WELCOMES AUSTIN BAY Author and syndicated columnist, professor, - - PowerPoint PPT Presentation

AUSTIN BAY

Author and syndicated columnist, professor, developmental aid advocate, radio commentator, retired reserve soldier, war game designer, principal in a training simulations and technology consulting company.

WELCOMES

Evaluating Big Debt’s Feudal War on Innovative Civilization (and your wallet)

Description: Austin Bay looks at the strategic implications of unpayable debt. Here’s the shot: John Stuart Mill’s Principles of Political Economy (1848) begins with this line: “In every department of human affairs, Practice long precedes, Science; systemic enquiry into the modes of action of the powers of nature is the tardy product

• f a long course of efforts to use those powers for practical ends.” Mills then tells us his

subject is “Wealth” which everyone understands, or, as Mills says “everyone has a notion, sufficiently correct for common purposes…” He elaborates: “All know that it is

• ne thing to be rich, another thing to be enlightened, brave or humane; that the questions

how a nation is made wealthy, and how it is made free, or virtuous, or eminent in literature, in the fine arts, in arms, or in polity, are totally distinct enquiries.” Then he qualifies distinct: “These things, indeed are all indirectly connected, and react upon one another.”

Here’s the chaser: This is a message from a genius who lived in the 19th century, a man so smart he knew he had to qualify “distinct enquiries.” No. Wealth, military capabilities, artistic eminence, political prestige, freedom -- there are multiple connections. Mr. Mill is so smart he deserves to be

• paraphrased. Based on my practical experience, everyone understands debt

“sufficiently correct for common purposes.” Both wealth and desperate necessity can spur innovation. But, over the “long course of efforts” (another steal from Mills) successful innovation tends to seed wealth creation. Moreover, wealth implies resources exist to experiment with innovative

• ptions. Desperate necessity? Well, in common parlance, that suggests fewer

and fewer choices, like one loaf of bread left on the grocery shelf, or one last bullet in the chamber…

TOM TROLL NATIONAL REALTY CONSULTANTS

It’s the Value, stupid!

WELCOMES

The other half is physical.

• Yogi Berra

Baseball is 90% mental.

Tax Consulting is 90% ________? The rest is ________?

Tax Consulting is 90% process. The rest is ___________?

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the Value.

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Agenda

• 1. Value: Fact or Concept
• 2. Overview of Income Property Valuation
• 3. Cap Rate Sources & Challenges
• 3. Valuation Dilemma (Tax & Feasility):

1 Equation; Multiple Unknowns

• 4. Valuation Dilemma Solutions
• 5. Q & A

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Get Your Mind Right

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Value: Fact or Concept?

13

Price versus Value

Price = Fact; Value?

Sale Price Value House $275,000 ? Apartment Complex $8,000,000 ? Office Building $4,500,000 ? Shopping Center $2,375,000 ? Warehouse $3,000,000 ?

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Value Curve -- SELLERS

Time $ Value

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Value Curve -- BUYERS

Time $ Value

16

Value Concept Curve

Time $ Value No Sale Possible Seller Opinion > Buyer Opinion

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Buyer & Seller Opinions of Value are IDENTICAL

Value is a Concept!

Time $ Value Market Value

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Active Market: Sales Possible

Time $ Value Buyer Opinions >= Seller Opinions of Value

Active Market Range

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Value Concept Curve

Time $ Value Market Transactions Prices = Fact

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Valuation Process

Time $ Value Market Data Facts Abstract Yardsticks of Value from Market Data and Apply to Subject Property Market Data NOT JUST SALES!

21

Valuation Concept

Abstract Yardsticks of Value from Market Data and Apply to Subject Property Sales Comparison: Price Per: sq ft, acre, room, etc. Cost Approach: Cost New & Depreciation Income Approach: Rents, Vacancy, Expenses, Cap Rate Yardsticks Reflect the Market

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Relationship of Value Opinions to Active Market

Time $ Value

Active Market Range

CAD Value Consultant Value BOTH WRONG!!!

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All Market Value Opinions Correct in Active Range

Time $ Value

Active Market Range

CAD Value Consultant Value BOTH CORRECT!!!

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Valuation Process is Designed to???

