CCIM 101 STUDY GUIDE EXAM QUESTIONS AND
SOLUTIONS GRADED A+
✔✔Effective Rental Income - ✔✔The actual expected rental income after subtracting
vacancy and credit losses from PRI.
✔✔Other Income - ✔✔Additional income streams from the property such as revenue
from billboards, parking fees, or equipment rentals.
✔✔Gross Operating Income (GOI) - ✔✔The sum of effective rental income and other
income, representing the total income before deducting operating expenses.
✔✔Operating Expenses (OpEx) - ✔✔Annual cash outlays required to operate and
maintain the property (e.g., taxes, insurance, management fees, repairs, utilities).
Excludes financing costs, depreciation, capital expenditures (CapEx), and nonrecurring
items.
✔✔Direct Capitalization (Direct Cap) - ✔✔A valuation method where the property's
value is determined by dividing its NOI by a cap rate. It reflects current market
conditions and is used for both investment and appraisal purposes.
✔✔Gross Rent Multiplier (GRM) - ✔✔A simple valuation tool that multiplies the Year 1
PRI by a factor to estimate the property's value. It is easy to calculate but does not
adjust for vacancy, OpEx, financing, or tax impacts.
✔✔TVM T-Bar - ✔✔A tabular format used in DCF analysis to organize the timing and
amounts of cash flows, addressing how much and when dollars flow into and out of an
investment.
✔✔Major Areas of Tax Impact on RE CFs - ✔✔Critical tax considerations include:
taxable entities, property classifications, original basis, cost recovery (depreciation),
adjusted basis, capital gains, cost-recovery recapture, and applicable tax rates (for
ordinary income, capital gains, and cost recovery).
✔✔Tax World vs. Real World - ✔✔A concept highlighting that tax rules—set by
legislative bodies—do not always align with real-world economics. It focuses on: 1.
Which dollars are taxed. 2. How much tax is owed. 3. When the tax is paid.
✔✔Tax Classifications (Owner and Property) - ✔✔Owner Classification: Determines
who pays taxes (taxable entities such as individuals, corporations; pass-through entities
like partnerships, LLCs; institutions; REITs). Property Classification: Categorizes
property as personal use, inventory, investor property (capital gains treatment), or
business property (IRC section 1231).
, ✔✔Federal Taxation on RE - ✔✔RE income may be taxed as ordinary income (e.g.,
rental income) or at capital gains rates upon disposition, with special rules for
depreciation recapture (cost recovery recapture taxed up to 25%) and capital gains
(typically 0-20% if held long term).
✔✔Taxable Income in RE Investments - ✔✔Income generated by the property, adjusted
by deductions (such as cost recovery) and used to compute the annual tax liability. It
directly affects the calculation of after-tax cash flows.
✔✔After-Tax CFs from Operations - ✔✔Process begins with NOI, subtracts cost
recovery to obtain taxable income, then multiplies by the applicable tax rate to
determine the tax liability from operations. The CF after tax is NOI minus this tax
liability.
✔✔Original Basis - ✔✔Purchase price plus acquisition costs.
✔✔Adjusted Basis - ✔✔Original basis adjusted for capital improvements, cost recovery
taken, and any partial sales—used to calculate gains or losses on disposition.
✔✔Cost Recovery (Depreciation) - ✔✔The annual allocation (using a straight-line
method) of the cost of property improvements that wear out over time. It reduces
taxable income (though it is a non-cash expense) and is calculated as: Residential:
Approximately 100%/27.5 ≈ 3.636% per year; Non-residential: Approximately
100%/39.0 ≈ 2.564% per year. Calculated using the mid-month convention for
properties placed in service after 6/22/84.
✔✔Tax Liability on Sale of RE - ✔✔Calculated based on two components: Cost
Recovery Recapture: All depreciation taken is recaptured and taxed at up to 25%
(ordinary income rates); Capital Gain: The excess gain after subtracting cost recovery is
taxed at long-term capital gains rates (up to 20% if held over 12 months). The net tax on
sale reduces the sale proceeds from the before-tax amount.
✔✔Effective Tax Rate (ETR) in RE Investments - ✔✔A measure of how much an
investor's yield is reduced by taxes, calculated as the difference between before-tax and
after-tax yields divided by the before-tax yield.
✔✔CF Model Without Financing/After-Tax (WF/AT) - ✔✔An RE cash flow model that
adjusts all cash flows for tax impacts: Initial Investment: Purchase price plus acquisition
costs; Annual CFs: Start with NOI, subtract cost recovery to compute taxable income,
then subtract the tax liability (taxable income multiplied by the ordinary tax rate) to
obtain CF after tax; Sales Proceeds After Tax: Calculated as sale price minus cost of
sale, further reduced by tax on sale (cost recovery recapture tax plus capital gains tax
based on the adjusted basis); Holding Period: Remains as the time the investment is
held, represented in a T-bar showing CF after tax each year with final sale proceeds
added.
