An appraiser is analyzing a mixed-use property with retail and office components. The retail segment has a potential gross income of $180,000 with a market vacancy of 8%. The office segment has a potential gross income of $120,000 with a market vacancy of 12%. What is the overall effective gross income for the property?
Correct Answer
A) $271,200
Why this is correct: each component carries its own vacancy rate, so the two effective gross incomes are computed separately and then summed. Calculation: retail $180,000 x 0.92 = $165,600; office $120,000 x 0.88 = $105,600; $165,600 + $105,600 = $271,200. Why the other choices are wrong: $276,000 applies a single 8% vacancy to the combined $300,000 of potential gross income, which understates the office segment’s vacancy; $282,000 applies 6% to the combined figure; $300,000 is the combined potential gross income with no vacancy deducted at all.
Why This Is the Correct Answer
Computing each segment's effective gross income separately and summing gives $165,600 plus $105,600, or $267,600. Segment-level treatment respects that the two components face genuinely different market conditions, which the differing vacancy rates express. It also produces the correct income-weighted result automatically, without the appraiser needing to construct a blended rate. The same segmentation should carry through the expense analysis and, where warranted, into separate capitalization rates.
Why the Other Options Are Wrong
Option B: $276,000
$276,000 is $300,000 reduced by a flat 8 percent, applying the retail vacancy rate to the entire property and ignoring the office segment's higher 12 percent. It overstates income by understating vacancy on 40 percent of the potential gross. Applying one segment's rate to the whole is the error segmentation exists to prevent.
Option C: $282,000
$282,000 is $300,000 reduced by 6 percent, a figure that appears nowhere in the stem, and appears to come from some partial or halved application of the vacancy rates. Neither 8 nor 12 percent nor any income-weighted blend of them produces 6 percent. The result is higher than either segment's rate would allow.
Option D: $300,000
$300,000 is the combined potential gross income with no vacancy deduction at all. Effective gross income is by definition potential gross less vacancy and collection loss, so this figure skips the entire step the question asks about. It is the answer produced by adding the two income figures and stopping.
Segment, Then Sum
Two components, two calculations, one total. Never blend rates when the incomes differ in size, because a simple average of rates silently assumes the segments are equal. Compute each and add.
How to use: Whenever a stem gives different rates for different components, run each line separately and sum at the end. Treat any single blended rate in the options as a distractor unless it is income weighted.
Exam Tip
A blended vacancy rate must be income weighted, not a simple average. Here the income-weighted rate is 10.8 percent, not the 10 percent a simple average would give.
Common Mistakes to Avoid
- -Applying one component's vacancy rate to the whole property
- -Averaging rates rather than weighting them by income
- -Reporting potential gross income when effective gross income was requested
Concept Deep Dive
Analysis
Mixed-use properties must be analyzed component by component, because the segments face different tenants, different demand drivers, and different market conditions. Retail and office space in the same building rarely share a vacancy rate, and averaging them would produce a figure describing neither. The correct approach computes effective gross income separately for each segment and then sums, which is what the stem's separate vacancy rates invite. Retail potential gross income of $180,000 at 8 percent vacancy retains 92 percent, giving $165,600. Office potential gross income of $120,000 at 12 percent vacancy retains 88 percent, giving $105,600. The total effective gross income is $267,600. Note what shortcut would fail: applying a blended rate computed as the simple average of 8 and 12 percent would weight the two segments equally when retail actually contributes 60 percent of the income, producing $270,000 and a $2,400 error. Segment-level analysis avoids that entirely and also positions the appraiser to allocate expenses appropriately.
Background Knowledge
You need the income build-up from potential gross income through vacancy and collection loss to effective gross income, and the practice of analyzing mixed-use properties by component. You should also know that segmentation carries into expense allocation and may justify separate capitalization rates or a discounted cash flow treating each component separately.
Real-World Application
An appraiser valuing a two-story mixed-use building computes retail and office effective gross income separately, allocates common area and management expenses between them by square footage, and considers whether the two income streams warrant different capitalization rates given the office segment's weaker submarket.
More Income Approach Questions
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What is the primary distinction, for appraisal purposes, between 'vacancy loss' and 'collection loss'?
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