Development of September 7 th 2017 Net Income During the Session - - PowerPoint PPT Presentation

Real Estate Investment & Finance/

Development of Net Income

During the Session Type "?" in Chat for a Question Type "&" to go back a slide Type "#" to see the math

Please mute phone systems to limit background noise September 7th 2017

Introduction

Introduction to Real Estate & Finance/ Development of Net Income

2

Real Estate Investment

Cost Sales Comparison Income Approach

Three Approaches to Determining Value

3

Real Estate Investment

Cost Sales Comparison Income Approach

Current Value is the Present Worth of Future Benefits

4

Income Approach

Based on ……………………………….

5

Real Estate Investment

6

Real Estate Investment

7

Real Estate Investment

8

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Factors to be considered by an Investor

Factors

Safety

Size of Investment

Liquidity

Use as Collateral

Time

Leverage Income Tax Advantage

Appreciation Management 9

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Factors

Factors

Safety

Size of Investment

Liquidity

Use as Collateral

Time

Leverage Income Tax Advantage

Appreciation Management 10

Safety

An insured savings account is safe regarding the money invested and the rate of return. Neither is assured in real estate investment. As safety increases, typically return decreases

11

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Factors

Factors

Safety

Size of Investment

Liquidity

Use as Collateral

Time

Leverage Income Tax Advantage

Appreciation Management 12

Size of Investment

Real Estate investment generally requires substantial sums of money. The larger the investment required, the fewer the number of possible investors and the higher the return Savings accounts can be quite small………..so rate of return is small

13

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Factors

Factors

Safety

Size of Investment

Liquidity

Use as Collateral

Time

Leverage Income Tax Advantage

Appreciation Management 14

Liquidity

A liquid asset is one that is easily converted to cash. Because a savings account is already cash, it is liquid. Real estate, however, requires time to be converted to cash…….

15

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Factors

Factors

Safety

Size of Investment

Liquidity

Use as Collateral

Time

Leverage Income Tax Advantage

Appreciation Management 16

Collateral

Savings accounts ordinarily can be used as collateral in the full amount of the account. Although real estate may be used as collateral under certain circumstances, there are limitations (due to liquidity).

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Pawn shops could be an example of “Collateral” as well

17

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Factors

Factors

Safety

Size of Investment

Liquidity

Use as Collateral

Time

Leverage Income Tax Advantage

Appreciation Management 18

Time

Some investors prefer long-term investments,

• thers prefer relatively

short-term

• investments. Real

estate is usually a long-term investment……

19

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Factors

Factors

Safety

Size of Investment

Liquidity

Use as Collateral

Time

Leverage Income Tax Advantage

Appreciation Management 20

Leverage

Borrowing of funds in hopes of earning a greater return than the cost of borrowing those funds. Can be Positive, Negative or

• neutral. Positive = higher rate of return of a

property than the cost of funds.

21

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Factors

Factors

Safety

Size of Investment

Liquidity

Use as Collateral

Time

Leverage Income Tax Advantage

Appreciation Management 22

Tax Advantages

Return on a savings account is taxed directly. However, real e s t a t e p r o v i d e s a t a x advantage to some, through deductions for building d e p r e c i a t i o n , m o r t g a g e interest, and lower taxes on long-term capital gains…..

23

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Factors

Factors

Safety

Size of Investment

Liquidity

Use as Collateral

Time

Leverage Income Tax Advantage

Appreciation Management 24

Appreciation

Real estate typically appreciates in value

• ver the period of ownership.

25

Type "?" for question; "&" to go back slide; "#" to see the math

Factors

Factors

Safety

Size of Investment

Liquidity

Use as Collateral

Time

Leverage Income Tax Advantage

Appreciation Management 26

Management

Real Estate investment property requires

• management. Either by

the investor or paid for by the investor. Includes time and money.

