Bladder ch8

Which of the following measures is considered the fundamental element needed to determine market value for an income-producing property?

• net operating income

• potential gross income

• operating expenses

• capital expenditures

Net operating income is similar to which of the following measures of cash flow in corporate finance?

• dividend yield

• earnings before deductions for interest, depreciation, income taxes, and amortization (EBITDA)

• price-earnings ratio

• discount rate

The process of converting periodic income into a value estimate is referred to as income capitalization. Income capitalization models can generally be categorized as either direct capitalization models or discounted cash flow forecasts (models are then used to create the forecasts). Which of the following statements best describes the direct capitalization method?

• Value estimates are based on a multiple of expected first year net operating income.

• Appraisers must make explicit forecasts of the property's net operating income for each year of the expected holding period.

• Appraisers must select the appropriate yield at which to discount future cash flows.

• The forecast must include the net income produced by a sale of the property at the end of the expected holding period.

The starting point in calculating net operating income is the total annual income the property would produce assuming 100 percent occupancy and no vacancy or collection losses. This is commonly referred to as:

• effective gross income.

• potential gross income.

• operating expenses.

• capital expenditures.

The rental income that a property would most probably command if all the space were continuously leased at current rental rates (and supply and demand is in balance) is more commonly referred to as the:

• market rent.

• historic rent.

• contract rent.

• net rent.

The actual rental income being paid in accordance with a legally binding commitment is more commonly referred to as the:

• market rent.

• historic rent.

• contract rent.

• potential rent.

The distinction between market rent and contract rent is important due to differences in lease terms. Office, retail, and warehouse tenants most commonly occupy their space under leases that run:

• 1. A)  one year or less.

• 1. B)  one to three years.

• 1. C)  three to five years.

• 1. D)  ten years or more.

One complication that appraisers may face is the variety of lease types that may be available for a particular property type. Which of the following statements best describes a “graduated” or step-up lease?

• The monthly rent remains fixed over the entire lease term.

• The lease establishes schedule of rental rate increases over the term of the lease.

• Rental rate increases are indexed to the general rate of inflation.

• Rental rates are a function of the sales of the tenant’s business.

The proportion of potential gross income not collected, even when supply equals demand in the rental market, is more commonly referred to as the:

• natural vacancy rate.

• absorption vacancy rate.

• turnover vacancy rate.

• static vacancy rate.

In calculating net operating income, vacancy losses must be subtracted from the gross income collected. The normal range for vacancy and collection losses for apartment, office, and retail properties is:

• between zero and one percent.

• between one and five percent.

• between five and fifteen percent.

• between fifteen and twenty percent.