Base rent has been reduced by its supported loss. Ancillary real-estate receipts are separately estimated at already-effective collectible amounts. How are they included in total EGI?
Correct Answer
A) Add them once to effective base rent.
Other income that is already forecast at effective collectible amounts can be added to effective base rent. Ancillary receipts are not universally immune to vacancy or noncollection; if the inputs are potential, forecast their losses explicitly. Define totals to avoid counting the same income twice.
Why This Is the Correct Answer
Option A is correct because the ancillary receipts are already at effective collectible amounts, so they are added once to the effective base rent to form total EGI. Applying another loss would understate income, and leaving them out would ignore real-estate income.
Why the Other Options Are Wrong
Option B: Apply the base-rent loss again to the effective amounts.
Option B applies the base-rent loss again to the effective amounts. Those receipts are already net of their own loss, so another deduction double-counts it.
Option C: Treat them as part of the terminal sale proceeds.
Option C treats the receipts as part of terminal sale proceeds. They are annual operating receipts of the real estate and belong in annual EGI, not in the reversion.
Option D: Omit them, since they are not base rent.
Option D omits them because they are not base rent. EGI includes other real-property income, not just base rent, so omitting it understates income.
Net once, add once
Each income stream gets its loss deducted one time; once it is effective, just add it.
How to use: Use this to avoid double deductions when combining base rent and other income.
Exam Tip
Look for words like effective or collectible; they mean the loss has already been taken for that income stream.
Common Mistakes to Avoid
- -Applying vacancy twice to already-effective other income
- -Leaving out ancillary real-estate income
- -Assuming ancillary income is immune from vacancy when it is given at potential amounts
Concept Deep Dive
Analysis
This question tests how to combine income streams into EGI without double-counting loss. Ancillary receipts already estimated at collectible amounts are effective income, so they are added once to effective base rent with no further loss deduction.
Background Knowledge
Potential gross income includes all income attributable to the property before vacancy and collection loss; EGI is that income after the loss. Other income can still face vacancy or noncollection, so if it is given at potential amounts, its loss is estimated explicitly.
Real-World Application
A fourplex has rent plus coin laundry and garage rental receipts reported at actual collections. The appraiser deducts vacancy from rent only and adds the collected ancillary receipts to reach total EGI.
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
Projecting a lease-up year for a half-empty building, the appraiser must recognize that fixed expenses:
Next Question
The owner of a fourplex asks an appraiser about installing new high-efficiency heating and air-conditioning systems, which the owner would finance with a 7% loan. Market evidence indicates $50 more monthly rent per unit for air-conditioned units. Vacancy and collection loss is 5% of PGI, owner-paid fuel costs would fall $720 per year, and the overall rate for similar fourplexes is 8%. What is the indicated increase in property value?