SAEE SAEE Income Approach and Capitalization 5 — Questions and Answers
Question 1: A 10-unit apartment building has a monthly rent per unit of $1,200. If the gross rent multiplier extracted from sales is 9.5, what is the indicated value?
- $1,140,000
- $1,368,000 (Correct answer)
- $1,026,000
- $912,000
Correct answer: $1,368,000
Annual GRI = 10 × $1,200 × 12 = $144,000; Value = $144,000 × 9.5 = $1,368,000.
Question 2: In a discounted cash flow analysis, the terminal value at the end of the holding period is most commonly estimated by:
- Adding all projected NOIs together
- Applying a terminal cap rate to the year-after-sale NOI (Correct answer)
- Multiplying purchase price by an appreciation factor
- Using the assessed value at sale
Correct answer: Applying a terminal cap rate to the year-after-sale NOI
The reversion is typically estimated by dividing the next year's NOI by a going-out (terminal) capitalization rate.
Question 3: Which of the following best describes the difference between a going-in cap rate and a going-out cap rate?
- Going-in applies to existing income; going-out applies to projected income at time of resale (Correct answer)
- Going-in is used for residential; going-out is used for commercial
- Going-in is higher than going-out for all property types
- They are interchangeable terms for the same concept
Correct answer: Going-in applies to existing income; going-out applies to projected income at time of resale
The going-in cap rate values the property at acquisition while the going-out (terminal) cap rate estimates the resale value at the end of the holding period.
Question 4: An office building has an effective gross income of $500,000 and an operating expense ratio of 40%. Using direct capitalization at a 6% cap rate, the value is approximately:
- $3,333,333
- $5,000,000 (Correct answer)
- $8,333,333
- $2,000,000
Correct answer: $5,000,000
NOI = $500,000 × (1 − 0.40) = $300,000; Value = $300,000 / 0.06 = $5,000,000.
Question 5: Recapture in the context of income capitalization refers to:
- The return OF invested capital from a wasting asset (Correct answer)
- The annual increase in market rents
- The recovery of vacancy losses through lease-up
- The portion of NOI attributable to land
Correct answer: The return OF invested capital from a wasting asset
Recapture (capital recovery) is the return of the depreciating investment in improvements over the economic life of the asset.
Question 6: In the Ellwood mortgage-equity technique, the overall rate accounts for all of the following EXCEPT:
- Mortgage amortization
- Equity build-up through loan paydown
- Depreciation or appreciation in property value
- Zoning classification of the property (Correct answer)
Correct answer: Zoning classification of the property
The Ellwood formula incorporates financing terms, equity yield, and value change, but zoning is a physical/legal attribute unrelated to the mortgage-equity model.
Question 7: A market-derived overall capitalization rate is best supported by:
- The appraiser's personal risk tolerance
- Analysis of recent comparable sales with known NOIs (Correct answer)
- The subject property's historical cap rates
- Federal Reserve interest rate benchmarks
Correct answer: Analysis of recent comparable sales with known NOIs
Market extraction from comparable sales where both sale price and NOI are known provides the most credible market-derived cap rate.
SAEE SAEE Income Approach and Capitalization 5
A 10-unit apartment building has a monthly rent per unit of $1,200.
If the gross rent multiplier extracted from sales is 9.5, what is the indicated value?