chapter009

# chapter009 - CHAPTER 9 Valuation Using the Income Approach...

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CHAPTER 9 Valuation Using the Income Approach Test Problems 1. Which of the following expenses is not an operating expense? d. Mortgage payment. 2. An overall capitalization rate (R o ) is divided into which type of income or cash flow to obtain an indicated value? a. Net operating income (NOI). 3. Which of the following types of properties probably would not be appropriate for income capitalization? e. Public school. 4. Reserves for replacement and other nonrecurring expenses are allowances that reflect: d. The annual depreciation of the short-lived components of the building and expenses that occur only occasionally. 5. An appraiser estimates that a property will produce NOI of \$25,000, the Y o is 11 percent, and the growth rate is 2.0 percent. What is the total property value (unrounded)? a. \$277,778. 6. If a comparable property sells for \$1,200,000 and the effective gross income of the property is \$12,000 per month, the gross income multiplier is b. 8.33 7. The final value estimate produced by one approach is called a. Indicated Value. 8. The methodology of appraisal differs from that of investment analysis primarily regarding e. Point of view and types of data used. Study Questions 1. Data for five comparable income properties that sold recently are shown below: Property NOI Sale Price Overall Rate A \$ 57,800 \$ 566,600 0.1020 B 49,200 496,900 0.0990 C 63,000 630,000 0.1000 D 56,000 538,500 0.1040 9-1

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E 58,500 600,000 0.0975 What is the indicated overall rate (R O )? Solution : The indicated overall cap rate of 10.05 percent is the simple average of the overall rates for the five comparable properties. 2. Why is the market value of real estate determined partly by the lender’s requirements and partly by the requirements of equity investors? Solution : Real estate investments are frequently financed using a combination of equity and mortgage debt. A real estate investment can be viewed as a joint investment made by both the lender and equity investor, and therefore, both parties’ required rates of return are relevant. Consequently, the investor’s minimum required rate of return is heavily influenced by the availability and terms of financing provided by lenders, as well by evaluating the required returns on alternative investments of similar risk. In general, a levered investment has greater risk than an unlevered investment, which increases the investor’s required rate of return. 3. The cap rate on mortgage financing is 7.5 percent for properties similar to the subject. The typical loan-to-value ratio is 75 percent of value. What would be the indicated R O by simple equity analysis, if equity dividend rates (R E S are running at about 11 percent? Solution : The appropriate going-in cap rate, or R O , is simply a weighted average of the equity dividend rate and the mortgage capitalization rate. Therefore, R O is 0.75(.075) + 0.25(.11), or 8.38%. 4. You are asked to appraise a vacant parcel of land. Your analysis shows that if apartments were constructed, the portion of the NOI attributable to the land would be \$30,000 per year. If offices were constructed, the portion attributable to land would
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