An overall capitalization rate that is lower than the market norm generally signals:
Correct Answer
C) Lower perceived risk, or expectations of income growth
Why this is correct: As the original explanation states, a lower capitalization rate implies a higher price for a given NOI, which investors accept when they perceive lower risk and/or expect future income growth. It signals greater confidence in the property's income stream. Why the other choices are wrong: 'Higher perceived risk in the property or its market' would lead to a higher cap rate, not lower. 'That the property's NOI was computed incorrectly' is a possibility, but the question asks what a lower rate 'generally signals.' 'A shorter remaining economic life' typically increases risk and the required return (cap rate). Exam tip: Cap Rate and Risk are directly related. Lower cap rate = lower perceived risk/greater growth expectations.
Why This Is the Correct Answer
Why this is correct: As the original explanation states, a lower capitalization rate implies a higher price for a given NOI, which investors accept when they perceive lower risk and/or expect future income growth. It signals greater confidence in the property's income stream. Why the other choices are wrong: 'Higher perceived risk in the property or its market' would lead to a higher cap rate, not lower. 'That the property's NOI was computed incorrectly' is a possibility, but the question asks what a lower rate 'generally signals.' 'A shorter remaining economic life' typically increases risk and the required return (cap rate). Exam tip: Cap Rate and Risk are directly related. Lower cap rate = lower perceived risk/greater growth expectations.
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:
People Also Study
Valuation Principles & Procedures
25% of exam
Property Description & Analysis
20% of exam
Market Analysis & Highest/Best Use
15% of exam
Appraisal Math & Statistics
15% of exam
USPAP (Ethics & Standards)
15% of exam
Previous Question
A capitalization rate developed by the band of investment reflects:
Next Question
An appraiser is analyzing a 20-unit apartment building. Market rent is $1,500 per unit per month. The appraiser identifies three comparables with the following characteristics: Comp 1: 22 units, 5% vacancy, 0.5% collection loss. Comp 2: 18 units, 7% vacancy, 1% collection loss. Comp 3: 25 units, 6% vacancy, no separate collection loss data. What is the market-indicated potential gross income and the appropriate stabilized vacancy and collection loss percentage for the subject?