the income approach
DESCRIPTION
Chapter 13. THE INCOME APPROACH. CHAPTER TERMS AND CONCEPTS. Income property Intangible benefit Lease term Market rent Minimum or base rent Net income ratio Net operating income Operating expense ratio Operating expenses Operating statement Overage rent Percentage lease. Amenities - PowerPoint PPT PresentationTRANSCRIPT
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THE INCOME APPROACH
Chapter 13
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CHAPTER TERMS AND CONCEPTS
AmenitiesCapital recoveryCapitalizationCapitalization rateContract rentCPI leaseDirect capitalizationEffective gross incomeExcess rentFixed expensesGross incomeGross income multiplier (GIM)
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Income propertyIntangible benefitLease termMarket rentMinimum or base rentNet income ratioNet operating incomeOperating expense ratioOperating expensesOperating statementOverage rentPercentage lease
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CHAPTER TERMS AND CONCEPTS
Potential gross incomePresent worth of future benefitsRecaptureRent rollReserves for replacementsReturn of investmentReturn on investmentStep-up (or “graduated”) leaseStraight (or “flat”) leaseTangible benefitVariable expenses
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LEARNING OUTCOMES
1. Distinguish between the tangible and intangible benefits of property ownership.
2. Name the six steps in the income approach to value.
3. Explain the use of gross income multipliers in the income approach.
4. Define the terms contract rent and market rent as used in appraisals.
5. Name the three main categories of expenses and give examples of items in each.
6. Outline the procedure used for reconstructing the owner’s operating statement.
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Types of Income Property
1. Multiple-family residential, including large and small apartment buildings.
2. Commercial buildings, including stores, offices, medical offices, convalescent hospitals, hotel and motel properties, and shopping centers.
3. Industrial properties, such as warehouses and factories.
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MOTIVES AND BENEFITS OF PROPERTY OWNERSHIP
Intangible Benefits Pride of ownership Sense of security Personal opportunityTangible Benefits Return on investment Return of investment
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CHARLEY’S SAVING ACCOUNT
How Much is in Charley’s Savings Account?
Amount on Deposit? $216 $600 $360 $6,000
We give 6% Hi Charley! Here’s your $36 annual check!
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Capitalization
• the process of converting an income estimate into a value estimate.
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IRV FOR VALUE
The Value Formula
Key Horizontal line indicates division Vertical line indicates multiplicationFormulas Value = I/R Rate = I/V Income = R X V
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BASIC STEPS: INCOME APPROACH
• Estimate the Annual Gross Income• Estimate Vacancy and Other Losses• Subtract to Get Effective Gross Income• Subtract Operating Expenses to Get Net
Operating Income• Arrive at a “Cap” Rate and Method• Divide Net Operating Income by
Capitalization Rate
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Analysis of GIM
Gross % Net Cap Income Expenses Income Rate Price GIM
$30,000 40.00% $18,000 6% $300,000 10
$30,000 50.00% $15,000 6% $250,000 8.3
$30,000 60.00% $12,000 6% $200,000 6.7
Gross Income MultipliersGIM = Price ÷ Gross Income Price Gross Income GIM $300,000 $30,000 10.0 $250,000 $30,000 8.3 $200,000 $30,000 6.7
Effect of Expense Ratios
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Analysis of GIM
GIM Varies with: Location Intangible Amenities Number of Units Expense Ratio Size of Units Services Included
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MARKET RENT
Market Rent Defined Potential gross rent Assumes no encumbrances Assumes efficient management Measures all the property rights
o Overage Rento Excess Rent
Responsibility for Expenseso Landlordo Tenanto Shared
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Contract Rent
• rent being paid under some form of contract that is binding on both owners and tenants. Such rental agreements range from simple oral contracts to complex leases that are beyond the scope of this book.
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Types of tenancieso Month to Montho Short-term Leaseo Long-term Lease
Common Lease Typeso Straighto Step Upo Percentage o Combinations
CONTRACT VS. MARKET RENT
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OPERATING EXPENSES
What to Include: Include Property-Related Expenseso Current Operating Expenseso Projected Expenditureso The Value of Owners Efforts
Exclude Owner-Related Expenses, such as:o Loan and Interest Paymentso Income Taxeso Depreciation
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OPERATING EXPENSES CATEGORIES
Operating Expense Categories Variable Expenses Fixed Expenses Reserves for Replacement
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INCOME AND EXPENSE RATIOS
Income and Expense Ratios The Net Income Ratio = NOI ÷ EGI The Operating Expense Ratio = Operating Expenses ÷ EGI
o NOI = Net Operating Incomeo EGI = Effective Gross Income
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An Owner’s Operating Statement
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A Reconstructed Operating Statement
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SUMMARY
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An overview of the income approach as it applies to various types of residential income, commercial, and industrial properties was also included. The income approach can either analyze the income year-by-year, or by emphasizing one year. Income property appraisals require an estimate of income and expenses for the property. A knowledge of typical expense ratios assists in the reconstruction of operating expense statements.