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?
Correct Answer
B) $220,000
250000×(1−0.12) = 220000. Common errors: reporting the loss instead of EGI gives $30,000; not deducting the 12% loss gives $250,000; dividing by 1.12 instead of multiplying by 0.88 gives $223,214.
Why This Is the Correct Answer
Option B is correct because EGI equals PGI less the 12% loss: $250,000 × (1 − 0.12) = $220,000. The loss is $30,000, and $250,000 − $30,000 = $220,000.
Why the Other Options Are Wrong
Option A: $30,000
Option A, $30,000, is the loss amount: $250,000 × 0.12 = $30,000. EGI is the income remaining after the loss, $220,000.
Option C: $223,214
Option C, $223,214, comes from dividing by 1.12 instead of multiplying by 0.88: $250,000 ÷ 1.12 = $223,214. Because the loss is 12% of PGI, EGI is $250,000 × 0.88 = $220,000.
Option D: $250,000
Option D, $250,000, does not deduct the 12% loss; it is the unadjusted PGI. EGI is $250,000 − $30,000 = $220,000.
Lose 12, keep 88
Subtract the loss percentage from 100% and multiply PGI by what remains. 12% lost means 88% kept.
How to use: Use this to compute EGI quickly from PGI and a stated loss rate.
Exam Tip
Watch for the answers that equal the loss amount or the unadjusted PGI; EGI falls between those two figures, below PGI by exactly the loss amount.
Common Mistakes to Avoid
- -Reporting the dollar loss as EGI
- -Dividing by 1.12 instead of multiplying by 0.88
- -Leaving PGI unadjusted for vacancy and collection loss
Concept Deep Dive
Analysis
This question tests converting potential gross income to effective gross income using a stated combined loss rate. The loss is 12% of PGI and is subtracted, leaving 88%. The distractors report the loss, skip it, or apply the percentage by division.
Background Knowledge
Effective gross income is potential gross income less anticipated vacancy and collection losses, plus any other income. The vacancy and collection allowance should be supported by market and subject evidence. EGI is the starting point for deducting operating expenses to reach NOI.
Real-World Application
An appraiser values an older strip center with $250,000 of potential gross income in a softer market. Market data support a 12% combined vacancy and collection loss, so she estimates EGI of $220,000.
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Previous Question
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?
Next Question
Annual NOI for the subject is $85,800. Typical financing covers 70% of value at an annual mortgage constant of 6%, and the remaining equity has a current annual dividend rate of 12%. Using the band of investment to develop the overall rate, what value is indicated, rounded to the nearest dollar?