When estimating Effective Gross Income for a stabilized property in a market value appraisal, an appraiser should treat reimbursable expenses from tenants (such as common area maintenance charges) in which of the following ways?
Correct Answer
B) Add them to income after calculating the vacancy loss on base rent.
Reimbursable expenses (recoveries) are typically not subject to vacancy loss. Standard practice in the income approach is to estimate Potential Gross Income (PGI) from base rents, apply a market vacancy and collection loss to that base rent to calculate effective base rent, and then add the expected reimbursements (other income) to arrive at Effective Gross Income (EGI). This method correctly reflects that while a unit may be vacant, the tenant reimbursement for that unit's share of expenses typically ceases.
Why This Is the Correct Answer
Reimbursable expenses (recoveries) are typically not subject to vacancy loss. Standard practice in the income approach is to estimate Potential Gross Income (PGI) from base rents, apply a market vacancy and collection loss to that base rent to calculate effective base rent, and then add the expected reimbursements (other income) to arrive at Effective Gross Income (EGI). This method correctly reflects that while a unit may be vacant, the tenant reimbursement for that unit's share of expenses typically ceases.
More income-approach Questions
In a percentage lease, rent is commonly structured as:
Escalation clauses and expense stops in a lease matter to the income analysis because they:
In a DCF, what is the reversion?
Potential gross income differs from effective gross income in that PGI assumes:
The reversion in a discounted cash flow model represents:
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?
Contract rent on a leased office is $30 per sq ft; market rent is $26. The $4 difference is called:
Building A (new, credit tenant, 20-year lease) and Building B (older, month-to-month tenants) sell the same week. Their cap rates should differ how?
An appraiser is analyzing a 15-unit apartment building. Market research indicates a 6% vacancy rate is typical for similar properties, but this property's historical vacancy has averaged 4%. The subject has experienced a 1% collection loss (uncollectible rents) over the past two years. When estimating effective gross income for the subject, what vacancy and collection loss percentage should the appraiser apply?
An overall rate extracted from a sale whose NOI excluded reserves, applied to a subject NOI that includes them, will:
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Previous Question
An appraiser is developing a discounted cash flow (DCF) analysis for a commercial property with a 7-year holding period. The projected net operating income (NOI) for Year 7 is $210,000, and the estimated reversion (sale proceeds net of transaction costs) at the end of Year 7 is $3,200,000. Using a discount rate of 9.5%, what is the present value of the Year 7 reversion component alone?
Next Question
An appraiser estimates a property’s reversion value by dividing the Year 8 NOI by a terminal cap rate. The Year 8 NOI is projected to be $312,000, and the terminal cap rate used is 5.8%. The appraiser then discounts that reversion back to present value using a 6.5% annual discount rate over 7 years. What is the present value of the reversion?