An investor calculates a property's NOI as $84,000 and applies a 5.25% cap rate, arriving at an initial value of $1,600,000. The investor then discovers that an annual Mello-Roos special tax of $6,000 was omitted from the operating expenses used to calculate NOI. What is the correct adjusted value?
Correct Answer
A) $1,485,714
Because the Mello-Roos special tax was omitted from operating expenses, NOI is overstated and must be corrected before capitalizing. Step 1 — Adjusted NOI = $84,000 − $6,000 = $78,000. Step 2 — Corrected Value = $78,000 ÷ 0.0525 = $1,485,714. Under California law (Mello-Roos Community Facilities Act of 1982, Gov. Code §53311 et seq.), Mello-Roos taxes are annual charges that run with the land and directly reduce net income. They must be treated as an operating expense in the income approach. Failing to include them overstates NOI and therefore overstates value.
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