $55,000, and equity investment of $200,000. What is the equity dividend rate (equity cap rate)?
- 12.5% (Correct answer)
- 27.5%
- 40%
- 10%
Correct answer: 12.5%
Equity dividend rate = (NOI - Debt Service) ÷ Equity = ($80,000 - $55,000) ÷ $200,000 = 12.5%.
Question 6: Which of the following is subtracted from effective gross income to derive net operating income?
- Debt service
- Income taxes on the property owner
- Operating expenses (Correct answer)
- Equity dividends
Correct answer: Operating expenses
NOI = Effective Gross Income minus Operating Expenses; debt service is not an operating expense.
Question 7: When using the Ellwood mortgage-equity technique, a rising equity ratio over time primarily reflects:
- Increasing rental income
- Loan amortization reducing outstanding debt (Correct answer)
- Market appreciation of the capitalization rate
- Declining operating expenses
Correct answer: Loan amortization reducing outstanding debt
As the mortgage is amortized, the loan balance decreases, increasing the owner's equity share.
SAEE Income Approach and Capitalization 4
A property generates a potential gross income of $120,000 with a 10% vacancy and credit loss allowance.
What is the effective gross income?