## Real Estate Principles A Value Approach 4th Edition By Ling and Archer – Test Bank

8

Student: ___________________________________________________________________________

1. Which of the following measures is considered the fundamental determinate of market value for incomeproducing properties? A. Net operating income B. Potential gross income C. Operating expenses D. Capital expenditures

2. Net operating income is similar to which of the following measures of cash flow in corporate finance? A. Dividend yield B. Earnings before deductions for interest, depreciation, income taxes, and amortization (EBIDTA) C. Price-earnings ratio D. Discount rate

3. The process of converting periodic income into a value estimate is referred to as income capitalization. Income capitalization models can generally be categorized as either direct capitalization models or discounted cash flow models. Which of the following statements best describes the direct capitalization method? A. Value estimates are based on a multiple of expected first year net operating income. B.

Appraisers must make explicit forecasts of the property’s net operating income for each year of the expected holding period. C. Appraisers must select the appropriate yield at which to discount future cash flows. D.

The forecast must include the net income produced by a sale of the property at the end of the expected holding period.

4. The starting point in calculating net operating income is the total annual income the property would produce assuming 100 percent occupancy and no collection losses. This is commonly referred to as: A. effective Gross Income B. potential Gross Income C. operating expenses D. capital expenditures

5. The distinction between market rent and contract rent is important due to differences in lease terms. Office, retail, and industrial tenants most commonly occupy their space under leases that run: A. one year or less B. one to three years C. three to five years D. ten years or more

6. One complication that appraisers may face is the variety of lease types that may be available for a particular property type. Which of the following statements best describes a “graduated” or step-up lease? A. The monthly rent remains fixed over the entire lease term. B. The lease establishes schedule of rental rate increases over the term of the lease. C. Rental rate increases are indexed to the general rate of inflation. D. Rental rates are a function of the sales of the tenant’s business.

7. In calculating net operating income, vacancy losses must be subtracted from the gross income collected. The normal range for vacancy and collection losses for apartment, office, and retail properties is: A. between zero and one percent B. between one and five percent C. between five and fifteen percent D. between fifteen and twenty percent

8. The expected costs to make replacements, alterations, or improvements to a building that materially prolong its life and increase its value is referred to as: A. operating expenses B. capital expenditures C. vacancy losses D. collection losses

9. Operating expenses can be divided into two categories: variable and fixed expenses. Which of the following best exemplifies a fixed expense? A. Utilities B. Property management C. Local property taxes D. Trash removal

10. Which of these is most likely to be regarded as a capital expenditure rather than an operating expense? A. Property taxes B. Trash removal C. Insurance payments D. Roof replacement

11. Most appraisers adhere to an “above-line” treatment of capital expenditures. This implies which of the following? A. Capital expenditures are subtracted in the calculation of net operating income. B. Capital expenditures are subtracted from net operating income to obtain a net cash flow measure. C. Capital expenditures are added to net operating income. D. Capital expenditures are excluded from all calculations because they are difficult to estimate.

12. The going-in cap rate, or overall capitalization rate, is a measure of the relationship between a property’s current income stream and its price or value. Which of the following statements regarding cap rates is true? A . It is a measure of total return since it accounts for future cash flows from operations and expected appreciation (depreciation) in the market value of the property. B. It is a discount rate that can be applied to future cash flows. C. It is analogous to the dividend yield on a common stock. D. It is the projected rate at which prices will appreciate in the future.