27

Factors

Factors

Safety

Size of Investment

Liquidity

Use as Collateral

Time

Leverage Income Tax Advantage

Appreciation Management 28

Mortgages

29

Types of Mortgages

30

• First claim on real estate securing the loan

First Mortgage

• 2nd Mortgage, usually higher interest rate

Jr Mortgage

• Short-Term for financing new construction

Construction Loan

• Given by the buyer to the seller to enable the purchase

transaction Purchase – Money

Mortgages

31

• Allows the borrower to obtain additional $$

Open End

• Covers Real Estate Plus Personal Property

Package Mortgage

• Covers Personal Property

Chattel Mortgage

Mortgages – Repayment

32

Mortgages – Repayment

Straight Mortgage

Short Term (3 years) Monthly or quarterly interest payments Balloon payment (balance due at end)

33

Mortgages – Repayment

Amortized

Reduction of principle plus interest

• n declining balance

Level, constant payments

34

Mortgages – Repayment

Partially Amortized

Some Reduction of principle plus interest on declining balance Monthly or quarterly payments Balloon payment at the end

35

Mortgages – Repayment

Reverse Mortgage

Low interest loan with home as collateral Not repaid until the last surviving homeowner moves out or passes away Estate then pays off loan or sells

36

Sources of Financing

37

Commercial Banks

Long-term and short-term Commercial lending

38

Mutual Savings Banks

Generally lend money on FHA insured mortgages, similar to commercial banks

39

Life Insurance Companies

Generally lend on large developments. Multifamily and commercial properties.

40

Retirement Funds

Generally lend on large developments and commercial properties considered low-risk.

41

Familiar Financing Terms

42

Loan-to-Value Ratio

The loan-to-value ratio (LTV) is the ratio, as a percentage (%) of the loan to total property value that the mortgage covers. For example, a 75% LTV on a $1,000,000 home would be $750,000

43

Term of the Loan

Number of years For Example, home loans of 10-, 15-, 25-, or 30- years The longer the term, typically, the greater amount of interest paid over the term of the loan

44

Interest Rate

Usually predetermined interest rate stated in the agreement The interest rate and the term of the loan determines the actual dollar amount of interest paid

45

Mortgage Amount

Typically the Principal declines as payments are made

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Equity

Equity is the owner’s interest in a property beyond the mortgage or other claims. For example, with a LTV of 75% on a $1,000,000 home, the equity required is 25% or $250,000

47

Financing – Who Cares?

Seller and Lender are the same party

Analyze the loan terms compared to the market

Buyer assumes seller’s mortgage

Sales price may be influenced, compare to market

Seller pays points

Sales price must be reduced by amount of points paid as compared to market

48

Survey Monkey?

https://www.surveymonkey.com/r/WZCMKSV

49

Income Approach

Based on ……………………………….

50

Suggestion to become familiar with your calculator

51

Develop NOI

Estimate Potential Gross Income (PGI) Deduct for vacancy and collection Loss Add Other Income Effective Gross Income (EGI) Determine Operating Expenses Deduct Operating Expenses from EGI Net Operating Income (NOI) Select Appropriate Capitalization Rate Capitalize the NOI into an estimated value

52

Estimate Potential Gross Income PGI

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Market or Economic Contract Leasehold Rent Overage Minimum Excess

Rents

53

Estimate Potential Gross Income PGI

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Market or Economic Contract Leasehold Rent Overage Minimum Excess

54

Market Rent

Market rent is the rent that the property is capable of producing, given its location, size and other physical characteristics, supply and demand factors and typical lease terms given knowledgeable and prudent owners and tenants. Justified by comparable rental properties.

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Estimate Potential Gross Income PGI

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Market or Economic Contract Leasehold Rent Overage Minimum Excess

56

Contract Rent

Contract rent is the actual rent paid by the tenant as set out in the lease or contract.

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Rents

• NNN – Triple Net Lease
• MG - Modified Gross Lease
• FSG - Full Service Gross Lease

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Do I need to know what Reimbursements are?

