A commercial property's annual schedule of potential gross income from rents is $480,000. Market vacancy and collection losses are estimated at 8%. The property also generates $15,000 annually from cell tower leases and vending machines. What is the property's effective gross income?
Correct Answer
B) $456,600
Effective Gross Income (EGI) is Potential Gross Income (PGI) minus vacancy and collection loss, plus other income. Here, vacancy and collection loss is $480,000 * 0.08 = $38,400. EGI from rents is $480,000 - $38,400 = $441,600. Adding other income of $15,000 gives a total EGI of $441,600 + $15,000 = $456,600.
Why This Is the Correct Answer
Vacancy and collection loss is 8% of the $480,000 potential gross income, or $38,400, leaving $441,600 of collected rent. The $15,000 of cell tower and vending income is then added, giving effective gross income of $456,600. Option B follows exactly this sequence: PGI, minus vacancy and collection loss, plus other income, equals EGI. Note the vacancy factor is applied to the rent only, not to the $495,000 combined figure.
Why the Other Options Are Wrong
Option A: $441,600
$441,600 is the rental income after the vacancy deduction but before other income is added, so it stops one line short of effective gross income. It is the most attractive wrong answer precisely because the arithmetic is right; the error is that the candidate forgot the $15,000 is part of EGI, not something added later. Other income belongs above the EGI line, not below it.
Option C: $495,000
$495,000 is $480,000 plus $15,000 with no vacancy deduction at all, which is a potential gross income figure rather than an effective one. Skipping the vacancy and collection loss line overstates income by $38,400 and would inflate any value derived by direct capitalization. This choice is what you get if you read 'effective' as merely 'total.'
Option D: $519,000
$519,000 has no defensible derivation in this fact pattern; it appears to add the vacancy amount instead of subtracting it, or otherwise inflate the total. Any figure above potential gross income plus other income is impossible by definition, because vacancy can only reduce income. Recognizing that ceiling lets you eliminate this option before doing any math.
Rent Minus Empty Plus Extras
Chant the line order: Rent (PGI), minus Empty (vacancy and collection loss), plus Extras (other income), equals Effective. The word 'Extras' comes after 'Empty' in the chant, which is the whole point of the question, since the extras are never vacancy-adjusted.
How to use: Whenever a stem gives you a rent figure, a percentage, and a second income item, write the four lines down the margin of your scratch paper before touching the calculator. Filling in the lines in order makes the near-miss answer that stops at $441,600 obvious.
Exam Tip
Do not multiply the vacancy rate by the combined rent-plus-other-income total; the exam builds a distractor from that mistake in nearly every EGI question.
Common Mistakes to Avoid
- -Stopping at rental income after vacancy and calling it effective gross income
- -Applying the vacancy percentage to other income as well as to rent
- -Confusing effective gross income with net operating income by forgetting that operating expenses have not yet been deducted
Concept Deep Dive
Analysis
This is a straight income-approach arithmetic problem testing the order of operations in the reconstructed operating statement. The statement begins with potential gross income, the rent the property would collect at full occupancy with no collection loss. Vacancy and collection loss is then deducted, and the exam convention is that this deduction applies to the rental income only, because other income streams such as vending, parking, laundry, and antenna leases are typically stated on a net or realized basis. Other income is then added, producing effective gross income, and only after that do operating expenses come out to reach net operating income. The distractors in this item are built by moving the other income to the wrong side of the vacancy deduction or by skipping a step entirely.
Background Knowledge
You need the reconstructed operating statement in order: potential gross income, less vacancy and collection loss, plus other income, equals effective gross income; less operating expenses equals net operating income. You should also know that the vacancy percentage is conventionally applied to rental income rather than to other income, and that mortgage payments, depreciation, and income taxes never appear as operating expenses.
Real-World Application
An appraiser valuing a suburban office building takes the rent roll to $480,000 of potential gross income, applies the 8% market vacancy indicated by a competitive survey, and then adds the rooftop carrier lease and vending revenue at full value because those streams do not vary with tenant occupancy of the suites.
More Income Approach Questions
In a percentage lease, rent is commonly structured as:
In a DCF, what is the reversion?
Potential gross income differs from effective gross income in that PGI assumes:
The reversion in a discounted cash flow model represents:
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An overall rate extracted from a sale whose NOI excluded reserves, applied to a subject NOI that includes them, will:
Replacement reserves cover which kind of expenditure?
What is the primary distinction, for appraisal purposes, between 'vacancy loss' and 'collection loss'?
An appraiser is analyzing a mixed-use property with retail and office components. The retail segment has a potential gross income of $180,000 with a market vacancy of 8%. The office segment has a potential gross income of $120,000 with a market vacancy of 12%. What is the overall effective gross income for the property?
The mortgage constant represents:
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