CFA Practice Question

There are 195 practice questions for this study session.

CFA Practice Question

Mary Keyes manages a property with annual income of $50,000. In addition to the expenses shown below, her property pays a 5% management fee on effective gross income and has vacancy and collection losses at 10% gross potential income. Compute the Net Operating Income of the following situation:

Miscellaneous Office expenses:
- Utilities 1,600
- Trash collection 500
- Repairs and maintenance 2,500
- Promotion and advertising 250
- Property insurance 750
- Property taxes 4,000

A. $23,450
B. $33,150
C. $32,900
Correct Answer: B

The "key" in this question is in determining the vacancy and collection losses off the gross income base of $50,000 and computing the management fee of 5% based on the effective gross income of $45,000. This may not be a considerable sum of money in many situations, but the distinction is important. Management should not collect its fees based on theoretical or gross potential income, rather, based on what is actually collected.

Gross Potential Income $50,000
Less: Vacancy and Collection Losses at 10% 5,000
Effective Gross Income (EGI) $45,000
Operating Expenses:
Management fee at 5% of EGI 2,250
Utilities 1,600
Trash collection 500
Repairs and maintenance 2,500
Promotion and advertising 250
Property insurance 750
Property taxes 4,000
Less: Total operating expenses 11,850
Net Operating Income (NOI) $33,150

User Contributed Comments 9

User Comment
chenyx Management fee base on the Effective Gross Income(EGI)
sonderfall I thought NOI is without taxes? Could anyone explain please?
aartis Income tax not included, Property tax is
LloydBraun7 Dirty!
Tommytang kinda tricky
harpalani Why deduct promotion & property insurance?
2014 Good problem ....
DannyZhou Certainly will get this one wrong if it is on actual exam.
czar harpalani, think of yourself as a land lord, if you put a promo/ad to get your apt to sell/rent in the market, you would reduce those as an expense..
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