SAEE Income Approach and Capitalization 5 — Questions and Answers
Question 1: A retail property has contract rents of $90,000 and market rents of $105,000. The difference between market and contract rent is called:
- Excess rent
- Leasehold value
- Deficit rent (Correct answer)
- Overage rent
Correct answer: Deficit rent
When contract rent is below market rent, the tenant benefits from deficit (or below-market) rent, creating leasehold value.
Question 2: In discounted cash flow analysis, the terminal value (reversion) is typically estimated by:
- Multiplying year-1 NOI by the holding period
- Applying a terminal cap rate to the following year's NOI (Correct answer)
- Summing all projected NOIs without discounting
- Using the original purchase price adjusted for inflation
Correct answer: Applying a terminal cap rate to the following year's NOI
The reversion is estimated by capitalizing the NOI in the year after the holding period ends using a terminal (going-out) cap rate.
Question 3: A property's gross rent multiplier (GRM) is 10, and monthly gross rent is $4,500. What is the indicated value?
- $540,000 (Correct answer)
- $45,000
- $450,000
- $504,000
Correct answer: $540,000
Annual gross rent = $4,500 × 12 = $54,000; Value = $54,000 × 10 = $540,000.
Question 4: Which expense is properly classified as an operating expense when calculating NOI?
- Mortgage interest payments
- Capital expenditure reserves (replacement reserves) (Correct answer)
- Income tax paid by the owner
- Loan origination fees
Correct answer: Capital expenditure reserves (replacement reserves)
Replacement reserves are an operating expense for appraisal purposes; financing costs and owner taxes are not.
Question 5: A property sells for $750,000 with an NOI of $60,000. If market cap rates subsequently rise to 9%, the same NOI would indicate a value of approximately:
- $666,667 (Correct answer)
- $675,000
- $700,000
- $810,000
Correct answer: $666,667
Value = $60,000 ÷ 0.09 ≈ $666,667; rising cap rates compress property values.
Question 6: In the income approach, a stabilized occupancy assumption is used to:
- Reflect actual short-term vacancy conditions only
- Represent long-term typical occupancy over a market cycle (Correct answer)
- Maximize the indicated property value
- Avoid any vacancy deduction from potential gross income
Correct answer: Represent long-term typical occupancy over a market cycle
Stabilized occupancy reflects the typical long-run occupancy level, smoothing out short-term fluctuations.
Question 7: If a property has a 25-year remaining economic life and no reversionary land value, which formula provides the appropriate income capitalization rate adjustment?
- Straight-line recapture added to the discount rate (Correct answer)
- Band-of-investment with no recapture component
- GRM based on monthly rents
- Ellwood equity model with 100% LTV
Correct answer: Straight-line recapture added to the discount rate
When improvements have finite economic life, a straight-line recapture rate (1 ÷ remaining life) is added to the discount rate.
SAEE Income Approach and Capitalization 5
A retail property has contract rents of $90,000 and market rents of $105,000.
The difference between market and contract rent is called: