The subject property is a four-unit apartment building with potential rent of $60,000 a year and stabilized vacancy and credit loss of 5% of rent. The owner's records also show $2,400 of collected fees for the on-site parking spaces, $3,000 of net receipts from renting furniture to tenants, and $1,600 of net profit from a vending business the owner runs. Operating expenses of the real property are $19,400 a year, and the market overall rate is 8%. What is the indicated value of the real property?
Correct Answer
A) $500,000
Only income attributable to the real property is capitalized: rent of $57,000 after the loss plus $2,400 of parking gives $59,400. NOI is $59,400 − $19,400 = $40,000, and $40,000 ÷ 0.08 = $500,000. Furniture rental comes from personal property and the vending profit comes from a business, so $520,000, $537,500 and $557,500 include one or both of them.
Why This Is the Correct Answer
Option A is correct because only rent and parking are attributable to the real property. EGI is $57,000 + $2,400 = $59,400 and NOI after $19,400 of expenses is $40,000. Dividing by 0.08 indicates $500,000.
Why the Other Options Are Wrong
Option B: $520,000
Option B, $520,000, adds the vending profit: $40,000 + $1,600 = $41,600, ÷ 0.08. That profit comes from a business the owner runs rather than from the real property, so the real-property value is $500,000.
Option C: $537,500
Option C, $537,500, adds the furniture receipts: $40,000 + $3,000 = $43,000, ÷ 0.08. Furniture is personal property, and capitalizing its income would put its value into the real-property figure of $500,000.
Option D: $557,500
Option D, $557,500, adds both: $40,000 + $4,600 = $44,600, ÷ 0.08. Each amount comes from something other than the real property, so neither belongs in the NOI that indicates $500,000.
Ask what asset earned it
For each receipt, name the asset producing it: land and buildings, movable items, or a business. Keep only the first in real-property income.
How to use: Use this test on any list of receipts beyond rent.
Exam Tip
Note the interest being valued. When the assignment is the real property alone, income from movable items or a business operation should be separated.
Common Mistakes to Avoid
- -Capitalizing all receipts shown in an owner's records
- -Assuming business profit is the same as real-property rent
- -Excluding parking income that is produced by the real property
Concept Deep Dive
Analysis
The owner's records list three kinds of extra receipts, and the assignment is the value of the real property alone. The test is what asset produces each receipt: the parking spaces produce parking income, furniture is personal property, and vending profit reflects a business. Only the first belongs in the income being capitalized.
Background Knowledge
Properties can earn non-rental income from sources such as laundry, parking, concessions and equipment rental. When the real property is what is being valued, the appraiser determines whether such income comes from real property, personal property or intangible assets. Effective gross income may include non-rental income attributable to the real property.
Real-World Application
A small apartment owner reports total receipts that include furniture rentals and a vending business. Asked to value the real property only, the appraiser keeps rent and parking in the income analysis and notes the separated items in the report.
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Annual PGI is $720,000. Vacancy loss is 4% of PGI and additional collection loss is 3% of that same PGI base. No other income applies. What EGI results?
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A review appraiser is testing a report that values a 10-unit apartment building at $1,500,000 using a 7.8% overall rate. Operating expenses other than management total $54,000, and management is 5% of effective gross income. What effective gross income does the reported value reflect?