real estate investment & finance/ development of th … estate investment & finance/...
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Real Estate Investment & Finance/
Development of Net Income
During the SessionType "?" 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
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Introduction
Introduction to Real Estate & Finance/ Development of Net Income
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Real Estate Investment
Cost
Sales Comparison
Income Approach
Three Approaches to
Determining Value
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Real Estate Investment
Cost
Sales Comparison
Income Approach
Current Value is the Present
Worth of Future Benefits
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Income Approach
Based on ……………………………….
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Real Estate Investment
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Real Estate Investment
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Real Estate Investment
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Type "?" for question; "&" to go back slide; "#" to see the math
Factors to be considered by an Investor
Factors
Safety Size of Investment Liquidity
Use as Collateral
TimeLeverageIncome Tax Advantage
Appreciation
Management
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Type "?" for question; "&" to go back slide; "#" to see the math
Factors
Factors
Safety Size of Investment Liquidity
Use as Collateral
TimeLeverageIncome Tax Advantage
Appreciation
Management
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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
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Type "?" for question; "&" to go back slide; "#" to see the math
Factors
Factors
Safety Size of Investment Liquidity
Use as Collateral
TimeLeverageIncome Tax Advantage
Appreciation
Management
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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
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Type "?" for question; "&" to go back slide; "#" to see the math
Factors
Factors
Safety Size of Investment Liquidity
Use as Collateral
TimeLeverageIncome Tax Advantage
Appreciation
Management
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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…….
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Type "?" for question; "&" to go back slide; "#" to see the math
Factors
Factors
Safety Size of Investment Liquidity
Use as Collateral
TimeLeverageIncome Tax Advantage
Appreciation
Management
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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).
Type "?" for question; "&" to go back slide; "#" to see the math
Pawn shops could be an example of “Collateral” as well
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Type "?" for question; "&" to go back slide; "#" to see the math
Factors
Factors
Safety Size of Investment Liquidity
Use as Collateral
TimeLeverageIncome Tax Advantage
Appreciation
Management
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Time
Some investors prefer long-term investments, others prefer relatively short-term investments. Real estate is usually a long-term investment……
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Type "?" for question; "&" to go back slide; "#" to see the math
Factors
Factors
Safety Size of Investment Liquidity
Use as Collateral
TimeLeverageIncome Tax Advantage
Appreciation
Management
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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.
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Type "?" for question; "&" to go back slide; "#" to see the math
Factors
Factors
Safety Size of Investment Liquidity
Use as Collateral
TimeLeverageIncome Tax Advantage
Appreciation
Management
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Tax Advantages
Return on a savings accountis taxed directly. However, reale s t a t e p r o v i d e s a t a xadvantage to some, throughd e d u c t i o n s f o r b u i l d i n gd e p r e c i a t i o n , m o r t g a g einterest, and lower taxes onlong-term capital gains…..
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Type "?" for question; "&" to go back slide; "#" to see the math
Factors
Factors
Safety Size of Investment Liquidity
Use as Collateral
TimeLeverageIncome Tax Advantage
Appreciation
Management
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Appreciation
Real estate typically appreciates in value over the period of ownership.
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Type "?" for question; "&" to go back slide; "#" to see the math
Factors
Factors
Safety Size of Investment Liquidity
Use as Collateral
TimeLeverageIncome Tax Advantage
Appreciation
Management
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Management
Real Estate investment property requires
management. Either by the investor or paid for by the investor. Includes time
and money.
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Factors
Factors
Safety Size of Investment Liquidity
Use as Collateral
TimeLeverageIncome Tax Advantage
Appreciation
Management
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Mortgages
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Types of Mortgages
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• 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
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Mortgages
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• Allows the borrower to obtain additional $$
Open End
• Covers Real Estate Plus Personal Property
Package Mortgage
• Covers Personal Property
Chattel Mortgage
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Mortgages – Repayment
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Mortgages – Repayment
Straight Mortgage
Short Term (3 years)
Monthly or quarterly interest payments
Balloon payment (balance due at end)
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Mortgages – Repayment
Amortized
Reduction of principle plus interest on declining balance
Level, constant payments
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Mortgages – Repayment
Partially Amortized
Some Reduction of principle plus interest on declining balance
Monthly or quarterly paymentsBalloon payment at the end
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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
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Sources of Financing
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Commercial Banks
Long-term and short-term Commercial lending
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Mutual Savings Banks
Generally lend money on FHA
insured mortgages,
similar to commercial banks
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Life Insurance Companies
Generally lend on large developments.
Multifamily and commercial properties.
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Retirement Funds
Generally lend on large developments
and commercial properties considered
low-risk.
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Familiar Financing Terms
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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
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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
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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
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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
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Financing – Who Cares?
