Question

Use the following to answer questions 1-5:

A local 20,000 square foot retail building is 100% occupied by a single tenant. The lease started last week and continues for 10 years. The rent is $7.00 per square foot per year. The landlord pays all the expenses associated with the building. The expenses total $2.00 per square foot per year, and we have determined that they are market-oriented. From a market survey, it is our opinion that 5% is a reasonable vacancy allowance and 2% is a reasonable allowance for collection loss. The market expects a 9% return on investment (overall rate) for investments like this.

The potential gross income (PGI) of the property is _______

	a.	$140,000
	b.	$280,000
	c.	$130,200
	d.	$90,000

The effective gross income (EGI) of the property is:

	a.	$90,200
	b.	$130,200
	c.	$280,000
	d.	$140,000

The total expenses are:

	a.	$80,000
	b.	$130,200
	c.	$20,000
	d.	$40,000

The net operating income (NOI) of the property is:

	a.	$140,000
	b.	$280,000
	c.	$130,200
	d.	$90,200

I will make sure to thumbs up if correct!

Answer 1

1)
Potential gross income = $ 7.00 x 20,000 = $140,000

Potential gross income = $ 140,000

2)

vacancy loss = 5%

vacancy loss = 0.05 x $ 140,000 = $ 7,000

credit loss = 2%

credit loss = 0.02 x $ 140,000 = $ 2,800

Effective gross income = $ 140,000 - $ 7,000 - $ 2,800 = $130,200

Effective gross income = $ 130,200

3) The total expenses are = $ 2.00 x 20,000
= $40,000.

The total expenses are = $ 40,000

4)
Net operating income of the property = effective gross income - total expenses

net operating income of the property = $ 130,200 - $ 40,000
= $90,200.

net operating income of the property = $ 90,200