58

Rents

• NNN – Triple Net Lease

Tenant is responsible for paying all operating expenses associated with a property

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Rents

FSG – Full Service Gross Lease

Landlord is responsible for paying all operating expenses associated with a property

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Rents

MG – Modified Gross Lease

Landlord is responsible for paying some

• perating expenses associated with a

property. Tenant is responsible for paying some

• perating expenses associated with a

property

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NNN

Landlord Pays

• $0

Tenant Pays

• Property

Insurance

• Utilities
• Maintenance &

Repair

• Property Taxes

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FSG

Tenant Pays

• $0

Landlord Pays

• Property

Insurance

• Utilities
• Maintenance &

Repair

• Property Taxes

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MG

Tenant Pays

“Typically”

• Utilities
• Property

Insurance

• Some

Maintenance & Repair

Landlord Pays

• Some

Maintenance & Repair

• Property Taxes

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Rents

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Assume there are three typical commercial properties (office or retail) and all are similar in location, condition, age, appeal and tenants. One has NNN leases, one has FSG leases and one has MG leases. Which one will have the higher rents? Which one will have lower rents?

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Problem -FSG

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Your subject property is an office building with the following tenants and 8,000 SF of NRA (net rentable area) as of the date of appraisal.

• Attorney’s of Narnia

FSG Lease $24.00/SF/Year 1,500 SF

• Accounts of Narnia

FSG Lease $28.00/SF/Year 1,000 SF

• Architects LLC

FSG Lease $30.00/SF/Year 750 SF

• Narnia Graphics

FSG Lease $20.00/SF/Year 4,000 SF

• Vacant Space

FSG Lease $30.00/SF/Year 750 SF Calculate the Current Potential Gross Income – ? Calculate the Current Vacancy Rate and amount – ? Calculate the Current Effective Gross Income - ?

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Calculate the Potential Gross Income – ($24 x 1,500) + ($28 x 1,000) + ($30 x 750) + ($20 x 4,000) + ($30 x 750) = $36,000 + $28,000 + $22,500 + $80,000 + $22,500 $189,000 = PGI Calculate the Vacancy Rate and amount – 750 SF/8,000 SF = .0938 or 9.4% $30 x 750 = $22,500

Problem - FSG

Your subject property is an office building with the following tenants and 8,000 SF of NRA (net rentable area) as of the date of appraisal.

• Attorney’s of Narnia

FSG Lease $24.00/SF/Year 1,500 SF

• Accounts of Narnia

FSG Lease $28.00/SF/Year 1,000 SF

• Architects LLC

FSG Lease $30.00/SF/Year 750 SF

• Narnia Graphics

FSG Lease $20.00/SF/Year 4,000 SF

• Vacant Space

FSG Lease $30.00/SF/Year 750 SF

67

Problem - FSG

Type "?" for question; "&" to go back slide; "#" to see the math

Your subject property is an office building with the following tenants and 8,000 SF of NRA (net rentable area) as of the date of appraisal.

• Attorney’s of Narnia

FSG Lease $24.00/SF/Year 1,500 SF

• Accounts of Narnia

FSG Lease $28.00/SF/Year 1,000 SF

• Architects LLC

FSG Lease $30.00/SF/Year 750 SF

• Narnia Graphics

FSG Lease $20.00/SF/Year 4,000 SF

• Vacant Space

FSG Lease $30.00/SF/Year 750 SF Calculate the Effective Gross Income – PGI less Vacancy = EGI $189,000

• $22,500

$166,500

68

Problem -NNN

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Your subject property is an office building with the following tenants and 8,000 SF of NRA (net rentable area) as of the date of appraisal.

• Attorney’s of Narnia

NNN Lease $19.00/SF/Year 1,500 SF

• Accounts of Narnia

NNN Lease $23.00/SF/Year 1,000 SF

• Architects LLC

NNN Lease $25.00/SF/Year 750 SF

• Narnia Graphics

NNN Lease $15.00/SF/Year 4,000 SF

• Vacant Space

NNN Lease $25.00/SF/Year 750 SF

• Expense Reimbursements are $5/SF/Year for all tenants

Calculate the Current Potential Gross Income – ? Calculate the Current Vacancy Rate and amount – ? Calculate the Current Effective Gross Income - ?

69

Problem - NNN

Your subject property is an office building with the following tenants and 8,000 SF of NRA (net rentable area) as of the appraisal date.

• Attorney’s of Narnia

NNN Lease $19.00/SF/Year 1,500 SF

• Accounts of Narnia

NNN Lease $23.00/SF/Year 1,000 SF

• Architects LLC

NNN Lease $25.00/SF/Year 750 SF

• Narnia Graphics

NNN Lease $15.00/SF/Year 4,000 SF

• Vacant Space

NNN Lease $25.00/SF/Year 750 SF

• Expense Reimbursements are $5/SF/Year for all tenants

Calculate the Potential Gross Income –

($19 x 1,500) + ($23 x 1,000) + ($25 x 750) + ($15 x 4,000) + ($25 x 750) + ($5 x 8,000) =

$28,500 + $23,000 + $18,750 + $60,000 + $18,750 + $40,000 $189,000 = PGI

70

Problem - NNN

Your subject property is an office building with the following tenants and 8,000 SF of NRA (net rentable area) as of the appraisal date.

• Attorney’s of Narnia

NNN Lease $19.00/SF/Year 1,500 SF

• Accounts of Narnia

NNN Lease $23.00/SF/Year 1,000 SF

• Architects LLC

NNN Lease $25.00/SF/Year 750 SF

• Narnia Graphics

NNN Lease $15.00/SF/Year 4,000 SF

• Vacant Space

NNN Lease $25.00/SF/Year 750 SF

• Expense Reimbursements are $5/SF/Year for all tenants

Calculate the Vacancy Rate and amount – 750 SF/8,000 SF = .0938 or 9.4% ($25 x 750) + ($5 x 750) = $22,500

71

Problem - NNN

Your subject property is an office building with the following tenants and 8,000 SF of NRA (net rentable area) as of the appraisal date.

• Attorney’s of Narnia

NNN Lease $19.00/SF/Year 1,500 SF

• Accounts of Narnia

NNN Lease $23.00/SF/Year 1,000 SF

• Architects LLC

NNN Lease $25.00/SF/Year 750 SF

• Narnia Graphics

NNN Lease $15.00/SF/Year 4,000 SF

• Vacant Space

NNN Lease $25.00/SF/Year 750 SF

• Expense Reimbursements are $5/SF/Year for all tenants

Calculate the Effective Gross Income – PGI less Vacancy = EGI $189,000

• $22,500

$166,500

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What happens if my Rent Comparables are a mix of NNN, MG and FSG?

• Do I have to use only NNN for NNN properties? MG for MG

properties? FSG for FSG properties as comparables?

• Are all MG properties the same?
• Are all NNN properties the same?
• Can adjustments be made?
• What should an appraiser do with all NNN, MG and FSG

properties to avoid errors?

Discussion

73

What happens if my Rent Comparables are a mix of NNN, MG and FSG?

• Do I have to use only NNN for NNN properties? MG for MG

properties? FSG for FSG properties as comparables?

• Are all MG properties the same?
• Are all NNN properties the same?
• Can adjustments be made?
• What should an appraiser do with all NNN, MG and FSG

properties to avoid errors?

Discussion

74

Market or Economic Contract Leasehold Rent Overage Minimum Excess

Rents

75

Contract Rent

Excess rent is the difference between the contract rent and the economic rent in situations where the contract rent is greater than market or economic rent.