Time $ Value

Active Market Range

Figure out what the Value IS NOT

25

Overview of Income Valuation

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Income Analysis

Potential Gross Income (All Sources) Less: Stabilized Vacancy & Collections Allowance Equals: Effective Gross Income (EGI) Less: Landlord Operating Expenses Equals: Net Operating Income Income = Value Rate

I R V

27

IRV RVI IVR

Income = Value Rate Income = Rate Value Rate x Value = Income

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Direct Capitalization

Subject Net Operating Income (I) = Subject Value (V) Overall Capitalization Rate (R) Sale Net Operating Income (I) = Cap Rate (R) Sales Price (V) Developed Directly from Sales Applied Directly to Subject Called Direct Because:

29

Band of Investments

Loan/Value Ratio x Loan Constant = Loan Contribution Equity/Value x Cash on Cash = + Equity Contribution Investment Yr 1 Cash Flow Rate = Overall Cap Rate Weighted Average of Component Cash Flows

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Market Financing: 75% loan; 30 yrs; 7% Initial Loan Constant: 7.9836% (0.0798363) Yr 1 Equity Cash on Cash Rate: 5% (0.05)

Band of Investments

.75 x .0798363 = Loan Contribution to R = 0.059877 .25 x .05 = Equity Contribution to R = + 0.012500 Overall Cap Rate (7.2377%) = 0.072377 Weighted Average of Component Cash Flows

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Overall Cap Rate NOT a Yield Rate

Overall Cap Rate IS / IS NOT

Net Operating Income = Value Overall Cap Rate Overall Cap Rate = Yr 1 Overall Investment Cash Flow Rate Overall Cap Rate = Income Analysis Yardstick of Value That Relates Net Income and Value

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Cap Rate Sources & Challenges

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PwC – Korpacz

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PwC – Korpacz (usually on page 90 something)

All of the Rest of the Cap Rates Here THEN THE FINE PRINT BELOW

35

PwC – Korpacz (usually on page 90 something)

Method 1 NOI After Reserves Before TIs & Leasing Method 2 NOI Before Reserves TIs & Leasing Method 3 NOI After Reserves TIs & Leasing

36

PwC – Korpacz (usually on page 90 something)

Method 3 NOI After Reserves TIs & Leasing Method 3 Used by Virtually NOBODY

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PwC Blended Cap Rates????

Not in compliance with accepted valuation methodologies Not applicable to any valuation scenario Violation of the Texas Property Tax Code and USPAP

that which should not be done at all.

• Peter Drucker

There is nothing so useless as doing efficiently

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CAD ESTIMATES Rent, Occupancy, Expenses, Reserves, TIs, & Leasing THERFORE, NOI & RESULTING CAP RATES [BOTH BEFORE/AFTER TIs & LEASING] ARE ESTIMATES, NOT FACTS

CAD Cap Rate Studies

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OFFICE CAP RATE STUDY JANUARY 2014 2012 - 2013 SALES Year Sale Sale PRICE NRA Cls Built Date Price PSF SF A 1998 Nov-13 $115,000,000 $231.18 497,447 A+ 1984 Oct-13 $245,449,050 $229.35 1,070,209 A++ 2012 Sep-13 $112,000,000 $370.20 302,536 A 1974 Aug-13 $38,000,000 $188.38 201,720 A++ 2008 Jun-13 $104,800,000 $284.52 368,340 A 2003 Jun-13 $18,250,000 $180.62 101,039 A 2006 Jun-13 $51,250,000 $248.35 206,362 A+ 2008 Jun-13 $46,000,000 $299.98 153,342 A++ 2008 May-13 $480,000,000 $493.22 973,192 A++ 1998 Apr-13 $48,750,000 $325.75 149,654 A 1981 Feb-13 $232,600,000 $181.75 1,279,759 A+ 1983 Jan-13 $412,000,000 $278.93 1,477,060 A 2008 Dec-12 $35,500,000 $245.57 144,563

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Estim. Stab. EGI Gross Estim. Cap Estim. NOI Cap

