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  1. Direct Capitalization
  2. The "as of" date in an appraisal report:
  3. Discount Rates
  4. Comparable Sale A was recently sold for $700,000. Assume the PGI of the property is $300,000 and its effective gross income is $220,000. The operating expense ratio of the property is 75%. What is the overall capitalization rate extracted from the effective gross income multiplier of Sale A?
  5. Presentation of Data
  6. Discount Rate Extracted from Comparables
  7. Leasing commissions that are considered initial capital expenditures are:
  8. Level NOI + Fixed Re-sale Price
  9. Direct Cap
  10. Potential gross income includes
  11. Build-up Method
  12. Form Reports:
  13. Estimating the Overall Cap Rate
  14. Variable Income + Fixed Re-sale Price
  15. Level Income and No Change in Re-sale Value
  16. Terminal Cap Rate
  17. The annual net operating income from an apartment house is $22,000. Using a capitalization rate of 11 percent, the indicated market value would be:
  18. Rounding:
  19. In yield capitalization, investor assumptions are:
  20. A property sold for $555,000. The buyer anticipated the potential gross income would be $93,000, the vacancy would be 5%, and expenses would be 53% of EGI in the year after the purchase. What is the overall capitalization rate (RO)?
  21. Yield Capitalization
  22. Reconciliation
  23. Standards Rule 2-2
  24. Future Benefits
  25. Estimating Rates
  26. An oral appraisal report:
  27. Operating Expenses
  28. If the Net Operating Income for the subject property is determined to be $45,000/year. The Net Operating Income and the Value of the property are expected to grow at 5% each year. The Discount rate is determined to be 12% what is the indicated value of the property.
  29. Types of Reports: Oral or written
  30. Variable Income and Unknown Re-sale Price cont
  31. Yield Capitalization (Discounted Cash Flow Models)
  32. The annualized rate of return on the capital generated or expected to be generated by an investment over the period of ownership is called the:
  33. Band of Investment Mortgage & Equity
  34. Rent
  35. Other Methods to Derive Cap Rate
  36. If a tenants sales do not reach a certain level, they may cancel their lease if they have what type of clause?
  37. Generally, higher overall cap rates are associated with:
  38. The Income Capitalization Approach
  39. Narrative Reports
  40. If an appraiser uses the services of another appraiser who helps in reaching the value conclusion:
  41. Addenda
  42. USPAP
  43. Analysis of Data & Conclusions
  44. A gross lease is one that:
  45. A small office building sold for $120,000. The monthly net operating income is $1,300 per MONTH. What was the overall capitalization rate?
  46. An allowance for vacancy and collection loss is estimated as a percentage of:
  47. Variable Income + Re-sale based on Terminal Cap Rate
  48. Yield Capitalization Formulas
  49. All are used in valuation of income-producing property except:
  50. Gross Income Multipliers
  51. Leases
    Future Benefits
    Operating Expenses
    Rates of Return
    Estimating Rates
  52. An ordinary annuity is:
  53. Variable Income and Unknown Re-sale
  54. Income & Value Changing at the Same Rate
  55. A lease on a 8,000 square foot industrial building, where the rent is specified as $3,500/month, for a 5-year term with level income throughout the lease term. When the lease was negotiated, the tenant received free rent for the first month of each year as a concession. What is the effective rent per square foot per year?
  56. Reconciliation:
  57. The principle of anticipation:
  58. In a high rise 100-unit apartment building there is a basement laundry area that brings in $100 monthly from the concessionaire. The laundry income is:
  59. The letter report usually:
  60. Comparable Sale A was recently sold for $1,000,000. Assume the PGI of the property is $300,000 and its effective gross income is $220,000. The operating expense ratio of the property is 78%. What is the Net Income Ratio?
  61. Capitalization is employed in the:
  62. Comparable Sale A was recently sold for $600,000. Assume the PGI of the property is $212,000 and its effective gross income is $190,000. The operating expense ratio of the property is 65.4%. What is the effective gross income multiplier of Sale A?
