IAAO Course 102- Review 2023 with Complete Solutions

Anticipation - ANSWER-Value is created by the expectation of benefits to be derived in the future. Leverage - ANSWER-The borrowing of funds in hopes of earning a greater return than the cost of the borrowed funds. Chattel mortgage - ANSWER-A mortgage only on persona property Yo - ANSWER-Also known as the discount rate, reflects the return on investment. Safe rate - ANSWER-Base rate on the safest investments such as government insured investments (Yo). Risk rate - ANSWER-An amount in addition to the safe rate which compensates the investor for the degree of risk in the investment (Yo). Rate for non-liquidity - ANSWER-An amount in addition to the safe rate and the risk rate which compensates the investor for the time necessary to convert the real estate into cash (Yo). Rate for management - ANSWER-An amount in addition to the safe rate, risk rate, and rate for non-liquidity which compensates the investor for the decision making process to manage the real estate investment. (Yo) Recapture rate - ANSWER-Provides for the return of the investment in the wasting portion of the asset. Effective tax rate (ETR) - ANSWER-Reflects the relationship between the real estate taxes and the value of the property. IRV - ANSWER-Income, value, rate VIF - ANSWER-Income, value, factor Lease - ANSWER-A written document in which the rights to use and occupy land or structures are transferred by the owner to another for a specified period of time for a specified rent. It is a contract and a conveyance. Percentage lease - ANSWER-A contract which calls for a fixed minimum base rent and a variable rent (overage) which is based on volume of business, sales, productivity, or use of the property by the tenant. Tenant Improvements - ANSWER-Allowance given by landlord for work done to the improvement. The landlord will recover the costs by amortizing it over the life of the lease and including it in the lease payment. Excess rent - ANSWER-The amount which contract rent exceeds market rent. Deficit rent - ANSWER-Leasehold rent or leasehold income- Occurs when market rent is greater than contract rent. d. All of the above - ANSWER-Which of the following would be considered a proper expense in the reconstructed operating expense statement? a. Salaries b. Management c. Utilities d. All of the above Rent concessions - ANSWER-take the form of either free rent or extra tenant improvement allowances. 5 Methods of Developing an Overall Capitalization Rate (Ro) - ANSWER-1. Derivation from comparable sales- (sales) most reflective of market. Most desirable. 2. Band of investment technique mortgage & equity components - Banks. 3. Net income ratio method (sales) 4. Debt coverage ratio method (Banks) 5. Band of investment technique land & improvement components (sales) 1. Land-to-improvement ratio 2. Operating expense ratio (OER) 3. Remaining economic life (REL) - ANSWER-When developing the overall capitalization rate from the market comparisons, three critical items which must be highly comparable between comparable sales and the subject property are: Rm (Mortgage capitalization rate - ANSWER-Mortgage annual constant Partial Payment Factor - ANSWER-Shows the periodic payment necessary to amortize a loan at a specified interest rate over a specific number of periods. Formula for developing a gross income multiplier - ANSWER-GIM=Sales Price/Gross Income List three comparability criteria necessary when utilizing direct capitalization. - ANSWER-1. Land-to Improvement (building) ratios 2. Expense ratios 3. Remaining economic life (REL)