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?
Correct Answer
A) 6.94%
Band-of-investment Ro = (Mortgage Weight × Mortgage Constant) + (Equity Weight × Equity Dividend Rate). Mortgage weight = 75% = 0.75; Equity weight = 25% = 0.25. Ro = (0.75 × 6.25%) + (0.25 × 9.0%) = 4.6875% + 2.25% = 6.9375%, which rounds to 6.94%. This calculation follows the standard band-of-investment formula in the Income Approach (as outlined in the Appraisal Institute's *The Appraisal of Real Estate*, 14th ed., Ch. 17) and is required under USPAP Standards Rule 1-5 for developing supportable capitalization rates when market extraction is limited.
Why This Is the Correct Answer
Band-of-investment Ro = (Mortgage Weight × Mortgage Constant) + (Equity Weight × Equity Dividend Rate). Mortgage weight = 75% = 0.75; Equity weight = 25% = 0.25. Ro = (0.75 × 6.25%) + (0.25 × 9.0%) = 4.6875% + 2.25% = 6.9375%, which rounds to 6.94%. This calculation follows the standard band-of-investment formula in the Income Approach (as outlined in the Appraisal Institute's *The Appraisal of Real Estate*, 14th ed., Ch. 17) and is required under USPAP Standards Rule 1-5 for developing supportable capitalization rates when market extraction is limited.
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Previous Question
An appraiser is estimating a market capitalization rate for a Class B office building in a stable but maturing submarket. She analyzes five recent, comparable sales of similar properties with fee-simple ownership and typical lease structures. The indicated overall capitalization rates (Ro) range from 6.2% to 7.8%. To derive a credible Ro, the appraiser adjusts each comparable’s Ro for differences in lease-up risk, tenant credit quality, and near-term lease rollover exposure—then selects a rate within the adjusted range. Which USPAP Standard explicitly governs the selection and justification of this final Ro?
Next Question
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?