Seller and Lender are the same partyAnalyze the loan terms compared to the market
Buyer assumes seller’s mortgageSales price may be influenced, compare to market
Seller pays pointsSales price must be reduced by amount of points paid as compared to market
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Survey Monkey?
https://www.surveymonkey.com/r/WZCMKSV
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Income Approach
Based on ……………………………….
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Suggestion to become familiar with your calculator
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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 value52
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Estimate Potential Gross IncomePGI
Type "?" for question; "&" to go back slide; "#" to see the math
Market or Economic
Contract
Leasehold Rent
Overage
Minimum
Excess
Rents
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Estimate Potential Gross IncomePGI
Type "?" for question; "&" to go back slide; "#" to see the math
Market or Economic
Contract
Leasehold Rent
Overage
Minimum
Excess
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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 IncomePGI
Type "?" for question; "&" to go back slide; "#" to see the math
Market or Economic
Contract
Leasehold Rent
Overage
Minimum
Excess
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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
Type "?" for question; "&" to go back slide; "#" to see the math
Do I need to know what Reimbursements are?
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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 LeaseLandlord is responsible for paying some operating expenses associated with a property.
Tenant is responsible for paying some operating expenses associated with a property
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NNN
Landlord Pays
• $0Tenant Pays
• Property Insurance
• Utilities• Maintenance &
Repair• Property Taxes
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FSG
Tenant Pays
• $0Landlord 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
Type "?" for question; "&" to go back slide; "#" to see the math
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
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 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 = PGICalculate 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
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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
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Problem -NNN
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 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 - ?
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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
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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
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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
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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
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Market or Economic
Contract
Leasehold Rent
Overage
Minimum
Excess
Rents
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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
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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
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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
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Type "?" for question; "&" to go back slide; "#" to see the math
“The knotty problem of Capital Hill….Finding a way to raise taxes without losing a single vote” – Dr Seuss
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Type "?" for question; "&" to go back slide; "#" to see the math
What is the effective annual rent for the following lease:1. Contract rent/year: $20/SF2. 5 months free rent; earned one month
per year over 4 yearsA. $18.33B. $18.98C. $19.10D. $19.23
Problem 1
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What is the effective annual rent for the following lease:1. Contract rent/year: $20/SF2. 5 months free rent; earned one month
per year over 4 yearsA. $18.33
$20/SF less free rent (1/12 x $20) = $18.33
Problem 1
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1/12 x $20 = $1.67
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Income Approach
Type "?" for question; "&" to go back slide; "#" to see the math
Deduct for vacancy and collection Loss
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Type "?" for question; "&" to go back slide; "#" to see the math
What is appropriate total vacancy and collection loss deduction if:1. Contract rent/year: $20/SF2. Net Rentable Area is 42,000 SF3. Market indicates 8% vacancy and collection
loss for similar properties.A. $67,200B. $84,000C. $42,000D. $62,700
Problem 2
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Type "?" for question; "&" to go back slide; "#" to see the math
What is appropriate total vacancy and collection loss deduction if:1. Contract rent/year: $20/SF2. Net Rentable Area is 42,000 SF3. 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
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Income Approach
Type "?" for question; "&" to go back slide; "#" to see the math
Add Other Income
- Expense Reimbursements- Parking Income- Laundry Income (multifamily)- Miscellaneous Income- Pet Income- Forfeited Deposits- Garages
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Type "?" for question; "&" to go back slide; "#" to see the math
Calculate the additional other income for a 40-unit apartment complex based on the last three years financial statements:1. Last Year: $50/unit/year2. 1 Year Ago: $45/unit/year3. 2 Years Ago: $42/unit/year
A. $2,000B. $1,800C. $1,680D. $2,200
(Hint: Based on increasing trend, use most current)
Problem 3
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Type "?" for question; "&" to go back slide; "#" to see the math
Calculate the additional other income for a 40-unit apartment complex based on the last three years financial statements:1. Last Year: $50/unit/year2. 1 Year Ago: $45/unit/year3. 2 Years Ago: $42/unit/year
A. $2,000
$50/unit/year x 40 units = $2,000
Problem 3
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Income Approach
Effective Gross Income (EGI)
Potential Gross Income (PGI)Less
Vacancy & Collection LossPlus
Other IncomeEquals
Effective Gross Income (EGI)
Discussion - Why do we not make a Vacancy & Collection Loss deduction from Other Income?
When would it be appropriate?
