The subject property is a 20-unit apartment building. Last year's actual NOI was $90,000. The appraiser projects next year's stabilized NOI at $96,000. The seller's pro forma shows NOI of $105,000 at full occupancy. Buyers of similar buildings priced their purchases on next year's stabilized NOI, and those sales indicate an overall rate of 8%. What is the indicated value?
Correct Answer
C) $1,200,000
The rate came from next year's stabilized income, so the matching subject figure is $96,000, and $96,000 ÷ 0.08 = $1,200,000. Last year's actual NOI gives $1,125,000, which mismatches the period. Averaging actual and projected NOI gives $1,162,500, a basis no sale used. The pro forma gives $1,312,500, but it assumes full occupancy with no vacancy loss.
Why This Is the Correct Answer
Option C is correct because the rate was extracted using buyers' next-year stabilized NOI, and the $96,000 figure is on that same basis. Dividing $96,000 by 8% indicates $1,200,000.
Why the Other Options Are Wrong
Option A: $1,125,000
Option A, $1,125,000, is $90,000 ÷ 0.08. Last year's actual income is a different period from the forward income behind the rate. The correct calculation is $96,000 ÷ 0.08 = $1,200,000.
Option B: $1,162,500
Option B, $1,162,500, averages actual and projected NOI to $93,000 and divides by 0.08. None of the sales were analyzed on a blended figure. The correct calculation is $96,000 ÷ 0.08 = $1,200,000.
Option D: $1,312,500
Option D, $1,312,500, is $105,000 ÷ 0.08. The seller's pro forma assumes full occupancy with no vacancy loss, which is not stabilized income. The correct calculation is $96,000 ÷ 0.08 = $1,200,000.
Rate's recipe, income's recipe
Before dividing, confirm that the income follows the same recipe as the rate: same period, same stabilization, same deductions.
How to use: Use this when an assignment presents several NOI figures for one property.
Exam Tip
When several incomes appear, find the fact that says how the rate was derived. That fact usually identifies the figure to use.
Common Mistakes to Avoid
- -Capitalizing a seller's pro forma with no vacancy allowance
- -Dividing trailing NOI by a rate built on forward income
- -Averaging income figures to avoid choosing a basis
Concept Deep Dive
Analysis
All three figures can be divided by 8%, so the arithmetic is not the hard part. The skill is seeing which income matches the way the rate was built. Read how the rate was extracted first, then choose the subject income on that same basis.
Background Knowledge
Investors price property on the income they anticipate, so rates are commonly derived from anticipated income rather than last year's results. Anticipated income may differ from actual current income. A rate then belongs with the same level and period of income in the subject.
Real-World Application
A seller's broker markets a building on a full-occupancy pro forma, while the appraiser's rate comes from buyers' forward stabilized underwriting. The appraiser capitalizes a forward stabilized estimate with a vacancy allowance and does not use the pro forma.
More Income Approach Questions
Which model describes yield capitalization of property benefits?
An appraiser is valuing a duplex. A market survey of recent duplex sales reports prices at 10.8 times potential gross income, with stabilized vacancy and credit loss of 10% of PGI and no other income. The subject's rent schedule is unavailable, but the property manager's records show collected income of $54,000 a year, in line with market rent and the 10% market loss. What value is indicated?
The subject property is a fourplex with annual EGI of $72,000 and operating expenses of $28,800. Of those expenses, $18,000 is fixed and $10,800 varies in direct proportion to EGI. The owner's annual mortgage payments are $21,000. An appraiser projects that EGI will fall 10% because of higher vacancy. What is the projected NOI?
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Annual PGI is $250,000 and combined vacancy and collection loss is explicitly 12% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $360,000 and combined vacancy and collection loss is explicitly 8% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $640,000. Combined vacancy and collection loss is 6.25% of PGI. There is no other income. What EGI remains?
An appraiser is updating a prior appraisal of a triplex with potential gross income of $60,000 and no other income. The prior appraisal used vacancy and credit loss of 5% of PGI, and a new survey of competing rentals indicates 8%. The operating expenses of $24,000 are property taxes, insurance and contract services that do not vary with occupancy, and the market overall rate remains 7.5%. By what percentages do effective gross income and indicated value decrease?
Annual potential rental income is $600,000 and vacancy loss alone is $36,000. What percentage of potential rent does that loss represent?
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Previous Question
A comparable and subject are otherwise economically identical. A rate is extracted using comparable NOI before deducting a positive reserve, then applied to subject NOI after deducting that same reserve. Relative to a fully matching-basis calculation, the result is:
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