SAEE SAEE Income Approach and Capitalization 4 — Questions and Answers
Question 1: 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?
- $1,350,000
- $2,400,000 (Correct answer)
- $1,800,000
- $1,200,000
Correct answer: $2,400,000
$180,000 / 0.075 = $2,400,000.
Question 2: Which of the following expenses is typically EXCLUDED from the calculation of Net Operating Income?
- Property taxes
- Management fees
- Mortgage debt service (Correct answer)
- Insurance premiums
Correct answer: Mortgage debt service
Debt service (mortgage payments) is a financing cost excluded from NOI, which reflects operating performance only.
Question 3: 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?
- $130,000
- $120,000 (Correct answer)
- $125,000
- $119,000
Correct answer: $120,000
EGI = $200,000 × 0.95 = $190,000; NOI = $190,000 − $70,000 = $120,000.
Question 4: The equity dividend rate (cash-on-cash return) measures the relationship between:
- NOI and total property value
- Pre-tax cash flow and equity investment (Correct answer)
- Net income and gross income
- Debt service and property value
Correct answer: Pre-tax cash flow and equity investment
The equity dividend rate equals before-tax cash flow divided by the equity investment.
Question 5: In the band-of-investment method, the overall capitalization rate is derived from:
- Comparable sales prices only
- Weighted contributions of mortgage and equity components (Correct answer)
- The risk-free rate plus a risk premium
- The Gordon Growth Model
Correct 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.
Question 6: An appraiser adjusts the overall cap rate upward when compared to a market extraction. This adjustment most likely reflects:
- Superior location of the subject
- Higher perceived risk for the subject property (Correct answer)
- Lower operating expenses for the subject
- Stronger rental demand in the market
Correct 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.
Question 7: Which technique converts a single year's stabilized income into a value indication using a divisor?
- Gross income multiplier
- Direct capitalization (Correct answer)
- Yield capitalization
- Discounted cash flow analysis
Correct answer: Direct capitalization
Direct capitalization divides a single stabilized NOI by an overall capitalization rate to produce a value estimate.
SAEE SAEE Income Approach and Capitalization 4
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?