The Income Approach to Value

Select the answer that most correctly completes the statement or answers the question.

1. The passage of 1978's Proposition 13 initiative measure, which added Article XIII A to the California Constitution, changed the approaches to value, and it is no longer necessary for the property tax appraiser to understand the income approach.
   True
   False
2. The Income Approach to Value is the preferred approach for the appraisal of land when reliable sales data for comparable properties are not available.
   True
   False
3. The Income Approach to Value is the preferred approach for the appraisal of improved real properties and personal properties when reliable sales data are not available and the cost approaches are unreliable.
   True
   False
4. For ad valorem property tax appraisal purposes, the income approach is based on the price at which fractional interests in the property or comparable properties have recently sold, and the extent to which such prices would have been increased had there been no prior claims on the assets.
   
   True
   False
5. The income approach is based on the amount that investors would be willing to pay for the right to receive the income that the property would be expected to yield, with the risks attendant upon its receipt.
   
   True
   False

6. The principle of anticipation is…
   
   a. a method of land valuation that is used when there is an absence of vacant land sales.
   b. is one of the underlying principles of the income approach to value.
   c. the difference between an observed value and a predicted value, given a dependent variable.
7. The following is an example of the principle of anticipation:
   
   a. An office constructed for a total cost of $500,000 will tend to set the upper limit of value for existing offices.
   b. Buyers buy the present worth of future benefits.
   c. Tasteful landscaping may increase the value of an office building much more than the actual cost of the landscaping.
8. We exclude property taxes as an expense when valuing property for ad valorem property tax purposes because…
   
   a. property taxes are a function of the value – until you know the value, you can't determine the amount of the property tax expense.
   b. the Multiple Listing Service has already included them in the expenses.
   c. under Prop 13 there's no need to include taxes as an expense, since they're a function of the purchase price.
9. The three basic assumptions of the income approach to value are:
   
   a. (1) a dollar today is worth more than a dollar in the future, (2) investors estimate how much the property earn, how long it'll earn it, and the likelihood of receiving the income, and (3) investors purchase the property for the income it will produce
   b. (1) income can come from rent, equity build-up (mortgage pay-down and appreciation), and income tax deductions, (2) real estate appreciates, and (3) rent can be increased, even when there is rent control
   c. (1) real estate outperforms stocks and bonds, (2) the value of money will grow in the future, and (3) real property is a tangible asset
10. Three types of allowable expenses may be deducted from Effective Gross Income; they are:
    
    a. fixed, maintenance, and repairs
    b. fixed, operating, and reserves for replacements
    c. operating, maintenance, and repairs
11. $1,000 deposited in an account that pays 2½ percent annual interest will grow to what amount in one year?
    
    a. $1,025
    b. $1,050
    c. $1,100
12. The Future Worth of One [FW1] of indicates the growth, at compound interest, of a single initial deposit of one (1); deposits are made at…
    
    a. any time during the period – beginning, middle, or end – it doesn't make a difference.
    b. the beginning of the period.
    c. the end of the period.
13. The Future Worth of One factor [FW1] is the reciprocal of the…
    
    a. Future Worth of One per Period factor [FW1/P].
    b. Present Worth of One factor [PW1].
    c. Sinking Fund Factor [SFF].
14. The Periodic Repayment factor [PR] is also known as the…
    
    a. reversion factor.
    b. partial payment factor.
    c. annuity factor.
15. When developing rates and multipliers from recently sold comparable properties, the sales price is compared with the incomes, rents, or productions…
    
    a. anticipated by the buyers of the comparable properties.
    b. obtained from knowledgeable Realtors® specializing in income-producing properties.
    c. that any reasonably well-informed owner would expect in the neighborhood.

16. Which of the following statements BEST describes the amount of adjustment an appraiser should make for vacancy allowance in a property?
    
    a. 5 percent of Potential Gross Income
    b. ½ percent for each year the property has been rented or leased, with a maximum allowance of 10 percent
    c. somewhere between 5 percent and 10 percent
    d. The amount will vary with each property, and should be determined from the market.
17. Which of the following expenses (costs) is NOT considered by an appraiser in estimating the net operating income of a particular property?
    
    a. property insurance
    b. mortgage payments
    c. property management fees
    d. upkeep and maintenance
18. When appraising income producing property, the appraiser often needs to estimate the reserves for replacement allowance. When doing so, the appraiser should avoid duplication with certain items that may already have been included in which of the following expense categories?
    
    a. fixed expenses
    b. repair and maintenance
    c. property management, insurance, and taxation escrow accounts
    d. insurance and taxation escrow accounts
19. If the property tax appraiser excludes property taxes as an expense, won't the property be overvalued?
    
    a. No, because the capitalization rate will be adjusted to include a property tax component.
    b. Yes; this gives the assessor room to negotiate the value down on an appeal.
    c. No, because property taxes should not affect the assessed ad valorem value.
    d. Yes – that is why the final value is divided by the CPI factor of 1.02.
20. A series of equal periodic payments or receipts is referred to as a(n)
    
    a. annuity
    b. cash flow
    c. mortgage payment
    d. principal
21. Using the income approach, the appraiser values an income property by computing the…
    
    a. the future worth of a present income stream.
    b. the present worth of a future income stream.
    c. the average of the values anticipated by the seller and the buyer of a recently sold property.
    d. the cost of replacing the property with a new property of similar utility.
22. Incomes streams considered by the appraiser may be…
    
    a. divided into longer segments, such as the estimated economic life of the improvements.
    b. divided horizontally by projecting a perpetual income for land and an income for the economic life of the improvements.
    c. projected as a level perpetual flow.
    d. divided vertically, into longer segments, horizontally, and|or projected as a level perpetual flow.
23. How can an appraiser develop an OverAll Rate [OAR]?
    