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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
$125,0002. Other income (Parking) is $13,0003. Market Vacancy and Collection Loss is
8%A. $126,960B. $128,000C. $129,690D. $182,000
Problem 4
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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
$125,0002. Other income (Parking) is $13,0003. 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
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Income ApproachDetermine Operating Expenses
Management
Insurance
Maintenance and Repair
Legal and Accounting
Wages, Salaries, Employee Benefits
Landscaping
Advertising
Utilities
Replacement Reserves
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Depreciation
Mortgage Interest
Franchise Fees
Personal Business Expenses (Owner)
Capital Improvements
Major Roof Repairs
Exterior Painting
Parking Lot Resurfacing
New Flooring
Income ApproachDetermine Operating Expenses
Discussion: Wait?! What about taxes?
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Typical Income/Expense Statement
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101
Typical Income/Expense Statements
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102
Typical Income/Expense Statements
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103
Typical Income/Expense Statements
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104
Typical Income/Expense Statements
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Typical Income/Expense Statements
Type "?" for question; "&" to go back slide; "#" to see the math 105
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Reconstruction of an Income Statement
Type "?" for question; "&" to go back slide; "#" to see the math
Expense Item Use as Stated Pro‐Rate EliminateA Management FeeB RepairsC MiscellaneousD UtilitiesE Interest on mortgageF Principal on mortgageG New roofH Insurance fire (3‐year policy)I Insurance Liability (1‐year policy)J janitor's SalaryK Painting ExteriorL Purchase of 4 new refrigeratorsM Purchase of 2 new range/ovensN SuppliesO Corporate income taxesP Red Cross donationQ Carpet replacement (6 units)R Redecorate 7 apartment unitsS Real Estate TaxesT Employee's Health Policy (1‐year)
106
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Reconstruction of an Income Statement
Expense ItemUse as Stated
(A)Pro‐Rate
(B)Eliminate
(C)A Management FeeB RepairsC MiscellaneousD UtilitiesE Interest on mortgageF Principal on mortgageG New roofH Insurance fire (3‐year policy)I Insurance Liability (1‐year policy)J janitor's SalaryK Painting ExteriorL Purchase of 4 new refrigeratorsM Purchase of 2 new range/ovensN SuppliesO Corporate income taxesP Red Cross donationQ Carpet replacement (6 units)R Redecorate 7 apartment unitsS Real Estate TaxesT Employee's Health Policy (1‐year)
107
Type A, B, C in chat
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Expenses – Comments/ Questions
Type "?" for question; "&" to go back slide; "#" to see the math 108
What about Replacement Reserves ?
Questionable Expenses?
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I R V
Type "?" for question; "&" to go back slide; "#" to see the math 109
Income (NOI) = Rate X ValueI=RxVR=I/VV=I/R
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I R V
Type "?" for question; "&" to go back slide; "#" to see the math 110
Income (NOI) = Rate X ValueI=R x VR=I/VV=I/R
NOI = $500,000, Rate = 11%What is the Value?
V=I/R$500,000/.11$4,545,455
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I R V
Type "?" for question; "&" to go back slide; "#" to see the math 111
Income (NOI) = Rate X ValueI=R x VR=I/VV=I/R
Rate = 11%Value = $4,545,455What is the NOI?
I = R x V.11 x $4,545,455$500,000
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I R V
Type "?" for question; "&" to go back slide; "#" to see the math 112
Income (NOI) = Rate X ValueI=R x VR=I/VV=I/R
Value = $4,545,455NOI = $500,000What is the Rate?
R = I/VR= $500,000 / $4,545,455.11 or 11%
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I R V
Type "?" for question; "&" to go back slide; "#" to see the math 113
Income (NOI) = Rate X ValueI=R x VR=I/VV=I/R
Value = $9,500,000NOI = $850,000What is the Rate?
R = I/VR= $850,000 / $9,500,000.089 or 9% (rounded)
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I R V
Type "?" for question; "&" to go back slide; "#" to see the math 114
Income (NOI) = Rate X ValueI=R x VR=I/VV=I/R
Value = ?NOI = $850,000Rate = 12%
V=I/RV= $850,000 / .12$7,083,333
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I R V
Type "?" for question; "&" to go back slide; "#" to see the math 115
Income (NOI) = Rate X ValueI=R x VR=I/VV=I/R
Value = 13,400,000NOI = $850,000Rate = ?
