The monthly gross rent loss at a property is $150, and the applicable monthly multiplier for this loss is 110. Independent evidence assigns 75% of the resulting loss to the improvements. What is the loss attributable to the improvements?
Correct Answer
B) $12,375
150×110×0.75 = 12375. Common errors: assigning the whole loss to the improvements gives $16,500; applying the 25% site share instead of the 75% improvement share gives $4,125; annualizing the monthly loss before applying a monthly multiplier gives $148,500.
Why This Is the Correct Answer
Option B is correct because total loss is $150 × 110 = $16,500. Assigning 75% of that loss to the improvements gives $16,500 × 0.75 = $12,375. The monthly loss is matched with the monthly multiplier, as the income levels must correspond.
Why the Other Options Are Wrong
Option A: $4,125
Option A, $4,125, applies the 25% site share instead of the 75% improvement share: $150 × 110 × 0.25. The improvement loss is $150 × 110 × 0.75 = $12,375.
Option C: $16,500
Option C, $16,500, is the total loss ($150 × 110) assigned entirely to the improvements. Only 75% belongs to the improvements: $16,500 × 0.75 = $12,375.
Option D: $148,500
Option D, $148,500, annualizes the monthly loss before applying a monthly multiplier: $150 × 12 × 110 × 0.75. A monthly multiplier must be applied to monthly income, giving $12,375.
Monthly with monthly, then share
Match the rent period to the multiplier period, then apply the improvement share of the loss.
How to use: Use this for rental loss questions that combine a multiplier with a land-improvement allocation.
Exam Tip
Check whether the multiplier is monthly or annual before converting rent. Also confirm whether the allocation applies to loss or to property value.
Common Mistakes to Avoid
- -Annualizing rent before applying a monthly multiplier
- -Assigning the entire loss to the improvements when an allocation is given
- -Applying the land share instead of the improvement share
Concept Deep Dive
Analysis
This question tests capitalization of rental loss with a monthly multiplier and an allocation of loss to improvements. The monthly loss is multiplied by the monthly multiplier to get total loss in value. Then the stated 75% loss share assigned to improvements is applied.
Background Knowledge
The capitalization of rental loss technique converts a loss in rent into a loss in value by applying a market-derived multiplier or rate. The multiplier must be applied to the same level of income from which it was derived, so a monthly multiplier pairs with monthly rent.
Real-World Application
A home near a new commercial facility rents for less than comparable homes. The appraiser multiplies the monthly rent loss by a market monthly gross rent multiplier and assigns the supported improvement share of the loss to external obsolescence of the improvements.
More Cost Approach Questions
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