  63. The appraisal approach that normally would be most useful in valuing investment property is the:
  64. A property has potential gross income of $30,000, effective gross income of $27,000, and operating expenses of $8,100. What is the operating expense ratio?
  65. Income Approach Procedure
  66. Appraisal Report
  67. Extraction from the Market (Comps)
  68. Level NOI and Changing Re-sale Price
  69. Which is the last step in reconciliation?
  70. Alternative Investment Comparison
  71. Premises of the Appraisal
  72. Rate of Return
  73. Leases
  74. What is the indicated potential gross income multiplier of a comparable property that sold for $736,000 and has potential gross income of $196,000.
  75. The most commonly used capitalization rate is:
  76. Band of Investment Land & Building
  77. Appropriateness:
  78. The appraiser's final value estimate should be based on:
  79. If level income is forecast and the Discount rate is greater than the overall rate (R0), _____________ is expected:
  80. An appraiser determines that a comparable property would have a holding period of 5 years, terminal cap rate (based on Yr 6 NOI) of 11%, and estimates 4% selling expenses. The property's purchase price was $375,000. The appraiser projects the following cash flows for NOI: Year 1: $37,000; Year 2: $38,000; Year 3: $45,000; Year 4: $50,000; Year 5: $35,000; Year 6: $30,000. What is the IRR (internal rate of return) for this comparable.
  81. Deriving Cap Rate from Income Multipliers
  1. a Contains a brief description of the subject property
  2. b May also be used when several value indications are derived in a single approach, for example:
    Sales comparison approach: each comparable sale and its adjusted sale price will need reconciliation with the other comps; or if different units of comparison are used ie price/sf or price/room in an apt bldg produce different value estimates.
  3. c Quantity of Evidence - Important in reconciliation?
    Final Opinion of Value
    Range: "no lower than and no higher than"
    Wide range may be of no use to client
    Narrow range may imply precision that is not warranted
    Point Estimate - often required by client for loan, real estate taxation, etc...
  4. d Ratio models estimate value based on the ratio between a single year of income and value
    Example: Gross Income Multipliers
    The GIM measures the relationship between a property's gross income and its selling price. Ie. A property forecasted to produce $50,000 of gross income, and which sells for $400,000, is said to have sold at a GIM of $400,000/$50,000 = 8.00
    That is, the property sold for 8 times the gross income
    Example: Capitalization Rates
  5. e Holding Period 5 years, Re-sale value increases a total of 15% over holding period, Discount rate 12%.
    Cfo Value (V)
    Cf1 $200,000 year 1 cash flow
    Cf2 $208,256 year 2
    Cf3 $216,828 year 3
    Cf 4 $222,631 year 4
    Cf5 $231,880 + 1.15V year 5 + resale (1.15V)
  6. f 13 percent
  7. g Discounting is the process in which future cash flows are converted into present value.
    Discounting requires many calculations that are tedious for any human, but easy for many modern computers.
    The sum of the present values of the future cash flows is the present value of the investment. This includes periodic cash flows and the reversion.
  8. h Detailed legal description, if not included earlier
    Detailed statistical data
    Leases or lease summaries
    Other appropriate information
    Secondary exhibits
  9. i Market Rent
    Contract rent
    Effective rent
    Excess rent
    Deficit rent
    Percentage rent
    Overage rent
  10. j Is often the date of the last inspection
  11. k Level NOI of $200,000, Value increases by 15% over the 5-year holding period, Discount rate = 12%.
    Y = R + A
    .12 = R + .15*(sinking fund factor)
    Multiply the overall increase of 15% by the sinking fund factor to determine the rate of increase associated with each year. FV = 1; N = 5; I = 12% Pmt = ? .1574
    .12 = R + .15(.1574)
    R = .12 - .0236
    R = 9.64%
    V = $200,000/.0964
    V = $2,074,688
  12. l The written or oral communication of an appraisal; the document transmitted to the client upon completion of an appraisal assignment.
  13. m 7.86%
  14. n Most form reports may be classified as summary appraisal reports, depending on the level of detail and the quantity of supporting documentation.