• Mkt. Rnt

Occ. PSF Exp. NOI PSF Rate NOI PSF Rate (est.) $19.50 95% $31.41 $14.39 $17.02 7.36% $13.88 $6,902,851 6.00% $19.00 95% $32.49 $14.92 $17.57 7.66% $14.32 $15,326,463 6.24% $23.00 95% $40.42 $16.69 $23.73 6.41% $19.69 $5,957,009 5.32% $17.00 93% $28.66 $12.80 $15.86 8.42% $13.00 $2,621,791 6.90% $19.00 95% $32.49 $14.50 $17.99 6.32% $14.74 $5,429,700 5.18% $13.50 93% $25.11 $11.05 $14.06 7.78% $11.55 $1,166,899 6.39% $12.50 93% $23.83 $10.52 $13.31 5.36% $10.93 $2,255,150 4.40% $17.50 95% $29.93 $13.96 $15.97 5.32% $12.97 $1,989,229 4.32% $29.00 95% $50.97 $20.85 $30.12 6.11% $25.02 $24,349,994 5.07% $19.00 93% $32.21 $13.87 $18.34 5.63% $15.12 $2,262,467 4.64% $17.00 93% $28.82 $12.86 $15.96 8.78% $13.08 $16,734,924 7.19% $19.00 95% $32.49 $15.07 $17.42 6.25% $14.18 $20,937,326 5.08% $17.00 93% $28.82 $12.79 $16.03 6.53% $13.15 $1,900,515 5.35% (Before TI & comm.) (After TI & comm.)

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OFFICE CAP RATE STUDY JANUARY 2014 2012 - 2013 SALES Year Sale Sale PRICE NRA Cls Built Date Price PSF SF A 1982 Dec-12 $68,500,000 $175.07 391,277 A 1984 Dec-12 $124,500,000 $200.59 620,675 A++ 2008 Nov-12 $92,000,000 $335.96 273,846 A 2007 Nov-12 $33,050,000 $189.38 174,521 A 1982 Nov-12 $36,700,000 $162.46 225,895 A 1975 Nov-12 $174,600,000 $166.64 1,047,748 A+ 2007 Nov-12 $154,750,000 $246.02 629,018 A 1962 Sep-12 $131,000,000 $216.48 605,134 A+ 1968 Aug-12 $550,000,000 $306.24 1,795,968 A 2002 Jun-12 $11,450,000 $113.32 101,039 A 1979 Mar-12 $60,000,000 $175.47 341,947 A++ 2001 Mar-12 $340,000,000 $406.13 837,161 A++ 2007 Jan-12 $107,500,000 $312.23 344,298

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Estim. Stab. EGI Gross Estim. Cap Estim. NOI Cap

• Mkt. Rnt

Occ. PSF Exp. NOI PSF Rate NOI PSF Rate (est.) $14.50 93% $25.64 $13.30 $12.34 7.05% $9.77 $3,824,308 5.58% $13.00 93% $23.70 $11.28 $12.42 6.19% $10.05 $6,235,773 5.01% $19.50 95% $34.49 $15.05 $19.44 5.79% $15.99 $4,379,946 4.76% $15.50 93% $28.96 $11.99 $16.97 8.96% $14.07 $2,456,167 7.43% $12.00 93% $22.42 $10.77 $11.65 7.17% $9.41 $2,125,310 5.79% $12.55 93% $21.71 $10.65 $11.06 6.64% $8.89 $9,312,480 5.33% $15.00 93% $25.81 $12.84 $12.97 5.27% $10.39 $6,533,453 4.22% $17.00 93% $28.82 $13.48 $15.34 7.09% $12.46 $7,537,925 5.75% $16.50 93% $28.54 $13.61 $14.93 4.88% $12.08 $21,690,857 3.94% $16.00 93% $26.78 $11.56 $15.22 13.43% $12.55 $1,267,595 11.07% $14.50 93% $25.64 $11.60 $14.04 8.00% $11.47 $3,923,470 6.54% $19.50 95% $33.35 $15.08 $18.27 4.50% $14.93 $12,499,232 3.68% $15.00 95% $27.50 $12.01 $15.49 4.96% $12.74 $4,387,131 4.08% 6.47% 5.33% 6.41% 5.32% MEAN CAP RATE: (Before TI & comm.) (After TI & comm.) MEDIAN CAP RATE:

Median Cap Rate Before TIs & Leasing: 6.47% Median Cap Rate After TIs & Leasing: 5.33%

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Estim. Stab. EGI Gross

• Mkt. Rnt

Occ. PSF Exp. (est.) Max $29.00 $50.97 $20.85 Min $12.00 $21.71 $10.52 Median $17.00 $28.82 $13.08 Mean $17.02 $29.65 $13.37

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Estim. Cap Estim. Cap NOI PSF Rate NOI PSF Rate (Before TI & comm.) (After TI & comm.) Max $30.12 13.43% $25.02 11.07% Min $11.06 4.50% $08.89 3.68% Median $15.91 6.47% $12.99 5.33% Mean $16.29 6.84% $13.32 5.59%

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to make only once.

