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

Answer 1

Answer:

6.11

Explanation:

Potential Gross Income (PGI) = $450,000

vacancy and collection losses = 9% of  PGI

                                                  = 450,000 × 9%

                                                  = 40,500

Effective gross income (EGI):

= PGI - vacancy and collection losses

= 450,000 - 40,500

= 409,500

Operating expenses:

= 38% of EGI

= 0.38 × 409,500

= 155,610

Net operating Income(NOI):

= EGI - Operating expenses

= 409,500 - 155,610

= $253,890

Capital expenditure = 4% of EGI

                                 = 409,500 × 4%

                                 = $16,380

Adjusted NOI = Net operating Income - Capital expenditure

                       =  $253,890 - $16,380

                       = 237,510

Value of property = $2,500,000

Implied going in capital rate = Adjusted NOI ÷ value of property

                                               = 237,510 ÷ 2,500,000

                                               = 9.50%

Effective gross income multiplier (EGIM):

= Value of property ÷ EGI

= 2,500,000 ÷ 409,500

= 6.11