Market data show that an external influence causes an annual net income loss of $14,400 and indicate a 9% capitalization rate for the loss. Risk and growth do not change. What is the indicated loss to the whole property, before allocation between site and improvements?
Correct Answer
D) $160,000
14400÷0.09 = 160000. Common errors: multiplying the loss by the rate instead of dividing gives $1,296; treating the annual income loss as the value loss gives $14,400; misplacing the decimal in the 9% rate gives $16,000.
Why This Is the Correct Answer
Option D is correct because capitalizing an annual net income loss means dividing it by the capitalization rate: $14,400 ÷ 0.09 = $160,000. That is the whole-property loss indication before allocation between site and improvements.
Why the Other Options Are Wrong
Option A: $1,296
Option A, $1,296, multiplies the loss by the rate ($14,400 × 0.09) instead of dividing. Capitalization divides income by the rate: $14,400 ÷ 0.09 = $160,000.
Option B: $14,400
Option B, $14,400, reports the annual income loss as if it were the value loss. Income must be capitalized into value: $14,400 ÷ 0.09 = $160,000.
Option C: $16,000
Option C, $16,000, misplaces the decimal by treating 9% as 0.9 ($14,400 ÷ 0.9). Nine percent is 0.09, so the correct result is $14,400 ÷ 0.09 = $160,000.
IRV: income over rate
Value equals Income divided by Rate. Dividing by a rate below 1 makes the number bigger.
How to use: Use IRV to check that a capitalized value is larger than the income figure you started with.
Exam Tip
If your capitalized value is smaller than the income loss, you multiplied instead of divided. Convert the percentage carefully: 9% is 0.09.
Common Mistakes to Avoid
- -Multiplying the income loss by the rate
- -Writing 9% as 0.9 instead of 0.09
- -Reporting the income loss as the value loss
Concept Deep Dive
Analysis
This question tests direct capitalization of a net income loss to measure external obsolescence. Value equals income divided by the capitalization rate. The loss is on the same net basis as the 9% rate, so dividing $14,400 by 0.09 gives the value loss.
Background Knowledge
The capitalization of rental loss technique can measure value loss from any cause, including external influences. The income loss and the capitalization rate must be on the same basis, such as annual net income with a rate extracted from net income. The result is a whole-property loss that may need allocation between site and improvements.
Real-World Application
A new waste-transfer station opens near a small apartment building, and comparable rentals show a supported $14,400 drop in annual net income. The appraiser capitalizes that loss at a rate extracted on the same net basis to estimate the external obsolescence.
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Improvement cost new is $352,000. Separately supported improvement depreciation deductions of $44,000, $12,000, $9,000 are expressly nonoverlapping and not already excluded from cost new. Add supported site value of $120,000, already reflecting any site losses. What total indicated value results?
Next Question
The cost new of the improvements is $310,000, and they have depreciated 20% of that cost. The site value of $88,000 already reflects any site influences. What is the indicated value by the cost approach?