**1i.** Data for five comparable income properties that sold recently are shown in the accompanying table.

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 |

E | 58,500 | 600,000 | 0.0975 |

What is the indicated overall cap rate (Ro)?

**1ii.**Which of the following expenses is not an operating expense?

**a.**Utilities.

**b.**Reserve for replacements and other nonrecurring expenses.

**c.**Management.

**d.**Mortgage payment.

**e.**Advertising.

**2i.**Why is the market value of real estate determined partly by the lender’s requirements and partly by the requirements of equity investors?

**2ii.** An overall capitalization rate (Ro) is divided into which type of income or cash flow to obtain an indicated market value?

**a.**Net operating income (NOI).

**b.**Effective gross income (EGI).

**c.**Before-tax cash flow (BTCF).

**d.**After-tax cash flow (ATCF).

**e.**Potential gross income (PGI).

**3i.** Assume a reserve for nonrecurring capital expenditures is to be included in the pro forma for the subject property. Explain how an above-line treatment of this expenditure would differ from a below-line treatment.

**3ii.**Which of the following types of properties probably would not be appropriate for income capitalization?

**a.**Apartment building.

**b.**Shopping center.

**c.**Farm.

**d.**Warehouse.

**e.**Public school.

**4.** Use the following property data:

Cash flow from operations:

Year | 1 | 2 | 3 | 4 | 5 |

NOI | $150,000 | $150,000 | $150,000 | $150,000 | $150,000 |

Debt service | $125,000 | $125,000 | $125,000 | $125,000 | $125,000 |

Cash flow at sale:

Sale price | $2,000,000 |

Cost of sale | $125,000 |

Mortgage balance | $1,500,000 |

**a.**Assuming the going-in capitalization rate is 8 percent, compute a value for the property using direct capitalization.

**b.**Assuming the required return on un-levered cash flows is 10 percent, and that the property will be held by a buyer for five years, compute the value of the property based on discounting un-levered cash flows.

**c.**Assuming the relevant required return on levered cash flows is 15 percent, and that the property will be held by a buyer for five years, what is the present value of the levered cash flows?

**5i.**Given the following owner’s income and expense estimates for an apartment property, formulate a reconstructed operating statement. The building consists of 10 units that could rent for $550 per month each.

Owner’s Income statement |
||

Rental income(last year) | $60,600 | |

Less: Expenses | ||

Power | $2,200 | |

Heat | 1,700 | |

Janitor | 4,600 | |

Water | 3,700 | |

Maintenance | 4,800 | |

Reserves for replacement | 2,800 | |

Management | 3,000 | |

Depreciation(tax) | 5,000 | |

Mortgage payments | 6,300 | 34,100 |

Net income | $26,500 |

Estimating vacancy and collection losses at 5 percent of potential gross income, reconstruct the operating statement to obtain an estimate of NOI. Remember, there may be items in the owner’s statement that should not be included in the reconstructed operating statement. Using the NOI and an R0 of 11.0 percent, calculate the property’s indicated market value. Round your final answer to the nearest $500.

**5ii.**An appraiser estimates that a property will produce NOI of $25,000, the y0 is 11 percent, and the growth rate is 2.0 percent. What is the total property value (unrounded)?

**a.**$277,778.

**b.**$227,273.

**c.**$323,762.

**d.**$243,762.

**e.**$231,580.

**6i.**You have been asked to estimate the market value of an apartment complex that is producing annual net operating income of $44,500. Four highly similar and competitive apartment properties within two blocks of the subject property have sold in the past three months. All four offer essentially the same amenities and services as the subject. All were open-market transactions with similar terms of sale. All were financed with 30–year fixed–rate mortgages using 70 percent debt and 30 percent equity. The sale prices and estimated first-year net operating incomes were as follows:

Comparable 1: Sales price $500,000; NOI $55,000

Comparable 2: Sales price $420,000; NOI $50,400

Comparable 3: Sales price $475,000; NOI $53,400

Comparable 4: Sales price $600,000; NOI $69,000

What is the indicated value of the subject property using direct capitalization?