• Beers Law

Some mistakes are too fun

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I've just found 700 ways that won't work.

• Thomas Edison

I have not failed!

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Tier 1: New/newer; quality construction; prime/good locations; RERC Definitions

RERC

Tier 2: Aging former Tier 1; good/average location; Tier 3: Older properties; functional inadequacies and/or marginal locations;

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RERC

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RERC

Individual Metro Area Analyses – First Tier ONLY

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RERC: Second Tier = Regional

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RERC Third Tier = Regional

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Tax Valuation Dilemma

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Chicken & Egg Dilemma

Potential Gross Income (All Sources) Less: Stabilized Vacancy & Collections Allowance Equals: Effective Gross Income (EGI) Less: Landlord Operating Expenses Equals: Net Operating Income Income = Value Rate Value x Tax Rate = Taxes Value Impacts Taxes Which Impacts Net Income Which Impacts Value PROBLEM INCREASES WITH REIMBURSED TAXES

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Valuation Dilemma Solution: LOAD THE CAP RATE

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Full Load Include Tax Reimbursements in Income Exclude Property Taxes in Operating Expenses Base Overall Cap Rate + Full Property Tax Rate Fully Loaded Cap Rate Owner Load EXCLUDE Tax Reimbursements in Income EXCLUDE Property Taxes in Operating Expenses Base Overall Cap Rate + Owner % of Tax Rate Owner Loaded Cap Rate More on Loading Cap Rates Later

Solution: When Expense = % of Value & Taxes are Reimbursed

Load Cap Rate, But Which Type?

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Will This Dog Hunt?

Proposed: Office Building Net Rentable: 100,000 sf Total Project Cost: $20,000,000 Market Occupancy: 93% Operating: $6.50 /sf excluding mgmt & taxes Market Mgmt: 4% of collected income Capital Reserves: $1.50 /sf Overall Cap Rate: 7.0% Property Tax Rate: 2.75%

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Market Rent: the rental income a property would command in the open market*

Will This Dog Hunt?

* Appraisal of Real Estate (14th Edition, p. 447) ** The Dictionary of Real Estate Appraisal (5th Edition, p. 64) Feasibility Hint: Start at the End and Work Backwards Market Rent versus Economic Rent Economic Rent: the amount of rent necessary to provide an adequate return on development cost**

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Economics of New Construction Gross Rents

After Tax Before Tax SF NRA 100,000 100,000 100,000 Cap Rate After Reserves 7.0000% 7.0000% 7.0000% Tax Rate 2.7500% 2.7500% Loaded Rate 7.0000% 9.7500% Project Cost New $20,000,000 $20,000,000 $20,000,000 Econ NOI After Reserves $1,400,000 $1,950,000 Reserves $1.50 $150,000 $150,000 Economic NOI Before Reserves $1,550,000 $2,100,000

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Economics of New Construction Gross Rents

After Tax Before Tax Economic NOI Before Reserves $1,550,000 $2,100,000 Annual Effective NOI/SF $15.50 $21.00 Stabilized Occupancy 93.00% V&C Adjustment / SF $1.17 $1.58 Tax V&C Adjustment YES $0.41 Economic NNN / SF $17.08 $22.58 Economic NNN Income / Yr $1,708,065 $2,258,065

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Gross Rents

After Tax Before Tax Economic NNN / SF $17.08 $22.58 Economic NNN Income / Yr $1,708,065 $2,258,065 Ad Valorem Taxes / SF / Yr $5.50 $0.00 Economic Taxes / Yr $550,000 $0 Total Opns Before Mgmt, Tx, VC $6.50 Reim Opns Exp / SF / Yr $0.00 $0.00 Non-Reim Exp / SF / Yr $6.50 $6.50 Total Operating / SF Before Taxes Mgmt, V&C $6.50 $6.50 Mgmt Adjustment 4.00% $114,583 $1.15 $1.15 $1.15 Expenses Before V&C Adjustment $7.65 $7.65 Expense V&C Adjustment $0.58 $0.58 Economic Opns Exp / SF $8.22 $8.22 Economic Opns Exp / Yr $822,133 $822,133

