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

To calculate the effective gross income multiplier (EGIM), find the Effective Gross Income (EGI) and then divide the market value of the property by the EGI. For the office building in question, the EGIM is approximately 6.10.

Step-by-step explanation:

To calculate the effective gross income multiplier (EGIM), you need to follow a number of steps:

1. Calculate the Effective Gross Income (EGI) by first determining the Potential Gross Income (PGI), then subtracting vacancy and collection losses, and lastly accounting for operating expenses and capital expenditures.
2. Use the EGI to find the EGIM, which is the market value of the property divided by the EGI.

Now let's calculate these for your question.

Step 1: Calculate the EGI.

• PGI = $450,000
• Vacancy and collection losses = 9% of PGI = 0.09 × $450,000 = $40,500
• EGI = PGI - Vacancy and collection losses = $450,000 - $40,500 = $409,500

From EGI, calculate Operating Expenses and Capital Expenditures:

• Operating Expenses = 38% of EGI = 0.38 × $409,500 = $155,610
• Capital Expenditures = 4% of EGI = 0.04 × $409,500 = $16,380

Step 2: With the EGI calculated, now we can compute the EGIM.

• EGIM = Market Value / EGI = $2,500,000 / $409,500
• EGIM ≈ 6.10

Therefore, the EGIM for the office building is approximately 6.10.