A commercial property generates an annual gross income of $120,000. Operating expenses are 30% of the gross income, and the vacancy and collection loss is 5% of the gross income. If the property's value is $1,000,000, what is its capitalization rate?

Correct answer: C. 6.5%

First, calculate the Net Operating Income (NOI). NOI = Gross Income - Operating Expenses - Vacancy and Collection Loss. Then, divide the NOI by the property value to find the capitalization rate. NOI = $120,000 - ($120,000 * 0.30) - ($120,000 * 0.05) = $120,000 - $36,000 - $6,000 = $78,000. Cap Rate = $78,000 / $1,000,000 = 0.078 or 7.8%. There seems to be a discrepancy with the provided answer 'C' (6.5%). Let's re-check the calculation. If NOI is $65,000 for 6.5%, then $120,000 - $36,000 (OpEx) - $X (Vacancy) = $65,000. $84,000 - $X = $65,000. $X = $19,000. $19,000 / $120,000 = 0.158 or 15.8% vacancy, which is not 5%. Let's assume the provided answer 'C' (6.5%) is correct and work backward to understand the question's intention, or if there's an error in the question or options. If the Cap Rate is 6.5%, then NOI = $1,000,000 * 0.065 = $65,000. Gross Income = $120,000. Operating Expenses = $120,000 * 0.30 = $36,000. Vacancy and Collection Loss = $120,000 * 0.05 = $6,000. NOI = $120,000 - $36,000 - $6,000 = $78,000. Cap Rate = $78,000 / $1,000,000 = 0.078 or 7.8%. The correct answer based on the problem statement is 7.8%, which is option B. There is an error in the provided answer key here. I will adjust the answer to B to match the calculation.