13. For smaller income-producing properties, appraisers may use the ratio of a property’s selling price to its effective gross income. This is an example of a: A. Net operating income B. Going-out cap rate C. Going-in cap rate D. Gross income multiplier

14. Gross income multiplier analysis assumes that the subject and comparable properties are collecting market rents. Therefore, it is frequently argued that an income multiplier approach to valuation is most appropriate for properties with short-term leases. Which of the following property types, therefore, would we find it most appealing to use a gross-income multiplier in our analysis? A. Apartments B. Office C. Industrial D. Retail

15. When using discounted cash flow analysis for valuation, the appraiser must estimate the sale price at the end of the expected holding period. This price (assuming selling expenses have yet to be accounted for) is referred to as the property’s: A. net sale proceeds B. selling expenses C. terminal value D. current market value

16. When using discounted cash flow analysis for valuation, an appraiser will prepare a cash flow forecast, often referred to as a: A. restricted appraisal report B. net operating income statement C. direct market extraction D. pro forma

17. When calculating the net operating income of a property, it is important to identify any expenses that will be incurred in attempts to maintain the property. All of the following would be considered operating expenses EXCEPT: A. Property taxes B. Property insurance premiums C. Mortgage payments D. Utility expenses

18. The cap rate is an important metric that investors use to analyze the state of commercial real estate markets. When interpreting cap rate movements, an increase in cap rates over time would indicate that: A. The discount rate used in TVM (time value of money) calculations has increased B. The discount rate used in TVM (time value of money) calculations has decreased C. Property values have increased D. Property values have decreased

19. Given the following information, calculate the overall capitalization rate. Sale price: $950,000, Potential Gross Income: $250,000, Vacancy and Collection Losses: $50,000, and Operating Expenses: $50,000. A. 15.8% B. 21.1% C. 26.3% D. 36.8%

20. Given the following information, calculate the net operating income assuming below-line treatment of capital expenditures? Property: 4 office units, Contract Rents per unit: $2500 per month, Vacancy and collection losses: 15%, Operating Expenses: $42,000, Capital Expenditures: 10%: A. $48,000 B. $60,000 C. $95,000 D. $102,000

21. Given the following information, calculate the effective gross income. Property: 4 office units, Contract rents per unit: $2500 per month, Vacancy and collection losses: 15%, Operating Expenses: $42,000, Capital Expenditures 10%: A. $100,000 B. $102,000 C. $120,000 D. $135,000

22. Given the following information, calculate the effective gross income multiplier. Sale price: $950,000, Potential Gross Income: $250,000, Vacancy and Collection Losses: 15%, and Miscellaneous Income: $50,000. A. 0.36 B. 0.30 C. 2.8 D. 3.6

23. Given the following information, calculate the appropriate going-in cap rate using mortgage-equity rate analysis. Mortgage financing = 75%, Typical debt financing cap rate: 10%, Sale price: $1,950,000, Before Tax Cash Flow (BTCF): $390,000. A. 9.6% B. 10% C. 12.5% D. 13.6%

24. Given the following information, calculate the appropriate going-in cap rate using general constantgrowth formula. Overall market discount rate = 12%, Constant growth rate projection: 3% per year, Sale price: $1,950,000, Net operating income: $390,000, Potential gross income: $520,000. A. 8% B. 9% C. 10% D. 11.5%

25. Given the following information, calculate the effective gross income multiplier. Sale price: $2,500,000; Effective Gross Income: $340,000; Operating Expenses: $100,000; Capital Expenditures: $36,000. A. 0.136 B. 7.35 C. 10.42 D. 12.25

26. Three highly similar and competitive income-producing properties within two blocks of the subject property have sold this month. All three offer essentially the same amenities and services as the subject property. The sale prices and estimated first-year NOI for each of the comparable properties are as follows:

Using the information provided, calculate the overall capitalization rate by direct market extraction assuming each property is equally comparable to the subject. A. 11.0% B. 11.2% C. 11.4% D. 12.0%

27. Suppose that you are attempting to value an income producing property using the direct capitalization approach. Using data from comparable properties, you have determined the overall capitalization rate to be 11.44%. If the projected first year net operating income (NOI) for the subject property is $44,500, what is the indicated value of the subject using direct capitalization? A. $49,590.80 B. $50,225.73 C. $388,986.00 D. $509,080.00

28. Suppose that an income producing property is expected to yield cash flows for the owner of $10,000 in each of the next five years, with cash flows being received at the end of each period. If the opportunity cost of investment is 12% annually and the property can be sold for $100,000 at the end of the fifth year, determine the value of the property today. A. $36, 047.76 B. $56,742.69 C. $83,333.33 D. $92,790.45

