81 Matching questions
- Direct Capitalization
- The "as of" date in an appraisal report:
- Discount Rates
- 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?
- Presentation of Data
- Discount Rate Extracted from Comparables
- Leasing commissions that are considered initial capital expenditures are:
- Level NOI + Fixed Re-sale Price
- Direct Cap
- Potential gross income includes
- Build-up Method
- Form Reports:
- Estimating the Overall Cap Rate
- Variable Income + Fixed Re-sale Price
- Level Income and No Change in Re-sale Value
- Terminal Cap Rate
- 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:
- In yield capitalization, investor assumptions are:
- 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)?
- Yield Capitalization
- Standards Rule 2-2
- Future Benefits
- Estimating Rates
- An oral appraisal report:
- Operating Expenses
- 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.
- Types of Reports: Oral or written
- Variable Income and Unknown Re-sale Price cont
- Yield Capitalization (Discounted Cash Flow Models)
- 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:
- Band of InvestmentMortgage & Equity
- Other Methods to Derive Cap Rate
- If a tenants sales do not reach a certain level, they may cancel their lease if they have what type of clause?
- Generally, higher overall cap rates are associated with:
- The Income Capitalization Approach
- Narrative Reports
- If an appraiser uses the services of another appraiser who helps in reaching the value conclusion:
- Analysis of Data & Conclusions
- A gross lease is one that:
- A small office building sold for $120,000. The monthly net operating income is $1,300 per MONTH. What was the overall capitalization rate?
- An allowance for vacancy and collection loss is estimated as a percentage of:
- Variable Income + Re-sale based on Terminal Cap Rate
- Yield Capitalization Formulas
- All are used in valuation of income-producing property except:
- Gross Income Multipliers
Rates of Return
- An ordinary annuity is:
- Variable Income and Unknown Re-sale
- Income & Value Changing at the Same Rate
- 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?
- The principle of anticipation:
- 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:
- The letter report usually:
- 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?
- Capitalization is employed in the:
- 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?
- The appraisal approach that normally would be most useful in valuing investment property is the:
- 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?
- Income Approach Procedure
- Appraisal Report
- Extraction from the Market (Comps)
- Level NOI and Changing Re-sale Price
- Which is the last step in reconciliation?
- Alternative Investment Comparison
- Premises of the Appraisal
- Rate of Return
- 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.
- The most commonly used capitalization rate is:
- Band of InvestmentLand & Building
- The appraiser's final value estimate should be based on:
- If level income is forecast and the Discount rate is greater than the overall rate (R0), _____________ is expected:
- 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.
- Deriving Cap Rate from Income Multipliers
- a Contains a brief description of the subject property
- 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.
- 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...
- 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
- 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)
- f 13 percent
- 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.
- h Detailed legal description, if not included earlier
Detailed statistical data
Leases or lease summaries
Other appropriate information
- i Market Rent
- j Is often the date of the last inspection
- 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
- l The written or oral communication of an appraisal; the document transmitted to the client upon completion of an appraisal assignment.
- m 7.86%
- 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.
- o Select a final estimate of value
- 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.
- q This should be stated in the appraisal report and both should sign it
- 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.
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.
- s 5.50%
- t ...
- u 7.48%
- v income approach
- 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.
- x Added to before-tax cash flow
- y Fixed expenses
- z Below-the-line
- aa Potential gross income
- ab Estimated Year 6 NOI = $241,480 and Terminal Cap Rate = 10%
Discount rate = 12%
Holding Period = 5 years
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 = ?
- ac Property appreciation
- ad 22 percent
- ae Flat rental
Step-up or step-down
Gross lease, modified gross lease, Net, Double Net, and Triple Net Lease.
- 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
Taxes and assessment data
Marketability study (if appropriate)
- 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.
- ah 5-year holding period, resale is 2.3 million, Discount rate is 12% annually
NOI = $200,000 years 1-5
Mkt Value = ?
- ai Three Basic Approaches to Select a Discount Rate
Alternate Investment Comparison
Discount Rate Extraction from Comparables
- 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
- 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)
- al Scheduled rent
- am Introduction
Letter of Transmittal
Table of Contents
Summary of Important Conclusions
- an Extraction from the Market (comparables)
Deriving the Cap Rate from Income Multipliers (ie EGIM).
Band of Investment
Mortgage and Equity
Land and Building
- ao Income Taxes
- 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
- 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.
- ar The income capitalization approach supports two basic methodologies:
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.
- as $4.81
- at $200,000
- au A weighing of the reliability of the information analyzed in each of the three approaches to value
- av 3.1579
- 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.
- 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.
- ay Debt Coverage Formula (Mortgage Underwriters Method)
R = M(mortgage ratio) RM (mortgage constant) DCR
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.
- az $642,857.14
- ba Is acceptable when the client requests it
- bb Kick-out clause
- 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.
- bd The overall rate
- be 30%
- 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?
- 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.
- bh Income approach - Income properties
- bi Internal rate of return
- 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)
- 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
- 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
- bm Is future oriented
- 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.
- 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:
V & C ($18,000)
Year 2-5 = ?
Mkt Value = ?
- 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
- bq Landlord pays for all operating expense
- br Potential gross income
Effective gross income
Net operating income
- bs Less desirable properties
- bt 3.7551
- 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%
- bv Regulated
- 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%
- 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
- by H&B use Vacant
H&B use Improved
Sales comparison approach
Income cap approach
Reconciliation and final opinion of value
Estimate of exposure time
Qualifications of the appraisers
- bz Risk
Rates on alternative investments
Rates on comps in the past
Availability of financing
- 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)
- 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.
- 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