Which expense pattern in an owner's statement most deserves scrutiny?
Correct Answer
A) Expenses noticeably below those of comparable buildings
Why this is correct: Operating expenses significantly below market norms for comparable properties often indicate deferred maintenance, under-reporting, or non-recurring items, which artificially inflate Net Operating Income (NOI) and value. Why the other choices are wrong: 'Insurance premiums rising modestly year over year with the market' is normal inflation. 'A utilities figure that varies with the seasons' is expected. 'Management stated as a percentage of collections' is a common and acceptable method. Exam tip: Always reconcile owner-provided expenses to market-derived expense ratios.
Why This Is the Correct Answer
Why this is correct: Operating expenses significantly below market norms for comparable properties often indicate deferred maintenance, under-reporting, or non-recurring items, which artificially inflate Net Operating Income (NOI) and value. Why the other choices are wrong: 'Insurance premiums rising modestly year over year with the market' is normal inflation. 'A utilities figure that varies with the seasons' is expected. 'Management stated as a percentage of collections' is a common and acceptable method. Exam tip: Always reconcile owner-provided expenses to market-derived expense ratios.
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:
People Also Study
Valuation Principles & Procedures
25% of exam
Property Description & Analysis
20% of exam
Market Analysis & Highest/Best Use
15% of exam
Appraisal Math & Statistics
15% of exam
USPAP (Ethics & Standards)
15% of exam
Previous Question
A mixed-use property has a retail component with potential gross income of $120,000 and an office component with potential gross income of $80,000. Market analysis indicates the retail sector has a 10% vacancy rate, while the office sector has a 15% vacancy rate. There is no other income. What is the property's overall effective gross income?
Next 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?