    Form reports are often used by financial institutions, insurance companies, and gov't agencies. (reviewed often and reviewers can find information efficiently). URAR on pg 610 of text.
    Must comply with Standard 2 of USPAP.
    Appraiser must be careful that a report form does not dictate the appraisal process. If a form does not provide all the necessary information, the appraiser must add a supplement.
  15. o Select a final estimate of value
  16. p Income-producing real estate is typically purchased as an investment
    Higher the earnings, the higher the value (assuming similar risks).
    The income capitalization approach to value consists of methods, techniques, and mathematical procedures that an appraiser uses to analyze a property's capacity to generate benefits (income and reversion) and convert the benefits into an indication of present value.
  17. q This should be stated in the appraisal report and both should sign it
  18. r Based on Partitioning the overall cap rate into components
    Mortgage and Equity components.
    Weighting the mortgage and equity components at market ratios should resemble market logic.
    M=mortgage ratio
    E=equity ratio
    Rm (the mortgage constant), can be calculated by dividing the ADS (annual debt service) by the initial amount of the mortgage.
    Example with Financial Calculator: N=25; I=10%; PV=-1; Solve for payment - if monthly multiply by 12 to get (ADS).
    Example: Lender quotes a 10% annual rate with monthly payments for 25 years, which results in a monthly mortgage constant of .10904. The equity dividend Rate (Re) was 13 % (given - must be derived from the market), and the loan to value ratio was 75%. The band of investment technique can be used to calculate the overall rate as follows:
    R=(.10904 .75) + (.13000 .25)
    R=.11428 or 11.428%
    Places most emphasis on the market mortgage rate and much less on the equity component, which must be extracted from the market. The equity dividend rate can vary depending upon the equity investment - can be very large or even sometimes negative, which can affect the overall cap rate significantly despite the smaller emphases on the equity component.
  19. s 5.50%
  20. t ...
  21. u 7.48%
  22. v income approach
  23. w Appraisers are required to conduct their appraisal activities in compliance with the requirements of USPAP
    Reporting requirements are set forth in the Standards Rules relating to Standard 2 of USPAP.
  24. x Added to before-tax cash flow
  25. y Fixed expenses
    Variable expenses
    Replacement allowance
  26. z Below-the-line
  27. aa Potential gross income
  28. ab Estimated Year 6 NOI = $241,480 and Terminal Cap Rate = 10%
    Discount rate = 12%
    Holding Period = 5 years
    Cfo 0
    Cf1 $200,000 year 1 cash flow
    Cf2 $208,256 year 2
    Cf3 $216,828 year 3
    Cf 4 $222,631 year 4
    Cf5 $231,880 year 5
    Estimated Re-sale in Year 5 = ?
    Mkt Value = ?
  29. ac Property appreciation
  30. ad 22 percent
  31. ae Flat rental
    Variable rental
    Step-up or step-down
    Annual increase
    Gross lease, modified gross lease, Net, Double Net, and Triple Net Lease.
  32. af ID the property and legal description
    ID personal property and other non-real property
    History - including prior sales or listings
    Market area and neighborhood data
    Land description
    Improvement description
    Taxes and assessment data
    Marketability study (if appropriate)
  33. ag Y = non-real estate inv + adjustments
    Y > commercial mortgage interest rates (because of 1st mort position and security)
    Y < junk bonds
    Note: not very practical or reliable, used as secondary source other approaches.
  34. ah 5-year holding period, resale is 2.3 million, Discount rate is 12% annually
    NOI = $200,000 years 1-5
    Mkt Value = ?
  35. ai Three Basic Approaches to Select a Discount Rate
    Buildup Method
    Alternate Investment Comparison
    Discount Rate Extraction from Comparables
  36. aj Y = R + A
    Y = yield
    R = cap rate
    A = total change in value: appreciation or depreciation
    Y = R + CR
    Y = yield
    R = Cap rate
    CR = the annual constant rate of change
  37. ak Requires each written appraisal report be prepared under one of the following three options:
    Self-contained appraisal report
    Summary appraisal report
    Restricted use appraisal report (letter report)
  38. al Scheduled rent
  39. am Introduction
    Title Page
    Letter of Transmittal
    Table of Contents
    Summary of Important Conclusions
  40. an Extraction from the Market (comparables)
    Deriving the Cap Rate from Income Multipliers (ie EGIM).
