Applying a GRM derived from single-family rentals to a small apartment building is:
Correct Answer
A) Inappropriate, since expense structures differ by type
Why this is correct: A Gross Rent Multiplier (GRM) implicitly reflects the operating expense structure, management intensity, and tenant turnover typical of the property type from which it is derived. Single-family rentals and apartment buildings differ significantly in these aspects, making a GRM from one inappropriate for the other. Why the other choices are wrong: It is not standard practice; expense differences matter. Similar unit counts do not make it acceptable because expense structures differ. Scarcity of apartment sales does not require using an inappropriate GRM; alternative valuation methods should be used. Exam tip: GRMs are property-type specific; don't transfer them between different residential income property types.
Why This Is the Correct Answer
Why this is correct: A Gross Rent Multiplier (GRM) implicitly reflects the operating expense structure, management intensity, and tenant turnover typical of the property type from which it is derived. Single-family rentals and apartment buildings differ significantly in these aspects, making a GRM from one inappropriate for the other. Why the other choices are wrong: It is not standard practice; expense differences matter. Similar unit counts do not make it acceptable because expense structures differ. Scarcity of apartment sales does not require using an inappropriate GRM; alternative valuation methods should be used. Exam tip: GRMs are property-type specific; don't transfer them between different residential income property types.
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Previous Question
A medical office building is leased to a physician group under a 12-year lease with rent set at $24.00/sf/year, escalating 3% annually. Market rent for similar space is currently $26.50/sf/year and is projected to grow at 2.75% annually. The appraiser calculates the present value of the rent differential (market minus contract) over the lease term at a 7.5% discount rate and arrives at $1,024,000. What does this figure represent?
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A commercial property's annual schedule of potential gross income from rents is $480,000. Market vacancy and collection losses are estimated at 8%. The property also generates $15,000 annually from cell tower leases and vending machines. What is the property's effective gross income?