An appraiser is analyzing a small office building with 5,000 square feet of rentable area. Annual market rent is $22 per rentable square foot, and combined vacancy and collection loss is 7% of potential rent. There is no other income. What is the annual EGI?
Correct Answer
B) $102,300
22×5000×(1−0.07) = 102300. Common errors: not deducting the 7% loss gives $110,000; reporting the loss instead of EGI gives $7,700; treating the annual rent per square foot as monthly gives $1,227,600.
Why This Is the Correct Answer
Option B is correct because $22 x 5,000 x (1 - 0.07) = $102,300. Potential gross rent is $110,000, and the 7% loss of $7,700 is deducted. With no other income, that remainder is EGI.
Why the Other Options Are Wrong
Option A: $7,700
Option A is wrong because $7,700 is the vacancy and collection loss, not EGI: $22 x 5,000 x 0.07 = $7,700. EGI is $110,000 - $7,700 = $102,300.
Option C: $110,000
Option C is wrong because $110,000 is potential gross rent before deducting the 7% loss: $22 x 5,000 = $110,000. EGI is $110,000 x 0.93 = $102,300.
Option D: $1,227,600
Option D is wrong because $1,227,600 comes from treating the annual rent per square foot as monthly: $22 x 5,000 x 12 x 0.93 = $1,227,600. The $22 is already annual, so EGI is $102,300.
Rate times area, less loss
Multiply rent per square foot by area to get potential income, then take off the loss to get EGI.
How to use: Use this two-step order whenever rent is quoted per square foot.
Exam Tip
Check whether a per-square-foot rent is annual or monthly before multiplying. Distinguish the loss amount from the EGI that remains.
Common Mistakes to Avoid
- -Forgetting to deduct vacancy and collection loss
- -Reporting the loss amount as EGI
- -Annualizing a rent that is already annual
Concept Deep Dive
Analysis
This question tests computing EGI from rent per square foot. Potential rent is $22 x 5,000 = $110,000, and the 7% vacancy and collection loss is deducted. EGI is $110,000 x 0.93 = $102,300.
Background Knowledge
Commercial rents are commonly quoted as an annual amount per rentable square foot. Potential gross income is rent times area, and vacancy and collection loss is deducted to reach effective gross income. Other income, if any, is added to EGI.
Real-World Application
An appraiser values a 5,000-square-foot office suite with market rent of $22 per square foot per year. Applying a 7% market vacancy and collection loss gives EGI of $102,300 for the income approach.
More Income Approach Questions
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