An appraiser's income reconstruction shows annual PGI of $180,000 and combined vacancy and collection loss of $15,000. There is no other income. All annual property expenses, excluding debt service, total $65,000. What is the NOI?
Correct Answer
A) $100,000
180000−15000−65000 = 100000. Common errors: leaving out the vacancy and collection loss gives $115,000; reporting EGI as NOI gives $165,000; adding the expenses instead of deducting them gives $230,000.
Why This Is the Correct Answer
Option A is correct because $180,000 PGI minus $15,000 vacancy and collection loss gives EGI of $165,000, and $165,000 minus $65,000 of operating expenses gives NOI of $100,000. This follows the standard sequence PGI less vacancy and collection loss equals EGI, and EGI less operating expenses equals NOI.
Why the Other Options Are Wrong
Option B: $115,000
Option B, $115,000, comes from $180,000 − $65,000, which leaves out the $15,000 vacancy and collection loss. The correct NOI is $180,000 − $15,000 − $65,000 = $100,000.
Option C: $165,000
Option C, $165,000, is $180,000 − $15,000, which is EGI, not NOI. Operating expenses of $65,000 still must be deducted, giving $100,000.
Option D: $230,000
Option D, $230,000, results from $180,000 − $15,000 + $65,000, adding the expenses instead of deducting them. Expenses reduce income, so the correct result is $180,000 − $15,000 − $65,000 = $100,000.
P minus V, minus E
Think PGI, then V for vacancy, then E for expenses: PGI − V = EGI, and EGI − E = NOI.
How to use: Use this sequence whenever a question gives PGI, vacancy, and expenses and asks for NOI.
Exam Tip
Write out each line of the income statement before choosing; distractors often equal an intermediate figure such as EGI.
Common Mistakes to Avoid
- -Skipping the vacancy and collection loss deduction
- -Stopping at EGI and calling it NOI
- -Adding expenses instead of subtracting them
Concept Deep Dive
Analysis
This question tests the order of the income reconstruction from potential gross income to net operating income. You first deduct vacancy and collection loss from PGI to reach effective gross income, then deduct operating expenses to reach NOI. Debt service is excluded, so it plays no part in the calculation.
Background Knowledge
Potential gross income is the income a property could produce at full occupancy. Subtracting vacancy and collection loss gives effective gross income, and subtracting operating expenses gives net operating income. Debt service is a financing cost and is not an operating expense in this reconstruction.
Real-World Application
An appraiser valuing a rented duplex receives a rent roll showing full-occupancy rent and an owner's expense statement. She deducts a market-supported vacancy and collection allowance before deducting operating expenses, and she leaves out the owner's mortgage payments, to arrive at NOI for capitalization.
More Income Approach Questions
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