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 . Type "?" for question; "&" to go back slide; "#" to see the math 55
Estimate Potential Gross Income PGI Market or Economic Excess Contract Leasehold Minimum Rent Overage Type "?" for question; "&" to go back slide; "#" to see the math 56
Contract Rent Contract rent is the actual rent paid by the tenant as set out in the lease or contract. Type "?" for question; "&" to go back slide; "#" to see the math 57
Rents • NNN – Triple Net Lease • MG - Modified Gross Lease • FSG - Full Service Gross Lease Do I need to know what Reimbursements are? Type "?" for question; "&" to go back slide; "#" to see the math 58
Rents • NNN – Triple Net Lease Tenant is responsible for paying all operating expenses associated with a property Type "?" for question; "&" to go back slide; "#" to see the math 59
Rents FSG – Full Service Gross Lease Landlord is responsible for paying all operating expenses associated with a property Type "?" for question; "&" to go back slide; "#" to see the math 60
Rents MG – Modified Gross Lease Landlord is responsible for paying some operating expenses associated with a property. Tenant is responsible for paying some operating expenses associated with a property Type "?" for question; "&" to go back slide; "#" to see the math 61
NNN Landlord Pays Tenant Pays • $0 • Property Insurance • Utilities • Maintenance & Repair • Property Taxes Type "?" for question; "&" to go back slide; "#" to see the math 62
FSG Tenant Pays Landlord Pays • $0 • Property Insurance • Utilities • Maintenance & Repair • Property Taxes Type "?" for question; "&" to go back slide; "#" to see the math 63
MG Tenant Pays Landlord Pays “Typically” • Some Maintenance & • Utilities Repair • Property • Property Taxes Insurance • Some Maintenance & Repair Type "?" for question; "&" to go back slide; "#" to see the math 64
Rents 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? Type "?" for question; "&" to go back slide; "#" to see the math 65
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 Calculate the Current Potential Gross Income – ? Calculate the Current Vacancy Rate and amount – ? Calculate the Current Effective Gross Income - ? Type "?" for question; "&" to go back slide; "#" to see the math 66
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 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 67
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 Calculate the Effective Gross Income – PGI less Vacancy = EGI Type "?" for question; "&" to $189,000 - $22,500 $166,500 go back slide; "#" to see the math 68
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 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 - ? Type "?" for question; "&" to go back slide; "#" to see the math 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 72
Discussion 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? 73
Discussion 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? 74
75 Leasehold Contract Rent Rents Market or Economic Overage Minimum Excess
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. Type "?" for question; "&" to go back slide; "#" to see the math 76
77 Leasehold Contract Rent Rents Market or Economic Overage Minimum Excess
Minimum Rent Minimum rent is the base or fixed rent provided for in a typical percentage rent lease % Type "?" for question; "&" to go back slide; "#" to see the math 78
Rents Market or Economic Excess Contract Leasehold Minimum Rent Overage Type "?" for question; "&" to go back slide; "#" to see the math 79
Overage Rent Overage rent is rent over and above the minimum rent in a percentage lease. % Type "?" for question; "&" to go back slide; "#" to see the math 80
81 Leasehold Contract Rent Rents Market or Economic Overage Minimum Excess
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” Type "?" for question; "&" to go back slide; "#" to see the math 82
Rents – Comments/Questions What about leasing commissions? What about Tenant Improvements? What about Concessions? Type "?" for question; "&" to go back slide; "#" to see the math 83
Survey Monkey? https://www.surveymonkey.com/r/SWRNR8G 84
Type "?" for question; "&" to go back slide; "#" to see the math 85
“The knotty problem of Capital Hill….Finding a way to raise taxes without losing a single vote” – Dr Seuss Type "?" for question; "&" to go back slide; "#" to see the math 86
Problem 1 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 Type "?" for question; "&" to go back slide; "#" to see the math 87
Problem 1 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 1/12 x $20 = $1.67 $20/SF less free rent (1/12 x $20) = $18.33 88
Income Approach Deduct for vacancy and collection Loss Type "?" for question; "&" to go back slide; "#" to see the math 89
Problem 2 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 Type "?" for question; "&" to go back slide; "#" to see the math 90
Problem 2 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 Type "?" for question; "&" to go back slide; "#" to see the math 91
Income Approach Add Other Income - Expense Reimbursements - Parking Income - Laundry Income (multifamily) - Miscellaneous Income - Pet Income - Forfeited Deposits - Garages Type "?" for question; "&" to go back slide; "#" to see the math 92
Problem 3 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) Type "?" for question; "&" to go back slide; "#" to see the math 93
Problem 3 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 Type "?" for question; "&" to go back slide; "#" to see the math 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
Problem 4 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 Type "?" for question; "&" to go back slide; "#" to see the math 96
Problem 4 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 Type "?" for question; "&" to go back slide; "#" to see the math 97
Income Approach Determine Operating Expenses Management Insurance Maintenance and Repair Legal and Accounting Wages, Salaries, Employee Benefits Landscaping Advertising Utilities Replacement Reserves 98
Income Approach Determine Operating Expenses Depreciation Mortgage Interest Franchise Fees Personal Business Expenses (Owner) Capital Improvements Major Roof Repairs Exterior Painting Parking Lot Resurfacing New Flooring Discussion: Wait?! What about taxes? 99
100 Typical Income/Expense Statement
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