An appraiser is analyzing a small office building. Market rent is $22 per square foot, and the building has 5,000 rentable square feet. Historically, the property has achieved 100% occupancy, but the appraiser's market study indicates a 7% vacancy and collection loss for comparable properties. There is no other income. What is the estimated annual Effective Gross Income for a market value appraisal?
Correct Answer
A) $102,300
First, calculate Potential Gross Income (PGI): $22/sq.ft. × 5,000 sq.ft. = $110,000 annually. For a market value appraisal, the appraiser must use a market-derived vacancy rate, not the subject's atypical historical performance. Applying the 7% market vacancy and collection loss: $110,000 × 0.07 = $7,700. Effective Gross Income (EGI) = PGI - Vacancy Loss = $110,000 - $7,700 = $102,300.
Why This Is the Correct Answer
First, calculate Potential Gross Income (PGI): $22/sq.ft. × 5,000 sq.ft. = $110,000 annually. For a market value appraisal, the appraiser must use a market-derived vacancy rate, not the subject's atypical historical performance. Applying the 7% market vacancy and collection loss: $110,000 × 0.07 = $7,700. Effective Gross Income (EGI) = PGI - Vacancy Loss = $110,000 - $7,700 = $102,300.
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