The subject property is a fourplex with market rent of $2,500 per unit per month. One unit was empty all of last year, and the owner's statement shows rent collected of $90,000, property taxes and insurance of $18,000, utilities and maintenance of $9,000 that vary in direct proportion to occupancy, and mortgage payments of $36,000. The stabilized vacancy/credit loss allowance for similar properties is 5% of PGI. What is the projected stabilized net operating income?
Correct Answer
B) $84,600
PGI is 4 × $2,500 × 12 = $120,000, so stabilized EGI is $114,000. Taxes and insurance stay at $18,000, occupancy-related costs rise from 75% to 95% occupancy ($9,000 × 95/75 = $11,400), and mortgage payments are not an operating expense, so NOI is $114,000 − $18,000 − $11,400 = $84,600. Scaling all expenses gives $79,800, leaving all expenses at last year's level gives $87,000, and omitting the 5% loss gives $90,600.
Why This Is the Correct Answer
Option B is correct because PGI is 4 × $2,500 × 12 = $120,000 and stabilized EGI is $120,000 × 0.95 = $114,000. Fixed expenses remain $18,000, and occupancy-related expenses rise from 75% to 95% occupancy: $9,000 × 95/75 = $11,400. NOI is $114,000 − $18,000 − $11,400 = $84,600, with the mortgage payments excluded.
Why the Other Options Are Wrong
Option A: $79,800
Option A, $79,800, scales all expenses with occupancy: ($18,000 + $9,000) × 95/75 = $34,200, and $114,000 − $34,200 = $79,800. Taxes and insurance do not vary with occupancy, so they stay at $18,000, and NOI is $84,600.
Option C: $87,000
Option C, $87,000, leaves all expenses at last year's level: $114,000 − $27,000 = $87,000. Occupancy-related costs for 95% occupancy are higher than for 75%, so they should be $11,400, and NOI is $84,600.
Option D: $90,600
Option D, $90,600, deducts the restated expenses from PGI: $120,000 − $18,000 − $11,400 = $90,600. It omits the 5% vacancy/credit loss allowance; the correct calculation starts from EGI of $114,000 and gives $84,600.
Fixed stays, variable follows occupancy
When occupancy changes, leave fixed expenses alone and scale variable expenses by new occupancy over old occupancy. Mortgage payments come off the statement.
How to use: Use this when an owner's statement reflects one occupancy level and stabilized NOI is needed at another.
Exam Tip
Read each line of an owner's statement and ask whether it is an operating expense and whether it changes with occupancy. Calculate PGI from market rent rather than starting from rent collected.
Common Mistakes to Avoid
- -Starting from rent collected in a year with an unusual vacancy
- -Scaling fixed expenses when occupancy changes
- -Deducting mortgage payments as an operating expense
Concept Deep Dive
Analysis
An owner's statement from a year with an empty unit has to be reconstructed before it can support a stabilized estimate. Income moves to stabilized occupancy, and expenses are split by how they behave: taxes and insurance hold steady while occupancy-related costs rise. Mortgage payments are financing, so they come off the statement altogether.
Background Knowledge
Expenses are often classified as fixed, which do not vary with occupancy or use, or variable, which do. Stabilized occupancy is the level expected when transitory market conditions cease, and direct capitalization typically uses an income estimate at that level. Debt service is a financing cost and is not deducted in arriving at net operating income.
Real-World Application
An appraiser values a fourplex using the owner's statement for a year when one unit sat empty. To build a stabilized estimate, the appraiser uses market rent for all four units, keeps taxes and insurance steady, raises occupancy-related costs and removes the mortgage payments.
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?
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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?
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Previous Question
The subject property has annual EGI of $99,000. Operating expenses other than reserves total $29,700, and the annual reserve is $3,300. The 8% overall rate was extracted from sales with income stated after the same reserve. What value is indicated?
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A cash-equivalent price is $480,000 and monthly gross rent is $2,000. What is the monthly-basis multiplier? The matching annual multiplier would use twelve equal monthly rents.