CLP Market Analysis & Valuation 2 — Questions and Answers
Question 1: What is the correct formula for calculating Net Operating Income (NOI)?
- Gross Potential Income minus Vacancy Loss minus Operating Expenses (Correct answer)
- Gross Potential Income plus Operating Expenses minus Vacancy Loss
- Total Revenue minus Debt Service
- Effective Gross Income minus Capital Expenditures
Correct answer: Gross Potential Income minus Vacancy Loss minus Operating Expenses
NOI equals Gross Potential Income minus vacancy and credit losses minus all operating expenses, excluding debt service.
Question 2: A property generates $150,000 in NOI and is valued using a 6% capitalization rate. What is the estimated property value?
- $900,000
- $2,500,000 (Correct answer)
- $1,500,000
- $900,000
Correct answer: $2,500,000
Value equals NOI divided by cap rate: $150,000 ÷ 0.06 = $2,500,000.
Question 3: Which valuation approach is most appropriate for income-producing multifamily residential properties?
- Cost approach
- Sales comparison approach
- Income approach (Correct answer)
- Replacement cost approach
Correct answer: Income approach
The income approach is primary for income-producing properties because it directly reflects the property's ability to generate revenue.
Question 4: The Gross Rent Multiplier (GRM) is calculated by dividing:
- Annual NOI by property value
- Property sale price by annual gross rental income (Correct answer)
- Monthly rent by property price
- Operating expenses by gross income
Correct answer: Property sale price by annual gross rental income
GRM = Sale Price ÷ Annual Gross Rental Income, providing a quick comparison metric across similar properties.
Question 5: Which factor would most directly cause capitalization rates to INCREASE in a market?
- Declining interest rates
- Rising investor demand for multifamily properties
- Rising interest rates and increasing economic uncertainty (Correct answer)
- Strong local employment growth
Correct answer: Rising interest rates and increasing economic uncertainty
Rising interest rates increase borrowing costs and investor return requirements, pushing cap rates higher and values lower.
Question 6: When comparing rental comps, a positive adjustment is made to a comparable property when the comparable:
- Has a superior amenity the subject lacks
- Lacks a feature that the subject property has (Correct answer)
- Is located in a more desirable submarket
- Has a larger average unit size than the subject
Correct answer: Lacks a feature that the subject property has
When a comp lacks something the subject has, you adjust the comp upward to reflect what it would have rented for if it had that feature.
Question 7: In the income approach, 'Effective Gross Income' (EGI) is best defined as:
- Total potential rental income assuming 100% occupancy at market rents
- Gross Potential Income minus vacancy losses and credit losses (Correct answer)
- Net Operating Income before deducting operating expenses
- Gross income remaining after debt service payments
Correct answer: Gross Potential Income minus vacancy losses and credit losses
EGI = Gross Potential Income minus vacancy loss and credit loss, representing realistic collectible income.
CLP Market Analysis & Valuation 2
What is the correct formula for calculating Net Operating Income (NOI)?