Why is the terminal capitalization rate usually set above today's rate?
Correct Answer
C) The building will be older and its remaining income shorter
Why this is correct: The 'terminal capitalization rate usually set above today's rate' because 'the building will be older and its remaining income shorter'—reflecting increased risk and diminished remaining economic life. Why the other choices are wrong: 'The discounting mathematics itself requires such a spread' is not inherently true; the relationship depends on assumptions. 'Terminal rates must include the future costs of the sale' is incorrect; sale costs are typically deducted from the reversion proceeds, not baked into the cap rate. 'Lenders impose the higher exit figure in their covenants' is not a general principle; terminal rates are market-derived. Exam tip: A terminal cap rate lower than the going-in rate implies expected market improvement, which should be explicitly justified.
Why This Is the Correct Answer
Why this is correct: The 'terminal capitalization rate usually set above today's rate' because 'the building will be older and its remaining income shorter'—reflecting increased risk and diminished remaining economic life. Why the other choices are wrong: 'The discounting mathematics itself requires such a spread' is not inherently true; the relationship depends on assumptions. 'Terminal rates must include the future costs of the sale' is incorrect; sale costs are typically deducted from the reversion proceeds, not baked into the cap rate. 'Lenders impose the higher exit figure in their covenants' is not a general principle; terminal rates are market-derived. Exam tip: A terminal cap rate lower than the going-in rate implies expected market improvement, which should be explicitly justified.
More Income Approach Questions
In a percentage lease, rent is commonly structured as:
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:
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 overall rate extracted from a sale whose NOI excluded reserves, applied to a subject NOI that includes them, will:
Replacement reserves cover which kind of expenditure?
What is the primary distinction, for appraisal purposes, between 'vacancy loss' and 'collection loss'?
An appraiser is analyzing a mixed-use property with retail and office components. The retail segment has a potential gross income of $180,000 with a market vacancy of 8%. The office segment has a potential gross income of $120,000 with a market vacancy of 12%. What is the overall effective gross income for the property?
The mortgage constant represents:
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam