Income Approach to Value Flashcards
7 cards from real CAE practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Income Approach to Value flashcards as text
In discounted cash flow (DCF) analysis, the 'discount rate' represents:
Answer: The required yield or total rate of return on the investment
The discount rate in DCF analysis is the required total rate of return (yield rate) used to convert future income streams and reversion to present value.
The 'reversion' in a discounted cash flow analysis refers to:
Answer: The projected resale value (net proceeds) at the end of the holding period
The reversion is the estimated net proceeds from resale of the property at the conclusion of the assumed holding period, discounted to present value.
When performing DCF analysis, terminal (going-out) capitalization rates are typically set HIGHER than going-in rates because:
Answer: The property will be older and perceived as riskier at the time of resale
A higher terminal cap rate reflects increased risk at resale due to the property's age, potentially shorter remaining economic life, and greater uncertainty about future income.
Reserves for replacement are included in operating expenses in the income approach to account for:
Answer: Periodic replacement of short-lived building components
Reserves for replacement represent the annual set-aside needed to fund future replacement of capital items such as roofing, HVAC, and appliances when they wear out.
Which type of property would MOST commonly rely on the income approach as the PRIMARY method of valuation for assessment purposes?
Answer: Stabilized apartment complex leased to multiple tenants
Income-producing properties like stabilized apartment complexes are primarily valued using the income approach because investors purchase them for the income stream they generate.
A net lease differs from a gross lease primarily in that under a net lease the:
Answer: Tenant pays some or all property operating expenses in addition to base rent
Under a net lease, the tenant assumes responsibility for some or all operating expenses (taxes, insurance, maintenance), reducing the landlord's expense burden.
When an assessor encounters a property with long-term leases at above-market rents, the appropriate value conclusion reflects:
Answer: Leased fee value, reflecting the actual above-market contract rent income stream
The leased fee interest captures the landlord's position under the existing leases, and above-market contract rents increase the leased fee value above the fee simple value.