An income-producing commercial property trades primarily on investment returns. Market NOI and capitalization evidence are strong, while sales and depreciation inputs are weak. Which approach deserves most weight?
Correct Answer
C) The income approach, because its application and data are strongest here.
The income approach is most persuasive under the stated investor behavior and strong income and capitalization evidence. Narrative report format does not prescribe a weighting rule, and commercial properties do not invariably require the same approach to dominate.
Why This Is the Correct Answer
Option C is correct because the property trades primarily on investment returns and the market NOI and capitalization evidence are strong, while sales and depreciation inputs are weak. When adequate and reliable data exist, the greatest reliance goes to the indicator that best measures the benefits the property is expected to yield. Here that is the income approach.
Why the Other Options Are Wrong
Option A: The cost approach because the report is narrative.
Option A, the cost approach because the report is narrative, is wrong because report format has nothing to do with which approach is most reliable. The cost approach here also relies on weak depreciation inputs.
Option B: Sales comparison, because it controls the outcome of commercial appraisals.
Option B, sales comparison because it controls commercial appraisals, is wrong because no approach controls all commercial appraisals. In this case the sales inputs are weak and the property trades on income.
Option D: All three equally because a narrative report discusses them.
Option D, all three equally because a narrative report discusses them, is wrong because discussing an approach in a report does not entitle it to equal weight. The approaches have very different support in this scenario.
Bought for income, valued by income
If buyers purchase a property for its income and the income data are strong, the income approach usually leads.
How to use: Use this when a question describes an investment property with strong income and rate data.
Exam Tip
Connect the weight to how buyers value the property and to data quality. Report format and blanket property-type rules are distractors.
Common Mistakes to Avoid
- -Linking approach weight to report format
- -Assuming one approach controls all commercial appraisals
- -Weighting approaches equally despite unequal data
Concept Deep Dive
Analysis
This question tests matching approach weight to how a property trades and to the strength of the data. An income-producing commercial property bought for investment returns, with strong NOI and capitalization evidence, is best measured by the income approach. Report format and property category labels do not set weights.
Background Knowledge
The income approach converts expected income into value using market-derived capitalization rates or discount rates. It is typically most persuasive for properties bought for their income, provided the income and rate data are reliable.
Real-World Application
An appraiser values a fully leased neighborhood shopping center with several reliable capitalization rate comparables but few truly similar sales. The appraiser gives the income approach primary weight and explains that investors price such centers on their net operating income.
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