    a. The appraiser may derive an OverAll Rate from recent sales of comparable properties.
    b. The appraiser may derive an OverAll Rate by the band-of-investment method.
    c. Both a. and b. are proper means of developing an OverAll Rate.
    d. None of the answers above are correct.
24. The difference between an OverAll Rate [OAR] and Yield rate [Y] is the…
    
    a. amount of ad valorem property taxes that are the owner's responsibility.
    b. amount of appreciation anticipated in the neighborhood.
    c. amount of mortgage payments typical for that type of investment.
    d. amount of recapture of the investment in any wasting asset.
25. The difference between an OverAll Rate [OAR] and cash flow rate [R_e] is the…
    
    a. amount of ad valorem property taxes.
    b. amount of appreciation for the marketplace.
    c. amount of the mortgage payment.
    d. amount of recapture.
26. Which of the following is a correct component of the concept of Highest and Best Use?
    
    a. The use must be legally permissible.
    b. The use must be physically possible.
    c. The use must be financially feasible or probable.
    d. All three of these answers, above, are constraints of Highest and Best Use.
27. Which of the following statements is NOT true.
    
    a. Property is valuable because of the future benefits it is expected to provide.
    b. It is the actual past income history with which the ad valorem property tax appraiser must be concerned.
    c. Net income is the difference between gross income and gross outgo (expenses, etc.).
    d. The property tax appraiser is required to measure the full value of the property.
28. Which of the following statements is NOT true.
    
    a. The upper limit of value tends to be set be the cost of acquiring a comparable substitute.
    b. A prudent lessee would not pay more rent than they'd pay to rent an equal property.
    c. When several office properties have substantially the same utility or benefit, the one with the lowest rent will attract the greatest demand and widest distribution.
    d. The principle of substitution, important in the comparative sales approach, contradicts the principle of anticipation, which is the basis of the income approach.
29. Which of the following are components of the income stream investors anticipate?
    
    a. The property has to provide enough income to cover property-related expenses.
    b. The property has to provide enough income to cover a recapture of the investment.
    c. The property has to provide enough income to cover a return on the investment.
    d. All three of these answers, above, are necessary components of the income stream.
30. Which of the following income streams best represents vacant land?
    
    a. Land produces a constant terminal annuity.
    b. Land produces a straight-line declining terminal income stream.
    c. Land produces a variable income stream with a reversion income.
    d. None of the above answers is correct.

31. A building with an annual Net Income Before deducting for recapture and Taxes [NIBT] of $10,000 is valued at $100,000. What is the estimated value of the building if the capitalization rate is increased by one percentage point.
    
    a. $90,000
    b. $91,000
    c. $100,000
    d. $110,000
    e. $111,000
32. Which of the following estimates would result in an OverAll Rate of 20 percent?
    
    a. Anticipated Potential Gross Income of $100,000; Selling Price of $500,000
    b. Anticipated Effective Gross Income of $100,000; Selling Price of $500,000
    c. Anticipated Net Operating Income of $100,000; Selling Price of $500,000
    d. Anticipated Net Income of $100,000; Selling Price of $500,000
    e. Anticipated Cash Flow of $100,000; Selling Price of $500,000
33. To estimate effective gross income, which of the following items are required?
    
    a. Gross Income and Vacancy and Collection Losses
    b. Gross Income and Fixed Expenses
    c. Gross Income and Operating Expenses
    d. Gross Income and Reserves for Replacement
    e. Gross Income and Annual Debt Service
34. A situation in which a property owner must make an outlay of funds to operate a property is referred to as negative…
    
    a. amortization.
    b. cash flow.
    c. debt service.
    d. depreciation.
    e. leverage.
35. Two properties have the same Net Operating Income, and both are considered to be very similar in most respects, except that Property "B" is a riskier investment that Property "A" – how should this difference affect an OverAll Rates derived from these two properties?
    
    a. The OverAll Rate for Property A will be lower than the OAR derived from Property B.
    b. The OverAll Rate will not be affected by the differences in risk.
    c. The OverAll Rate for Property A will be the same as the OAR derived from Property B.
    d. The OverAll Rate could be lower or higher, depending upon the type of risk.
    e. The OverAll Rate for Property A will be higher than the OAR derived from Property B.
36. A stream of scheduled and predictable income or payment amounts is called a(n)…
    
    a. annuity.
    b. capitalizer.
    c. debt.
    d. discount.
    e. recapture.
37. What is the Gross Income Multiplier derived from a $2½ million sale, where the buyer anticipated an annual gross income of $475,000?
    
    a. 1.9
    b. 5.3
    c. 9.1
    d. 10.5
    e. 19.0
38. A property recently sold for a cash equivalent sales price of $2 million; the completed sales questionnaire indicated the new owner anticipates an annual gross income of $600,000. Examining comparable properties in the neighborhood, you know the gross income will be closer to $450,000 or $500,000. What is the GIM indicated by the sale?
    
    a. 2.4
    b. 3.0
    c. 3.3
    d. 4.0
    e. 4.3
39. A new office building, with eight 750 sq. ft. units, recently sold for $750,000. Similar nearby offices, with comparable income potential, are renting for $1,250 per month; recent sales of comparable properties indicate a GIM of 5.5. What is the value of this new building?
    
    a. $660,000
    b. $700,000
    c. between $660,000 and $750,000
    d. $750,000
    e. $1,200,000
40. An office building recently sold for $10 million; the buyer estimate his before-income-tax cash flow will be $100,000. His monthly mortgage payments are $75,000. What is the OverAll Rate [OAR] derived from this sale?
    
    a. 1.00%
    b. 2.50%
    c. 9.00%
    d. 10.00%
    e. 19.00%