29. Suppose that examination of a pro forma reveals that the fifth year net operating income (NOI) for an income producing property that you are analyzing is $138,446 (you can assume that this cash flow occurs at the end of the year). If you estimate the projected rental growth rate for the property to be 5% per year, determine the projected sale price of the property at the end of year five if the going-out capitalization rate is 9%. A. $988,900.00 B. $1,465,037.00 C. $1,538,289.00 D. $1,615,203.00

30. Analysis of a subject property’s pro forma reveals that its fifth year net operating income (NOI) is projected to be $100,282 (you can assume that this cash flow occurs at the end of the year). If you estimate the projected rental growth rate for the property to be 3% per year and the going-out capitalization rate in year five to be 10%, determine the net sale proceeds the current owner of the property would receive if he were to sell the property at the end of year five and incur selling expenses that amounted to $58,300. A. $944,520.00 B. $974,610.00 C. $1,002,820.00 D. $1,032,910.00

8 Key 1. Which of the following measures is considered the fundamental determinate of market value for income-producing properties? A. Net operating income B. Potential gross income C. Operating expenses D. Capital expenditures

Difficulty: Basic

Learning Objective: 08-01 Explain the difference between direct capitalization and discounted cash flow (DCF) models of property valuation.

Ling – Chapter 08 #1

2. Net operating income is similar to which of the following measures of cash flow in corporate finance? A. Dividend yield B. Earnings before deductions for interest, depreciation, income taxes, and amortization (EBIDTA) C. Price-earnings ratio D. Discount rate

Difficulty: Basic

Learning Objective: 08-01 Explain the difference between direct capitalization and discounted cash flow (DCF) models of property valuation.

Ling – Chapter 08 #2

3. The process of converting periodic income into a value estimate is referred to as income capitalization. Income capitalization models can generally be categorized as either direct capitalization models or discounted cash flow models. Which of the following statements best describes the direct capitalization method? A. Value estimates are based on a multiple of expected first year net operating income. B.

Appraisers must make explicit forecasts of the property’s net operating income for each year of the expected holding period. C. Appraisers must select the appropriate yield at which to discount future cash flows. D.

The forecast must include the net income produced by a sale of the property at the end of the expected holding period.

Difficulty: Intermediate

Learning Objective: 08-01 Explain the difference between direct capitalization and discounted cash flow (DCF) models of property valuation.

Ling – Chapter 08 #3

4. The starting point in calculating net operating income is the total annual income the property would produce assuming 100 percent occupancy and no collection losses. This is commonly referred to as: A. effective Gross Income B. potential Gross Income C. operating expenses D. capital expenditures

Difficulty: Basic

Learning Objective: 08-01 Explain the difference between direct capitalization and discounted cash flow (DCF) models of property valuation.

Ling – Chapter 08 #4

5. The distinction between market rent and contract rent is important due to differences in lease terms. Office, retail, and industrial tenants most commonly occupy their space under leases that run: A. one year or less B. one to three years C. three to five years D. ten years or more

Difficulty: Intermediate

Learning Objective: 08-01 Explain the difference between direct capitalization and discounted cash flow (DCF) models of property valuation.

Ling – Chapter 08 #5

6. One complication that appraisers may face is the variety of lease types that may be available for a particular property type. Which of the following statements best describes a “graduated” or step-up lease? A. The monthly rent remains fixed over the entire lease term. B. The lease establishes schedule of rental rate increases over the term of the lease. C. Rental rate increases are indexed to the general rate of inflation. D. Rental rates are a function of the sales of the tenant’s business.

Difficulty: Basic

Learning Objective: 08-01 Explain the difference between direct capitalization and discounted cash flow (DCF) models of property valuation.