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Rents

Market or Economic Contract Leasehold Rent Overage Minimum Excess

77

Minimum Rent

Minimum rent is the base or fixed rent provided for in a typical percentage rent lease %

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Market or Economic Contract Leasehold Rent Overage Minimum Excess

Rents

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Overage Rent

Overage rent is rent over and above the minimum rent in a percentage

• lease. %

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Rents

Market or Economic Contract Leasehold Rent Overage Minimum Excess

81

Leasehold Rent

Leasehold Rent is the opposite of excess rent. Difference between market and contract rent where market rent is greater than contract. Creates a leasehold interest in favor of the tenant

• Think….favorable to tenant
• Also called “Deficit Rent”

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Rents – Comments/Questions

What about leasing commissions? What about Tenant Improvements? What about Concessions?

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Survey Monkey?

https://www.surveymonkey.com/r/SWRNR8G

84

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“The knotty problem of Capital Hill….Finding a way to raise taxes without losing a single vote” – Dr Seuss

86

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What is the effective annual rent for the following lease:

• 1. Contract rent/year: $20/SF
• 2. 5 months free rent; earned one month

per year over 4 years

• A. $18.33
• B. $18.98
• C. $19.10
• D. $19.23

Problem 1

87

What is the effective annual rent for the following lease:

• 1. Contract rent/year: $20/SF
• 2. 5 months free rent; earned one month

per year over 4 years

• A. $18.33

$20/SF less free rent (1/12 x $20) = $18.33

Problem 1

88

1/12 x $20 = $1.67

Income Approach

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Deduct for vacancy and collection Loss

89

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What is appropriate total vacancy and collection loss deduction if:

• 1. Contract rent/year: $20/SF
• 2. Net Rentable Area is 42,000 SF
• 3. Market indicates 8% vacancy and collection

loss for similar properties.

• A. $67,200
• B. $84,000
• C. $42,000
• D. $62,700

Problem 2

90

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What is appropriate total vacancy and collection loss deduction if:

• 1. Contract rent/year: $20/SF
• 2. Net Rentable Area is 42,000 SF
• 3. Market indicates 8% vacancy and

collection loss for similar properties.

• A. $67,200

$20/SF x 42,000 SF = $840,000 PGI $840,000 x 8% = $67,200

Problem 2

91

Income Approach

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Add Other Income

• Expense Reimbursements
• Parking Income
• Laundry Income (multifamily)
• Miscellaneous Income
• Pet Income
• Forfeited Deposits
• Garages

92

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Calculate the additional other income for a 40-unit apartment complex based on the last three years financial statements:

• 1. Last Year: $50/unit/year
• 2. 1 Year Ago: $45/unit/year
• 3. 2 Years Ago: $42/unit/year
• A. $2,000
• B. $1,800
• C. $1,680
• D. $2,200

(Hint: Based on increasing trend, use most current)

Problem 3

93

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Calculate the additional other income for a 40-unit apartment complex based on the last three years financial statements:

• 1. Last Year: $50/unit/year
• 2. 1 Year Ago: $45/unit/year
• 3. 2 Years Ago: $42/unit/year
• A. $2,000

$50/unit/year x 40 units = $2,000

Problem 3

94

Income Approach

Effective Gross Income (EGI)

Potential Gross Income (PGI) Less Vacancy & Collection Loss Plus Other Income Equals Effective Gross Income (EGI) Discussion - Why do we not make a Vacancy & Collection Loss deduction from Other Income? When would it be appropriate?

