In the income approach used in California, an appraiser starts with Potential Gross Income (PGI) and makes deductions to arrive at Net Operating Income (NOI). What is the correct sequence of deductions?
Correct Answer
C) PGI → minus vacancy and credit losses → equals EGI → minus operating expenses → equals NOI
The correct sequence in the income approach is: PGI (all potential rental income at market rates) → minus vacancy and collection losses → equals Effective Gross Income (EGI) → minus operating expenses (property taxes, insurance, management, maintenance, etc.) → equals NOI. This sequence is standard in California and nationally under USPAP.
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Previous Question
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?
Next Question
A California appraiser is using the income approach for a mixed-use property in downtown Los Angeles. The property has retail space on the ground floor and apartments above. The apartments are subject to the LA Rent Stabilization Ordinance, but the retail space is not. How should the appraiser handle the income analysis?