Final answer:
To calculate the cap rate, we found the annual income from all sources, accounted for vacancy, deducted operating expenses, and divided the net operating income by the property value. The cap rate for the Grant Building is 7.7%, which is answer (A).
Step-by-step explanation:
The question asks for the calculation of the capitalization (cap) rate for the Grant Building based on its income, expenses, and appraisal value. The cap rate is a measure used to estimate the return on investment for a real estate property. To calculate the cap rate, we need to find the net operating income (NOI) and then divide that by the property value.
First, we need to calculate the annual income from all sources:
- Residential rents = $3,720/month × 12 months = $44,640/year
- Commercial rents = $24,650/year
- Parking fee revenue = $2,355/year
Combined annual income = $44,640 + $24,650 + $2,355 = $71,645
Then we need to account for the 6% vacancy, which would reduce our effective income:
Effective income after vacancy = $71,645 × (1 - 0.06) = $67,346.3
Next, we deduct operating expenses, which are 33% of the effective income:
Operating expenses = $67,346.3 × 0.33 = $22,224.28
NOI = Effective income after vacancy - Operating expenses
NOI = $67,346.3 - $22,224.28 = $45,122.02
To find the cap rate, we divide the NOI by the appraisal value:
Cap rate = NOI / Property value
Cap rate = $45,122.02 / $585,500
Cap rate = 0.077 or 7.7%
Therefore, the correct answer is (A) 7.7%.