An office building has a potential gross income of $480,000. In addition to base rents, tenants pay their own utilities and a pro-rata share of property taxes, which total $120,000 annually. If the market vacancy and collection loss rate is 8%, what is the property's effective gross income?
Correct Answer
C) $561,600
Correct. Effective Gross Income (EGI) includes all income from the operation of the property after vacancy and collection losses. Tenant reimbursements (for property taxes) are income to the property. Therefore, Total Potential Gross Income = Base Rent PGI ($480,000) + Reimbursements ($120,000) = $600,000. EGI = Total PGI × (1 - Vacancy Rate) = $600,000 × (1 - 0.08) = $600,000 × 0.92 = $561,600.
Why This Is the Correct Answer
Correct. Effective Gross Income (EGI) includes all income from the operation of the property after vacancy and collection losses. Tenant reimbursements (for property taxes) are income to the property. Therefore, Total Potential Gross Income = Base Rent PGI ($480,000) + Reimbursements ($120,000) = $600,000. EGI = Total PGI × (1 - Vacancy Rate) = $600,000 × (1 - 0.08) = $600,000 × 0.92 = $561,600.
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Previous Question
A property has potential gross income of $275,000 and reimbursable parking income of $18,000 annually. The property's historic vacancy and collection loss is 6.5%, but market research indicates that due to recent rent increases and new competition, the vacancy rate going forward is likely to be 8%. What is the appropriate estimate of effective gross income?
Next Question
An appraiser is estimating the value of a retail strip center using discounted cash flow analysis. The property will be held for 7 years. Annual net operating income (NOI) is projected to grow at 3% per year, starting at $420,000 in year 1. The reversion is estimated using a terminal capitalization rate of 7.5% applied to year 7 NOI. The discount rate used for both the income stream and reversion is 9.0%. What is the present value of the reversion component?