Annual potential base rent is $340,000 with 8% combined loss on base rent only. Additional tenant reimbursements have already been forecast at collectible effective amounts of $12,500 and have no further loss. What total EGI results?
Correct Answer
C) $325,300
340000×0.92+12500 = 325300. Common errors: leaving out the tenant reimbursements gives $312,800; applying the 8% loss to the reimbursements as well gives $324,300; not deducting the 8% loss gives $352,500.
Why This Is the Correct Answer
Option C is correct because base rent after loss is $340,000 × 0.92 = $312,800, and adding the already-effective reimbursements of $12,500 gives $325,300. The loss applies to base rent only, so the reimbursements are added at full value. This follows the PGI minus vacancy and collection loss equals EGI sequence.
Why the Other Options Are Wrong
Option A: $312,800
Option A, $312,800, is only the base rent after loss ($340,000 × 0.92) and leaves out the $12,500 of tenant reimbursements. The correct EGI is $312,800 + $12,500 = $325,300.
Option B: $324,300
Option B, $324,300, applies the 8% loss to the reimbursements as well: ($340,000 + $12,500) × 0.92. The reimbursements are already collectible amounts, so the correct figure is $340,000 × 0.92 + $12,500 = $325,300.
Option D: $352,500
Option D, $352,500, simply adds $340,000 + $12,500 without deducting the 8% loss on base rent. Deducting the loss gives $340,000 × 0.92 + $12,500 = $325,300.
Haircut each item once
Each income line gets its loss deduction exactly once: base rent takes the 8% haircut, and already-effective income has had its haircut.
How to use: Use this when a problem says some income is already collectible or effective.
Exam Tip
Read which income the loss percentage applies to before multiplying. Distractors often apply the rate to the combined total.
Common Mistakes to Avoid
- -Applying the vacancy rate to reimbursements that are already stated at collectible amounts
- -Forgetting to add other income after deducting the loss from base rent
- -Treating potential gross income as effective gross income
Concept Deep Dive
Analysis
This question tests whether you apply a vacancy and collection loss only to the income it is meant to cover. Base rent is reduced by 8%, while the tenant reimbursements are already stated at collectible amounts and are simply added. Working the two pieces separately avoids double-counting the loss.
Background Knowledge
Effective gross income is potential gross income less vacancy and collection loss, plus other income at its effective level. When an income item is already stated net of its own losses, applying the general loss rate to it again understates EGI.
Real-World Application
An appraiser valuing a retail center receives the owner's forecast of expense reimbursements already adjusted for expected nonpayment. The appraiser deducts market vacancy and collection loss from base rent only and adds the reimbursements as forecast, documenting why no second deduction was taken.
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
An appraiser is reconstructing the owner's statement for a 12-unit apartment building with identical units. Market rent is $1,200 per month, and 11 units are leased to tenants at that rent with no vacancy. The twelfth unit is occupied rent-free by a resident manager as part of the manager's pay, along with a cash wage of $600 per month, an arrangement typical of competing buildings. The statement shows rent collected of $158,400, operating expenses of $60,000 that include the cash wage, and mortgage payments of $48,000, with no entry for the manager's unit. What potential gross income and operating expenses should the reconstructed statement show?
Next Question
The subject property is an office building in lease-up. In-place NOI is $96,000, and NOI at stabilized occupancy is projected at $120,000. Sales of stabilized office buildings in the market indicate an overall rate of 8%. Remaining rent loss until stabilization is estimated at $70,000, and remaining leasing commissions and tenant improvements at $110,000. What is the indicated as-is value?