Review 102 Spring 2024 Solutions 1 PDF

SOLUTIONS REVIEW COURSE 102 Spring 2024 1|Page Solutions  Solutions Review IAAO Course 102 Spring 2022 1. C $16.85 From the problem: 3,000 s...

SOLUTIONS REVIEW COURSE 102 Spring 2024 1|Page Solutions  Solutions Review IAAO Course 102 Spring 2022 1. C $16.85 From the problem: 3,000 square feet $2,900 month 3.5% for gross sales over $400,000 Last year sales $850,000 gross year RENT PER SQFT Annual rent $2,900 X 12 = $34,800 $850,000 - $400,000 = $450,000 in overage income $450,000 X 0.035 = $15,750 rent calculated on overage income Rent = $34,800 + $15,750 = $50,550 base annual rent plus overage rent Rent ÷ square footage = rent per square foot $50,550 ÷ 3,000 = $16.85 2. D convert income into an estimate of value 3. C $900,000 Property Value From the problem: Land Value $300,000 NOI $105,000 Land Rate 10% Building Rate 12.5% IRV USING LAND AND BUILDING Land Value X Land Rate = Land Income 300,000 X 0.10 = $30,000 NOI - Land Income = Building Income $105,000 - $30,000 = $75,000 Bldg Income ÷ Bldg Rate = Bldg Value $75,000 ÷ 0.125 = $600,000 Property Value $300,000 + $600,000 = $900,000 2|Page Solutions  4. D R=IXV 5. D Anticipation 6. D Value, net operating income, rate 7. B.47 OE Ratio CALCULATE OPERATING EXPENSE RATIO From the problem: Effective Gross Income $320,000 Operating Expenses $150,000 Miscellaneous Expenses $85,000 OE ÷ EGI = OE Ratio $150,000 ÷ $320,000 =.4687 or.47 rounded 8. C To develop an estimated projection of expected income and expense that will reflect the economic earning capacity of the property 9. B $1,624,300 Rounded Property Value Land Value 1,264,285 Imp Value 360,000 Property Value $1,634,285 RESIDUAL Given: 90,000 square feet paving $4.00 per sq ft *Recapture 10 years *Return Yield 9% *Tax Rate $3.00 per hundred *Assessment Level 50% Income PGI 90,000 X $3.00 = $270,000 V/C 10% 27,000 EGI $243,000 OE 15% 36,450 NOI $206,550 3|Page Solutions  Set up the Rates_________________________________________________ Discount Yo 9%.09 Improvement Rate =.205 Recapture 1 ÷10 10%.10 Land Rate =.105 ETR.03 x.50.015 Calculated Improvement Value 90,000 X $4 (paving) = $360,000 Find the improvement income using IRV. (value x rate = income) Calculated Improvement Income: 360,000 X.205 = 73,800 Find the land income. NOI – improvement income = land income Land Income 206,550 – 73,800 = 132,750 Find the land value using IRV. Land Value 132,750 ÷.105 = 1,264,285 10. D effective gross income 11. B $26.17 Rent adjusted for tenant improvements RENT ADJUSTMENTS – CONCESSIONS From the problem: 12,000 square feet $22.00 per square foot Tennant Improvement $250,000 5-year lease Tennant Improvements ÷ 5 years = cost per year $250,000 ÷ 5 = 50,000 PER YEAR Cost per year ÷ square footage = cost per sqft 50,000 ÷ 12,000 = $4.17 Base Rent + Tennant Imp cost per SQFT = base rent per square foot $22.00 + $4.17 = $26.17 4|Page Solutions  12. A 10% Ro by NIR Method of developing an overall cap rate RO BY NET INCOME RATIO METHOD From the problem: Effective Gross Income Multiplier = 6 Operating Expense Ratio = 40% 100% - OE Ratio = NIR 100% - 40% = 60% Net Income Ratio The formula is the NIR divided by EGIM. NIR = 100 – OE Ratio NIR 60% EGIM 6 = 10% 13. B building residual 14. B NOI $ 468,000 Reconstruct the income statement: Eliminate Annual Debt Service Given: Vacancy and Collection Loss $ 30,000 Operating expenses 111,000 Replacement Reserves 39,000 Potential Gross Income 600,000 Miscellaneous