The gross rental income for an apartment building allowing for vacancies is $500,000. Estimated expenses total $200,000. If the capitalization rate is 10%, the value of this building using the direct capitalization approach is closest to:

A) $3,000,000.

B) $3,500,000.

C) $2,500,000.

All of the following variables might be factors when calculating the net operating income (NOI) for a property EXCEPT:

A) collection losses.

B) depreciation.

C) insurance.

An investor is considering purchasing an office building that is currently 95% 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) $75,750.

B) $64,750.

C) $81,000.

Johnson 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%.
• 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%.

The property’s net operating income (NOI) and value should be closest to:

A) $2.83 million $33.75 million

B) $2.70 million $33.75 million

C) $2.70 million $21.60 million

The portfolio manager of a large real estate investment trust (REIT) has identified an office building as a potential investment. Based upon the following data, what is its net operating income (NOI)?

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) $150,550.

B) $176,400.

C) $190,500.

Net operating income (NOI) is calculated by subtracting which of the following from the property's gross potential rental income?

A) Depreciation.

B) Income taxes.

C) Property taxes.

The income approach to valuing real estate is most similar to the following method of valuing common stock:

A) Dividend discount model with normal growth.

B) Dividend discount model with zero growth.

C) Price-to-sales ratio.

Based 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) $120,000.

B) $104,000.

C) $98,600.

Jill Booton is evaluating an apartment building as a possible investment to add to her portfolio. She has been told that real estate is a good addition to a portfolio for diversification purposes. Jill will not be able to handle the maintenance issues at the complex and thus must hire a full-time maintenance employee at $35,000 per year. She will also hire a full-time manager at $40,000 per year. Property taxes are expected to be $75,000 per year and insurance will be another $25,000. If fully occupied, the gross rental income from the property will be $850,000. Due to the location of the building, Jill estimates a very low vacancy rate of 3.5 percent annually. The net operating income of the property is closest to:

A) $825,250.

B) $645,250.

C) $4,963,462.

A real estate property has net operating income of $956,000, requires taxes of $143,400, and has a capitalization rate of 16%. The estimated property value is closest to:

A) $7,353,800.

B) $5,975,000.

C) $5,078,750.

A portfolio manager is considering the purchase of an office building. He has identified the major characteristics of a property that affect value, and has assigned a quantitative rating to each one, based upon recent comparable sales in the area. Using a regression model, he has developed benchmark values for each characteristic, which he will use to estimate the market value of the potential investment. This method of estimating property value is best described as the:

A) sales comparison approach.

B) hedonic price estimation.

C) regression price model.

The data below pertains to an office building’s next reporting period:

• Gross rental income = $6.5 million.
• Operating expense = $2.3 million.
• Financing expense = $900,000.
• Depreciation expense = $750,000.
• Vacancy rate = 8.5%.

The market expects a return of 12.3%. The value of the office building is closest to:

A) $16.24 million.

B) $22.33 million.

C) $29.65 million.

A real estate agent contacts an investor regarding a property that has recently come on the market. The real estate agent can provide reliable information regarding the property’s net operating income, as well as the prevailing market cap rate, based on recent comparable sales. The investor can best estimate the market value of the property, with the information supplied by the real estate agent, using the:

A) discounted cash flow model.

B) income approach.

C) sales comparison approach.

An investor with a large real estate portfolio must estimate the value of his holdings at year-end. Given the following data for an apartment building in the portfolio, estimate the appraised value using the income approach:

NOI	$165,000
Marginal tax rate	28%
Market cap rate	9%

A) $1,833,333.

B) Need additional information to calculate.

C) $1,319,999.

John Williams wants to purchase an apartment complex. The complex consists of 75 units each renting for $700 per month. The estimated vacancy and collection loss rate is 7%. The insurance for the building is $40,000 annually and taxes are $22,000 annually. Utilities are $18,000 and the maintenance expense is $29,000.

Assume a market cap rate of 11%. Recent sales of nearby apartment complexes have resulted in the following information.

Characteristics	Units	Slope Coefficient in $ per Unit
Proximity to downtown	Miles	-350,000
Vacancy rate	Percent	-500
Building size	Units	+75,000

Williams' proposed apartment complex is 4 miles away from downtown and has an estimated vacancy rate of 6%.

What is the net operating income (NOI) for Williams' proposed apartment complex?

A) $498,900.

B) $436,153.

C) $476,900.

A) $4,060,000.

B) $4,222,000.

C) $3,894,500.

A) $4,525,455.

B) $5,727,273.

C) $4,335,455.

A property has a gross potential rental income of $740,000. Operating expenses, excluding insurance and property taxes, amount to 30% of gross rents. Insurance and property taxes total $16,800. If the market capitalization rate is 22%, the value of this property is closest to:

A) $2,278,000.

B) $1,727,000.

C) $2,431,000.

A real estate analysis estimates the market value of an income-producing property at $2,560,000. The annual gross potential rental income is $596,000, the annual property operating expenses and taxes are $178,800, and the annual vacancy and collection losses are $89,400. What capitalization rate was used by the analysis to assess the property at $2,560,000?

A) 0.1280.

B) 0.1275.

C) 0.1290.

An investor made the following purchase:

• Bought an office building for $500,000 using 90% financing.
• The borrowing cost was 10%.
• They received $29,000 at year-end from rentals.
• They sold the building for $520,000 at the end of the year.

Assuming a flat tax rate on income and capital gains of 25% what was the return on equity?

A) +6%.

B) -3%.

C) +10%.

Ron Biggs is considering a real estate investment. In the first year, the property is expected to generate revenue of $65,000. The expense in the first year is $25,000 and the depreciation allowance will be 2.6 percent of the $350,000 initial investment. Assuming all cash flows occur at the end of the year and Biggs expects to be in a 35 percent marginal tax bracket, the after-tax cash flow in year 1 is closest to:

A) $30,900.

B) $29,185.

C) $20,085.

A real estate speculator is considering an investment in a piece of raw land that will be developed. He expects to invest $150,000 in the land. It will not be developed for three years, but at the end of year 3, he expects a cash flow of $25,000. In years 4 and 5, the cash flow will increase to $35,000, and at the end of year 5 he expects to sell the land for $185,000. Due to the risky nature of the investment, he requires an 18% return.

The net present value of this investment is closest to:

A) -$20,568.

B) -$32,903.

C) $30,222.

A) 12.6%.

B) 14.3%.

C) 18.1%.

An investor purchases a property for $1,000,000, financing 92% of the purchase price. He plans to sell the property four years later for $1,200,000. The expected net cash flows for the investment are as follows:

Year 1	$23,450
Year 2	$25,312
Year 3	$27,879
Year 4 (net of mortgage payoff)	$261,450

Assuming a 9% cost of equity, the net present value (NPV) of the cash flows at the time the property is purchased is:

A) $338,091.

B) $249,564.

C) $169,564.

An investor purchases an office building for $2,500,000. He puts 10 percent down and finances the remainder at a 9 percent rate of interest. Calculate the first year’s after-tax cash flow for the investment using the following information:

NOI	$243,000
Depreciation	$25,000
Annual mortgage payment	$218,000
Marginal income tax rate	28%

A) $11,160.

B) $18,000.

C) $20,660.