New York Real Estate Broker Exam — All Questions

An investment property has potential gross income of $200,000, vacancy and collection loss of $10,000, other income of $5,000 and operating expenses of $70,000. Net operating income is:

• a.$125,000, before annual debt service is deducted✓
• b.$120,000, before annual debt service is deducted
• c.$130,000, before annual debt service is deducted
• d.$135,000, before annual debt service is deducted

The reconstructed operating statement the broker syllabus asks for runs in a fixed order: potential gross income, less vacancy and collection loss, plus other income, gives effective gross income; effective gross income less operating expenses gives net operating income. Here $200,000 less $10,000 plus $5,000 is $195,000 of effective gross income, and $195,000 less $70,000 is $125,000. The line that follows is the one that separates the property from the deal: net operating income less annual debt service is before-tax cash flow, so financing never enters the net operating income figure. Reserves, fixed and variable expenses all sit above the line; mortgage payments, depreciation and income tax sit below it.

A Buffalo apartment building produces $96,000 of net operating income and sells for $1,200,000. The overall capitalization rate is:

• a.8 percent, since the rate is income divided by value✓
• b.12 percent, since the rate is income divided by value
• c.6 percent, since the rate is income divided by value
• d.10 percent, since the rate is income divided by value

The income capitalization relationship is value equals net operating income divided by rate, so the rate is net operating income divided by value: $96,000 divided by $1,200,000 is 0.08, or 8 percent. Rearranged the other way, a buyer who demands a 10 percent return on the same income would pay $960,000, and one satisfied with 6 percent would pay $1,600,000 — which is why a small change in the rate moves value so much on income property. The broker syllabus asks for both the overall rate and a built-up rate, and it ties the rate to risk: the worse the property's condition and the shakier its tenancy, the higher the rate a buyer demands and the lower the value that follows.

A two-family house in Queens sells for $840,000 and produces $70,000 of gross annual income. Its gross income multiplier is:

• a.10, because price is divided by annual gross income
• b.14, because price is divided by annual gross income
• c.8, because price is divided by annual gross income
• d.12, because price is divided by annual gross income✓

The gross income multiplier is sale price divided by gross annual income, so $840,000 divided by $70,000 is 12. Multipliers are a screening tool rather than a valuation: they use gross income, so they ignore differences in vacancy and in operating expenses between two buildings, and a property with high expenses will look identical to a lean one at the same multiplier. The broker syllabus lists four variants — potential gross income, effective gross income, net operating income and gross rent multipliers — and expects a broker to know which income figure each one uses. Where the rent figure is monthly rather than annual, a gross rent multiplier of 12 means something entirely different, so check the period before applying anyone's rule of thumb.

A New York investment property produces $150,000 of net operating income against $120,000 of annual debt service. The debt coverage ratio is:

• a.0.80, computed from income and annual debt service
• b.2.00, computed from income and annual debt service
• c.1.25, computed from income and annual debt service✓
• d.1.50, computed from income and annual debt service

Debt coverage is net operating income divided by annual debt service, so $150,000 divided by $120,000 is 1.25. Lenders read the figure as the cushion between what the property earns and what the loan costs, and commercial underwriting commonly asks for something in the region of 1.20 to 1.25 before it will fund. Inverting the division gives 0.80, which is the classic error and would describe a property whose income does not cover its payment at all. Getting 1.50 would need debt service of $100,000, and 2.00 would need $75,000. The broker syllabus lists the ratio alongside the equity dividend, loan-to-value, operating expense and cash break-even ratios as the set used to judge an investment property's financial health.

For federal income tax purposes, an investor in a New York apartment building recovers the building's cost:

• a.over 15 years, straight line, including the value of the land
• b.over 39 years, straight line, with no deduction for the land
• c.over 27.5 years, straight line, with no deduction for the land✓
• d.over 27.5 years, straight line, including the value of the land

The broker syllabus states the two recovery periods together — “Yearly depreciation allowances (27.5 /39yrs); straight-line” — and pairs them with land and building allocation ratios. Residential rental property uses 27.5 years and nonresidential real property uses 39, so an apartment building takes 27.5 and an office or retail building takes 39. Land is never depreciable, because it is not consumed, which is why the allocation between land and improvements has to be made before any deduction is computed. The depreciable basis, sometimes called book value, then feeds the taxable income formula the syllabus sets out: net operating income plus reserves, less loan interest, less depreciation, less amortized loan costs.

In a triple net commercial lease, the tenant pays base rent plus:

• a.a share of the landlord's income taxes and mortgage interest
• b.real estate taxes, building insurance and maintenance costs✓
• c.utilities only, with the landlord covering taxes and insurance
• d.real estate taxes only, with the landlord covering the rest

The three nets are real estate taxes, building insurance and maintenance, and the broker syllabus devotes two of the four hours of its Conveyance of Real Property chapter to commercial leasing terms including triple net, full-service gross, modified gross, sublease clauses, exclusive rights and rent escalation. Under a full-service gross lease the landlord pays those expenses out of the rent; a modified gross lease splits them, usually by fixing a base year and passing through increases. A tenant's share of a landlord's income taxes and mortgage interest is not passed through in any of these structures — those are the landlord's costs of ownership and financing, not the building's operating expenses. Knowing which structure is on the table is what makes two quoted rents comparable.

A Manhattan office tenant's rentable area exceeds its usable area because rentable area includes:

• a.a share of the building's common areas, expressed as a loss factor✓
• b.the square footage of the tenant's private storage space in the basement
• c.the area of the parking spaces the lease assigns to that tenant
• d.the square footage the tenant plans to sublet in a later year

Usable area is what the tenant can occupy and furnish; rentable area adds the tenant's proportionate share of lobbies, corridors, lavatories and mechanical space, and the gap between the two is quoted as a loss factor. Rent is charged on the rentable figure, so a suite with 10,000 usable feet and a 25 percent loss factor is billed on roughly 13,300 feet, and two buildings quoting the same rent per square foot can cost very different amounts for the same working space. The broker syllabus lists “Rentable vs. usable SF” among the rent types and lease clauses a broker must be able to explain. Storage, parking and any future sublease are separately negotiated and do not define the measurement.