Annual potential base rent for a property is $85,000, and tenants also pay the landlord potential reimbursements of $15,000. A combined loss of 8% applies to both, and the reimbursements have not already been adjusted for loss. What is the annual EGI?
Correct Answer
B) $92,000
(85000+15000)×0.92 = 92000. Common errors: leaving out the reimbursements gives $78,200; not applying the loss to the reimbursements gives $93,200; not deducting the 8% loss gives $100,000.
Why This Is the Correct Answer
Option B is correct because total potential income is $85,000 + $15,000 = $100,000, and after an 8% loss, EGI is $100,000 × 0.92 = $92,000. The same loss rate applies to both components.
Why the Other Options Are Wrong
Option A: $78,200
Option A, $78,200, comes from leaving out the reimbursements: $85,000 × 0.92 = $78,200. The $15,000 of reimbursements is part of potential income, so EGI is ($85,000 + $15,000) × 0.92 = $92,000.
Option C: $93,200
Option C, $93,200, results from applying the loss only to base rent: $85,000 × 0.92 + $15,000 = $93,200. The 8% loss applies to both, giving ($85,000 + $15,000) × 0.92 = $92,000.
Option D: $100,000
Option D, $100,000, is total potential income with no loss deducted: $85,000 + $15,000 = $100,000. Deducting the 8% loss gives $100,000 × 0.92 = $92,000.
Add it all, then lose
Sum all potential income lines first, then take the loss percentage off the total when the loss applies to all of it.
How to use: Use this when a question gives several potential income components and one combined loss rate.
Exam Tip
Read whether the loss applies to all income or only some components; here it applies to both.
Common Mistakes to Avoid
- -Leaving reimbursements out of potential income
- -Applying the loss rate only to base rent
- -Forgetting to deduct vacancy and collection loss
Concept Deep Dive
Analysis
This question tests building effective gross income when tenant reimbursements are part of potential income and subject to the same loss rate. Add base rent and reimbursements to get total potential income, then apply the 8% combined loss. The reimbursements have not already been adjusted for loss.
Background Knowledge
Potential gross income includes all income the property could produce at full occupancy, including base rent and tenant reimbursements. Vacancy and collection loss is then deducted to reach effective gross income. Whether a loss applies to a given income component depends on how that income is collected and stated.
Real-World Application
An appraiser analyzing a small retail center finds that tenants reimburse the landlord for common-area costs. Because vacant suites produce neither rent nor reimbursements, the appraiser applies the vacancy and collection allowance to both income lines.
More Income Approach Questions
Which model describes yield capitalization of property benefits?
An appraiser is valuing a duplex. A market survey of recent duplex sales reports prices at 10.8 times potential gross income, with stabilized vacancy and credit loss of 10% of PGI and no other income. The subject's rent schedule is unavailable, but the property manager's records show collected income of $54,000 a year, in line with market rent and the 10% market loss. What value is indicated?
The subject property is a fourplex with annual EGI of $72,000 and operating expenses of $28,800. Of those expenses, $18,000 is fixed and $10,800 varies in direct proportion to EGI. The owner's annual mortgage payments are $21,000. An appraiser projects that EGI will fall 10% because of higher vacancy. What is the projected NOI?
Annual NOI available for debt service is $168,000 and total annual mortgage principal and interest debt service is $120,000. What is NOI ÷ debt service?
Annual PGI is $250,000 and combined vacancy and collection loss is explicitly 12% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $360,000 and combined vacancy and collection loss is explicitly 8% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $640,000. Combined vacancy and collection loss is 6.25% of PGI. There is no other income. What EGI remains?
An appraiser is updating a prior appraisal of a triplex with potential gross income of $60,000 and no other income. The prior appraisal used vacancy and credit loss of 5% of PGI, and a new survey of competing rentals indicates 8%. The operating expenses of $24,000 are property taxes, insurance and contract services that do not vary with occupancy, and the market overall rate remains 7.5%. By what percentages do effective gross income and indicated value decrease?
Annual potential rental income is $600,000 and vacancy loss alone is $36,000. What percentage of potential rent does that loss represent?
In the subject's market, lenders on fourplexes have lowered their typical loan-to-value ratio from 70% to 60%. The annual mortgage constant remains 5% and the equity dividend rate remains 10%. The subject's NOI has not changed. How does this affect the overall rate indicated by the band of investment and the indicated value?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Previous Question
What distinguishes a DCF discount rate from an overall capitalization rate?
Next Question
The subject property has an annual potential gross income (PGI) of $142,000. Sales of similar properties in the market area indicate a multiplier of 8.5, based on annual PGI. What is the indicated value of the subject?