1. © 2007. Barry D. Yatt. All rights reserved. 1 Takoma Park Dog Lounge What’s it Worth: Assessing Return

2. © 2007. Barry D. Yatt. All rights reserved. 2 Brief Background

3. © 2007. Barry D. Yatt. All rights reserved. 3 Value Value is the relationship between: Return: How much good one derives from something Cost: How much time, effort, and/or money one must invest to get the benefit To properly assess value, one must look both at benefit and cost. Cost estimating assesses only half of the issues involved in determining value. One must also assess return. What does this mean? That… When costs decrease, return tends to decrease as well. Costs can be increased so long as return experiences a corresponding increase.

4. © 2007. Barry D. Yatt. All rights reserved. 4 Where am I? I know: The intended property: Lots 1- 6 at 7000 Carroll Ave, Takoma Park, MD, totaling 29,359 SF. The zoning district: C-1 The maximum height allowed by zoning. 30’, but for a pitched roof it’s measured halfway between eave and ridge, with a maximum of up to 45’. 30’ will only fit 2 stories, 45 will take 3. The required setbacks allowed by zoning: 0’ along Carroll Ave and adjacent to the commercial properties. 8’ adjacent to Lot 7. Several tentative zoning envelope diagram alternatives with the biggest scheme being about 5,500 SF of office over about 5,500 SF of retail, with the existing 10,346 SF building remaining, and a total of about 43 parking spaces occupying about 11k SF. At this point, no basement is anticipated. So far, so good. What kind of return could it generate? Project Recap

5. © 2007. Barry D. Yatt. All rights reserved. 5 Return

6. © 2007. Barry D. Yatt. All rights reserved. 6 Return A project’s value is mostly a function of how much return it will generate. Functional return is difficult to quantify, and will largely be set by the principal. But financial return is measured by the revenues it will generate, which are based on use, size, and location. Use: As currently considered, the project will mix office space rented to a tenant with retail space used by the owners. Size: According to our zoning envelope diagram, the biggest scheme is about 5,500 SF of office over about 5,500 SF of retail, with the existing 10,346 SF building remaining, and a total of about 43 parking spaces occupying about 11k SF. At this point, no basement is anticipated. Location: Old Town Takoma Park, where space is worth… how much? I’ll ask a commercial real estate broker for comparables.

7. © 2007. Barry D. Yatt. All rights reserved. 7 Return The broker* generated this report using CoStar ®, a database common in the business. I note the similarity of the building shown, which is almost directly across the street from the project… …and how much it’s renting for. * Information provided by Grubb & Ellis.

8. © 2007. Barry D. Yatt. All rights reserved. 8 Return So now I have numbers. I’ll run the calculations (first option only): Office space: 5,500 SF x ($22/SF/year) = $121,000 Retail space : 5,500 SF x ($22/SF/year) = $121,000 Parking spaces: 43 x ($50/month) = $24,600 Total Income = $266,600 But I also must consider vacancy rates and expenses. Total income isn’t as important to know as net income, the amount left after expenses are paid. The broker advises me that expenses and real estate taxes for a full-service lease agreement run about $10/SF/year. As for vacancy, I can assume that the retail space will be 100% occupied (since the owner will occupy it), but perhaps retail will be only 80%, and parking may be 75%. So…

9. © 2007. Barry D. Yatt. All rights reserved. 9 Return: NOI Revised calculations (first option only): Office space: 5,500 SF x ($22/SF/year - $10/SF/year costs) x 80% = $52,800 Retail space : 5,500 SF x ($22/SF/year - $10/SF/year costs) x 100% = $66,000 Parking spaces: (41 x ($50/month*12) x 75%) - (11k SF x $0.50/SF/year) = $12,950 Total NOI (Net Operating Income) = $131,750 Obviously, other combinations of program and area will change NOI. Several alternatives should be generated and compared. Perhaps the Therriers won’t be paying themselves rent on their space or the parking they use, but they need to act as is they are, to insure that their business is viable. Besides, they may choose to operate the real estate operation as a separate business from their dog care business. And banks will want to see unambiguous calculations.

10. © 2007. Barry D. Yatt. All rights reserved. 10 Return: Value NOI ÷ Cap (Capitalization) Rate for specific project type and market = market value. Experienced developers and mortgage lenders can tell us what the cap rate would be for this project. They suggest 7%. So… $131,750 ÷ 7% = $1,882,143 If our project would have a value of $1.8 million (total including land and improvements), I’ll need to find out if it can be acquired and built within that amount. But I’ll also check that a bank will be willing to finance it at this cost.

11. © 2007. Barry D. Yatt. All rights reserved. 11 Return: Leverage The client’s lender will probably use DSCR (Debt Service Coverage Ratio) to determine the maximum P&I payments to which they will likely agree, based on predicted NOI. In my current proposal, NOI is $131,750. I’ll say, for now, that DSCR will be around 1.1 (it’s often between 1.0 and 1.3). Therefore… $131,750 NOI ÷ 1.1 DSCR = $119,773 maximum P&I This works out to $9,981 per month

12. © 2007. Barry D. Yatt. All rights reserved. 12 Return: Leverage I can use the $9,981 figure to determine the maximum available loan by checking loan tables like the one at http://www.mortgage-x.com/calculators/amortization.htm.http://www.mortgage-x.com/calculators/amortization.htm

13. © 2007. Barry D. Yatt. All rights reserved. 13 Return: Leverage The loan table software indicates, after a bit of trial and error, that paying P&I of $9,979 per month for 30 years at 7.00% would equate to a total loan of $1,500,000. But banks generally don’t loan 100% of the project’s value. They prefer at least 20% as a down payment. So… …if the $1.5M loan is 80% of the total investment, 20% remains for a down payment. In summary: $1.5M ÷ 80% = $1,875,000 total worth a bank will finance. $1,500,000 would be loaned, and the remaining $375,000 would be the required down payment.

14. © 2007. Barry D. Yatt. All rights reserved. 14 Return: Leverage So long as the total initial project costs can be held to $1,875,000, the bank will lend the money. A few minutes ago I noted that the NOI and Cap Rate determined a maximum worth target for land and improvements of $1,882,143. Since I know that the land and improvements are currently assessed as worth $1,225,000, any further improvements will need to be kept under… …$1,882,143 - $1,225,000, or $657,143. Clearly, the loan ceiling of $1,875,000 will not be an issue. Later, through cost assessment, I’ll see if the building the Therrier’s want to be built can be built for under $657,143 total.

15. © 2007. Barry D. Yatt. All rights reserved. 15 Results And as always, all proposals need to be communicated to the clients for their consideration and response. When I have a few minutes, I’ll write a memo to them.