95

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What is the Effective Gross Income if:

• 1. Gross Potential Income from rents is

$125,000

• 2. Other income (Parking) is $13,000
• 3. Market Vacancy and Collection Loss is

8%

• A. $126,960
• B. $128,000
• C. $129,690
• D. $182,000

Problem 4

96

Type "?" for question; "&" to go back slide; "#" to see the math

What is the Effective Gross Income if:

• 1. Gross Potential Income from rents is

$125,000

• 2. Other income (Parking) is $13,000
• 3. Market Vacancy and Collection Loss is 8%
• B. $128,000

$125,000 – (8% x $125,000) = $115,000 $115,000 + $13,000 = $128,000

Problem 4

97

Income Approach

Determine Operating Expenses

Management Insurance Maintenance and Repair Legal and Accounting Wages, Salaries, Employee Benefits Landscaping Advertising Utilities Replacement Reserves

98

Depreciation Mortgage Interest Franchise Fees Personal Business Expenses (Owner) Capital Improvements Major Roof Repairs Exterior Painting Parking Lot Resurfacing New Flooring

Income Approach

Determine Operating Expenses

Discussion: Wait?! What about taxes?

99

100

Typical Income/Expense Statement

10 1

Typical Income/Expense Statements

102

Typical Income/Expense Statements

10 3

Typical Income/Expense Statements

10 4

Typical Income/Expense Statements

Typical Income/Expense Statements

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Reconstruction of an Income Statement

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Expense Item Use as Stated Pro‐Rate Eliminate A Management Fee B Repairs C Miscellaneous D Utilities E Interest on mortgage F Principal on mortgage G New roof H Insurance fire (3‐year policy) I Insurance Liability (1‐year policy) J janitor's Salary K Painting Exterior L Purchase of 4 new refrigerators M Purchase of 2 new range/ovens N Supplies O Corporate income taxes P Red Cross donation Q Carpet replacement (6 units) R Redecorate 7 apartment units S Real Estate Taxes T Employee's Health Policy (1‐year)

106

Reconstruction of an Income Statement

Expense Item Use as Stated (A) Pro‐Rate (B) Eliminate (C) A Management Fee B Repairs C Miscellaneous D Utilities E Interest on mortgage F Principal on mortgage G New roof H Insurance fire (3‐year policy) I Insurance Liability (1‐year policy) J janitor's Salary K Painting Exterior L Purchase of 4 new refrigerators M Purchase of 2 new range/ovens N Supplies O Corporate income taxes P Red Cross donation Q Carpet replacement (6 units) R Redecorate 7 apartment units S Real Estate Taxes T Employee's Health Policy (1‐year)

107

Type A, B, C in chat

Expenses – Comments/ Questions

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What about Replacement Reserves ? Questionable Expenses?

I R V

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Income (NOI) = Rate X Value I=RxV R=I/V V=I/R

I R V

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Income (NOI) = Rate X Value I=R x V R=I/V V=I/R NOI = $500,000, Rate = 11% What is the Value? V=I/R $500,000/.11 $4,545,455

I R V

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Income (NOI) = Rate X Value I=R x V R=I/V V=I/R Rate = 11% Value = $4,545,455 What is the NOI? I = R x V .11 x $4,545,455 $500,000

I R V

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Income (NOI) = Rate X Value I=R x V R=I/V V=I/R Value = $4,545,455 NOI = $500,000 What is the Rate? R = I/V R= $500,000 / $4,545,455 .11 or 11%

I R V

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Income (NOI) = Rate X Value I=R x V R=I/V V=I/R Value = $9,500,000 NOI = $850,000 What is the Rate? R = I/V R= $850,000 / $9,500,000 .089 or 9% (rounded)

I R V

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Income (NOI) = Rate X Value I=R x V R=I/V V=I/R Value = ? NOI = $850,000 Rate = 12% V=I/R V= $850,000 / .12 $7,083,333

I R V

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Income (NOI) = Rate X Value I=R x V R=I/V V=I/R Value = 13,400,000 NOI = $850,000 Rate = ? R=I/V R= $850,000 / $13,400,000 0.063 or 6.3%

I R V

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Income (NOI) = Rate X Value I=R x V R=I/V V=I/R Value = 5,600,000 NOI = ? Rate = 12% I=R x V V= .12 x $5,600,000 $672,000