Ling – Chapter 08 #6

7. In calculating net operating income, vacancy losses must be subtracted from the gross income collected. The normal range for vacancy and collection losses for apartment, office, and retail properties is: A. between zero and one percent B. between one and five percent C. between five and fifteen percent D. between fifteen and twenty percent

Difficulty: Intermediate

Learning Objective: 08-01 Explain the difference between direct capitalization and discounted cash flow (DCF) models of property valuation.

Ling – Chapter 08 #7

8. The expected costs to make replacements, alterations, or improvements to a building that materially prolong its life and increase its value is referred to as: A. operating expenses B. capital expenditures C. vacancy losses D. collection losses

Difficulty: Basic

Learning Objective: 08-02 Distinguish between operating expenses and capital expenditures.

Ling – Chapter 08 #8

9. Operating expenses can be divided into two categories: variable and fixed expenses. Which of the following best exemplifies a fixed expense? A. Utilities B. Property management C. Local property taxes D. Trash removal

Difficulty: Intermediate

Learning Objective: 08-02 Distinguish between operating expenses and capital expenditures.

Ling – Chapter 08 #9

10. Which of these is most likely to be regarded as a capital expenditure rather than an operating expense? A. Property taxes B. Trash removal C. Insurance payments D. Roof replacement

Difficulty: Intermediate

Learning Objective: 08-02 Distinguish between operating expenses and capital expenditures.

Ling – Chapter 08 #10

11. Most appraisers adhere to an “above-line” treatment of capital expenditures. This implies which of the following? A. Capital expenditures are subtracted in the calculation of net operating income. B. Capital expenditures are subtracted from net operating income to obtain a net cash flow measure. C. Capital expenditures are added to net operating income. D. Capital expenditures are excluded from all calculations because they are difficult to estimate.

Difficulty: Basic

Learning Objective: 08-02 Distinguish between operating expenses and capital expenditures.

Ling – Chapter 08 #11

12. The going-in cap rate, or overall capitalization rate, is a measure of the relationship between a property’s current income stream and its price or value. Which of the following statements regarding cap rates is true? A . It is a measure of total return since it accounts for future cash flows from operations and expected appreciation (depreciation) in the market value of the property. B. It is a discount rate that can be applied to future cash flows. C. It is analogous to the dividend yield on a common stock. D. It is the projected rate at which prices will appreciate in the future.

Difficulty: Intermediate

Learning Objective: 08-03 Explain the general relationship between discount rates and capitalization rates.

Ling – Chapter 08 #12

13. For smaller income-producing properties, appraisers may use the ratio of a property’s selling price to its effective gross income. This is an example of a: A. Net operating income B. Going-out cap rate C. Going-in cap rate D. Gross income multiplier

Difficulty: Basic

Learning Objective: 08-05 Describe an effective gross income multiplier ( EGIM ) approach to valuation and demonstrate its use; given appropriate data.

Ling – Chapter 08 #13

14. Gross income multiplier analysis assumes that the subject and comparable properties are collecting market rents. Therefore, it is frequently argued that an income multiplier approach to valuation is most appropriate for properties with short-term leases. Which of the following property types, therefore, would we find it most appealing to use a gross-income multiplier in our analysis? A. Apartments B. Office C. Industrial D. Retail

Difficulty: Intermediate

Learning Objective: 08-05 Describe an effective gross income multiplier ( EGIM ) approach to valuation and demonstrate its use; given appropriate data.

Ling – Chapter 08 #14

15. When using discounted cash flow analysis for valuation, the appraiser must estimate the sale price at the end of the expected holding period. This price (assuming selling expenses have yet to be accounted for) is referred to as the property’s: A. net sale proceeds B. selling expenses C. terminal value D. current market value

Difficulty: Basic

Learning Objective: 08-01 Explain the difference between direct capitalization and discounted cash flow (DCF) models of property valuation.

Ling – Chapter 08 #15

16. When using discounted cash flow analysis for valuation, an appraiser will prepare a cash flow forecast, often referred to as a: A. restricted appraisal report B. net operating income statement C. direct market extraction D. pro forma

Difficulty: Basic

Learning Objective: 08-06 Develop a five-year net cash flow forecast (pro forma); including the expected cash flows from sale; given appropriate data.

Ling – Chapter 08 #16

17. When calculating the net operating income of a property, it is important to identify any expenses that will be incurred in attempts to maintain the property. All of the following would be considered operating expenses EXCEPT: A. Property taxes B. Property insurance premiums C. Mortgage payments D. Utility expenses

Difficulty: Basic

Learning Objective: 08-02 Distinguish between operating expenses and capital expenditures.

Ling – Chapter 08 #17

18. The cap rate is an important metric that investors use to analyze the state of commercial real estate markets. When interpreting cap rate movements, an increase in cap rates over time would indicate that: A. The discount rate used in TVM (time value of money) calculations has increased B. The discount rate used in TVM (time value of money) calculations has decreased C. Property values have increased D. Property values have decreased

Difficulty: Intermediate

Learning Objective: 08-03 Explain the general relationship between discount rates and capitalization rates.

Ling – Chapter 08 #18

19. Given the following information, calculate the overall capitalization rate. Sale price: $950,000, Potential Gross Income: $250,000, Vacancy and Collection Losses: $50,000, and Operating Expenses: $50,000. A. 15.8% B. 21.1% C. 26.3% D. 36.8%

Difficulty: Basic

Learning Objective: 08-04 Calculate the overall capitalization rate by direct market extraction given appropriate data.

Ling – Chapter 08 #19

20. Given the following information, calculate the net operating income assuming below-line treatment of capital expenditures? Property: 4 office units, Contract Rents per unit: $2500 per month, Vacancy and collection losses: 15%, Operating Expenses: $42,000, Capital Expenditures: 10%: A. $48,000 B. $60,000 C. $95,000 D. $102,000

Difficulty: Intermediate

Learning Objective: 08-04 Calculate the overall capitalization rate by direct market extraction given appropriate data.

Ling – Chapter 08 #20

21. Given the following information, calculate the effective gross income. Property: 4 office units, Contract rents per unit: $2500 per month, Vacancy and collection losses: 15%, Operating Expenses: $42,000, Capital Expenditures 10%: A. $100,000 B. $102,000 C. $120,000 D. $135,000

Difficulty: Basic

Learning Objective: 08-04 Calculate the overall capitalization rate by direct market extraction given appropriate data.

Ling – Chapter 08 #21

22. Given the following information, calculate the effective gross income multiplier. Sale price: $950,000, Potential Gross Income: $250,000, Vacancy and Collection Losses: 15%, and Miscellaneous Income: $50,000. A. 0.36 B. 0.30 C. 2.8 D. 3.6

Difficulty: Basic

Learning Objective: 08-05 Describe an effective gross income multiplier ( EGIM ) approach to valuation and demonstrate its use; given appropriate data.

Ling – Chapter 08 #22

23. Given the following information, calculate the appropriate going-in cap rate using mortgageequity rate analysis. Mortgage financing = 75%, Typical debt financing cap rate: 10%, Sale price: $1,950,000, Before Tax Cash Flow (BTCF): $390,000. A. 9.6% B. 10% C. 12.5% D. 13.6%

Difficulty: Advanced

Learning Objective: 08-04 Calculate the overall capitalization rate by direct market extraction given appropriate data.

Ling – Chapter 08 #23

24. Given the following information, calculate the appropriate going-in cap rate using general constantgrowth formula. Overall market discount rate = 12%, Constant growth rate projection: 3% per year, Sale price: $1,950,000, Net operating income: $390,000, Potential gross income: $520,000. A. 8% B. 9% C. 10% D. 11.5%

Difficulty: Intermediate

Learning Objective: 08-04 Calculate the overall capitalization rate by direct market extraction given appropriate data.

Ling – Chapter 08 #24

25. Given the following information, calculate the effective gross income multiplier. Sale price: $2,500,000; Effective Gross Income: $340,000; Operating Expenses: $100,000; Capital Expenditures: $36,000. A. 0.136 B. 7.35 C. 10.42 D. 12.25

Difficulty: Basic

Learning Objective: 08-05 Describe an effective gross income multiplier ( EGIM ) approach to valuation and demonstrate its use; given appropriate data.

Ling – Chapter 08 #25

26. Three highly similar and competitive income-producing properties within two blocks of the subject property have sold this month. All three offer essentially the same amenities and services as the subject property. The sale prices and estimated first-year NOI for each of the comparable properties are as follows:

Using the information provided, calculate the overall capitalization rate by direct market extraction assuming each property is equally comparable to the subject. A. 11.0% B. 11.2% C. 11.4% D. 12.0%

Difficulty: Basic

Learning Objective: 08-04 Calculate the overall capitalization rate by direct market extraction given appropriate data.

Ling – Chapter 08 #26

27. Suppose that you are attempting to value an income producing property using the direct capitalization approach. Using data from comparable properties, you have determined the overall capitalization rate to be 11.44%. If the projected first year net operating income (NOI) for the subject property is $44,500, what is the indicated value of the subject using direct capitalization? A. $49,590.80 B. $50,225.73 C. $388,986.00 D. $509,080.00

Difficulty: Basic

Learning Objective: 08-04 Calculate the overall capitalization rate by direct market extraction given appropriate data.

Ling – Chapter 08 #27

28. Suppose that an income producing property is expected to yield cash flows for the owner of $10,000 in each of the next five years, with cash flows being received at the end of each period. If the opportunity cost of investment is 12% annually and the property can be sold for $100,000 at the end of the fifth year, determine the value of the property today. A. $36, 047.76 B. $56,742.69 C. $83,333.33 D. $92,790.45

Difficulty: Intermediate

Learning Objective: 08-07 Estimate an indicated market value by DCF analysis.

Ling – Chapter 08 #28

29. Suppose that examination of a pro forma reveals that the fifth year net operating income (NOI) for an income producing property that you are analyzing is $138,446 (you can assume that this cash flow occurs at the end of the year). If you estimate the projected rental growth rate for the property to be 5% per year, determine the projected sale price of the property at the end of year five if the going-out capitalization rate is 9%. A. $988,900.00 B. $1,465,037.00 C. $1,538,289.00 D. $1,615,203.00

Difficulty: Advanced

Learning Objective: 08-07 Estimate an indicated market value by DCF analysis.

Ling – Chapter 08 #29

30. Analysis of a subject property’s pro forma reveals that its fifth year net operating income (NOI) is projected to be $100,282 (you can assume that this cash flow occurs at the end of the year). If you estimate the projected rental growth rate for the property to be 3% per year and the going-out capitalization rate in year five to be 10%, determine the net sale proceeds the current owner of the property would receive if he were to sell the property at the end of year five and incur selling expenses that amounted to $58,300. A. $944,520.00 B. $974,610.00 C. $1,002,820.00 D. $1,032,910.00

Difficulty: Advanced

Learning Objective: 08-07 Estimate an indicated market value by DCF analysis.

Ling – Chapter 08 #30

8 Summary Category # of Questions Difficulty: Advanced 3 Difficulty: Basic 16 Difficulty: Intermediate 11 Learning Objective: 0801 Explain the difference between direct capitalization and discounted cash flow (DCF) models of property valuation. 8 Learning Objective: 08-02 Distinguish between operating expenses and capital expenditures. 5 Learning Objective: 08-03 Explain the general relationship between discount rates and capitalization rates. 2 Learning Objective: 08-04 Calculate the overall capitalization rate by direct market extraction given appropriate data. 7 Learning Objective: 0805 Describe an effective gross income multiplier ( EGIM ) approach to valuation and demonstrate its use; given appropriate data. 4 Learning Objective: 08-06 Develop a fiveyear net cash flow forecast (pro forma); including the expected cash flows from sale; given appropriate data. 1 Learning Objective: 08-07 Estimate an indicated market value by DCF analysis. 3 Ling – Chapter 08

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