Annual effective gross income at an income property is $18.50 per square foot without an influence and $14.20 per square foot with it, on 25,000 square feet. Market data indicate an EGI multiplier of 7.5 for this income loss. Independent evidence assigns 70% of the resulting loss to the improvements. What is the loss attributable to the improvements?
Correct Answer
C) $564,375
(18.50−14.20)×25000×7.5×0.70 = 564375. Common errors: assigning the whole loss to the improvements gives $806,250; applying the 30% site share instead of the 70% improvement share gives $241,875; not applying the 7.5 EGI multiplier gives $75,250.
Why This Is the Correct Answer
Option C is correct because the income loss is $18.50 - $14.20 = $4.30 per square foot, and $4.30 x 25,000 sf = $107,500 per year. Capitalizing with the 7.5 multiplier gives $107,500 x 7.5 = $806,250 of total value loss. The supported allocation assigns 70% to improvements, so $806,250 x 0.70 = $564,375.
Why the Other Options Are Wrong
Option A: $75,250
Option A, $75,250, comes from ($18.50 - $14.20) x 25,000 x 0.70, which allocates the annual income loss but does not capitalize it with the 7.5 multiplier. The correct result is $107,500 x 7.5 x 0.70 = $564,375.
Option B: $241,875
Option B, $241,875, comes from $806,250 x 0.30, which applies the 30% site share instead of the 70% improvement share. The improvement loss is $806,250 x 0.70 = $564,375.
Option D: $806,250
Option D, $806,250, is ($18.50 - $14.20) x 25,000 x 7.5, the entire capitalized loss with nothing allocated to the site. The supported evidence assigns only 70% to improvements, giving $564,375.
Difference, Area, Multiply, Allocate
Work in order: find the income difference, multiply by the area, capitalize with the multiplier, and allocate last. Allocating before capitalizing, or skipping a step, produces the distractor figures.
How to use: Use this sequence whenever a question converts an income loss into a value loss and then splits it between site and improvements.
Exam Tip
Check that the multiplier matches the income level given (effective income here) and that you apply the share for the component the question asks about. Write the steps out to avoid using the site share by mistake.
Common Mistakes to Avoid
- -Allocating the annual income loss without capitalizing it
- -Using the 30% site share when the improvement share is asked
- -Assigning the entire capitalized loss to the improvements
Concept Deep Dive
Analysis
This question tests the capitalization of income loss technique followed by a supported allocation of that loss between site and improvements. First find the annual income loss per square foot, multiply by the area, then capitalize the annual loss with the 7.5 multiplier. Only then apply the independently supported 70% improvement share.
Background Knowledge
The capitalization of rental or income loss technique converts an income loss into a value loss by applying a market-derived multiplier or rate, and it may be used to measure loss of value from any cause. A multiplier must be applied to the same level of income from which it was derived. When a loss affects both site and improvements, the share assigned to improvements needs its own support rather than a simple property-value ratio.
Real-World Application
An appraiser values a small retail building next to a newly built waste transfer station, and comparable rents show a drop in effective income per square foot. The appraiser capitalizes the annual loss with a market-derived income multiplier, then uses separate market evidence to decide how much of that loss belongs to the building versus the land.
More Cost Approach Questions
Why can equivalent-utility replacement cost be useful for an obsolete improvement?
An appraiser estimates the current replacement cost new of the improvements at $890,000, accrued depreciation from all causes at $170,000, and land value at $325,000. All necessary cost components and depreciation are included in those amounts. What is the indicated property value?
Improvement cost new is $595,000. Separately supported improvement depreciation deductions of $48,000, $27,000 are expressly nonoverlapping and not already excluded from cost new. Add supported site value of $155,000, already reflecting any site losses. What total indicated value results?
What best supports a claimed loss from a bathroom-layout deficiency?
Improvement cost new is $1,850,000. Separately supported improvement depreciation deductions of $310,000, $620,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
Which scenario most strongly supports giving the cost approach substantial weight?
A cost total $650,000 explicitly includes $40,000 of non-realty FF&E outside the appraised real-property interest. Exclude it. Supported realty-only total depreciation is $55,000. Add site $200,000, with no overlap. What real-property cost indication results?
A 2,200-sf dwelling costs $200 per square foot, and a separate 400-sf garage costs $75 per square foot. These costs are complete and do not overlap. Both have an effective age of 15 years and a total life of 50 years, with straight-line depreciation and no salvage value. No site value or other loss is involved. What is the combined depreciated cost of the dwelling and garage?
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An external influence causes an annual net income loss of $9,600. The capitalization rate for the loss is 8%, and no other economic factors change. What is the indicated loss in value of the whole property, before allocation between site and improvements?
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