Income 48,000 Annual Debt Service 84,000 Reconstructed Income Statement PGI 600,000 V/C - 30,000 Misc +48,000 EGI 618,000 OE - 111,000 Reserves - 39,000 NOI 468,000 5|Page Solutions  15. D Market Rent 16. A Sale price by annual income 17. C 9.0 % IRV RO BY IRV From the problem: Building Value $6,050,000 Net Monthly Income $45,375 Calculate the annual income: Monthly Income $45,375 Use IRV to calculate value: Months per year X 12 $544,550 divided by Annual Income $544,500 $6,050,000 equals Rate.09 18. B 44% rounded From the problem: PGI $500,000 V/C 6% 30,000 OE $205,000 Create a reconstructed income and expense statement. PGI $500,000 V/C 6% 30,000 EGI $470,000 OE $205,000 Calculate the operating expense ratio. Operating Expense Ratio = Operating Expenses divided by EGI OE 205,000 EGI 470,000 =.43617 or.44 44% rounded 6|Page Solutions  19. D 11.428% Rate Overall Band of Investment Mortgage Equity From the problem: L:V ratio 75% Finance rate 10% Monthly payments 25 years The wording: “interest rate of 10% with monthly payment for a term of 25 years” is the key to send you looking at the annuity tables. Find the Monthly Compound Interest Table for 10%: Go to 25 Years on the left and go to across Col. 6: multiply factor times 12 months Equity rate 9% ETR 1% in decimal.01 Set up Band of Investment Formula Component % Rate Product Debt.75 (.009087 X 12).0817830 Equity.25.09.02250.10428 Plus ETR.01.11428 20. C effective tax rate 21. A 0.115 From the problem: Building Cap Rate 0.12 Land to Building Ratio of 1:4 Land Cap Rate 0.095 L:B 1:4 means Land is 20% and Improvement is 80% Develop an overall cap rate land and building – Band of Investment Component % Rate Product Land.20.095.0190 Imp.80.120.0960 Total.1150 7|Page Solutions  22. B Lease 23. A $1,917,000 Land Value $700,000 From the Problem: Land Value $700,000 Net Operating Income $300,000 Building Cap Rate 0.12 Land Cap Rate 0.10 BUILDING RESIDUAL USING IRV TO GET COMPONENTS Find the Land Income using IRV: Land Value X Land Rate = 700,0000 X.10 = 70,000 Land income Find the Building Income: NOI – Land Income is = 300,000 – 70,000 = 230,000 Bldg Income Find the Building Value using IRV: Bldg Income ÷ Bldg Rate = 230,000 ÷.12 = 1,916,667 Building Value 24. C 8.0% From the Problem: Value $420,000 Net Income $2,800 monthly Find the Annual Income: Net Income $2,800 monthly X 12 months = 33,600 Annual Income Find the cap rate using IRV: Annual Net Income $33,600 ÷ 420,000 Value =.08 (8% cap rate) 25. C recapture rate 8|Page Solutions  26. C 1.8 Debt Coverage Ratio DCR = NOI ÷ EGI FINDING THE DEBT COVERAGE RATIO From the problem: Annual Debt Service $100,000 (income to satisfy mortgage) Gross Rent $250,000 Operating Expense $70,000 Net Operating Income $180,000 Calculate the dept coverage ratio using NOI ÷ Im NOI 180,000] Im 100,000 = 1.8 27. D Direct Capitalization 28. B Net Income Ratio 29. B Partial Payment Factor 30. A 25 Years Remaining Economic Life CALCULATING RECAPTURE RATE AND REMAINING ECONOMIC LIFE From the Problem: Recapture Rate 4% 1/.04 = 25 1 divided by the recapture rate = remaining economic life 1 divided by the remaining economic life = recapture rate 9|Page Solutions  31. A Sale A – not a good Comp The OE Ratio is 34.82% and all the other comps and the subject have an OE of 40%. COMPARABLES: Calculate the Operating Expense Ratio for all the sales and the Subject by dividing the OE by the EGI Given: Subject A B C Sales Price 672,000 975,000 480,000 EGI 140,000 112,000 162,000 80,000 OE 56,000 39,000 65,000 32,000 GIM 6.0 6.0 6.0 OE Ratio 40% 34.82% 40% 40% When determining comparability, you must use the operating expense ratio to compare. 