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Based on the following, calculate the operating expenses: 1. Gross Potential Income from rents is $125,000 2. Other income (Parking) is $13,000 3. Market Vacancy and Collection Loss is 8% 4. Management is based on 3.5% of EGI (effective gross income) 5. Maintenance and repairs were $25,000 but included $5,000 for roof replacement 6. Utilities last year were $6,000 but there was a severe water leak (subsequently repaired) and the more typical expense for utilities is $5,000 7. Salaries, wages, benefits were $20,000 last year 8. Reserves for replacement are typically 2.5% of EGI

Problem 5

117

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Based on the following, calculate the operating expenses: Total Expenses : $52,680 $125,000 – (8% x $125,000) = $115,000 (PGI less vacancy) $115,000 + $13,000 = $128,000 (EGI) Management: 3.5% x $128,000 = $4,480 Maintenance & Repair: $20,000 (roof was capital expense) Utilities: $5,000 (water leak was unusual expense) Salaries: $20,000 Replacement Reserves: 2.5% x $128,000 = $3,200

Problem 5

118

Income Approach

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Deduct Operating Expenses from EGI

Total Expenses : $52,680 $4,480 + $20,000 + $5,000 + $20,000 + $3,200 = And the NOI is what?

119

Income Approach

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Net Operating Income (NOI)

Less Total Expenses : $52,680 EGI: $128,000 Net Operating Income: $75,320

• What is the operating expense ratio?

58.8% NOI/EGI $75,320/$128,000 = 58.8%

• If the property sold for $685,000 what was

the capitalization rate? 11.0% NOI/Sale$ $75,320/$685,000=.11 or 11.0%

120

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What is the net operating income given the following: 1. Potential gross rent is $40,000 2. Vacancy & collection loss is 10% 3. Expense reimbursement charges are $4,000 based on a pro-rata share of certain operating expenses 4. Property management fee is 10% of EGI 5. Other non-reimbursable fixed expenses are $16,000

• A. $19,316
• B. $19,640
• C. $20,050
• D. Cannot be determined without knowing variable

expenses.

Problem 6

121

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Potential Gross Income $40,000 Plus Expense reimbursement @100% occupancy $4,000 Total Gross Income $44,000 Less Vacancy & Collection Loss (10% x subtotal above) ($4,400) Effective Gross Income $39,600 Less Expenses Property Management (10% of EGI) ($3,960) Remaining Expenses ($16,000) Net Operating Income $19,640

• B. $19,640

Problem 6

?

122

Income Approach

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Select Appropriate Capitalization Rate

123

Overall Capitalization Rate OAR The direct relationship between a single year’s annual net operating income and the property’s sale price or value. Typically, concluded OARs are rounded to ¼ (8.25%, 8.50%, 8.75%). However, when calculated off of a sale, typically use two decimal places (8.24%, 8.49%, 8.74%). Just be consistent Taxes? Replacement Reserves?

Subject is a fully occupied property leased to a national credit

• tenant. What is the appropriate Capitalization Rate based on the

following three sales: Sale 1: 7.5%; property leased to a local tenant Sale 2: 8.0%; property was 20% vacant at time of sale Sale 3: 7.0%; property included surplus land for expansion or additional parking

• A. Less than 7.0%
• B. 7.0 – 7.5%
• C. 7.5 – 8.0%
• D. More than 8.0%

Problem 7

124

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• A. Less than 7.0%
• B. 7.0 – 7.5%
• C. 7.5 – 8.0%
• D. More than 8.0%

Sale 3 sets the lower limit because surplus land adds value (R = I/V) Sale 1 sets the upper limit because properties leased to a local tenant would likely sell at a higher capitalization rate (i.e. higher risk) than if leased to a credit tenant.

