Shanta, a property manager of a retail center, is using the Income Capitalization Approach in trying to project future earnings for the partners who own the center. She first estimates the annual potential gross income, subtracts an appropriate allowance for vacancy and collection losses to arrive at a gross income, deducts operating expenses (including debt service and mortgage payments). This gives her the Net Operating Income. She then applies a capitalization rate to the net income to determine the value. Did she use the correct steps?
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