The subject property is a mixed-use building with annual NOI of $60,000 from ground-floor retail and $40,000 from upper-floor offices. An appraiser is valuing the two components separately. A retail building in the same district recently sold for $1,000,000 with NOI of $80,000. An office building nearby recently sold for $900,000 with NOI of $90,000. What total value is indicated?
Correct Answer
D) $1,150,000
Each stream takes its own market rate: retail is $80,000 ÷ $1,000,000 = 8% and office is $90,000 ÷ $900,000 = 10%. Value is $60,000 ÷ 0.08 + $40,000 ÷ 0.10 = $750,000 + $400,000 = $1,150,000. A simple average multiple of 11.25 on all $100,000 gives $1,125,000. Swapping the rates gives $1,100,000, and using the office rate on all income gives $1,000,000.
Why This Is the Correct Answer
Option D is correct because the 8% retail rate belongs with the retail income and the 10% office rate belongs with the office income. That gives $750,000 + $400,000 = $1,150,000.
Why the Other Options Are Wrong
Option A: $1,000,000
Option A, $1,000,000, applies the office rate to everything: $100,000 ÷ 0.10. The retail income is valued at a rate drawn from a different kind of income. The correct total is $60,000 ÷ 0.08 + $40,000 ÷ 0.10 = $1,150,000.
Option B: $1,100,000
Option B, $1,100,000, swaps the rates: $60,000 ÷ 0.10 + $40,000 ÷ 0.08. Each rate should go with its own income type. The correct total is $60,000 ÷ 0.08 + $40,000 ÷ 0.10 = $1,150,000.
Option C: $1,125,000
Option C, $1,125,000, averages the multiples of 12.5 and 10.0 to 11.25 and applies that to $100,000. A simple average ignores that 60% of the income is retail. The correct total is $60,000 ÷ 0.08 + $40,000 ÷ 0.10 = $1,150,000.
Each stream, its own rate
Match each income stream with evidence from its own property type, value it, and then add the results.
How to use: Use this when a subject has two kinds of income and separate sales exist for each.
Exam Tip
Be careful with simple averages of rates or multiples when income is unevenly split. Calculating each part separately avoids a weighting error.
Common Mistakes to Avoid
- -Applying one sale's rate to all of a mixed-use subject's income
- -Using a simple average when income is split unevenly
- -Pairing a rate with the wrong income stream
Concept Deep Dive
Analysis
The skill is keeping two income streams separate when each has its own market evidence. Each sale provides a rate for one kind of income. Value each stream with the right rate, then add the two parts.
Background Knowledge
Income streams of different risk can warrant different rates, and therefore different multipliers. When the appraiser values components separately, each component's income is matched with evidence for that kind of income. A blended multiplier works if it is weighted by the income mix and a blended rate works if it is weighted by each component's share of value, while a simple average reflects neither.
Real-World Application
A downtown building has ground-floor shops and upper-floor offices, which trade at different levels in the local market. The appraiser analyzes each component with sales of that type and explains how the components combine into an indication for the whole.
More Income Approach Questions
Which model describes yield capitalization of property benefits?
An appraiser is valuing a duplex. A market survey of recent duplex sales reports prices at 10.8 times potential gross income, with stabilized vacancy and credit loss of 10% of PGI and no other income. The subject's rent schedule is unavailable, but the property manager's records show collected income of $54,000 a year, in line with market rent and the 10% market loss. What value is indicated?
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In the subject's market, lenders on fourplexes have lowered their typical loan-to-value ratio from 70% to 60%. The annual mortgage constant remains 5% and the equity dividend rate remains 10%. The subject's NOI has not changed. How does this affect the overall rate indicated by the band of investment and the indicated value?
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Previous Question
The subject property is a retail building owned in fee simple, with annual NOI of $127,500. A similar nearby retail building stands on leased land. An investor recently paid $1,400,000 for the leasehold interest in that building, which earns annual NOI of $170,000 before a ground rent of $30,000 per year. The ground rent is at market. At about the same time, the landowner sold the leased fee interest for $600,000. What is the indicated value of the subject by direct capitalization?
Next Question
End-of-year-one net operating cash flow is $89,000 and additional net sale proceeds at that same date are $1,000,000. No other cash flows apply. At a 10% annual discount rate, what present value results?