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Economics of New Construction Gross Rents

After Tax Before Tax Economic NNN / SF $17.08 $22.58 Economic NNN Income / Yr $1,708,065 $2,258,065 Ad Valorem Taxes / SF / Yr $5.50 $0.00 Economic Taxes / Yr $550,000 $0 Economic Opns Exp / SF $8.22 $8.22 Economic Opns Exp / Yr $822,133 $822,133 Total Economic Rent / SF $30.80 $30.80 Total Economic Rent $3,080,197 $3,080,197

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Valuation Model Gross Rents

After Tax Before Tax Net Rentable Area 100,000 100,000 Economic Rent / SF / Yr $30.80 $30.80 $3,080,197 $3,080,197 Reimbursements - Opns Reimbursements - Tax Gross Potential / Yr $3,080,197 $3,080,197 Less: V&C Allowances 7.00% $215,614 $215,614 Effective Gross Income $2,864,583 $2,864,583

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Valuation Model Gross Rents

After Tax Before Tax Effective Gross Income $2,864,583 $2,864,583 Less: Management $114,583 $114,583 Less: Reimb Opns Exp $0 $0 Less: Non-Reim Opns Exp $650,000 $650,000 Less: Capital Reserves $150,000 $150,000 Less: Ad Valorem Taxes $550,000 $0 Total Operating Exp $1,464,583 $914,583 Net Operating Income $1,400,000 $1,950,000 Cap Rate 7.0000% 9.7500% Value $20,000,000 $20,000,000

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Economics of New Construction NNN Full Load Owner

After Tax Before Tax Before Tax SF NRA 100,000 100,000 100,000 Cap Rate After Reserves 7.0000% 7.0000% 7.0000% Tax Rate 2.7500% 0.1925% Loaded Rate 7.0000% 9.7500% 7.1925% Project Cost New $20,000,000 $20,000,000 $20,000,000 Econ NOI After Reserves $1,400,000 $1,950,000 $1,438,500 Reserves $150,000 $150,000 $150,000 Economic NOI Before Reserves $1,550,000 $2,100,000 $1,588,500

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Economics of New Construction NNN Full Load Owner

After Tax Before Tax Before Tax Economic NOI Before Reserves $1,550,000 $2,100,000 $1,588,500 Annual Effective NOI/SF $15.50 $21.00 $15.89 Stabilized Occupancy V&C Adjustment / SF $1.17 $1.58 $1.20 Tax V&C Adjustment $0.41 Economic NNN / SF $17.08 $22.58 $17.08 Economic NNN Income / Yr $1,708,065 $2,258,065 $1,708,065

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NNN Full Load Owner

After Tax Before Tax Before Tax Economic NNN / SF $17.08 $22.58 $17.08 Economic NNN Income / Yr $1,708,065 $2,258,065 $1,708,065 Ad Valorem Taxes / SF / Yr $5.50 $0.00 $0.00 Economic Taxes / Yr $550,000 $0 $0 Total Opns Before Mgmt, Tx, VC Reim Opns Exp / SF / Yr $6.50 $6.50 $6.50 Non-Reim Exp / SF / Yr $0.00 $0.00 $0.00 Total Operating / SF Before Taxes $6.50 $6.50 $6.50 Mgmt Adjustment $114,583 $1.15 $1.15 $1.15 Expenses Before V&C Adjustmen $7.65 $7.65 $7.65 Expense V&C Adjustment $0.58 $0.58 $0.58 Economic Opns Exp / SF $8.22 $8.22 $8.22 Economic Opns Exp / Yr $822,133 $822,133 $822,133

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Economics of New Construction NNN Full Load Owner

After Tax Before Tax Before Tax Economic NNN / SF $17.08 $22.58 $17.08 Economic NNN Income / Yr $1,708,065 $2,258,065 $1,708,065 Ad Valorem Taxes / SF / Yr $5.50 $0.00 $0.00 Economic Taxes / Yr $550,000 $0 $0 Economic Opns Exp / SF $8.22 $8.22 $8.22 Economic Opns Exp / Yr $822,133 $822,133 $822,133 Total Economic Rent / SF $30.80 $30.80 $25.30 Total Economic Rent $3,080,197 $3,080,197 $2,530,197

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Valuation Model NNN Full Load Owner

