A Florida commercial property generates $125,000 in annual net operating income. The property is located in a flood zone and requires flood insurance costing $8,000 annually, which is $5,000 more than similar properties outside the flood zone. If the market capitalization rate for similar properties is 7.5%, what adjustment should be made to account for the flood zone location?
Correct Answer
D) $66,667 reduction in value
The excess flood insurance cost of $5,000 annually should be capitalized at the market rate: $5,000 ÷ 0.075 = $66,667 reduction in value. Option A uses the wrong divisor. Option C capitalizes the total insurance cost rather than the excess. Option D calculates total value rather than the adjustment.
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