An otherwise supported $648,000 indication excludes a particular external influence. Its attributable stabilized annual net income loss is $4,500. The applicable direct-capitalization model uses 9% for that loss. What indication follows after recognizing the effect once?
Correct Answer
D) $598,000
Under the stated applicable model, capitalized loss=$4,500÷0.09=$50,000. Deduct it once from the excluding baseline:$648,000−$50,000=$598,000. The loss is expressly net, stabilized and attributable, and the capitalization treatment is stipulated as appropriate. Gross rent loss or a temporary loss would require additional expense or duration analysis; do not deduct an effect already reflected in value.
Why This Is the Correct Answer
Option D is correct because the capitalized loss is $4,500 ÷ 0.09 = $50,000, and $648,000 − $50,000 = $598,000. The baseline excludes the external influence, so the effect must be deducted once. The loss is stated as net, stabilized and attributable, so direct capitalization applies as stipulated.
Why the Other Options Are Wrong
Option A: $648,000
Option A, $648,000, is the baseline before recognizing the loss; it ignores the $4,500 ÷ 0.09 = $50,000 capitalized loss, which brings the indication to $648,000 − $50,000 = $598,000.
Option B: $594,000
Option B, $594,000, implies a $54,000 deduction, which results from treating the $4,500 as a monthly loss and multiplying by 12 rather than capitalizing it. The correct result is $648,000 − ($4,500 ÷ 0.09 = $50,000) = $598,000.
Option C: $4,500
Option C, $4,500, is the annual net income loss itself, not a value indication; it must be capitalized ($4,500 ÷ 0.09 = $50,000) and deducted from $648,000 to reach $598,000.
Income over rate equals value
Divide the annual net loss by the rate to get the value loss, then subtract it one time.
How to use: Use this IRV relationship whenever a question converts an income loss into a value deduction.
Exam Tip
Make sure the baseline does not already reflect the loss before you subtract it, so you do not count the effect twice.
Common Mistakes to Avoid
- -Multiplying the loss by the rate instead of dividing
- -Deducting a loss already reflected in the baseline
- -Capitalizing gross rent loss without accounting for expenses
Concept Deep Dive
Analysis
This question tests capitalizing an income loss into a value loss and deducting it once. Divide the stabilized annual net income loss by the stated rate to get the capitalized loss, then subtract it from the baseline that excludes the influence. Watch for options that ignore the loss or report only an intermediate figure.
Background Knowledge
The capitalization of rental loss technique converts an income loss into a value loss by dividing it by an appropriate capitalization rate. It can measure loss of value from any cause, including external influences, when the loss is supported and the rate is appropriate.
Real-World Application
A rented house near a new noisy industrial use loses $4,500 per year in net income. Using a supported 9% rate, the appraiser capitalizes the loss to $50,000 and deducts it from the value indication that excluded the influence.
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