honeycfa

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.

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MV	=	NOI
		CAP
CAP	=	NOI
		MV

596,000 ? 178,800 ? 89,400	=	0.128
2,560,000

honeycfa

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.

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Net operating income (NOI) = gross rental income × (1 ? vacancy rate) ? operating expenses
NOI = $6.5 million × (91.5%) ? $2.3 million
NOI = $3.6475 million
Value = NOI / market cap rate
Value = $3.6475 million / 12.3%
Value = $29.6545 million

honeycfa

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.

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The sales comparison approach uses recent transactions to estimate a benchmark value. The discounted cash flow model is used as a check on investment valuation. The income approach uses a property’s NOI, divided by the market cap rate, to estimate market value.

honeycfa

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.

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Appraisal price = NOI / Market cap rate = $165,000 / 0.09 = $1,833,333. Remember that all calculations for the income approach are made pre-tax.

honeycfa

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.

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Appraised Price = NOI / CAP

Appraised Price = 956,000 / 0.16 = 5,975,000

honeycfa

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.

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The sales comparison approach uses recent transactions to estimate a benchmark value. The regression price model is a fictitious model. The hedonic price model is a variation of the sales comparison approach, but is a more formalized, structured approach.

honeycfa

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.

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NOI does not consider income taxes, financing charges, or depreciation.

honeycfa

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.

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The income approach for valuing real estate uses the following formula:

Appraised Price_{real 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:

Price_{common stock} = Dividend (D) / (Required Rate of Return on the Stock (k) - Growth (g))

When g = 0, the formulas simplify to:

Appraised Price_{real estate} = NOI / R

Price_{common 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.

honeycfa

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.

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MV = NOI / CAP

To solve for NOI, rewrite the formula as: MV × CAP = NOI

600,000 × 0.2 = 120,000

honeycfa

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.

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NOI = $850,000 – ($850,000 x 0.035) – $35,000 – $40,000 – $25,000 – $75,000 = $645,250.