Lesson 5 Exercises – Definition of the Income Approach and Property Tax Rule 8 (The Income Approach to Value)

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  1. The income approach to value:
    1. Is based on the principle of anticipation
    2. Translates the ability of property to generate income into an indication of value
    3. Requires an estimate of net operating income of property
    4. All of the above

d. All of the above

Explanation: The income approach to value is based on the principle of anticipation, which states that value changes in expectation of some future benefit or detriment affecting the property. The translation of the ability of property to generate income into an indication of value, as well as an estimate of net operating income, are both part of the income approach to value.

  1. Which property tax rule prescribes the conditions under which the income approach may be applied?
    1. Rule 4
    2. Rule 6
    3. Rule 8
    4. None of the above

c. Rule 8

  1. Value is derived using the income approach by?
    1. Converting present cash benefits from the property into an estimate of property value.
    2. Converting future cash benefits from the property into an estimate of property value.
    3. Adding economic rent to gross income.
    4. None of the above

b. Converting future cash benefits from the property into an estimate of property value.

  1. The income approach to value?
    1. Converts an income stream into an indicator of value.
    2. Is also called the capitalization approach.
    3. Converts future cash benefits into an estimate of value.
    4. All of the above.

d. All of the above

  1. What is an income stream?
    1. A single payment from an investment or property.
    2. A reversion received at the termination of an investment.
    3. A series of payments from an investment or property.
    4. All of the above

d. All of the above

  1. What is the preferred method to derive a capitalization rate when required sales prices and incomes are available?
    1. By comparing the net incomes that could reasonably have been anticipated from recently sold comparable properties with their sales prices, adjusted, if necessary, to cash equivalents (the market-derived rate.)
    2. By deriving a weighted average of the capitalization rates for debt and for equity capital appropriate to the California money markets (the band-of-investment method) and adding increments for expenses that are excluded from outgo because they are based on the value that is being sought or the income that is being capitalized.
    3. All of the above
    4. None of the above

a. By comparing the net incomes that could reasonably have been anticipated from recently sold comparable properties with their sales prices, adjusted, if necessary, to cash equivalents (the market-derived rate.)

Explanation: Property Tax Rule 8, subdivision (b) provides for two methods of developing a capitalization rate for property tax appraisals. Those two methods are described in answers a and b of question 6 above. However, subdivision (g)(1) states, regarding the market-derived rate, "This method of deriving a capitalization rate is preferred when the required sales prices and incomes are available."