The subject property is an eight-unit apartment building appraised at $1,400,000 using an 8.5% overall rate. Operating expenses are $61,000 and annual debt service is $75,000. Potential rental income is $200,000, and parking income of $6,000 is collected separately with no loss. What vacancy and collection loss, as a percentage of potential rental income, does the appraisal reflect?
Correct Answer
B) 13.0%
NOI is $1,400,000 × 0.085 = $119,000, so EGI is $119,000 + $61,000 = $180,000. Removing the $6,000 of parking income leaves effective rent of $174,000, so the loss on rent is $200,000 − $174,000 = $26,000, or 13.0% of $200,000. The 10.0% answer forgets to remove parking income from EGI, while 14.4% and 14.9% divide the correct loss by EGI and by effective rent rather than by potential rent. Debt service plays no part because NOI is measured before financing.
Why This Is the Correct Answer
Option B is correct because NOI of $1,400,000 × 0.085 = $119,000 plus $61,000 of expenses gives EGI of $180,000. Removing $6,000 of effective parking income leaves $174,000 of effective rent. The $26,000 shortfall from potential rent is 13.0% of $200,000.
Why the Other Options Are Wrong
Option A: 10.0%
Option A, 10.0%, compares EGI of $180,000 directly with potential rent: $20,000 ÷ $200,000. That treats parking income as if it were rent. Removing the $6,000 first gives a $26,000 loss, or 13.0%.
Option C: 14.4%
Option C, 14.4%, uses the right $26,000 loss but divides it by EGI: $26,000 ÷ $180,000. The rate asked for is measured on potential rent, so the correct result is $26,000 ÷ $200,000 = 13.0%.
Option D: 14.9%
Option D, 14.9%, divides the $26,000 loss by effective rent: $26,000 ÷ $174,000. Effective rent is what remains after the loss, so it is the wrong base. On potential rent of $200,000 the rate is 13.0%.
Loss over potential, not over collected
A loss rate compares what was missed with what could have been earned. Strip other income out first so only rent is compared with rent.
How to use: Use this whenever you must recover a vacancy rate from an income statement or value conclusion.
Exam Tip
Check which base the rate is measured on before dividing. Several wrong answers on this type of problem use the right dollar loss over the wrong denominator.
Common Mistakes to Avoid
- -Leaving already-effective other income in the rent figure
- -Dividing the loss by effective gross income
- -Dividing the loss by effective rent instead of potential rent
Concept Deep Dive
Analysis
The calculation reverses the path from potential rent to value. You rebuild NOI and then EGI, then decide how the parking income fits. Since parking is already effective, it must come out of EGI before comparing collected rent with potential rent, and the loss is measured against potential rent.
Background Knowledge
Vacancy and collection loss is an allowance for income lost to vacancy, turnover and nonpayment, usually stated as a percentage of potential gross income. Effective gross income can also include non-rental income from the real property. Implied rates like this one help an appraiser compare a valuation's assumptions with market vacancy evidence.
Real-World Application
A reviewer receives a report valuing an apartment building, but the vacancy assumption is not clearly shown. By rebuilding the income from the value and rate, the reviewer finds the implied loss and compares it with vacancy in competing buildings.
More Income Approach Questions
Which model describes yield capitalization of property benefits?
An appraiser is valuing a duplex. A market survey of recent duplex sales reports prices at 10.8 times potential gross income, with stabilized vacancy and credit loss of 10% of PGI and no other income. The subject's rent schedule is unavailable, but the property manager's records show collected income of $54,000 a year, in line with market rent and the 10% market loss. What value is indicated?
The subject property is a fourplex with annual EGI of $72,000 and operating expenses of $28,800. Of those expenses, $18,000 is fixed and $10,800 varies in direct proportion to EGI. The owner's annual mortgage payments are $21,000. An appraiser projects that EGI will fall 10% because of higher vacancy. What is the projected NOI?
Annual NOI available for debt service is $168,000 and total annual mortgage principal and interest debt service is $120,000. What is NOI ÷ debt service?
Annual PGI is $250,000 and combined vacancy and collection loss is explicitly 12% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $360,000 and combined vacancy and collection loss is explicitly 8% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $640,000. Combined vacancy and collection loss is 6.25% of PGI. There is no other income. What EGI remains?
An appraiser is updating a prior appraisal of a triplex with potential gross income of $60,000 and no other income. The prior appraisal used vacancy and credit loss of 5% of PGI, and a new survey of competing rentals indicates 8%. The operating expenses of $24,000 are property taxes, insurance and contract services that do not vary with occupancy, and the market overall rate remains 7.5%. By what percentages do effective gross income and indicated value decrease?
Annual potential rental income is $600,000 and vacancy loss alone is $36,000. What percentage of potential rent does that loss represent?
In the subject's market, lenders on fourplexes have lowered their typical loan-to-value ratio from 70% to 60%. The annual mortgage constant remains 5% and the equity dividend rate remains 10%. The subject's NOI has not changed. How does this affect the overall rate indicated by the band of investment and the indicated value?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Previous Question
An appraiser is valuing a leased fee by discounted cash flow analysis. The landlord must replace a roof for $420,000 at the end of year three. The forecast includes all other benefits and costs, but not this cost or any reserve for it. At a positive annual discount rate, how should this obligation affect the value?
Next Question
The subject property has annual potential rental income of $240,000, vacancy and collection loss of 5% of that amount and no other income. Annual operating expenses of $48,000 include property taxes and the same reserve allowance used to extract the 8% overall rate; they exclude debt service. What value is indicated by direct capitalization, rounded to the nearest dollar?