The income capitalization approach to appraisal uses which term as I in the capitalization formula V = I ÷ R?

The income capitalization approach to appraisal evaluates a property’s value based on its ability to generate income. In the capitalization formula ( V = I ÷ R ), where ( V ) represents the value of the property, ( I ) refers to the income generated, and ( R ) is the capitalization rate, the correct term to represent ( I ) is Net Operating Income (NOI).

Net operating income is particularly important because it reflects the actual income the property is expected to generate after all operating expenses are deducted from gross income. This makes it a clear indicator of the property's profitability and cash flow potential, which investors are primarily interested in when determining value.

The other options represent different stages of income measurement or potential income generated by a property. For example, effective gross income accounts for vacancy and collection losses but does not consider operating expenses. Gross operating income includes all potential income from the property before any deductions, which is not used in the capitalization formula for determining value. Potential gross income is an estimate of total income a property could generate if fully leased, also before any adjustments for losses or expenses.

Using net operating income in the capitalization approach provides a more accurate reflection of a property's financial performance, making it the correct choice in this context.