Annual retail PGI is $180,000 and combined loss for that segment is 8%. Annual office PGI is $120,000 with combined loss of 12%. There is no other income. What is their combined annual EGI?
Correct Answer
C) $271,200
180000×0.92+120000×0.88 = 271200. Common errors: leaving out the office income gives $165,600; applying the retail 8% loss to both segments gives $276,000; applying the office 12% loss to both segments gives $264,000.
Why This Is the Correct Answer
Option C is correct because retail EGI is $180,000 × 0.92 = $165,600 and office EGI is $120,000 × 0.88 = $105,600. Adding them gives combined EGI of $271,200. Each segment's vacancy and collection loss is deducted from its own potential gross income.
Why the Other Options Are Wrong
Option A: $165,600
Option A, $165,600, is $180,000 × 0.92, the retail EGI alone. It leaves out the office EGI of $120,000 × 0.88 = $105,600, so the correct total is $271,200.
Option B: $264,000
Option B, $264,000, comes from ($180,000 + $120,000) × 0.88, applying the office 12% loss to both segments. Retail should use its own 8% loss, giving $165,600 + $105,600 = $271,200.
Option D: $276,000
Option D, $276,000, comes from ($180,000 + $120,000) × 0.92, applying the retail 8% loss to both segments. Office should use its own 12% loss, giving $165,600 + $105,600 = $271,200.
Each segment pays its own loss
Compute EGI for each segment with its own loss rate, then add the results.
How to use: Use this whenever a property has more than one income stream with different vacancy rates.
Exam Tip
Match each loss percentage to the income it belongs to before adding anything together.
Common Mistakes to Avoid
- -Applying one segment's loss rate to all income
- -Leaving out one income segment
- -Averaging the loss rates without weighting by income
Concept Deep Dive
Analysis
This question tests calculating EGI when two income segments carry different loss rates. Each segment's loss must be applied only to that segment's PGI, and then the two EGIs are added. Using one rate for both segments, or dropping a segment, produces the distractors.
Background Knowledge
Effective gross income equals potential gross income less vacancy and collection loss. Mixed-use properties often have different market vacancy levels for each use. Applying segment-specific losses gives a more accurate EGI than one blended rate.
Real-World Application
An appraiser values a two-story building with ground-floor retail and upper-floor offices. Market data show different vacancy for each use, so she estimates EGI separately for the retail and office space before combining them.
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?
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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?
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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?
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Previous Question
The subject property is a duplex with a failing roof. Tenants currently pay reduced rents, and annual NOI is $26,400. Once the roof is replaced, market rents apply and annual NOI will be $30,000. The replacement costs $25,000, can be done at once with no loss of rent, and is what buyers of similar duplexes would do. Sales of similar duplexes in good repair indicate a 7.5% overall rate. Which calculation indicates the as-is fee simple value?
Next Question
A comparable sold for a cash-equivalent price of $640,000 and has annual EGI of $80,000. The subject property has annual EGI of $75,000. Market data indicate the subject would sell at the same price-to-income ratio, and no other adjustments are required. What value is indicated for the subject, to the nearest dollar?