Property Valuation
When appraising a Virginia commercial property, an appraiser uses the direct capitalization method. Which formula correctly expresses this?
AValue = Cap Rate × NOI
BValue = NOI ÷ Cap Rate✓ Correct
CValue = NOI × GRM
DValue = Cap Rate ÷ NOI
Explanation
Direct capitalization: Value = NOI ÷ Cap Rate. This is the fundamental income approach formula for commercial property valuation.
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Key Terms to Know
Capitalization Rate (Cap Rate)
A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
Gross Rent Multiplier (GRM)A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.
Net Operating Income (NOI)The annual income generated by an income-producing property after subtracting operating expenses, but before debt service.
AppraisalA professional estimate of a property's market value prepared by a licensed or certified appraiser.
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