Problem 7

125

Income Approach

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Capitalize the NOI into an estimated value

Three properties have the following NOIs: Property A: $75,360 Property B: $95,650 Property C: $125,867 If the market is utilizing capitalization rates between 7.0% and 7.5%, what is the range of value based

• n the three properties?

$1,004,800 to $1,798,100 $75,360/.075 = $1,004,800 $125,867/.07 = $1,798,100

126

Survey Monkey?

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https://www.surveymonkey.com/r/8DCL3YF

127

SM #10

An office building has an NOI of $345,978. What is the market value if the capitalization rate is 7.0% rounded to the nearest $100,000?

Type "?" for question; "&" to go back slide; "#" to see the math 128

V=I/R $345,978/.07 = $4,942,542 Rounded to: $4,900,000

Type "?" for question; "&" to go back slide; "#" to see the math 129

Matching

Borrowing of funds in hopes of earning a greater return than the cost of the borrowed funds. This amount can be negative, positive, or neutral.

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Leverage

130

Matching

The tenant is required to pay all or part of the operating expenses associated with the real estate.

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Net Lease

131

Matching

Reflects the relationship between the real estate taxes and the value of the property.

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Effective Tax Rate (ETR)

132

Matching

Includes only the floor area occupied by the tenant.

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Net Leasable Area (NLA) or Net Rentable Area (NRA)

133

Matching

Obtained after determining the potential income for the property.

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Effective Gross Income (EGI)

134

Matching

Market Rent, Contract Rent, Excess Rent, Percentage Rent, Effective Rent, Leasehold Rent.

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Types of Rents

135

Matching

Value is created by the expectation of benefits to be derived in the future.

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Anticipation

136

Matching

Most common type of financing for Real Estate.

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Mortgage

137

Matching

A contract will calls for a fixed minimum base rent and a variable rent

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Percentage % Lease

138

Matching

Parking Fees, vending machines, coin-

• perated laundries

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Miscellaneous Income

139

Survey Monkey?

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https://www.surveymonkey.com/r/7R9FHT8

140

SM #4

An office building has a potential gross income of $525,000 and a 7% vacancy and collection loss rate. Assuming an expense ratio equal to 45% of effective gross income, calculate the net operating income (NOI).

Type "?" for question; "&" to go back slide; "#" to see the math 141

$525,000 – ($525,000 X 7%) = $525,000 - $36,750 = $488,250 (EGI) $488,250 X 45% = $219,712.50 (rounded to) $219,713 (expenses) $488,250 - $219,713 = $268,538 (NOI)

SM #6

What is the indicated value of the subject property if the NOI is $135,850 and the

• verall capitalization rate is 11%?

Type "?" for question; "&" to go back slide; "#" to see the math 142

V=I/R $135,850/.11 = $1,235,000

SM #7

What is a property's overall capitalization rate if it sold for $4,325,000 with an NOI of $475,750?

Type "?" for question; "&" to go back slide; "#" to see the math 143

R=I/V $475,750/$4,325,000 = .11

SM #8

What is a property's NOI if it sold for $375,000 with an overall capitalization rate

• f 11.5%?

Type "?" for question; "&" to go back slide; "#" to see the math 144

I=R x V .115 x $375,000 = $43,125

SM #9

A property sold for $5,100,000 with a capitalization rate of 8.43%. If the Expense ratio was 45% of Effective Gross Income. What was the property's EGI?

145

I=R x V .0843 x $5,100,000 = $429,930 = NOI NOI = 55% of total expenses EGI = NOI/.55 EGI = $429,930/.55 = $781,691

SM #9

A property sold for $5,100,000 with a capitalization rate of 8.43%. If the Expense ratio was 45% of Effective Gross Income. What was the property's PGI if Vacancy & Collection Loss was 8%?

146

EGI was $781,691 PGI – Vacancy = EGI PGI – (8% x PGI) = EGI PGI – (8% x PGI) = $781,691 92% x PGI = $781,691 PGI = $781,691/.92 = $849,664 (PGI)