R=I/VR= $850,000 / $13,400,0000.063 or 6.3%
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I R V
Type "?" for question; "&" to go back slide; "#" to see the math 116
Income (NOI) = Rate X ValueI=R x VR=I/VV=I/R
Value = 5,600,000NOI = ?Rate = 12%
I=R x VV= .12 x $5,600,000$672,000
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Type "?" for question; "&" to go back slide; "#" to see the math
Based on the following, calculate the operating expenses:1. Gross Potential Income from rents is $125,0002. Other income (Parking) is $13,0003. 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 replacement6. 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 year8. Reserves for replacement are typically 2.5% of EGI
Problem 5
117
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Type "?" for question; "&" to go back slide; "#" to see the math
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 = $4,480Maintenance & Repair: $20,000 (roof was capital expense)Utilities: $5,000 (water leak was unusual expense)Salaries: $20,000Replacement Reserves: 2.5% x $128,000 = $3,200
Problem 5
118
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Income Approach
Type "?" for question; "&" to go back slide; "#" to see the math
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
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Income Approach
Type "?" for question; "&" to go back slide; "#" to see the math
Net Operating Income (NOI)
Less Total Expenses : $52,680EGI: $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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Type "?" for question; "&" to go back slide; "#" to see the math
What is the net operating income given the following:1. Potential gross rent is $40,0002. Vacancy & collection loss is 10%3. Expense reimbursement charges are $4,000 based on a
pro-rata share of certain operating expenses4. Property management fee is 10% of EGI5. Other non-reimbursable fixed expenses are $16,000
A. $19,316B. $19,640C. $20,050D. Cannot be determined without knowing variable expenses.
Problem 6
121
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Type "?" for question; "&" to go back slide; "#" to see the math
Potential Gross Income $40,000Plus Expense reimbursement @100% occupancy $4,000Total Gross Income $44,000Less Vacancy & Collection Loss (10% x subtotal above) ($4,400)Effective Gross Income $39,600Less Expenses
Property Management (10% of EGI) ($3,960)Remaining Expenses ($16,000)
Net Operating Income $19,640
B. $19,640
Problem 6
?
122
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Income Approach
Type "?" for question; "&" to go back slide; "#" to see the math
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?
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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 tenantSale 2: 8.0%; property was 20% vacant at time of saleSale 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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Type "?" for question; "&" to go back slide; "#" to see the math
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
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Income Approach
Type "?" for question; "&" to go back slide; "#" to see the math
Capitalize the NOI into an estimated value
Three properties have the following NOIs:
Property A: $75,360Property B: $95,650Property 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
126
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Survey Monkey?
Type "?" for question; "&" to go back slide; "#" to see the math
https://www.surveymonkey.com/r/8DCL3YF
127
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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 = $4,942,542Rounded to: $4,900,000
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Type "?" for question; "&" to go back slide; "#" to see the math 129
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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.
Type "?" for question; "&" to go back slide; "#" to see the math
Leverage
130
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Matching
The tenant is required to pay all or part of the operating expenses associated with the
real estate.
Type "?" for question; "&" to go back slide; "#" to see the math
Net Lease
131
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Matching
Reflects the relationship between the real estate taxes and the value of the property.
Type "?" for question; "&" to go back slide; "#" to see the math
Effective Tax Rate (ETR)
132
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Matching
Includes only the floor area occupied by the tenant.
Type "?" for question; "&" to go back slide; "#" to see the math
Net Leasable Area (NLA) or Net Rentable Area (NRA)
133
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Matching
Obtained after determining the potential income for the property.
Type "?" for question; "&" to go back slide; "#" to see the math
Effective Gross Income (EGI)
134
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Matching
Market Rent, Contract Rent, Excess Rent, Percentage Rent, Effective Rent, Leasehold
Rent.
Type "?" for question; "&" to go back slide; "#" to see the math
Types of Rents
135
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Matching
Value is created by the expectation of benefits to be derived in the future.
Type "?" for question; "&" to go back slide; "#" to see the math
Anticipation
136
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Matching
Most common type of financing for Real Estate.
Type "?" for question; "&" to go back slide; "#" to see the math
Mortgage
137
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Matching
A contract will calls for a fixed minimum base rent and a variable rent
Type "?" for question; "&" to go back slide; "#" to see the math
Percentage % Lease
138
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Matching
Parking Fees, vending machines, coin-operated laundries
Type "?" for question; "&" to go back slide; "#" to see the math
Miscellaneous Income
139
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Survey Monkey?
Type "?" for question; "&" to go back slide; "#" to see the math
https://www.surveymonkey.com/r/7R9FHT8
140
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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)
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SM #6
What is the indicated value of the subject property if the NOI is $135,850 and the overall 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
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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
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SM #8
What is a property's NOI if it sold for $375,000 with an overall capitalization rate of 11.5%?
Type "?" for question; "&" to go back slide; "#" to see the math 144
I=R x V
.115 x $375,000 = $43,125
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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 expensesEGI = NOI/.55EGI = $429,930/.55 = $781,691
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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%?
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EGI was $781,691PGI – Vacancy = EGIPGI – (8% x PGI) = EGIPGI – (8% x PGI) = $781,69192% x PGI = $781,691PGI = $781,691/.92 = $849,664 (PGI)