An appraiser is extracting an overall rate from the cash-equivalent sale of an apartment building at $2,000,000. The seller's statement shows income of $130,000 after deductions for on-site property management of $12,000, partnership accounting and investor reporting of $10,000, and the owner's personal vehicle costs of $4,000. All other deductions are property operating expenses. What overall rate does the sale indicate?
Correct Answer
D) 7.2%
Costs of running the ownership entity and the owner's personal costs are not property expenses, so $10,000 and $4,000 are added back; on-site management stays deducted. Corrected NOI = $130,000 + $10,000 + $4,000 = $144,000, and $144,000 ÷ $2,000,000 = 7.2%. Using the statement unadjusted gives 6.5%, adding back the vehicle costs alone gives 6.7%, and adding back the partnership costs alone gives 7.0%.
Why This Is the Correct Answer
Option D is correct because partnership accounting and personal vehicle costs are not expenses of the property, while on-site management is. Corrected NOI is $130,000 + $10,000 + $4,000 = $144,000, and $144,000 ÷ $2,000,000 = 7.2%. The on-site management of $12,000 stays deducted.
Why the Other Options Are Wrong
Option A: 6.5%
Option A, 6.5%, uses the statement as reported: $130,000 ÷ $2,000,000 = 6.5%. That leaves entity and personal costs in the income; correcting them gives $144,000 ÷ $2,000,000 = 7.2%.
Option B: 6.7%
Option B, 6.7%, adds back the $4,000 vehicle costs but not the $10,000 partnership costs: $134,000 ÷ $2,000,000 = 6.7%. Running the investment entity is not a property expense, so the corrected rate is 7.2%.
Option C: 7.0%
Option C, 7.0%, adds back the $10,000 partnership costs but not the $4,000 vehicle costs: $140,000 ÷ $2,000,000 = 7.0%. Personal costs unrelated to the property also come out, so the corrected rate is 7.2%.
Building's bills, not owner's bills
Ask whose bill it is. If the building would still need it under a new owner, it stays; if it follows the partnership or the owner, it goes.
How to use: Use this when you verify the income of a sale before extracting a rate.
Exam Tip
Errors in a comparable's income flow straight into the extracted rate. An understated NOI produces an understated rate, which would then overstate a subject's value if applied.
Common Mistakes to Avoid
- -Extracting a rate from a seller's statement without correcting it
- -Treating partnership administration as property management
- -Adding back on-site management along with ownership costs
Concept Deep Dive
Analysis
The unknown here is the rate, and bad expense data distort a rate just as they distort a value. Sort the three named deductions into property costs and ownership costs. Property management is a cost of running the real estate, while partnership administration and personal costs belong to the owner.
Background Knowledge
An extracted overall rate is NOI divided by a cash-equivalent price, so its reliability depends on how carefully the sale's income was analyzed. Property management is an operating expense, but managing an investment entity or paying an owner's personal costs is not. Removing those costs puts the comparable's income on a property-level basis.
Real-World Application
An appraiser confirming a comparable sale gets the seller's statement from the partnership's accountant. It includes investor reporting and personal charges, so the appraiser removes them before calculating the rate and notes the corrections in the sale file.
More Income Approach Questions
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