Direct capitalization differs from yield capitalization (DCF) in that direct cap:
Correct Answer
A) One stabilized year converted by one rate; DCF discounts multi-year flows
Why this is correct: Direct capitalization converts one stabilized year's Net Operating Income (NOI) into value using a capitalization rate. Yield capitalization (DCF) discounts multiple years of projected cash flows and a reversion. Why the other choices are wrong: It requires specialized valuation software while a DCF analysis does not is incorrect; both can be done manually or with software. Applies only to raw land parcels is false; direct cap is used for income-producing properties. Ignores the property's income entirely is opposite; both methods use income. Exam tip: Direct cap = one-year snapshot; DCF = multi-year movie.
Why This Is the Correct Answer
Why this is correct: Direct capitalization converts one stabilized year's Net Operating Income (NOI) into value using a capitalization rate. Yield capitalization (DCF) discounts multiple years of projected cash flows and a reversion. Why the other choices are wrong: It requires specialized valuation software while a DCF analysis does not is incorrect; both can be done manually or with software. Applies only to raw land parcels is false; direct cap is used for income-producing properties. Ignores the property's income entirely is opposite; both methods use income. Exam tip: Direct cap = one-year snapshot; DCF = multi-year movie.
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Previous Question
A certified general appraiser is valuing a regional shopping center subject to long-term triple-net leases. One anchor tenant occupies 40% of the GLA under a 12-year lease with fixed annual rent of $1.2 million; the remaining space is leased to smaller tenants at market rates, with rents projected to grow at 2.5% per year. The appraiser develops a discounted cash flow model with a 10-year holding period. Which statement best reflects the appropriate treatment of the anchor tenant’s rent in the DCF model?
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A replacement reserve in an operating statement accounts for: