Insurance premiums that have risen sharply since the last policy year should be:
Correct Answer
D) Projected at the current level a buyer would pay
Why this is correct: For income approach expense analysis, use the current, market-level expense a typical buyer would expect to pay at the effective date. Using a stale, lower figure would overstate Net Operating Income (NOI) and thus value. Why the other choices are wrong: Excluding it as non-recurring is wrong if the increase is a permanent market shift. Averaging with prior years smooths but may not reflect the new market reality. Carrying the older figure is explicitly incorrect. Exam tip: In the income approach, always project expenses at the level a buyer would pay on the effective date.
Why This Is the Correct Answer
Why this is correct: For income approach expense analysis, use the current, market-level expense a typical buyer would expect to pay at the effective date. Using a stale, lower figure would overstate Net Operating Income (NOI) and thus value. Why the other choices are wrong: Excluding it as non-recurring is wrong if the increase is a permanent market shift. Averaging with prior years smooths but may not reflect the new market reality. Carrying the older figure is explicitly incorrect. Exam tip: In the income approach, always project expenses at the level a buyer would pay on the effective date.
More Income Approach Questions
In a percentage lease, rent is commonly structured as:
In a DCF, what is the reversion?
Potential gross income differs from effective gross income in that PGI assumes:
The reversion in a discounted cash flow model represents:
Building A (new, credit tenant, 20-year lease) and Building B (older, month-to-month tenants) sell the same week. Their cap rates should differ how?
An overall rate extracted from a sale whose NOI excluded reserves, applied to a subject NOI that includes them, will:
Replacement reserves cover which kind of expenditure?
What is the primary distinction, for appraisal purposes, between 'vacancy loss' and 'collection loss'?
An appraiser is analyzing a mixed-use property with retail and office components. The retail segment has a potential gross income of $180,000 with a market vacancy of 8%. The office segment has a potential gross income of $120,000 with a market vacancy of 12%. What is the overall effective gross income for the property?
The mortgage constant represents:
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When estimating Effective Gross Income for a stabilized property in a market value appraisal, an appraiser should treat reimbursable expenses from tenants (such as common area maintenance charges) in which of the following ways?
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A statement shows $96,000 EGI and these expenses: taxes $11,000, insurance $4,000, utilities $8,500, maintenance $7,000, management $4,800, reserves $2,700, mortgage payments $31,000. NOI is: