c. Gross income Explanation: Gross income is the amount of gross receipts if all available income is collected; it assumes no vacancies or collection losses. b. Economic (market) rent Explanation: Because a lease interest is not being valued, the market rent should be used to
estimate income. By using market rent (the typical rent found in comparable properties) instead of the actual rent of the property, the appraiser will be estimating the value to a typical investor, or market value. a. It would be included as "other income" in calculating gross income Explanation: Income from renting a garage space
is an example of "other income" that would normally be included in the calculation of gross income, because the garage is part of the apartment complex. d. The amount will vary with each property Explanation: There is no absolute number or adjustment that can be used for vacancy allowance. One of the responsibilities of the appraiser in analyzing the market is to estimate what the
specific number should be for the subject property. b. Gross income and vacancy and collection loss Explanation: By definition, effective gross income is equal to gross income less vacancy and collection loss. b. Mortgage payments Explanation: Mortgage (debt) payments are not part of the calculation
to estimate net operating income. The remaining three choices are all subtracted from effective gross income to estimate net operating income. b. Repair and maintenance Explanation: The appraiser needs to analyze all expenses carefully when using the income approach to value. One reason is
to make sure that certain items are not being either counted twice or eliminated completely. One area where careful attention should be given concerns replacement allowances, which could have mistakenly been placed in a repair and maintenance category. c. Expenses that do not vary with the level of occupancy Explanation: The distinction between fixed and variable expenses is based on whether or not the expense varies with the
level of occupancy. For example, property taxes are considered a fixed operating expense because they will not change if occupancy (vacancy) changes. However, they are not necessarily constant over a holding period and certainly not forever. b. Roof replacement when it is worn out Explanation: Reserves are intended for long-lived items that must be replaced before the end of the economic life of the property. An example would be the replacement of a
worn-out roof. "a." is replacing the entire building at the end of its remaining economic life; "b." is replacing the roof when it, the roof, is worn out, but before the building has reached the end of its economic life, so that it, the building, can continue to produce income. b. Gross lease Explanation: If the lessor has to pay the expenses, it is a gross lease. If the lessee (tenant) pays the expenses, it is a net lease. The term pass through is sometimes used to refer to passing through expenses to a
tenant. Estimate the annual gross income of the subject property based upon the following data: Neighborhood: All stores are 100 feet in depth; and, except for front footage, all of the stores are similar in age, quality, condition, and other units of comparability. The neighborhood has averaged 5 percent vacancy and collection losses over the last five years. Subject Property: The subject property has 50 feet of frontage. The building
was leased four years ago for $1,000 per month. The term of the lease is ten years. The subject's rental income is old. Three comparables, 1, 2, and 3B, provide the best evidence of current market rents. 3, 3C, and
3D, are old and/or long term leases, and not good indicators current market rents – for property tax appraisal purposes, we're usually after a fee simple absolute value, "free and clear" of any restrictions.
Gross Income: 50 F.F. x $30.00/F.F. = $1,500 x 12 months = $18,000
Solution:Gross Income (GI) : $850 x 2 units x 12 months $20,400 Effective Gross Income [EffGI] $20,400 Water/sewer/garbage: $50 x 12 months - $600 Maintenance: $70 x 2 units x 12 months - $1,680 Net Income Before deducting Recapture & Taxes (NIBT) = $17,420 Property Taxes (PT): $175,000 x 1% - $1,750 Net Income Before Recapture (NIBR) = $15,670
Solution:Gross Income (GI): 40,000 x $0.35 x 12 $168,000 Vacancy & Collection Loss (V&CL): $168,000 x 7% - $11,760 Effective Gross Income (EGI) = $156,240 Insurance: 40,000 x $0.11 - $4,400 Maintenance and reserves: 40,000 x $0.40 - $16,000 Water/sewer/garbage: $350 x 12 - $4,200 Net Income Before deducting Recapture & Taxes (NIBT) = $131,640 Property Taxes (PT): $1,500,000 x 1% - $15,000 Net Income Before Recapture (NIBR) = $116,640
Solution:Gross Income (GI): 60,000 x $1.85 x 12 $1,332,000 Vacancy & Collection Loss (V&CL): $1,332,000 x 7% - $93,240 Effective Gross Income (EGI) = $1,238,760 Management: $1,238,760 x 7% - $86,713 Net Income Before deducting Recapture and Taxes (NIBT) = $961,247 Property Taxes (PT): $9,000,000 x 1% - $90,000 Net Income Before Recapture (NIBR) = $871,247
Solution:Gross Income (GI) = 30,000 x $0.70 x 12 = $252,000 Vacancy & Collection Loss (V&CL) = $252,000 x 3.5% - $8,820 Effective Gross Income (EGI) = $243,180 Management = $243,180 x 1% - $2,432 Expenses = $700 x 12 - $8,400 Net Income Before deducting Recapture (NIBR) = $232,348 Rent is net to the owner; therefore, the owner passes through all operating expenses, including property taxes, to the tenant. Even though it is a "net" lease, it is appropriate to deduct for V&CL, if vacancies and/or collections losses are typical in the market. Note that the Net Income Before deducting Recapture is the same net income level as Net Operating Income [NOI] – two names, but the same level of net income -- annual net income after all operating expenses, including ad valorem property taxes are subtracted from the effective gross income.
Solution:
Effective Gross Income (EGI) $58,000 Property Management - $2,166 Property Insurance - $1,800 Reserve for Replacement - $1,190 Net Income Before deducting Recapture and Taxes (NIBT) = $43,344 Property Taxes (PT) - $9,000 Net Income Before Recapture (NIBR) = $34,344 Notice that in exercise above, the income did not begin with gross income instead the income stream was processed using effective gross income. As discussed in the lesson, effective gross income is the amount of income that remains after deducting vacancy and collection loss. The actual rents received are the effective gross income of the property. Since we have the effective gross income of the property, we do not need to deduct for vacancy and collection losses. In addition, the expenses also require analysis: corporate franchise tax, depreciation, and mortgage interest are excluded from the definition of gross outgo and, therefore, are not deducted as operating expenses.
Solution:Part 1: Compute NIBT Actual Effective Gross Income (EGI) $57,520 Actual Allowable Operating Expenses (OE) Miscellaneous Repairs $3,130 Insurance ($3,600/3 Years) $1,200 Actual Net Income Before deducting Recapture and Taxes (NIBT) = $34,030 Part 2: Would you use NIBT from Part I to value the property? You would not use the NIBT that was calculated in part I because it was based on actual income and expenses for the property. For purposing of deriving value, we use market rents and expenses. If the income was being processed for valuation purposes, the income would be processed as follows: Gross Income:
$63,360 Potential Gross Income (PGI) $63,360 Vacancy & Collection Loss (V&CL) = $63,360 x 5% - $3,168 Effective Gross Income (EGI) = $60,192 Operating Expenses (OE) = $60,192 x 25% - $15,048 Net Income Before deducting Recapture & Taxes (NIBT) = $45,144 (Note in this case the gross income was based on the properties actual rent schedule – that was because it was representative of market – the situation explained that the rent schedule is well in line with other apartments in the neighborhood.) What is included in operating income?Operating Income = Gross income - operating expenses. Operating expenses include selling, general and administrative expenses (SG&A), depreciation, amortization, and other operating expenses. Operating income excludes taxes and interest expenses, which is why it's often referred to as EBIT.
Which of the following would be included in the determination of comprehensive income?Comprehensive income includes net income and unrealized income, such as unrealized gains or losses on hedge/derivative financial instruments and foreign currency transaction gains or losses. It provides a holistic view of a company's income not fully captured on the income statement.
Which of the following is not included in computing operating income?Interest expense, interest income, and other non-operational revenue sources are not considered in computing for operating income.
Which of the following is the correct formula to calculate operating income?Method 1. Operating Income Formula = Total Revenue – Cost of Goods Sold – Operating Expenses.
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