SAEE Income Approach and Capitalization 4

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?

Accepted Answer

$108,000

Answer

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?

Accepted Answer

Yield capitalization (DCF)

Answer

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?

Accepted Answer

$600,000

Answer

Value = NOI ÷ Cap Rate = $54,000 ÷ 0.09 = $600,000.

Question 4

The mortgage constant (Rm) in the band-of-investment technique represents:

Accepted Answer

The annual debt service per dollar of loan

Answer

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)?

Accepted Answer

12.5%

Answer

Equity dividend rate = (NOI - Debt Service) ÷ Equity = ($80,000 - $55,000) ÷ $200,000 = 12.5%.

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