In developing an income approach for a stabilized property, an appraiser estimates potential gross income based on market rent. Which of the following best describes the relationship between potential gross income and effective gross income?
Correct Answer
A) Effective gross income is potential gross income minus vacancy and collection loss plus other income.
Effective Gross Income (EGI) is defined as Potential Gross Income (PGI) minus vacancy and collection losses plus any other income (such as from vending machines, parking, or laundry facilities). Operating expenses and replacement reserves are deducted from EGI to arrive at Net Operating Income. Thus, option A is the correct, complete definition per standard income capitalization principles.
Why This Is the Correct Answer
Effective Gross Income (EGI) is defined as Potential Gross Income (PGI) minus vacancy and collection losses plus any other income (such as from vending machines, parking, or laundry facilities). Operating expenses and replacement reserves are deducted from EGI to arrive at Net Operating Income. Thus, option A is the correct, complete definition per standard income capitalization principles.
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Previous Question
A certified general appraiser is developing a market-derived overall capitalization rate for an industrial warehouse using direct capitalization. She selects four comparable sales but excludes one because its lease included a tenant improvement allowance amortized over the lease term, causing the reported net operating income to understate the property’s sustainable operating income. Which USPAP standard most directly governs this exclusion decision?
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Using the band of investment with a 70% loan at a 7.2% mortgage constant and 30% equity requiring a 10.5% dividend, the overall rate is: