1.The portfolio manager of a large real estate investment trust (REIT) has identified an office building as a potential investment. He must determine its net operating income (NOI), based upon the following data:
Gross potential rental income | $235,000 |
Estimated vacancy and collection loss rate | 6% |
Insurance and taxes | $15,000 |
Repairs and maintenance | $17,000 |
Utilities | $12,500 |
Cost of equity | 11% |
A) $190,500.
B) $150,550.
C) $176,400.
D) $164,650.
2.hnson is considering the purchase of Happy Valley Acres, a 300-unit apartment complex. She has hired Carson, CFA, to advise her on the investment. Carson has estimated the following data for Happy Valley’s next accounting period:
§ Potential rental income = $3.80 million
§ Vacancy rate = 3.5 percent
§ Insurance costs = $250,000
§ Financing costs = $940,000
§ Property taxes = $400,000
§ Utility expense = $120,000
§ Repair costs = $200,000
§ Depreciation = $350,000
§ Required Return = 8 percent
The property’s net operating income (NOI) and value should be closest to:
NOI | Value |
A) $2.70 million $21.60 million
B) $2.83 million $21.60 million
C) $2.83 million $33.75 million
D) $2.70 million $33.75 million
3. investor is considering purchasing an office building that is currently 95 percent leased.
Gross potential rental income | $105,000 |
Insurance and taxes | $9,000 |
Repairs and maintenance | $15,000 |
Depreciation | $11,000 |
What is the building's net operating income (NOI), based on the above table?
A) $64,750.
B) $81,000.
C) $70,000.
D) $75,750.
4.l of the following variables might be factors when calculating the net operating income (NOI) for a property EXCEPT:
A) vacancy rate.
B) insurance.
C) depreciation.
D) collection losses.
5．sed upon the following information, what is the net operating income (NOI) of the property?
Estimated Market Value | $600,000 |
Capitalization Rate | 20% |
Taxes | $27,000 |
Operating Expenses | $107,000 |
A) $104,000.
B) $120,000.
C) $98,600.
D) $114,600.
6．t operating income (NOI) is calculated by subtracting which of the following from the property's gross potential rental income?
A) Property taxes.
B) Income taxes.
C) Interest on debt financing.
D) Depreciation.
7．e income approach to valuing real estate is most similar to the following method of valuing common stock:
A) Dividend discount model with zero growth.
B) Dividend discount model with normal growth.
C) Price-to-book ratio.
D) Price-to-sales ratio.
1.The portfolio manager of a large real estate investment trust (REIT) has identified an office building as a potential investment. He must determine its net operating income (NOI), based upon the following data:
Gross potential rental income | $235,000 |
Estimated vacancy and collection loss rate | 6% |
Insurance and taxes | $15,000 |
Repairs and maintenance | $17,000 |
Utilities | $12,500 |
Cost of equity | 11% |
A) $190,500.
B) $150,550.
C) $176,400.
D) $164,650.
The correct answer was C)
The NOI is $235,000 – ($235,000 × 6%) - $15,000 - $17,000 - $12,500 = $176,400. The cost of equity number is not needed, because the NOI calculation is independent of any financing arrangements.
2.hnson is considering the purchase of Happy Valley Acres, a 300-unit apartment complex. She has hired Carson, CFA, to advise her on the investment. Carson has estimated the following data for Happy Valley’s next accounting period:
§ Potential rental income = $3.80 million
§ Vacancy rate = 3.5 percent
§ Insurance costs = $250,000
§ Financing costs = $940,000
§ Property taxes = $400,000
§ Utility expense = $120,000
§ Repair costs = $200,000
§ Depreciation = $350,000
§ Required Return = 8 percent
The property’s net operating income (NOI) and value should be closest to:
NOI | Value |
A) $2.70 million $21.60 million
B) $2.83 million $21.60 million
C) $2.83 million $33.75 million
D) $2.70 million $33.75 million
The correct answer was D)
NOI = rental income × (1-vacancy rate) - insurance costs - property taxes - utility expense-repair costs
NOI = $3.80 million × (96.5%) - 250,000 - 400,000 - 120,000 - 200,000 = 2.70 million
Value of building = 2.70 million / 0.08 = 33.75 million
3. investor is considering purchasing an office building that is currently 95 percent leased.
Gross potential rental income | $105,000 |
Insurance and taxes | $9,000 |
Repairs and maintenance | $15,000 |
Depreciation | $11,000 |
What is the building's net operating income (NOI), based on the above table?
A) $64,750.
B) $81,000.
C) $70,000.
D) $75,750.
The correct answer was D)
NOI can be calculated as gross rental income minus vacancy losses, insurance and taxes, and repairs and maintenance. Depreciation is not a factor in calculating NOI. NOI for the building is $105,000 – ($105,000 × 5%) - $9,000 - $15,000 = $75,750.
4.l of the following variables might be factors when calculating the net operating income (NOI) for a property EXCEPT:
A) vacancy rate.
B) insurance.
C) depreciation.
D) collection losses.
The correct answer was C)
The vacancy rate, insurance expenses, and collection losses for a property are all factors in the NOI calculation. Depreciation is not a factor when calculating NOI because a basic, underlying assumption is that routine repairs and maintenance will keep the property in its existing condition.
5．sed upon the following information, what is the net operating income (NOI) of the property?
Estimated Market Value | $600,000 |
Capitalization Rate | 20% |
Taxes | $27,000 |
Operating Expenses | $107,000 |
A) $104,000.
B) $120,000.
C) $98,600.
D) $114,600.
The correct answer was B)
MV = NOI/CAP
To solve for NOI, rewrite the formula as: MV × CAP = NOI
600,000 × 0.2 = 120,000
6．t operating income (NOI) is calculated by subtracting which of the following from the property's gross potential rental income?
A) Property taxes.
B) Income taxes.
C) Interest on debt financing.
D) Depreciation.
The correct answer was
Net operating income does not consider income taxes, financing charges or depreciation.
7．e income approach to valuing real estate is most similar to the following method of valuing common stock:
A) Dividend discount model with zero growth.
B) Dividend discount model with normal growth.
C) Price-to-book ratio.
D) Price-to-sales ratio.
The correct answer was A)
The income approach for valuing real estate uses the following formula:
Appraised Pricereal estate = annual net operating income (NOI) / Market Capitalization Rate (R)
The dividend discount model (DMM) with zero growth approach for valuing common stock uses the following formula:
Pricecommon stock = Dividend (D) / (Required Rate of Return on the Stock (k) - Growth (g))
When g = 0, the formulas simplify to:
Appraised Pricereal estate = NOI / R
Pricecommon stock = D / k
or, a period cash flow divided by a rate of return.
The DMM with normal growth would not be a correct response because the income approach for real estate assumes a constant (no growth) NOI stream to perpetuity.
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