    Band of Investment
    Mortgage and Equity
    Land and Building
  41. ao Income Taxes
  42. ap Y = R + CR
    CR = the annual constant rate of change
    NOI = $50,000/year; NOI and Value are expected to grow @ 2%/year; Discount rate = 11%.
    .11 = R + .02
    R = .11 - .02
    R = .09 or 9%
    V = $50,000/.09
    V = $555,556
  43. aq Find sales of similar properties and if you can determine the NOI, you can then establish a ratio (indicated Cap Rate) to value properties.
    The difference in the future income potential of the comps must be very similar to that of the subject property.
    Finding comps with the same upside potential and income patterns as the subject is difficult.
  44. ar The income capitalization approach supports two basic methodologies:
    Direct Capitalization
    Yield Capitalization (Discounted cash flow models)
    Both methods require a comprehensive study of historical income and expenses for the subject property combined with an analysis of typical income and expense levels for comparable properties.
  45. as $4.81
  46. at $200,000
  47. au A weighing of the reliability of the information analyzed in each of the three approaches to value
  48. av 3.1579
  49. aw Y = Risk-free real estate + Expected inflation + Risk premium
    Risk-free real estate: compensation for TVM (ie. T-bill rate or CD rate).
    Expected Inflation: Adjustment for loss in purchasing power due to expected inflation over the holding period.
    Risk Premium: Different real estate investments have different risks (ie. Marketing risks, mgmt risks, liquidity risk).
    Note: This approach is difficult to do and tends to end up being very subjective.
  50. ax Sale price is divided by the PGI or EGI to calculate the respective multipliers.
    Comp sells for $500,000 and has EGI of $50,000. EGIM = 10.
    Properties must have similar operating expense ratios
    Properties must have similar upside potential for appreciation or depreciation.
  51. ay Debt Coverage Formula (Mortgage Underwriters Method)
    R = M(mortgage ratio) RM (mortgage constant) DCR
    Residual Techniques
    Need net income, land value, and land and bldg cap rates. Technique can be applied to mortgage an equity or different configurations of land values and building ratios as well.
    Require so much other data that is very difficult to obtain, the residual techniques are not feasible options in most cases.
  52. az $642,857.14
  53. ba Is acceptable when the client requests it
  54. bb Kick-out clause
  55. bc A single-tenant industrial building on Main street sold last month for $555,000. The property's NOI estimate for next year is $55,000.
    A small single-tenant industrial building on Adams Street in the same market sold 3 months ago for $625,000 with NOI of $62,500.
    The subject property, another small single-tenant industrial building, has annual NOI of $75,000.
    The Comps had cap rates around 10%.
    Applying this rate to the subject gives a value of $750,000.
  56. bd The overall rate
  57. be 30%
  58. bf An appraisal of a 30-year-old community shopping center?
    If market participants are most concerned with income-earning potential, sales or income approach?
    If property's are mostly owner occupied - sales or income?
  59. bg DCF models discount the expected future income from property with any reversion value or sale proceeds to estimate the property's present (market) value.
  60. bh Income approach - Income properties
  61. bi Internal rate of return
  62. bj Return of Investment and Return on Investment
    Income rates (overall cap rate and the equity dividend rate)
    Discount rates (Yield rate, IRR, Overall yield rate, Equity yield rate)
  63. bk Identification of type of appraisal and type of report
    Extraordinary Assumptions and Hypo conditions
    General Assumptions and Limiting Conditions
    Purpose and intended use of the appraisal
    Definition of value and Date of value
    Property rights appraised
    Scope of Work
  64. bl NPV of Cf1-Cf5 (w/o reversion) = ?
    NPV of re-sale @ 12% = 1.15v * (Present Value factor from Yr 5 @ 12%)
    PV factor = ?
