Before vacancy and collection deductions, what does a stated full-occupancy potential-rent model include?
Correct Answer
D) Scheduled rent for all lawful rentable space, on the stated basis.
Potential gross rental income includes all modeled rentable space at the income basis appropriate to the rights and assignment. It can use contract or market rent as specified; there is no universal choose-the-higher rule. Losses and operating expenses are later deductions, with actual cash receipts a different measure.
Why This Is the Correct Answer
Option D is correct because potential gross rental income includes scheduled rent for all lawful rentable space on the stated basis, before any deductions. The income sequence runs from potential gross income, minus vacancy and collection losses, to effective gross income, then minus operating expenses. The basis may be contract or market rent as the assignment specifies.
Why the Other Options Are Wrong
Option A: Rent from the occupied suites, with vacant suites left out.
Option A is wrong because including rent from occupied suites while leaving vacant suites out already reflects vacancy. Potential gross income assumes full occupancy, with vacancy deducted as a separate step.
Option B: Income that is already net of the operating expenses the property pays.
Option B is wrong because income already net of the operating expenses the property pays is closer to net operating income. Potential gross income comes before both loss deductions and operating expenses.
Option C: Rent that is already net of all vacancy and credit losses.
Option C is wrong because rent already net of all vacancy and credit losses describes effective gross income, not potential gross income. Those losses are deducted after potential gross income is established.
Potential means full house
Potential gross income pictures every rentable space leased, before any vacancy or expense comes out.
How to use: Use this to spot answers that have already taken deductions out of potential income.
Exam Tip
If a choice describes income already reduced by vacancy or expenses, it is not potential gross income.
Common Mistakes to Avoid
- -Leaving vacant space out of potential gross income and then deducting vacancy again
- -Confusing potential gross income with effective gross income
- -Assuming potential income must use the higher of contract or market rent
Concept Deep Dive
Analysis
This question tests what potential gross income represents. Before deductions, a full-occupancy potential-rent model includes scheduled rent for all lawful rentable space on the stated basis. Vacancy, credit losses and operating expenses are taken out at later steps.
Background Knowledge
The income approach builds income in layers: potential gross income at full occupancy, effective gross income after vacancy and collection loss plus other income, and net operating income after operating expenses. Each layer has its own definition, and mixing them causes double deductions or omissions. The rent basis used for potential income should fit the property rights and assignment.
Real-World Application
An appraiser analyzing a fourplex with one vacant unit includes scheduled rent for that unit in potential gross income. She then deducts a market-supported vacancy and collection allowance to reach effective gross income. This avoids leaving vacant space out and then deducting vacancy a second time.
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
The subject property is a retail strip center with annual potential rent of $300,000, combined vacancy and collection loss of 10% and no other income. Property management is typical for the market at 6% of collected income. All other expenses, including property taxes, total $100,000 a year. Sales of similar centers indicate an 8% overall rate. What is the indicated value by direct capitalization?
Next Question
How should a DCF reflect a specified free-rent concession?