32. B annually 33. D 15% Given: (you are given a lot of extra information) Sales Price $3,000,000 Land Value $600,000 Improvement (Building) Income $360,000 Assessment Level 50 percent Tax Rate $4.00 per hundred First Mortgage representing 50% of Value at 6% Equity rate representing 50% of value at 10% Find the building value: Sales Price – Land Value = Building Value $3,000,000 - $600,000 = $2,400,000 Find the building rate using IRV: Building Income ÷ building value = building rate $360,000 ÷ $2,400,000 = 0.15 10 | P a g e Solutions  34. C $426,800 Land Value LAND RESIDUAL USING IRV FOR COMPONENTS From the problem: Net Operating Income $125,000 Construction Cost $900,00 Building Cap Rate 10% Land Cap Rate 8.2% Use IRV calculate the building income. Building Value $900,000 X Building Rate.10 = Building Income $90,000 Find the land income. NOI – Building Income = Land Income $125,000 - $90,000 = $35,000 Land Income Use IRV find the Land Value Land Income $35,000 ÷ Land Rate.082 = Land Value $426,829 Rounded Land Value $426,800 35. D All of the Above A. Expense Ratios B. Land to Building Ratios C. Remaining Economic Life 36. B 1:4 Land to Building Ratio From the problem: Property Value $4800,000 Land Value $96,000 Property Value $480,000 ÷ Land Value $96,000 = 5 parts total Land is 1 part and Improvement 4 parts 37. B Effective Gross Income Multiplier Ro = Net Income Ratio ÷ Effective Gross Income Multiplier 11 | P a g e Solutions  38. D.024 From the problem: Assessment Level 30% Tax Rate $8.00 per hundred EAT Triangle Effective Tax Rate = Assessment Level X Tax Rate =.30 X.08 ETR =.024 39. C.09 RESIDUAL – COMPONENTS AND IRV From the problem: Building Income = 80% of net operating income PGI $80,000 V&C L 4% OE 40% Building Value $409,600 Create Reconstructed Operating Expense Statement PGI $80,000 v/c 4% 3,200 EGI 76,800 OE 40% 30,720 NOI $46,080 Calculate the Building Income using the % given: NOI 46,080 X building percentage 80% = $36,864 Building Income Using IRV calculate the building Rate: Bldg Income $36,864 ÷ Bldg Value $409,600 = Bldg Rate.09 40. D all of the above – overall rate is developed from sale in which Land to building ratios are similar Remaining Economic Life is similar Income and expense ratios are similar 41. A Gross Income Multiplier = Sales Price ÷ Gross Income 12 | P a g e Solutions  42. C Effective Tax Rate Usually included for an appraisal for ad valorum tax purposes 43. B Effective tax rate times the yield rate to maturity is not a method for Ro 44. D Assumes the property will increase in value during the holding period. Not an assumption 45. A An overall capitalization rate reflects the percentage that: net operating income is of value 46. A Rent Concessions The term that describes how free rent or extra tenant improvement allowances are classified 47. B.08 Land Capitalization Rate From the problem: Remaining Economic Life 25 years Building Cap Rate 12% - *Building Cap rate has: Discount Rate Yo, ETR, and Recapture Rate. *Land rate has: Discount Rate Yo, and ETR. Calculate the recapture rate: Recapture rate = 1 ÷ remaining economic life: 1 ÷ 25 =.04 Calculate land rate as: building rate – recapture rate = land rate.12 -.04 =.08 48. A.02 = Effective Tax Rate CALCULATED BY ADJUSTING THE OVERALL RATE From the problem: Building