An annual replacement allowance is $350 per unit for 24 units. What is the total annual allowance?
Correct Answer
C) $8,400
24×350 = 8400. Common errors: annualizing the per-unit allowance (× 12) instead of multiplying by the 24 units gives $4,200; treating the annual allowance as a monthly amount gives $100,800; reporting the per-unit allowance instead of the total gives $350.
Why This Is the Correct Answer
Option C is correct because the total annual allowance is $350 per unit × 24 units = $8,400. The allowance is stated as annual, so it only needs to be multiplied by the number of units. The question asks only for that total, not how it is treated in NOI.
Why the Other Options Are Wrong
Option A: $350
Option A, $350, reports the per-unit allowance instead of the total. Multiplying by the 24 units gives $350 × 24 = $8,400.
Option B: $4,200
Option B, $4,200, multiplies the per-unit allowance by 12 instead of by the 24 units: $350 × 12 = $4,200. The allowance is already annual, so the total is $350 × 24 = $8,400.
Option D: $100,800
Option D, $100,800, treats the annual allowance as monthly: $350 × 24 × 12 = $100,800. Since $350 is already annual, the total is $350 × 24 = $8,400.
Per unit times units
A per-unit annual figure becomes a building total by multiplying by the unit count, not by 12.
How to use: Use this whenever an expense is quoted per unit per year.
Exam Tip
Check whether a per-unit figure is annual or monthly before deciding whether 12 belongs in the calculation.
Common Mistakes to Avoid
- -Multiplying an annual per-unit figure by 12
- -Reporting the per-unit amount as the total
- -Confusing the number of units with the number of months
Concept Deep Dive
Analysis
This question tests a simple total of a per-unit annual allowance. The allowance is already annual at $350 per unit, so the total is $350 × 24 units = $8,400. No monthly conversion is involved.
Background Knowledge
A replacement allowance, or reserve for replacements, provides for periodic replacement of short-lived building components such as roofs, appliances and flooring. It is often estimated per unit per year. Whether it is deducted above the NOI line should match how the capitalization rate was derived.
Real-World Application
An appraiser analyzing a 24-unit apartment building estimates a market-supported annual reserve per unit for appliances, carpet and roof replacement. She multiplies by the unit count to get the annual reserve total. She deducts it consistently with how her comparable capitalization rates were extracted.
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A review appraiser is testing a report that values a 10-unit apartment building at $1,500,000 using a 7.8% overall rate. Operating expenses other than management total $54,000, and management is 5% of effective gross income. What effective gross income does the reported value reflect?
Next Question
The subject property is a retail strip center with annual potential rent of $300,000, combined vacancy and collection loss of 10% and no other income. Property management is typical for the market at 6% of collected income. All other expenses, including property taxes, total $100,000 a year. Sales of similar centers indicate an 8% overall rate. What is the indicated value by direct capitalization?