Direct capitalization converts:
Correct Answer
C) A single year's stabilized income into a value indication
Why this is correct: Direct capitalization estimates value by dividing a single year's stabilized Net Operating Income (NOI) by an overall capitalization rate (OAR). The formula is Value = NOI / OAR. It is a snapshot method assuming stable, perpetual income. Why the other choices are wrong: "The reversion into an annual equivalent" describes the process for a sinking fund factor or annuity. "A series of periodic cash flows converted into present value" describes Discounted Cash Flow (DCF) analysis. "Gross income into net operating income" is just one step in the income approach, not the capitalization process. Exam tip: Direct cap: Value = NOI / Rate. DCF: Value = PV of future cash flows + PV of reversion.
Why This Is the Correct Answer
Why this is correct: Direct capitalization estimates value by dividing a single year's stabilized Net Operating Income (NOI) by an overall capitalization rate (OAR). The formula is Value = NOI / OAR. It is a snapshot method assuming stable, perpetual income. Why the other choices are wrong: "The reversion into an annual equivalent" describes the process for a sinking fund factor or annuity. "A series of periodic cash flows converted into present value" describes Discounted Cash Flow (DCF) analysis. "Gross income into net operating income" is just one step in the income approach, not the capitalization process. Exam tip: Direct cap: Value = NOI / Rate. DCF: Value = PV of future cash flows + PV of reversion.
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An overall rate extracted from a sale whose NOI excluded reserves, applied to a subject NOI that includes them, will:
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