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:
Escalation clauses and expense stops in a lease matter to the income analysis because they:
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:
Two identical buildings differ only in risk: one has a single tenant on a short lease, the other five tenants on staggered terms. How do their cap rates compare?
Contract rent on a leased office is $30 per sq ft; market rent is $26. The $4 difference is called:
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?
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An overall rate extracted from a sale whose NOI excluded reserves, applied to a subject NOI that includes them, will:
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Previous Question
An appraiser estimates a property’s reversion value by dividing the Year 8 NOI by a terminal cap rate. The Year 8 NOI is projected to be $312,000, and the terminal cap rate used is 5.8%. The appraiser then discounts that reversion back to present value using a 6.5% annual discount rate over 7 years. What is the present value of the reversion?
Next Question
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: