A commercial property investor in Alberta is analyzing a potential acquisition. The property generates $200,000 in annual net operating income and comparable properties are trading at a 7% capitalization rate. What is the estimated market value?

Q: What is the correct answer to: A commercial property investor in Alberta is analyzing a potential acquisition. The property generates $200,000 in annual net operating income and comparable properties are trading at a 7% capitalization rate. What is the estimated market value?

The correct answer is $2,857,143. The income approach formula Value = NOI / Cap Rate is the standard method for commercial property valuation. $200,000 / 0.07 = $2,857,143. This calculation is consistent with the Appraisal Institute of Canada standards and is the primary valuation method used for income-producing properties in Alberta and across Canada.

Q: What background knowledge is needed for this Commercial Real Estate question?

The income approach is one of three recognized approaches to property valuation alongside the cost approach and sales comparison approach. For income-producing commercial properties, it is typically the most relevant method. The cap rate is derived from comparable property sales in the market and reflects current investor expectations for returns.

Q: What is a good way to remember the answer to this Commercial Real Estate question?

The formula is simple: Value = NOI / Cap Rate. For this question: $200,000 / 0.07 = $2,857,143. Always express the cap rate as a decimal (7% = 0.07). When doing cap rate calculations, always convert the percentage to a decimal first. Then divide NOI by that decimal. Double-check by multiplying your answer by the cap rate — you should get the NOI.

Q: What exam tip applies to this Commercial Real Estate question?

For cap rate calculations: Value = NOI / Cap Rate. Convert percentage to decimal first (7% = 0.07). Check your answer: $2,857,143 x 0.07 = $200,000. This confirms the answer.

Q: How does this Commercial Real Estate concept apply in real world practice?

An investor evaluates a multi-tenant office building in Edmonton generating $200,000 NOI. Their commercial broker provides comparable sales showing a 7% cap rate for similar properties. Using Value = $200,000 / 0.07, they determine the estimated market value is approximately $2.86 million and structure their offer accordingly.

Question

Commercial Real EstateABHARD

A commercial property investor in Alberta is analyzing a potential acquisition. The property generates $200,000 in annual net operating income and comparable properties are trading at a 7% capitalization rate. What is the estimated market value?

Answer Options

A

$1,400,000

B

$2,857,143

C

$3,500,000

D

$14,000,000