SOLUTIONS GRADED A+
✔✔Effective Rental Income - ✔✔The actual expected rental income after subtracting
vacancy and credit losses from PRI.
✔✔Other Income - ✔✔Additional income streams from the property such as revenue
from billboards, parking fees, or equipment rentals.
✔✔Gross Operating Income (GOI) - ✔✔The sum of effective rental income and other
income, representing the total income before deducting operating expenses.
✔✔Operating Expenses (OpEx) - ✔✔Annual cash outlays required to operate and
maintain the property (e.g., taxes, insurance, management fees, repairs, utilities).
Excludes financing costs, depreciation, capital expenditures (CapEx), and nonrecurring
items.
✔✔Direct Capitalization (Direct Cap) - ✔✔A valuation method where the property's
value is determined by dividing its NOI by a cap rate. It reflects current market
conditions and is used for both investment and appraisal purposes.
✔✔Gross Rent Multiplier (GRM) - ✔✔A simple valuation tool that multiplies the Year 1
PRI by a factor to estimate the property's value. It is easy to calculate but does not
adjust for vacancy, OpEx, financing, or tax impacts.
✔✔TVM T-Bar - ✔✔A tabular format used in DCF analysis to organize the timing and
amounts of cash flows, addressing how much and when dollars flow into and out of an
investment.
✔✔Major Areas of Tax Impact on RE CFs - ✔✔Critical tax considerations include:
taxable entities, property classifications, original basis, cost recovery (depreciation),
adjusted basis, capital gains, cost-recovery recapture, and applicable tax rates (for
ordinary income, capital gains, and cost recovery).
✔✔Tax World vs. Real World - ✔✔A concept highlighting that tax rules—set by
legislative bodies—do not always align with real-world economics. It focuses on: 1.
Which dollars are taxed. 2. How much tax is owed. 3. When the tax is paid.
✔✔Tax Classifications (Owner and Property) - ✔✔Owner Classification: Determines
who pays taxes (taxable entities such as individuals, corporations; pass-through entities
like partnerships, LLCs; institutions; REITs). Property Classification: Categorizes
property as personal use, inventory, investor property (capital gains treatment), or
business property (IRC section 1231).
, ✔✔Federal Taxation on RE - ✔✔RE income may be taxed as ordinary income (e.g.,
rental income) or at capital gains rates upon disposition, with special rules for
depreciation recapture (cost recovery recapture taxed up to 25%) and capital gains
(typically 0-20% if held long term).
✔✔Taxable Income in RE Investments - ✔✔Income generated by the property, adjusted
by deductions (such as cost recovery) and used to compute the annual tax liability. It
directly affects the calculation of after-tax cash flows.
✔✔After-Tax CFs from Operations - ✔✔Process begins with NOI, subtracts cost
recovery to obtain taxable income, then multiplies by the applicable tax rate to
determine the tax liability from operations. The CF after tax is NOI minus this tax
liability.
✔✔Original Basis - ✔✔Purchase price plus acquisition costs.
✔✔Adjusted Basis - ✔✔Original basis adjusted for capital improvements, cost recovery
taken, and any partial sales—used to calculate gains or losses on disposition.
✔✔Cost Recovery (Depreciation) - ✔✔The annual allocation (using a straight-line
method) of the cost of property improvements that wear out over time. It reduces
taxable income (though it is a non-cash expense) and is calculated as: Residential:
Approximately 100%/27.5 ≈ 3.636% per year; Non-residential: Approximately
100%/39.0 ≈ 2.564% per year. Calculated using the mid-month convention for
properties placed in service after 6/22/84.
✔✔Tax Liability on Sale of RE - ✔✔Calculated based on two components: Cost
Recovery Recapture: All depreciation taken is recaptured and taxed at up to 25%
(ordinary income rates); Capital Gain: The excess gain after subtracting cost recovery is
taxed at long-term capital gains rates (up to 20% if held over 12 months). The net tax on
sale reduces the sale proceeds from the before-tax amount.
✔✔Effective Tax Rate (ETR) in RE Investments - ✔✔A measure of how much an
investor's yield is reduced by taxes, calculated as the difference between before-tax and
after-tax yields divided by the before-tax yield.
✔✔CF Model Without Financing/After-Tax (WF/AT) - ✔✔An RE cash flow model that
adjusts all cash flows for tax impacts: Initial Investment: Purchase price plus acquisition
costs; Annual CFs: Start with NOI, subtract cost recovery to compute taxable income,
then subtract the tax liability (taxable income multiplied by the ordinary tax rate) to
obtain CF after tax; Sales Proceeds After Tax: Calculated as sale price minus cost of
sale, further reduced by tax on sale (cost recovery recapture tax plus capital gains tax
based on the adjusted basis); Holding Period: Remains as the time the investment is
held, represented in a T-bar showing CF after tax each year with final sale proceeds
added.