After Tax Before Tax Before Tax Net Rentable Area 100,000 100,000 100,000 Economic Rent / SF / Yr $17.08 $17.08 $17.08 $1,708,065 $1,708,065 $1,708,065 Reimbursements - Opns $8.22 $8.22 $8.22 $822,133 $822,133 $822,133 Reimbursements - Tax $5.50 $5.50 $0.00 $550,000 $550,000 $0 Gross Potential / Yr $3,080,197 $3,080,197 $2,530,197 Less: V&C Allowances $215,614 $215,614 $177,114 Effective Gross Income $2,864,583 $2,864,583 $2,353,083

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Valuation Model NNN Full Load Owner

After Tax Before Tax Before Tax Effective Gross Income $2,864,583 $2,864,583 $2,353,083 Less: Management $114,583 $114,583 $114,583 Less: Reimb Opns Exp $650,000 $650,000 $650,000 Less: Non-Reim Opns Exp $0 $0 $0 Less: Capital Reserves $150,000 $150,000 $150,000 Less: Ad Valorem Taxes $550,000 $0 $0 Total Operating Exp $1,464,583 $914,583 $914,583 Net Operating Income $1,400,000 $1,950,000 $1,438,500 Cap Rate 7.0000% 9.7500% 7.1925% Value $20,000,000 $20,000,000 $20,000,000

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Impacts of Erroneous Tax Projections

What IF Taxes No Load Full Load Too High by: Eff Gross None None Expenses Too High None NOI Too Low None Value Too Low None Too Low by: Eff Gross None None Expenses Too Low None NOI Too High None Value Too High None Gross Lease - Taxes NOT Reimb.

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Impacts of Erroneous Tax Projections

What IF Taxes NNN Full Load NNN Owner Load Too High by: Eff Gross Phantom Income None Expenses None None NOI Phantom Income None Value Excess Value None Too Low by: Eff Gross Too Low None Expenses None None NOI Too Low None Value Too Low None NNN Lease / Prop Tax Reimbursed

Remember The Three Bears

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Impacts of Erroneous Tax Projections

What IF Taxes NNN Full Load NNN Owner Load Too High by: $50,000 Eff Gross Phantom Income None Expenses None None NOI Phantom Income None Value Excess Value None Potential Gross Income NNN Full Load NNN Owner Load Potential Rental Income $1,708,065 $1,708,065 Reimbursed Opns NOT in Rent $822,133 $822,133 Reimb Prop Taxes > Base in Rent $550,000 $0 Tax Too High $50,000 $0 Taxes Too Low $0 $0 Potential Primary Income $3,130,197 $2,530,197 Less: Stabilized V&C Allowance 7.00%

• $219,114
• $177,114

Effective Gross Income $2,911,083 $2,353,083 NNN Lease / Prop Tax Reimbursed

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Impacts of Erroneous Tax Projections

What IF Taxes NNN Full Load NNN Owner Load Too High by: $50,000 Eff Gross Phantom Income None Expenses None None NOI Phantom Income None Value Excess Value None Effective Gross Income $2,911,083 $2,353,083 Less: Operating Costs (Excluding Property Taxes) Management $114,583 $114,583 Reim Landlord Opns Exp $650,000 $650,000 Non-Reim Landlord Opns Exp $0 $0 Capital Reserves $150,000 $150,000 Property Taxes $0 $0 Property Tax Over/Under Estimate $0 $0 Total Expenses Excluding Property Taxes $914,583 $914,583 Net Operating Income $1,996,500 $1,438,500 NNN Lease / Prop Tax Reimbursed

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Impacts of Erroneous Tax Projections

What IF Taxes NNN Full Load NNN Owner Load Too High by: $50,000 Eff Gross Phantom Income None Expenses None None NOI Phantom Income None Value Excess Value None Net Operating Income $1,996,500 $1,438,500 Market Base Cap Rate 7.000% 7.000% Tax Contribution to Overall Cap Rate 2.750% 0.193% Overall Capitalization Rate 9.750% 7.193% Market Value at Stabilzed Occupancy $20,476,923 $20,000,000 NNN Lease / Prop Tax Reimbursed

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Impacts of Erroneous Tax Projections

