Potential Gross Income (PGI)

Real Estate Investment & Finance/ September 7th Development of 2017 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 Introduction

Introduction to Real Estate & Finance/ Development of Net Income

2 Real Estate Investment

Three Approaches to Cost Determining Value Sales Comparison Income Approach

3 Real Estate Investment

Cost

Current Value is the Present Sales Worth of Future Benefits Comparison Income Approach

4 Income Approach

Based on ……………………………….

5 Real Estate Investment

6 Real Estate Investment

7 Real Estate Investment

8 Factors to be considered by an Investor

Safety Size of Investment Liquidity Management

Use as Appreciation Factors Collateral

Income Tax Advantage Leverage Time

Type "?" for question; "&" to go back slide; "#" to see the math 9 Factors

Safety Size of Investment Liquidity Management

Use as Appreciation Factors Collateral

Income Tax Advantage Leverage Time

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

Safety Size of Investment Liquidity Management

Use as Appreciation Factors Collateral

Income Tax Advantage Leverage Time

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

Safety Size of Investment Liquidity Management

Use as Appreciation Factors Collateral

Income Tax Advantage Leverage Time

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

Safety Size of Investment Liquidity Management

Use as Appreciation Factors Collateral

Income Tax Advantage Leverage Time

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

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

Type "?" for question; "&" to go back slide; "#" to see the math 17 Factors

Safety Size of Investment Liquidity Management

Use as Appreciation Factors Collateral

Income Tax Advantage Leverage Time

Type "?" for question; "&" to go back slide; "#" to see the math 18 Time

Some investors prefer long-term investments, others prefer relatively short-term investments. Real estate is usually a long-term investment……

19 Factors

Safety Size of Investment Liquidity Management

Use as Appreciation Factors Collateral

Income Tax Advantage Leverage Time

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

Safety Size of Investment Liquidity Management

Use as Appreciation Factors Collateral

Income Tax Advantage Leverage Time

Type "?" for question; "&" to go back slide; "#" to see the math 22 Tax Advantages

Return on a savings account is taxed directly. However, real estate provides a tax advantage to some, through deductions for building depreciation, mortgage interest, and lower taxes on long-term capital gains…..

23 Factors

Safety Size of Investment Liquidity Management

Use as Appreciation Factors Collateral

Income Tax Advantage Leverage Time

Type "?" for question; "&" to go back slide; "#" to see the math 24 Appreciation

Real estate typically appreciates in value over the period of ownership.

25 Factors

Safety Size of Investment Liquidity Management

Use as Appreciation Factors Collateral

Income Tax Advantage Leverage Time

Type "?" for question; "&" to go back slide; "#" to see the math 26 Management

Real Estate investment property requires management. Either by the investor or paid for by the investor. Includes time and money.

27 Factors

Safety Size of Investment Liquidity Management

Use as Appreciation Factors Collateral

Income Tax Advantage Leverage Time

28 Mortgages

29 Types of Mortgages

First Mortgage

• First claim on real estate securing the loan

Jr Mortgage

•2nd Mortgage, usually higher interest rate

Construction Loan

• Short-Term for financing new construction

Purchase – Money

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

30 Mortgages

Open End

• Allows the borrower to obtain additional $$

Package Mortgage

• Covers Real Estate Plus Personal Property

Chattel Mortgage

• Covers Personal Property

31 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 on 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

Type "?" for question; "&" to go back slide; "#" to see the math 46 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

Market or Economic

Excess Contract Rents

Leasehold Minimum Rent

Overage

Type "?" for question; "&" to go back slide; "#" to see the math 53 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 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.

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 • Utilities Maintenance & • Property Repair Insurance • Property Taxes • 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.

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.

Calculate the Effective Gross Income –

PGI less Vacancy = EGI Type "?" for $189,000 - $22,500 $166,500 question; "&" to 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.

($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.

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.

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 Rents

Market or Economic

Excess Contract

Leasehold Minimum Rent

Overage

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.

