An office building has a Potential Gross Income of $12,600 per year with a 5% vacancy rate. The annual expenses are $3,600. What is the market value if the capitalization rate is 12%?

To determine the market value of the office building, it is essential to calculate the Net Operating Income (NOI) first and then apply the capitalization rate.

1. Calculate Effective Gross Income (EGI): The Effective Gross Income accounts for vacancy and collection losses.

• The potential gross income is $12,600 and the vacancy rate is 5%.

• The vacancy amount is ( 12,600 \times 0.05 = 630 ).

• Therefore, the Effective Gross Income is ( 12,600 - 630 = 11,970 ).

2. Deduct Annual Expenses: Next, subtract the annual expenses from the EGI to find the NOI.

• Annual expenses are $3,600.

• Thus, the Net Operating Income is ( 11,970 - 3,600 = 8,370 ).

3. Calculate Market Value using Capitalization Rate: The market value is calculated by dividing the NOI by the capitalization rate.

• The capitalization rate is 12%, or 0.12 as a decimal.

• Therefore, the market value can be calculated as ( \frac{8,370}{0.12}