**6ii.**If a comparable property sells for $1,200,000 and the effective gross income of the property is $12,000 per month, the effective gross income multiplier is:

**a.**0.12

**b.**8.33

**c.**100

**d.**0.01

**e.**10

**7.**You are estimating the market value of a small office building. Suppose the estimated NOI for the first year of operations is $100,000.

**a.**If you expect that NOI will remain constant at $100,000 over the next 50 years and that the office building will have no value at the end of 50 years, what is the present value of the building assuming a 12.2% discount rate? If you pay this amount, what is the indicated initial cap rate?

**b.**If you expect that NOI will remain constant at $100,000 forever, what is the value of the building assuming a 12.2% discount rate? If you pay this amount, what is the indicated initial cap rate?

**c.**If you expect that the initial $100,000 NOI will grow forever at a 3% annual rate, what is the value of the building assuming a 12.2% discount rate? If you pay this amount, what is the indicated initial cap rate?

**8i.**Describe the conditions under which the use of gross income multipliers to value the subject property is appropriate.

**8ii.**The methodology of appraisal differs from that of investment analysis primarily regarding:

**a.**Use of DCF analysis.

**b.**Use of direct capitalization.

**c.**Length of holding period analyzed.

**d.**Type of debt assumed in the analysis.

**e. **Point of view and types of data used.

**9i.** In what situations or for which types of properties might discounted cash flow analysis be preferred to direct capitalization?

**9ii.** Use the following information to answer questions 9 and 10. You have just completed the appraisal of an office building and have concluded that the market value of the property is $2,500,000. You expect potential gross income (PGI) in the first year of operations to be $450,000; vacancy and collection losses to be 9 percent of PGI; operating expenses to be 38 percent of effective gross income (EGI), and capital expenditures to be 4 percent of EGI.What is the implied going-in capitalization rate?

**a.**9.5 percent

**b.**10.0 percent

**c.**10.5 percent

**d.**11.0 percent

**e.**16.4 percent.

**10i.** What is the difference between a fee simple estate and a leased fee estate?

**10ii.**Use the following information to answer questions 9 and 10. You have just completed the appraisal of an office building and have concluded that the market value of the property is $2,500,000. You expect potential gross income (PGI) in the first year of operations to be $450,000; vacancy and collection losses to be 9 percent of PGI; operating expenses to be 38 percent of effective gross income (EGI),and capital expenditures to be 4 percent of EGI.

What is the effective gross income multiplier (EGIM)?

**a.**5.56

**b.**6.11

**c.**10.5

**d.**16.38

**e.**18.00

**11.**What is the difference between contract rent and market rent? Why is the distinction more important for investors purchasing existing office buildings than for investors purchasing existing apartment complexes?

**12.**Estimate the market value of the following small office building. The property has 10,500 sq. ft. of leasable space that was leased to a single tenant on January 1, four years ago. Terms of the lease call for rent payments of $9,525 per month for the first five years, and rent payments of $11,325 per month for the next five years. The tenant must pay all operating expenses.

During the remaining term of the lease there will be no vacancy and collection losses; however, upon termination of the lease, it is expected that the property will be vacant for three months. When the property is released under short-term leases, with tenants paying all expenses, a vacancy and collection loss allowance of 8 percent per year is anticipated.

The current market rental for properties of this type under triple net leases is $11 per sq. ft., and this rate has been increasing at a rate of 3 percent per year. The market discount rate for similar properties is about 11 percent, the “going-in” cap rate is about 9 percent, and terminal cap rates are typically 1 percentage point above going-in cap rates.

Prepare a spreadsheet showing the rental income, expense reimbursements, NOIs, and net proceeds from sale of the property at the end of an eight-year holding period. Then use the information provided to estimate the market value of the property.

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