Income Approach and Capitalization Flashcards

A retail property has contract rents of $90,000 and market rents of $105,000. The difference between market and contract rent is called:

Answer: Deficit rent

When contract rent is below market rent, the tenant benefits from deficit (or below-market) rent, creating leasehold value.

In discounted cash flow analysis, the terminal value (reversion) is typically estimated by:

Answer: Applying a terminal cap rate to the following year's NOI

The reversion is estimated by capitalizing the NOI in the year after the holding period ends using a terminal (going-out) cap rate.

A property's gross rent multiplier (GRM) is 10, and monthly gross rent is $4,500. What is the indicated value?

Answer: $540,000

Annual gross rent = $4,500 × 12 = $54,000; Value = $54,000 × 10 = $540,000.

Which expense is properly classified as an operating expense when calculating NOI?

Answer: Capital expenditure reserves (replacement reserves)

Replacement reserves are an operating expense for appraisal purposes; financing costs and owner taxes are not.

A property sells for $750,000 with an NOI of $60,000. If market cap rates subsequently rise to 9%, the same NOI would indicate a value of approximately:

Answer: $666,667

Value = $60,000 ÷ 0.09 ≈ $666,667; rising cap rates compress property values.

In the income approach, a stabilized occupancy assumption is used to:

Answer: Represent long-term typical occupancy over a market cycle

Stabilized occupancy reflects the typical long-run occupancy level, smoothing out short-term fluctuations.

If a property has a 25-year remaining economic life and no reversionary land value, which formula provides the appropriate income capitalization rate adjustment?

Answer: Straight-line recapture added to the discount rate

When improvements have finite economic life, a straight-line recapture rate (1 ÷ remaining life) is added to the discount rate.