A commercial property generates $120,000 in annual rental income with operating expenses of $30,000. If the capitalization rate is 8%, what is the estimated property value?
Correct Answer
D) $1,125,000
The property value is calculated using NOI ÷ Cap Rate = Value. NOI = $120,000 - $30,000 = $90,000. Value = $90,000 ÷ 0.08 = $1,125,000.
Why This Is the Correct Answer
Option D is correct because it properly applies the income capitalization formula. First, calculate the Net Operating Income (NOI) by subtracting operating expenses from gross rental income: $120,000 - $30,000 = $90,000. Then divide the NOI by the capitalization rate: $90,000 ÷ 0.08 = $1,125,000. This method is the standard approach for commercial property valuation in Canada and is recognized under provincial real estate regulations for determining fair market value based on income-producing potential.
Why the Other Options Are Wrong
Deep Analysis of This Commercial Real Estate Question
Background Knowledge for Commercial Real Estate
Memory Technique
Exam Tip for Commercial Real Estate
Real World Application in Commercial Real Estate
Common Mistakes to Avoid on Commercial Real Estate Questions
Key Terms
More Commercial Real Estate Questions
In Alberta, what advantage does the absence of land transfer tax provide for commercial real estate investors?
Under Alberta's condominium property legislation, what unique consideration applies when purchasing a commercial condominium unit compared to freehold commercial property?
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?
A commercial property has an annual NOI of $120,000 and was purchased for $1,500,000. What is the capitalization rate?
An office building is leased on triple net terms with annual base rent of $500,000. Operating expenses of $150,000 a year are all paid by the tenants. The owner bought it for $4,200,000 with 75% financing at 5.5% interest. What is the property's net operating income?
- → In a BC commercial lease, what is the difference between 'usable area' and 'rentable area'?
- → A commercial property has a Net Operating Income (NOI) of $120,000 and was purchased for $1,500,000. What is the capitalization rate?
- → A commercial investor is valuing a 10-year lease on 5,000 square feet at $30 per square foot in year one, with rent rising 3% each year. Rent is paid annually at the end of each year. Using a 7% discount rate, what is the present value of the lease payments, to the nearest dollar?
- → What is an agricultural land transaction in Alberta, and what makes it different from a standard commercial transaction?
- → A BC landlord wants to end a commercial lease early to carry out major renovations. What determines whether the landlord can do so?
- → A retail shopping center tenant has a percentage lease with 3% of gross sales above $500,000 annually, plus base rent of $8,000 monthly. If the tenant's annual gross sales are $750,000, what is their total annual rent payment?
- → Is GST (Goods and Services Tax) applicable to commercial real estate transactions in BC?
- → Which commercial property type typically generates the highest rental income per square foot?
- → A foreign corporation buys a commercial office building in downtown Vancouver for $20,000,000. The property contains no residential space. How much Property Transfer Tax is payable?
- → An office building generates $200,000 in gross rental income with operating expenses of $75,000. If the property was purchased for $1,250,000, what is the capitalization rate?
People Also Study
Real Property Law
60 questions
Contracts & Agreements
60 questions
Agency & Professional Ethics
60 questions
Mortgage & Real Estate Finance
60 questions
Related Study Resources
Helpful Resources
Previous Question
A commercial property generates $120,000 in annual rental income and has operating expenses of $30,000. What is the Net Operating Income (NOI)?
Next Question
A commercial property generates $120,000 in annual rental income with operating expenses of $35,000. If the property was purchased for $850,000, what is the capitalization rate?