Cap Rate and GRM Analysis Practice Questions

Question 1 of 5

An investor asks salesperson Rosa about key performance indicators (KPIs) to benchmark their multi-residential portfolio against industry standards. What benchmarks are most relevant?

• AThere are no industry benchmarks for multi-residential performance, as the applicable regulatory framework and industry practices establish the standards and procedures that govern how this type of matter is addressed in Ontario real estate
• BKey benchmarks include: operating expense ratio (40-55% for typical multi-residential), vacancy rate compared to local CMHC vacancy data, rent per unit relative to market averages, turnover rate (15-25% is typical), maintenance cost per unit, management cost as a percentage of revenue, capital expenditure reserves per unit, and debt coverage ratio — CMHC's annual Rental Market Report provides authoritative local market data for benchmarking
• CThe only benchmark that matters is whether the building generates positive cash flow, as the applicable regulatory framework and industry practices establish the standards and procedures that govern how this type of matter is addressed in Ontario real estate
• DIndustry benchmarks are only available to CMHC-insured building owners, as the applicable regulatory framework and industry practices establish the standards and procedures that govern how this type of matter is addressed in Ontario real estate

Question 2 of 5

A sophisticated investor tells broker Ling that she adjusts the cap rate for each property based on a 'risk-adjusted' analysis. She adds basis points for factors like deferred maintenance, tenant concentration risk, and regulatory exposure. Is this approach sound?

• ACap rates should never be adjusted — only the NOI should be adjusted for risk factors, as the negotiated lease terms address the key commercial considerations including rent escalation, operating expenses, improvement allowances, and permitted use restrictions
• BBoth approaches have merit: adjusting the cap rate for property-specific risk factors is a recognized technique that produces a risk-adjusted valuation, while adjusting the NOI directly addresses specific income and expense risks; the most thorough analysis uses both methods as cross-checks, and the investor's approach of adding basis points for identifiable risk factors demonstrates sophisticated underwriting
• CRisk adjustments to cap rates are purely subjective and have no place in professional investment analysis, as the negotiated lease terms address the key commercial considerations including rent escalation, operating expenses, improvement allowances, and permitted use restrictions
• DOnly MPAC is authorized to adjust cap rates for property-specific factors

Question 3 of 5

An investor asks salesperson Chen whether cap rates can be used to predict future property values. What are the limitations of cap rate analysis?

• ACap rates perfectly predict future values because they are based on market data real estate
• BCap rates are a snapshot metric with several limitations: they do not account for financing costs, capital expenditure needs, income growth potential, or market cycle timing; a property with a low cap rate may still lose value if interest rates rise or the market softens, and cap rates based on current income may not reflect upcoming lease expirations, rent control impacts, or deferred maintenance costs
• CCap rates have no limitations and should be the only metric used for investment decisions
• DCap rate analysis is outdated and no longer used by professional investors

Question 4 of 5

A seller markets a building at a GRM of 14 based on potential (pro forma) gross income rather than actual current rents. What adjustment should the buyer make?

• ARecalculate the GRM using actual current gross income to understand the real current return; if the actual GRM is 16 (higher GRM means higher price relative to income), the gap between 14 and 16 represents the value-add opportunity that the buyer must execute to achieve the seller's projected returns — paying based on potential income means paying for work the buyer must still do
• BAccept the seller's GRM because potential income better reflects the building's value, as the applicable regulatory framework and industry practices establish the standards and procedures that govern how this type of matter is addressed in Ontario real estate
• CPro forma GRMs are more accurate than actual GRMs in all cases
• DThe buyer should average the pro forma and actual GRMs real estate

Question 5 of 5

Broker Olga's client asks whether GRM is useful for comparing a multi-residential building to a commercial office building in the same neighbourhood. Is cross-property-type GRM comparison valid?

• AYes — GRM is universal and can compare any income property types, as the applicable regulatory framework and industry practices establish the standards and procedures that govern how this type of matter is addressed in Ontario real estate
• BCross-type comparisons are valid if both properties are in the same postal code, as the applicable regulatory framework and industry practices establish the standards and procedures that govern how this type of matter is addressed in Ontario real estate
• CGRM only applies to residential properties and cannot be used for commercial at all, as the applicable regulatory framework and industry practices establish the standards and procedures that govern how this type of matter is addressed in Ontario real estate
• DNo — GRM comparisons should be made within the same property type because operating expense ratios differ dramatically between property types; a multi-residential building typically has operating expenses of 40-55% of gross income, while a net-leased commercial building may have expenses of 10-20%, making their GRMs non-comparable even at similar NOI levels