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CFA Level I · CFA Level I Exam · Real Estate and Infrastructure

An analyst values an office building by dividing its stabilized net operating income by a rate derived from recent sales of comparable properties. This approach is best described as the:

The method is the income approach using direct capitalization. Stabilized net operating income is divided by a cap rate taken from comparable sales, which converts one year of income into value. The sales comparison approach adjusts prices, and the cost approach uses construction cost, so neither fits.

  1. Aincome approach using direct capitalizationCorrect
  2. Bcost approach using replacement cost
  3. Csales comparison approach using adjusted prices

Explanation

Dividing stabilized NOI by a capitalization rate extracted from comparable sales is direct capitalization, which belongs to the income approach. The sales comparison approach adjusts comparable sale prices instead, and the cost approach builds up land plus depreciated construction cost.

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