Two identical buildings differ only in risk: one has a single tenant on a short lease, the other five tenants on staggered terms. How do their cap rates compare?
Correct Answer
D) The single-tenant building takes the higher rate
Why this is correct: The capitalization rate reflects investor perception of risk. A property reliant on a single tenant (concentration risk) is riskier than one with multiple tenants (diversification), so investors demand a higher return, which translates to a higher cap rate. Why the other choices are wrong: 'The single-tenant building capitalizes at the lower rate' would imply it's less risky, which is false. 'Both take the same rate, since the buildings match' ignores the tenancy risk difference. 'The rates differ only if the incomes differ' is incorrect; risk alone can cause rate differences. Exam tip: Higher risk = Higher cap rate = Lower value for the same NOI.
Why This Is the Correct Answer
Why this is correct: The capitalization rate reflects investor perception of risk. A property reliant on a single tenant (concentration risk) is riskier than one with multiple tenants (diversification), so investors demand a higher return, which translates to a higher cap rate. Why the other choices are wrong: 'The single-tenant building capitalizes at the lower rate' would imply it's less risky, which is false. 'Both take the same rate, since the buildings match' ignores the tenancy risk difference. 'The rates differ only if the incomes differ' is incorrect; risk alone can cause rate differences. Exam tip: Higher risk = Higher cap rate = Lower value for the same NOI.
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Effective gross income is $118,800 and operating expenses total $43,800. Net operating income is:
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In preparing a stabilized pro forma for an apartment building, an appraiser analyzes the property's 5-year history and market data. The appraiser concludes a long-term, typical vacancy and collection loss of 6% is supportable. To correctly develop the stabilized effective gross income estimate, the appraiser should apply this 6% rate to which of the following?