A commercial building has gross rental income of $240,000 annually and operating expenses of $85,000. If an investor wants a 9% cap rate, what should they pay for the property?

Q: What is the correct answer to: A commercial building has gross rental income of $240,000 annually and operating expenses of $85,000. If an investor wants a 9% cap rate, what should they pay for the property?

The correct answer is $1,722,222. Option B ($1,722,222) is correct because it properly applies the cap rate formula: Property Value = NOI ÷ Cap Rate. First, calculate NOI by subtracting operating expenses from gross rental income: $240,000 - $85,000 = $155,000. Then divide NOI by the desired cap rate: $155,000 ÷ 0.09 = $1,722,222. This formula is the standard method for commercial property valuation and is recognized across all Canadian jurisdictions for investment analysis and appraisal purposes.

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

The capitalization rate (cap rate) is a fundamental metric in commercial real estate that measures the relationship between a property's Net Operating Income and its market value. NOI is calculated by subtracting all operating expenses from gross rental income, excluding debt service and depreciation. The cap rate formula can be rearranged three ways: Cap Rate = NOI ÷ Property Value, Property Value = NOI ÷ Cap Rate, and NOI = Property Value × Cap Rate. This method is widely accepted across Canadian provinces and is essential for investment analysis, property valuation, and comparative market analysis in commercial real estate transactions.

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

Think of making a financial 'recipe': First, you need clean NOI (Net Operating Income) by removing all the 'bad ingredients' (operating expenses) from your gross income. Then you 'divide and conquer' by splitting your clean NOI by the cap rate percentage. Remember: 'Clean NOI first, then divide to thrive!' Just like cooking, you must prepare your ingredients (calculate NOI) before you can create the final dish (property value). When you see cap rate questions, immediately think 'recipe time!' First step: clean your NOI by subtracting expenses. Second step: divide NOI by cap rate. This two-step process ensures you never skip the crucial NOI calculation and jump straight to using gross income.

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

Always calculate NOI first by subtracting operating expenses from gross income, then divide by the cap rate. Double-check that you're using NOI, not gross income, in your final calculation.

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

A commercial real estate agent in Toronto is helping an investor evaluate a small office building. The building generates $300,000 in annual rent but has $120,000 in operating expenses (maintenance, property taxes, insurance, management). The investor wants an 8% return. Using NOI of $180,000 ÷ 0.08 = $2,250,000, the agent can advise whether the asking price of $2,400,000 meets the investor's criteria. This calculation helps determine negotiation strategy and investment viability under TRESA guidelines.

Question

Commercial Real EstateInvestment AnalysisMEDIUM

A commercial building has gross rental income of $240,000 annually and operating expenses of $85,000. If an investor wants a 9% cap rate, what should they pay for the property?

Answer Options

A

$1,555,556

B

$1,722,222

C

$2,555,556

D

$2,666,667