Which assignment most calls for discounted cash flow over direct capitalization?
Correct Answer
D) A half-vacant center being repositioned over three years
Why this is correct: Discounted cash flow (DCF) is needed when future income is expected to change significantly, as with 'a half-vacant center being repositioned over three years' where lease-up and rent increases are projected. Why the other choices are wrong: 'A stabilized fourplex with long-term tenants' has stable income, suited for direct cap. 'A single-tenant building on a flat twenty-year lease' has fixed income, also suitable for direct cap. 'A leased-up office at market rents throughout' implies stable income, favoring direct cap. Exam tip: Use DCF for non-stable income streams; use direct cap for stable, representative income.
Why This Is the Correct Answer
Why this is correct: Discounted cash flow (DCF) is needed when future income is expected to change significantly, as with 'a half-vacant center being repositioned over three years' where lease-up and rent increases are projected. Why the other choices are wrong: 'A stabilized fourplex with long-term tenants' has stable income, suited for direct cap. 'A single-tenant building on a flat twenty-year lease' has fixed income, also suitable for direct cap. 'A leased-up office at market rents throughout' implies stable income, favoring direct cap. Exam tip: Use DCF for non-stable income streams; use direct cap for stable, representative income.
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
A property's income statement shows a potential gross income of $200,000. Last year, it experienced 3 months of vacancy for one of its four units (each unit rents for $4,167 per month) and wrote off $5,000 in uncollectible rent from a tenant who occupied space all year. What was the property's effective gross income last year?
Next Question
Utilities paid by tenants rather than the landlord affect the analysis by: