Why does the GRM technique skip vacancy and expenses entirely?
Correct Answer
C) The multiplier was extracted from sales the same way, embedding costs
Why this is correct: The Gross Rent Multiplier (GRM) is calculated as Sale Price ÷ Gross Scheduled Income. The multiplier is derived from market sales data, so the typical market expenses and vacancy rates for similar properties are already embedded within it. This embedded assumption is the reason the technique skips explicit vacancy and expense deductions. Why the other choices are wrong: Gross rent does not legally define value; it's a market-derived indicator. Small properties do have vacancies. Expenses being the tenant's problem is not a universal rule and ignores owner-paid expenses. Exam tip: GRM's strength (simplicity) is also its weakness—it assumes typical expenses. It fails for properties with atypical costs.
Why This Is the Correct Answer
Why this is correct: The Gross Rent Multiplier (GRM) is calculated as Sale Price ÷ Gross Scheduled Income. The multiplier is derived from market sales data, so the typical market expenses and vacancy rates for similar properties are already embedded within it. This embedded assumption is the reason the technique skips explicit vacancy and expense deductions. Why the other choices are wrong: Gross rent does not legally define value; it's a market-derived indicator. Small properties do have vacancies. Expenses being the tenant's problem is not a universal rule and ignores owner-paid expenses. Exam tip: GRM's strength (simplicity) is also its weakness—it assumes typical expenses. It fails for properties with atypical costs.
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In a discounted cash flow analysis for a commercial property, the appraiser uses a discount rate of 7.8% and a terminal capitalization rate of 6.2%. Which conclusion is supported by these rates under standard investment theory?
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Escalation clauses and expense stops in a lease matter to the income analysis because they: