Net operating income is $84,000 and the market capitalization rate is 7%. The indicated value is:
Correct Answer
A) $1,200,000
Why this is correct: In direct capitalization, Value = Net Operating Income / Capitalization Rate. Here, $84,000 / 0.07 = $1,200,000. Why the other choices are wrong: "$588,000, the income times the rate factor" incorrectly multiplies NOI by the rate ($84,000 x 0.07 = $5,880). "$840,000, ten times the income earned" uses an arbitrary multiplier. "$1,120,000, after rounding the rate up" uses a rate of 7.5% ($84,000 / 0.075) without basis. Exam tip: Value = NOI / Cap Rate. Don't multiply NOI by the rate; divide by it.
Why This Is the Correct Answer
Why this is correct: In direct capitalization, Value = Net Operating Income / Capitalization Rate. Here, $84,000 / 0.07 = $1,200,000. Why the other choices are wrong: "$588,000, the income times the rate factor" incorrectly multiplies NOI by the rate ($84,000 x 0.07 = $5,880). "$840,000, ten times the income earned" uses an arbitrary multiplier. "$1,120,000, after rounding the rate up" uses a rate of 7.5% ($84,000 / 0.075) without basis. Exam tip: Value = NOI / Cap Rate. Don't multiply NOI by the rate; divide by it.
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A retail center's rent roll shows $340,000 potential, 8% vacancy and collection loss, and $12,500 in reimbursements. EGI is:
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A 3-story office building is leased to a single tenant under a 10-year gross lease with 7 years remaining. The tenant pays a flat $36,000 annual rent, which includes all operating expenses. Market rent for similar space is $30,000 annually *net* of expenses, and typical operating expenses for such properties average $12,000 per year. What is the annual effective gross income attributable to the leasehold interest for valuation purposes?