Which statement correctly describes PGI and EGI relationship?

Which statement correctly describes PGI and EGI relationship?

• A. EGI accounts for vacancies and other income adjustments
• B. EGI equals PGI
• C. EGI includes debt service
• D. EGI is always higher than PGI

Answer: (A)

Understanding how EGI relates to PGI and what gets adjusted is the key. Potential Gross Income (PGI) is the total income the property would generate if it were rented to full occupancy at market rents. To get the actual income the property can expect, you account for vacancies and bad debt (vacancy/credit losses) and then add other income such as laundry, parking, or vending machines. This process yields Effective Gross Income (EGI). So EGI reflects vacancies and credit losses and also incorporates other income, giving a more realistic picture of income than PGI alone. Debt service is not part of this calculation—it’s a financing expense, not income. EGI isn’t guaranteed to be higher than PGI; if vacancy losses are large, EGI can be lower. For example, if PGI is 100,000 and vacancy losses are 8,000 while other income is 3,000, EGI would be 95,000.

Understanding how EGI relates to PGI and what gets adjusted is the key. Potential Gross Income (PGI) is the total income the property would generate if it were rented to full occupancy at market rents. To get the actual income the property can expect, you account for vacancies and bad debt (vacancy/credit losses) and then add other income such as laundry, parking, or vending machines. This process yields Effective Gross Income (EGI). So EGI reflects vacancies and credit losses and also incorporates other income, giving a more realistic picture of income than PGI alone. Debt service is not part of this calculation—it’s a financing expense, not income. EGI isn’t guaranteed to be higher than PGI; if vacancy losses are large, EGI can be lower. For example, if PGI is 100,000 and vacancy losses are 8,000 while other income is 3,000, EGI would be 95,000.