Income and Expense Analysis

Income and Expense Analysis When converting periodic income into a lump-sum value estimate, you can estimate value from: 1. PGI using a PGI multiplier 2. EGI using an EGI multiplier 3. NOI using a capitalization rate 4. Equity income using an equity capitalization rate and adding back the mortgage value 5. Analysis of income estimates for several years using a DCF model Chapter 22

Estimating and Adjusting Market Rent Lessee and lessor are typically motivated Both parties are well-informed A reasonable time is allowed for exposure The rent is in terms of cash in US dollars The rental amount represents normal consideration for the property leased, unaffected by special fees Chapter 22

Income and Expense Data Rent Rent concessions Division of expenses Renewal options Expense stop and expense cap clauses Escalation clauses Expense recovery clauses Purchase options Escape, kick-out, cotenancy, and buyout clauses Continued occupancy clauses Tenant improvements Noncompete, dark store, and exclusive use clauses Chapter 22

Lease Data Date of lease Description of the leased premises Lease terms, rental rate, and payment Tenant-installed trade fixtures Revaluation clauses Signage Chapter 22

Developing Reconstructed Operating Statements Estimating PGI From comparable leases From the current subject property leases From the subject’s history Estimating vacancy and collection loss From comparable properties Chapter 22

Lease Comparison Grid Chapter 22

Developing Reconstructed Operating Statements, continued Estimating operating expenses From comparable properties From subject’s history Estimating reserves for replacement using contractors’ estimates Estimating tenant improvement expenses Chapter 22

Developing Reconstructed Operating Statements, continued Calculating net operating income Additional calculations Estimating mortgage debt service Estimating equity income Estimating expense and income ratios Chapter 22

Review Exercise 1. Suggested Solution Chapter 22

Review Exercise 2. Suggested Solution Chapter 22