You have just completed the appraisal of an office building and have concluded t

Question

You have just completed the appraisal of an office building and have concluded that the market value of the property is $2,500,000. You expect potential gross income (PGI) in the first year of operations to be $450,000; vacancy and collection losses to be 9 percent of PGI; operating expenses to be 38 percent of effective gross income (EGI); and capital expenditures to be 4 percent of EGI.

a. What is the EGI for the first year?

b. What is the NOI for the first year?

c. What is the implied going-in capitalization rate?

d. What is the effective gross income multiplier (EGIM)?

Explanation / Answer

PGI 450000 given VACANCY & COLLECTION LOSSES 40500 (450000*9%) EGI 409500 (450000-40500) OPERATING EXPENSES 155610 (409500*38%) NOI 253890 (409500-155610) CAPITAL EXPENDITURE 16380 (409500*4%) ADJUSTED NOI 237510 Value of property 2500000 Implied going in capital rate = ADJUSTED NOI/VALUE OF PROPERTY 237510/2500000 9.50% EGIM = VALUE OF PROPERTY/EGI 2500000/409500                                                            6.11

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