The subject office building has annual potential base rent of $480,000. Tenants also pay the landlord potential expense reimbursements of $120,000 a year, which are not included in the base rent, and pay nothing directly to third-party suppliers. Combined vacancy and collection loss is 8% of both the rent and the reimbursements. What is the annual EGI?
Correct Answer
B) $552,000
(480000+120000)×0.92 = 552000. Common errors: leaving out the reimbursements gives $441,600; not applying the loss to the reimbursements gives $561,600; not deducting the 8% loss gives $600,000.
Why This Is the Correct Answer
Option B is correct because ($480,000 + $120,000) × 0.92 = $600,000 × 0.92 = $552,000. Reimbursements paid to the landlord are part of potential gross income and here bear the same loss as base rent.
Why the Other Options Are Wrong
Option A: $441,600
Option A, $441,600, is wrong because it leaves out the $120,000 of reimbursements ($480,000 × 0.92 = $441,600). Reimbursements paid to the landlord are income, so EGI is $552,000.
Option C: $561,600
Option C, $561,600, is wrong because it does not apply the 8% loss to the reimbursements ($480,000 × 0.92 + $120,000 = $561,600). The 8% loss applies to both components, giving $552,000.
Option D: $600,000
Option D, $600,000, is wrong because it does not deduct the 8% loss at all ($480,000 + $120,000 = $600,000). After the loss, EGI is $552,000.
Vacant space pays nothing
An empty suite pays neither rent nor reimbursements, so the loss applies to both when the facts say so.
How to use: Use this when deciding whether reimbursements should bear the vacancy and collection loss.
Exam Tip
Check whether reimbursements are paid to the landlord and whether the stated loss covers them.
Common Mistakes to Avoid
- -Excluding landlord-paid reimbursements from gross income
- -Applying the vacancy loss to base rent only when it covers reimbursements too
- -Forgetting to deduct the loss
Concept Deep Dive
Analysis
This question tests applying a vacancy and collection loss to all income components the facts say it covers. Both base rent and expense reimbursements are paid to the landlord and are subject to the same 8% loss. EGI is the combined potential income times 0.92.
Background Knowledge
Expense reimbursements paid by tenants to the landlord are part of the property's gross income. If a tenant's space is vacant or a tenant fails to pay, both the rent and the reimbursement are lost. Amounts that tenants pay directly to third parties are not landlord income.
Real-World Application
An appraiser valuing a shopping center sees that tenants reimburse the landlord for common area maintenance. Because vacant space produces neither base rent nor reimbursements, the appraiser applies the market loss allowance to both.
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?
Annual NOI available for debt service is $168,000 and total annual mortgage principal and interest debt service is $120,000. What is NOI ÷ debt service?
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?
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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?
In the subject's market, lenders on fourplexes have lowered their typical loan-to-value ratio from 70% to 60%. The annual mortgage constant remains 5% and the equity dividend rate remains 10%. The subject's NOI has not changed. How does this affect the overall rate indicated by the band of investment and the indicated value?
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Previous Question
The subject property is a four-unit apartment building. This year the owner paid an $8,100 premium for a three-year property insurance policy and no other insurance. Effective gross income is $48,000, and expenses other than insurance, including property taxes, are $18,000. Sales of similar properties indicate an 8% overall rate. What is the indicated value by direct capitalization?
Next Question
The subject property is a triplex in which the owner pays all electricity and water, at a cost of $3,600 a year. The owner plans to install separate meters so that the tenants pay these costs directly and the owner pays none of them. Market evidence shows that similar units with tenant-paid utilities rent for $80 per month less than units with owner-paid utilities. Stabilized vacancy and credit loss is 5% of PGI in either case, and the market overall rate of 8% would not change. Before considering the cost of the meters, what is the effect on indicated value?