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?
Correct Answer
D) USPAP Standards Rule 1-5, requiring analysis of comparable income properties and reconciliation of indications
USPAP Standards Rule 1-5(b)(vii) specifically requires the appraiser to 'analyze comparable income properties' and 'reconcile the indications of value derived from the income approach.' This includes extracting, adjusting, and selecting an overall capitalization rate (Ro) based on market evidence — and justifying that selection. While Rule 1-4(b) addresses data appropriateness, Rule 1-5 directly governs the analytical process of deriving and reconciling income-based value indications. Rules 1-2(a) and 2-2(a) are unrelated to capitalization rate derivation.
Why This Is the Correct Answer
USPAP Standards Rule 1-5(b)(vii) specifically requires the appraiser to 'analyze comparable income properties' and 'reconcile the indications of value derived from the income approach.' This includes extracting, adjusting, and selecting an overall capitalization rate (Ro) based on market evidence — and justifying that selection. While Rule 1-4(b) addresses data appropriateness, Rule 1-5 directly governs the analytical process of deriving and reconciling income-based value indications. Rules 1-2(a) and 2-2(a) are unrelated to capitalization rate derivation.
More income-approach Questions
In a percentage lease, rent is commonly structured as:
Escalation clauses and expense stops in a lease matter to the income analysis because they:
In a DCF, what is the reversion?
Potential gross income differs from effective gross income in that PGI assumes:
The reversion in a discounted cash flow model represents:
Two identical buildings differ only in risk: one has a single tenant on a short lease, the other five tenants on staggered terms. How do their cap rates compare?
Contract rent on a leased office is $30 per sq ft; market rent is $26. The $4 difference is called:
Building A (new, credit tenant, 20-year lease) and Building B (older, month-to-month tenants) sell the same week. Their cap rates should differ how?
An appraiser is analyzing a 15-unit apartment building. Market research indicates a 6% vacancy rate is typical for similar properties, but this property's historical vacancy has averaged 4%. The subject has experienced a 1% collection loss (uncollectible rents) over the past two years. When estimating effective gross income for the subject, what vacancy and collection loss percentage should the appraiser apply?
An overall rate extracted from a sale whose NOI excluded reserves, applied to a subject NOI that includes them, will:
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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?