What IF Taxes NNN Full Load NNN Owner Load Too Low by: $50,000 Eff Gross Too Low None Expenses None None NOI Too Low None Value Too Low None Potential Gross Income NNN Full Load NNN Owner Load Potential Rental Income $1,708,065 $1,708,065 Reimbursed Opns NOT in Rent $822,133 $822,133 Reimb Prop Taxes > Base in Rent $550,000 $0 Tax Too High $0 $0 Taxes Too Low

• $50,000

$0 Potential Primary Income $3,030,197 $2,530,197 Less: Stabilized V&C Allowance 7.00%

• $212,114
• $177,114

Effective Gross Income $2,818,083 $2,353,083 NNN Lease / Prop Tax Reimbursed

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Impacts of Erroneous Tax Projections

What IF Taxes NNN Full Load NNN Owner Load Too Low by: $50,000 Eff Gross Too Low None Expenses None None NOI Too Low None Value Too Low None Effective Gross Income $2,818,083 $2,353,083 Less: Operating Costs (Excluding Property Taxes) Management $114,583 $114,583 Reim Landlord Opns Exp $650,000 $650,000 Non-Reim Landlord Opns Exp $0 $0 Capital Reserves $150,000 $150,000 Property Taxes $0 $0 Property Tax Over/Under Estimate $0 $0 Total Expenses Excluding Property Taxes $914,583 $914,583 Net Operating Income $1,903,500 $1,438,500 NNN Lease / Prop Tax Reimbursed

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Owner Load = Baby Bear; Always Just Right!!!

Impacts of Erroneous Tax Projections

What IF Taxes NNN Full Load NNN Owner Load Too Low by: $50,000 Eff Gross Too Low None Expenses None None NOI Too Low None Value Too Low None Net Operating Income $1,903,500 $1,438,500 Market Base Cap Rate 7.000% 7.000% Tax Contribution to Overall Cap Rate 2.750% 0.193% Overall Capitalization Rate 9.750% 7.193% Market Value at Stabilzed Occupancy $19,523,077 $20,000,000 NNN Lease / Prop Tax Reimbursed

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IF You Use Full Load with Reimbursed Taxes

CORRECT 1 Were reimbursements separated between Opns and Taxes? YES Operating Reimbursements $764,583 Operating Costs $764,583 Indicated Tax Reimbursements $550,000 2 Were operating reimbursements adjusted for V&C Allowance? YES 3 Was tax reimbursement income adjusted for V&C Allowance? YES 4 Did operating reimbursements exceed operating expenses? NO 5 BiDirectional Conformity Stabilized Value Indication $20,000,000 Tax Rate $0.027500 Calculated Taxes $550,000 Tax Reimbursements $550,000 CONFORMS

Checks on Evaluation Uniformity & Reliability

that it has been accomplished.

• George Bernard Shaw

The greatest problem in communication is the illusion

81

Value is

• a. Fact
• b. Concept
• c. All of the Above
• d. None of the Above
• b. Concept

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Full Load Include Tax Reimbursements in Income Exclude Property Taxes in Operating Expenses Base Overall Cap Rate + Full Property Tax Rate Fully Loaded Cap Rate Owner Load EXCLUDE Tax Reimbursements in Income EXCLUDE Property Taxes in Operating Expenses Base Overall Cap Rate + Owner % of Tax Rate Owner Loaded Cap Rate

Solution: When Expense = % of Value & Taxes are Reimbursed

Methods of Loading Cap Rates

IF using Full Load, verify UP & DOWN the Ladder Equal

Tax Consulting is 90% process. The rest???

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It’s the Value, stupid!

85

delivered in the presence

• f a witness.
• Margaret Miller

Most conversations are simply monologues

86

Prepare for Questions

87

88

Questions & Random Thoughts

89

that we don’t learn from lessons learned.

• T. Block

What we learn from lessons learned is

90

• - especially about the future.
• Yogi Berra

Prediction is difficult

91

You got to be careful if you don't know where you're going because you might not get there.

• Yogi Berra

92

what you are going to do.

• Henry Ford

You can't build a reputation on

93

Plans are only good intentions unless they immediately degenerate into hard work.

• Peter Drucker

94

When you come to a fork in the road, take it.

• Yogi Berra

95

The more time you spend reporting on what you are doing, the less time you have to do anything. Stability is achieved when you spend all your time doing nothing but reporting

• n the nothing you are doing.
• Cohn's Law

96

to make only once.

• Beers Law

Some mistakes are too fun

97

It’s the Value, stupid!