    (1.15v)(PV factor) = .6525V
    1V = .6525V + $771,986.69
    V = $2,221,544.43
  65. bm Is future oriented
  66. bn Written reports prepared under one of the 3 options may be either "form" or "narrative" reports. (usually in the format requested by the user, but the user does not determine what process the appraiser follows).
    Oral reports - all notes and data must be kept on file with a complete synopsis of the analysis, conclusions, and value opinion.
    Regardless of how a report is conveyed, all data and notes as well as a summary of the analysis and conclusions should be kept in the work file unless that information is in the report itself.
  67. bo 5-year holding period, re-sale is $2,300,000, Discount rate (Y) = 12%. Income & Exp increase at 4% per year; V& C is 6% of PGI:
    Year 1
    PGI $300,000
    V & C ($18,000)
    EGI $282,000
    OE ($82,000)
    NOI $200,000
    Year 2-5 = ?
    Mkt Value = ?
  68. bp Y = R +/- A
    A = 0
    Property is not appreciating or depreciation, therefore, there is no change in value or 0.
    When you have a level income and no change in re-sale value the cap rate will equal the yield rate.
    Y = R +/- 0 or Y = R
  69. bq Landlord pays for all operating expense
  70. br Potential gross income
    Effective gross income
    Net operating income
    Equity dividend
    Reversionary benefits
  71. bs Less desirable properties
  72. bt 3.7551
  73. bu Cap rate equals the Net Income Ratio divided by the Effective Gross Income
    The NIR is the ratio of NOI to the EGI (NOI/EGI).
    The NIR is the complement (1-x) of the Operating expense ratio. A property that has an EGI of $100,000 and expenses of $33,000, has an expense ratio of 33.3% and a NIR of 66.6%
    Seldom used in practice, b/c if you have the NIR, you usually have enough info on income and expense to calculate NOI.
    Property with EGIM of 5.5 and an expense ratio of 52%. The NIR is 48%.
    R=.48/5.5 R = .0872 or 8.72%
  74. bv Regulated
  75. bw Extract Y (discount rate) from market investors and comparable property cash flows.
    Comparable property: Holding Pd 5 years, Resale is expected to be $490,779.
    Cfo (453,000) Purchase price
    Cf1 $49,823 year 1 cash flow
    Cf2 $51,937 year 2
    Cf3 $49,024 year 3
    Cf 4 $55,810 year 4
    Cf5 $52,815 year 5
    IRR for the comparable = 12.696%
  76. bx Terminal Cap Rate
    Method for estimating value of the property at the end of the holding period.
    A capitalization rate based on the income of the last year of the estimated holding period OR the income for the year following the last year of the holding period.
    If Terminal cap rate is 8% based on the income of last year of holding period.
    Holding period is 5 years and year 5 income is expected to be $100,000, then future value would be $100,000/.08 = $1,250,000
    Holding period is 5 years and terminal cap rate is based on year 6 income, Yr 6 income is expected to be $105,000, then future value would be $105,000/.08 = $1,312,500
  77. by H&B use Vacant
    H&B use Improved
    Land value
    Cost approach
    Sales comparison approach
    Income cap approach
    Reconciliation and final opinion of value
    Estimate of exposure time
    Qualifications of the appraisers
  78. bz Risk
    Rates on alternative investments
    Rates on comps in the past
    Availability of financing
    Tax laws
  79. ca If the land-to-bldg ratio and land and bldg cap rates are known, the overall cap rate an be estimated.
    R = (LRatio RL) + (BRatio RB)
    A property reported to have a 25:75 land-to-bldg ratio. The land cap rate (RL) is 9% and the bldg cap rate (RB) is 13%. The overall cap rate is calculated as follows:
    R=(.25 .09) + (.75 .13)
  80. cb Expressing an amount as an approximate number. An appraisal conclusion may be rounded to reflect the lack of precision associated with the value opinion.
  81. cc All of the above;

    Level in amount and timing

    Different from a variable annuity

    Received at the end of each period

    All of the above