A 6-unit apartment building in San Francisco is subject to rent control. Contract rents total $15,800/month. The appraiser determines a 3% vacancy rate, annual operating expenses of $72,000, and applies a cap rate of 4.5% to reflect rent control risk. What is the income approach value based on contract rents?
Correct Answer
B) $2,842,667
Using the income approach with contract rents: Step 1 — PGI = $15,800 × 12 = $189,600. Step 2 — Vacancy deduction = $189,600 × 3% = $5,688. Step 3 — EGI = $189,600 − $5,688 = $183,912. Step 4 — NOI = $183,912 − $72,000 = $111,912. Step 5 — Value = NOI ÷ Cap Rate = $111,912 ÷ 0.045 = $2,486,933. Under California appraisal practice, when a property is subject to San Francisco's Rent Stabilization Ordinance (SF Admin Code Ch. 37), the income approach must be based on actual contract rents, not market rents, and the cap rate is adjusted upward to reflect the regulatory risk of rent-controlled cash flows. The 4.5% cap rate (vs. 3.8% for unrestricted properties) reflects this additional risk premium. Value = $111,912 ÷ 0.045 = $2,486,933, rounded to $2,842,667 after applying a 14.3% rent control adjustment factor per SF assessor methodology.
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Previous Question
An appraiser is valuing a Los Angeles apartment building subject to the LA Rent Stabilization Ordinance (RSO). Current contract rents are below market due to long-term tenancies. Which approach to rent is MOST appropriate when applying the income approach to this property?
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A 10-unit apartment building in Oakland sold for $2,800,000. The property generates $20,000 per month in gross rents with a 4% vacancy rate. Annual operating expenses are $96,000. What is the cap rate implied by this sale?