A small commercial building has potential gross income of $120,000 annually. The appraiser analyzes three comparable properties, which have stabilized vacancy and collection losses of 8%, 9%, and 7.5%. The subject property's owner provides records showing a 5% vacancy rate over the past three years due to long-term tenants. What is the appropriate stabilized vacancy and collection loss rate to use in estimating effective gross income?
Correct Answer
B) The average of the three comparable rates, weighted by their similarity to the subject.
Correct. Valuation requires the use of market-derived data. While historical data is informative, the appraiser must analyze the market to develop a stabilized, market-supported rate. The appropriate method is to analyze the rates from comparables, giving more weight to the data from the comparables most similar to the subject in terms of location, age, and tenant profile. A simple average (D) or midpoint (C) is less supportable without an analysis of comparability. Using only the subject's low historical rate (A) ignores market conditions and is not appropriate for a market value appraisal.
Why This Is the Correct Answer
Correct. Valuation requires the use of market-derived data. While historical data is informative, the appraiser must analyze the market to develop a stabilized, market-supported rate. The appropriate method is to analyze the rates from comparables, giving more weight to the data from the comparables most similar to the subject in terms of location, age, and tenant profile. A simple average (D) or midpoint (C) is less supportable without an analysis of comparability. Using only the subject's low historical rate (A) ignores market conditions and is not appropriate for a market value appraisal.
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Previous Question
An appraiser develops a band of investment rates using mortgage-equity analysis for a proposed 100-unit apartment project. She estimates a mortgage constant of 6.25% on a 75% loan-to-value mortgage at 5.5% interest amortized over 30 years, and an equity dividend rate of 9.0% based on investor surveys and comparable equity investments. Using the band-of-investment method, what is the overall capitalization rate (Ro) indicated for the property?
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Building A (new, credit tenant, 20-year lease) and Building B (older, month-to-month tenants) sell the same week. Their cap rates should differ how?