1. Chapter 12: Sales Comparison Approach

2. The Sales Comparison Approach is Useful When:  An active market exists  Comparable sale are highly similar to the subject property  Data can be readily verified  Local market conditions are not changing rapidly  Regional or national economic factors are not changing

3. Sources of Comparable Data  Primary sources  Buyers and sellers  Brokers  Public records  Professional data companies  Multiple listing services  Appraisers

4. Sources of Comparable Data  Should be reported using same units of comparison  Units of comparison used should be those considered important by the typical investor  Use market areas considered comparable by the typical investor in that market

5. Identification of Units of Comparison: Physical Units  Price per square foot of gross building area  Difficult to use if the comparable or subject represent different ownership interests  Differences in location and physical characteristics should be adjusted  Price per square foot of net building area  Better to use if building efficiency ratios are not similar  Price per unit  Price per seat  Price per door  Price per boat slip  Price per parking space  Price per hole  Price per lane  Price per lot or pad

6. Identification of Units of Comparison: Income Units  Potential gross income multiplier  Difficult to use if the comparable is rented under different terms than the subject property  Difficult to use if the comparable or subject represents a leased fee interest  Difficult to use if efficiency ratios are not in a reasonable range  Effective gross income multiplier  Difficult to use if the comparable is rented under different terms than the subject property  Difficult to use if the comparable or subject represents a different ownership interest  Can be used if efficiency ratios are not in a reasonable range

7. Identification of Units of Comparison: Income Units  Gross rent multiplier  Used primarily for residential properties  Net income multiplier  Difficult to use if the comparable or subject represents a different ownership interest

8. Identification of Units of Comparison  Factors should be based on the same units for comparable and subject property  Differences in factors may be caused by  Differences in ownership interests  Non-cash equivalent sales prices  Excess land  Possible differences in lease terms, market condition and expense treatment in leases  Differences in occupancy levels

9. Elements of Comparison  Ownership interest  Fee simple  Leased fee  Non-market financing  Conditions of sale  Market Conditions  Locational attributes  Access to transportation patterns  Neighborhood land use pattern  Existence of public utilities and facilities  Existence or lack of support facilities

10. Elements of Comparison  Physical characteristics  Appearance and design  Effective age  Construction type and quality  Condition  Size and finished area  Floor height/ceiling height  Equipment  Amenities  Site improvements  Economic characteristics  Operating expenses  Management  Lease terms and concessions  Tenant mix

11. Elements of Comparison  Use  Existing versus highest and best use  Intended use  Nonrealty components of value  Business value  Personalty

12. The Adjustment Process  Percentage adjustment  Locational  Physical  Dollar adjustment  Ownership interests  Cash equivalency  Functional and economic obsolescence adjustments  Qualitative analysis  Statistical analysis

13. Sales Comparison Approach Example  Subject Property:  Gross building area=24,000 sqft  Net building area=20,000 sqft  Market rent/sqft net=$15.00  Market expenses/sqft=$4.10  Market vacancy=6%  Age of building=new  Effective date of Appraisal: January 1, 2003

14. Comparable Office Building Sales Property Number123 Date of saleMay-02Oct-01Dec-02 Age1 year4 years3 years Sales price2,675,0004,200,0001,650,000 Property rights purchasedFee simple Leased fee Site area74,300 sqft84,000 sqft35,000 sqft Gross building area26,500 sqft46,200 sqft22,300 sqft Net building area22,200 sqft40,150 sqft18,300 sqft Potential gross income$344,000$592,000$227,000 Vacancy/credit loss5%6%0% Effective gross income326,800556,500227,000 Operating expenses99,000172,50072,000 Net operating income227,800384,000155,000 Loan amount$2,000,000$2,750,000$1,400,000 Interest rate9.75%8.75%9.50% Property 1 contains 28,000 sqft or $200,000 of excess land. The market interest rate was 9.75% at date of sale for property 2.

15. Comparable Office Building Sales  All three sales have locations similar to the subject.  Comparables 1 and 2 have materials of better quality than the subject.  Comparable 3 has materials of lower quality than the subject.

16. Ratio Extraction – No Adjustments Property Number123 Price/sqft gross area$100.94$90.91$73.99 Price/sqft net area$120.50$104.61$95.63 Building efficiency ratio83.8%86.9%82.1% PGIM7.787.097.27 EGIM8.197.557.27 Expense ratio30.30%31%31.70% Expense/sqft gross area$3.75$3.73$3.23 Overall rate0.0850.0910.094 Rent/sqft gross area$12.98$12.81$10.18 Rent/sqft net area$15.50$14.75$12.40 Floor area ratio41.2%55.0%63.7%

17. Sales Price Adjustment Chart Property Number123 Sales price$2,675,000$4,200,000$1,650,000 Property rights appraised00200,000 Excess land adjustment-200,00000 Financing adjustment0-215,0000 Adjusted price (Fee simple)$2,475,000$3,985,000$1,850,000 Potential gross income$344,000$592,000$265,350 Vacancy5%6% Effective gross income$326,800$556,500$249,429 Operating expenses$99,000$172,500$78,000 Net operating income$227,800$384,000$171,429 Property 3 receives adjustments for market equivalency of property rights and PGI and income based on the market.

18. Ratio Extraction – After Adjustment Property Number123 Price/sqft gross area$93.40$86.26$82.96 Price/sqft net area$111.49$99.25$101.09 Building efficiency ratio83.8%86.9%82.1% PGIM7.196.736.97 EGIM7.577.167.42 Expense ratio30.3%31.0%31.3% Expense/sqft gross area$3.75$3.73$3.50 Overall rate0.0920.0960.093 Rent/sqft gross area$12.98$12.81$11.08 Rent/sqft net area$15.50$14.75$13.50 Floor area ratio57.2%55.0%63.7%

19. Adjustment Grid – Making the Comparable Properties Look More Like the Subject Property Property Number123 Price/sqft gross area$93.40$86.26$82.96 Market conditions1.873.450 Adjusted price/sqft$95.27$89.71$82.96 Location000 Age1%4%3% Size02%0 Quality-5% 5% Condition000 Total Adjustment-4%1%8% Price/sqft$91.46$90.61$89.60

20. Range of Value Indicators for Subject Before Adjustments Range% Difference PGIM7.09-7.789.7% EGIM7.27-8.1912.6% Overall cap rate8.5%-9.4%10.5% Price/sqft of gross building area$73.99-$100.9436.4%

21. Range of Value Indicators for Subject After Adjustments Range% Difference PGIM6.73-7.196.8% EGIM7.16-7.575.7% Overall cap rate9.2%-9.6%4.3% Price/sqft of gross building area$89.60-$90.611.2%

22. Pro forma for the subject property Potential gross income$300,000 Vacancy and credit loss (6%)-$18,000 Effective gross income$282,000 Operating expenses-$82,000 Net operating income$200,000

23. Valuation using PGIM  PGIM=7.0  Value of subject=$300,000 x 7.0 = $2,100,000

24. Valuation using EGIM  EGIM=7.5  Value of subject = $282,000 x 7.5 = $2,115,000

25. Valuation using cap rate  Cap rate = 9.4%  Value of subject = $200,000 /.094 = $2,127,660

26. Valuation using price per square foot  Price per square foot = $90/sqft  Value of subject = 24,000 sqft x $90/sqft = $2,160,000

27. Summary of Subject Value Estimates Method UsedValue Indication PGIM$2,100,000 EGIM$2,115,000 Overall cap rate$2,127,660 Price per sqft gross building area$2,160,000