Type "?" for question; "&" to go back slide; "#" to see the math 76 Rents

Market or Economic

Excess Contract

Leasehold Minimum Rent

Overage

77 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 Rents

Market or Economic

Excess Contract

Leasehold Minimum Rent

Overage

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”

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

$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

$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 Typical Income/Expense Statement

100 Typical Income/Expense Statements

10 1 Typical Income/Expense Statements

102 Typical Income/Expense Statements

10 3 Typical Income/Expense Statements

10 4 Typical Income/Expense Statements

Type "?" for question; "&" to go back slide; "#" to see the math 105 Reconstruction of an Income Statement

Expense Item Use as Stated Pro‐Rate Eliminate A Management Fee BRepairs C Miscellaneous D Utilities E Interest on mortgage FPrincipal on mortgage GNew roof H Insurance fire (3‐year policy) I Insurance Liability (1‐year policy) Jjanitor's Salary K Painting Exterior LPurchase of 4 new refrigerators MPurchase of 2 new range/ovens N Supplies OCorporate income taxes PRed Cross donation QCarpet replacement (6 units) R Redecorate 7 apartment units SReal Estate Taxes T Employee's Health Policy (1‐year)

Type "?" for question; "&" to go back slide; "#" to see the math 106 Reconstruction of an Income Statement

Use as Stated Pro‐Rate Eliminate Expense Item (A) (B) (C) A Management Fee Type BRepairs A, B, C C Miscellaneous D Utilities in chat E Interest on mortgage FPrincipal on mortgage GNew roof H Insurance fire (3‐year policy) I Insurance Liability (1‐year policy) Jjanitor's Salary K Painting Exterior LPurchase of 4 new refrigerators MPurchase of 2 new range/ovens N Supplies OCorporate income taxes PRed Cross donation QCarpet replacement (6 units) R Redecorate 7 apartment units SReal Estate Taxes T Employee's Health Policy (1‐year) 107 Expenses – Comments/ Questions

What about Replacement Reserves ?

Questionable Expenses?

Type "?" for question; "&" to go back slide; "#" to see the math 10 8 I R V

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

Type "?" for question; "&" to go back slide; "#" to see the math 10 9 I R V

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

Type "?" for question; "&" to go back slide; "#" to see the math 11 0 I R V

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

Type "?" for question; "&" to go back slide; "#" to see the math 111 I R V

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%

Type "?" for question; "&" to go back slide; "#" to see the math 11 2 I R V

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)

Type "?" for question; "&" to go back slide; "#" to see the math 11 3 I R V

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

Type "?" for question; "&" to go back slide; "#" to see the math 11 4 I R V

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%

Type "?" for question; "&" to go back slide; "#" to see the math 11 5 I R V

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

Type "?" for question; "&" to go back slide; "#" to see the math 11 6 Problem 5

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

Type "?" for question; "&" to go back slide; "#" to see the math 117 Problem 5

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

Type "?" for question; "&" to go back slide; "#" to see the math 118 Income Approach

Deduct Operating Expenses from EGI

$4,480 + $20,000 + $5,000 + $20,000 + $3,200 =

Total Expenses : $52,680

And the NOI is what?

Type "?" for question; "&" to go back slide; "#" to see the math 119 Income Approach

Net Operating Income (NOI)

EGI: $128,000 Less Total Expenses : $52,680 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 11.0% the capitalization rate?

NOI/Sale$ $75,320/$685,000=.11 or 11.0%

Type "?" for question; "&" to go back slide; "#" to see the math 120 Problem 6

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.

Type "?" for question; "&" to go back slide; "#" to see the math 121 Problem 6

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

Type "?" for question; "&" to go back slide; "#" to see the math 122 Income Approach

Select Appropriate Capitalization Rate Overall Capitalization Rate OAR

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

Just be consistent Type "?" for question; "&" to go back slide; "#" to see the math 123 Problem 7

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%

124 Problem 7

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.

Type "?" for question; "&" to go back slide; "#" to see the math 125 Income Approach

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 on the three properties?

$1,004,800 to $1,798,100

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

Type "?" for question; "&" to go back slide; "#" to see the math 126 Survey Monkey?

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

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

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 128 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.

Leverage

Type "?" for question; "&" to go back slide; "#" to see the math 130 Matching

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

Net Lease

Type "?" for question; "&" to go back slide; "#" to see the math 131 Matching

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

Effective Tax Rate (ETR)

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Includes only the floor area occupied by the tenant.

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

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Obtained after determining the potential income for the property.

Effective Gross Income (EGI)

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

Types of Rents

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

Anticipation

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Most common type of financing for Real Estate.

Mortgage

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

Percentage % Lease

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Parking Fees, vending machines, coin- operated laundries

Miscellaneous Income

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

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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). $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)

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What is the indicated value of the subject property if the NOI is $135,850 and the overall capitalization rate is 11%?

V=I/R

$135,850/.11 = $1,235,000

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

R=I/V

$475,750/$4,325,000 = .11

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What is a property's NOI if it sold for $375,000 with an overall capitalization rate of 11.5%?

I=R x V

.115 x $375,000 = $43,125

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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? 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

145 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%? 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)

146