cap rate 14% Remaining economic life 25 years Overall yield rate Yo 8% Building Rate is: Overall yield rate Yo + Recapture Rate + Effective Tax Rate ETR Calculate the Recapture Rate: 1÷ 25 =.04 13 | P a g e Solutions  Calculate the effective tax rate by subtracting the Yo and the recapture rate from the building cap rate..14 -.08 -.04 =.02 49. A $23.75 per square foot net leasable area From the problem: Subject 80’ X 170’ Common Area 2,000 sqft NOI $275,500 Calculate the gross leasable area and subtract the common area to get net leasable area. Area = 80’ X 170’ = 13,600 sq feet Common Area 2,000 sq feet Net Leasable Area 11,600 sq feet Divide the NOI by the Net leasable area to get net leasable rent Net operating Income ÷ Net leasable area = net leasable rent $275,500 ÷ 11,600 = $23.75 50. A.015 1.5% From the problem: Purchase price $450,000 Annual Tax Bill $6,750 Taxes Dollars ÷ Property Market Value = Effective Tax Rate $6,700 ÷ $450,000 =.015 51. C 20 years Remaining Economic Life From the problem: 5% difference between the land cap rate and the building cap rate The difference between the building cap rate and the land cap rate is the recapture rate. 1 divided by recapture rate = remaining economic life Calculate the remaining economic life by dividing 1 ÷ recapture rate 1 ÷.05 = 20 14 | P a g e Solutions  52. D RM The total amount of principal and interest payments and the amount of the loan 53. C leverage Borrowing funds in hopes of earning a greater return that the cost of the borrowed funds 54. B Overall yield rate, effective tax rate, recapture rate 55. D Overall yield rate – reflects the return on an investment 56. A Recapture rate provides for the return of the investment in the wasting portion of the asset 57. B Chattel mortgage is a loan on personal property 58. B Excess Rent is the amount which contract rent exceeds market rent Given: Contract Rent $5.00 per SQFT Comparable properties rent $4.50 per SQFT 59. D Deficit rent occurs when market rent is greater than contract rent 60. A Capital improvement is not a proper expense in a reconstructed income and expense statement for appraisal purposes 61. D Anticipation is the underlying principle provides the basis of the income approach 15 | P a g e Solutions  62. D Direct capitalization. Overall cap rate derived from analysis of comp sales using IRV 63. D 10,008,900 From the problem: ETR 1% NOI $1,040,929 Mortgage is 80% of value at 8% monthly Mortgage Term is 25 years Equity Rate 10% Go to the monthly 8% compound interest table – go to 25 years on the left and go across to column 6. Multiple factor time 12 months Mortgage 25 years 8% monthly rate.007718 X 12 =.092616 Use Band of Investment - Mortgage & Equity - to calculate overall rate without a tax component. Add the.01 ETR to get the overall rate with a tax component. Component % Rate Product Mortgage.80.092616.0740928 Equity.20.10.02 Total.0940928 +Effective Tax Rate.01 Cap Rate.104 Use IRV – calculate the value of the property NOI ÷ Rate = Value $1,040,928 ÷.104 = $10,008,923 64. D None of the above 65. C $39,500 From the Problem: Potential gross income 50,000 Annual debt service 7,000 Vacancy/collection loss 2,000 Miscellaneous income 4,000 Operating expenses 9,250 Reserves for replacement 3,250 Eliminate the annual debt service and restructure the income statement PGI $50,000 EGI $52,000 v/c - 2,000 OE -9,250 16 | P a g e Solutions  misc + 4,000 RESERVES -3,250 EGI 52,000 NOI $39,500 17 | P a g e Solutions