Potential base rent excludes other income. Loss is applied to base rent only; other income is already stated at effective collectible amounts. Which construction gives total EGI?
Correct Answer
A) Potential base rent minus its loss plus the already-effective other income.
For this explicitly separated construction, subtract rental loss from potential base rent, then add already-effective other income. If potential gross income already includes ancillary receipts, do not add them twice. Expense and reserve deductions belong later according to the stated NOI convention.
Why This Is the Correct Answer
Option A is correct because, with the stated construction, EGI equals potential base rent minus its vacancy and collection loss plus the other income already stated at effective amounts. The other income is not reduced again because its losses are already reflected. Operating expenses and reserves are deducted later, when moving from EGI to NOI.
Why the Other Options Are Wrong
Option B: Subtract operating expenses as well and still label the result gross income.
Option B is wrong because subtracting operating expenses produces net operating income, not gross income. Labeling a figure after expenses as gross income misstates the income step.
Option C: Ignore the stated positive other income in the EGI total.
Option C is wrong because ignoring the stated positive other income understates EGI. The other income is collectible real-property income and belongs in the EGI total.
Option D: Subtract a replacement reserve instead of recognizing rental loss.
Option D is wrong because a replacement reserve is not a substitute for vacancy and collection loss. Rental loss is deducted to reach EGI, while any reserve is treated later under the stated NOI convention.
Lose It, Then Add It
Take the loss off the base rent first, then add the other income that is already net. Expenses wait for the next step.
How to use: Use this sequence when a problem separates base rent from other income.
Exam Tip
Read whether other income is already effective or still potential; that tells you whether the vacancy rate applies to it.
Common Mistakes to Avoid
- -Applying the vacancy rate to other income that is already effective
- -Deducting operating expenses before reporting EGI
- -Adding other income twice when it is already in potential gross income
Concept Deep Dive
Analysis
This question tests how to build effective gross income when base rent and other income are stated separately. Loss applies only to base rent here, and other income is already at effective collectible amounts. So EGI is base rent minus its loss plus the other income, with expenses and reserves coming later.
Background Knowledge
Vacancy and collection loss is an allowance for reductions in potential income from vacancies, tenant turnover and nonpayment of rent. EGI is potential gross income less that allowance, plus any other income not already included. If potential gross income already includes ancillary receipts, they are not added a second time.
Real-World Application
An apartment appraiser projects base rent for all units, deducts a market vacancy and collection allowance, and then adds laundry and parking income already reported at collected amounts. The result is EGI, from which operating expenses are then deducted.
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?
The subject property is a fourplex with annual EGI of $72,000 and operating expenses of $28,800. Of those expenses, $18,000 is fixed and $10,800 varies in direct proportion to EGI. The owner's annual mortgage payments are $21,000. An appraiser projects that EGI will fall 10% because of higher vacancy. What is the projected NOI?
Annual NOI available for debt service is $168,000 and total annual mortgage principal and interest debt service is $120,000. What is NOI ÷ debt service?
Annual PGI is $250,000 and combined vacancy and collection loss is explicitly 12% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $360,000 and combined vacancy and collection loss is explicitly 8% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $640,000. Combined vacancy and collection loss is 6.25% of PGI. There is no other income. What EGI remains?
An appraiser is updating a prior appraisal of a triplex with potential gross income of $60,000 and no other income. The prior appraisal used vacancy and credit loss of 5% of PGI, and a new survey of competing rentals indicates 8%. The operating expenses of $24,000 are property taxes, insurance and contract services that do not vary with occupancy, and the market overall rate remains 7.5%. By what percentages do effective gross income and indicated value decrease?
Annual potential rental income is $600,000 and vacancy loss alone is $36,000. What percentage of potential rent does that loss represent?
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 an office building whose income is reported after management but with no deduction for replacement reserves. A comparable office building sold for $2,000,000 cash. Its reported NOI of $148,000 is after a $6,000 management fee and a $12,000 replacement reserve. What overall rate from this sale matches the subject's income?
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Debt funds 70% of value at an annual mortgage constant of 7.2%, and the remaining equity has a current annual dividend rate of 10.5%. What overall rate does the band of investment indicate?