Certified Pennsylvania Evaluator Practice Exam

Which of the following represents the first step in the Income Approach?

1. Estimate effective gross income (EGI)

2. Select and apply capitalization rate

3. Estimate potential gross income (PGI)

4. Estimate net operating income (NOI)

The correct answer is: Estimate potential gross income (PGI)

The first step in the Income Approach is to estimate potential gross income (PGI). This step is crucial because PGI represents the total income a property could generate if fully leased and at market rates, before any vacancy or collection losses are accounted for. Calculating PGI provides a foundational figure upon which other components of the Income Approach, such as effective gross income, net operating income, and ultimately the property’s value through capitalization, are based. Understanding PGI is essential for evaluators because it sets the stage for analyzing the property's income potential comprehensively. Once PGI is established, adjustments can be made to reflect the actual operating conditions, leading to the calculation of effective gross income (EGI) and subsequent metrics like net operating income (NOI) and value through capitalization rates. Thus, estimating PGI is indeed the logical starting point in the Income Approach, ensuring evaluators have a clear picture of the property's income capabilities before considering deductions for expenses or vacancies.