Chapter 14
INCOME ESTIMATION AND ANALYSIS

Gross income

*   Expected vs actual

*   Previously operating property

*   Newly placed in service (or proposed)

*   Contract vs market rentals

Lease analysis

Lease concessions

*   Free rent

*   Tenant improvements

*   Restrictive clauses

*   Renewal and escape options

Lease types

*   Flat rate

*   Step-up or graduated

*   Index

*   Percentage or participation

*   Reappraisal or revaluation

Gross Income Multiplier

*   Types of properties

*   Small

*   Plain-Jim(Jane)

*   Assumptions and limitations

*   Income realization motive for market

*   Market uses multiplier or derivative

*   Neighborhood and community standards of comparability

*   Neighborhood in stable phase of life cycle

*   On single-family homes, income motivation is dominate over owner-occupied motive

*   Mechanics of GIM analysis

Gross Income Multiplier Example

*   An inspection of comparable sales indicated the following gross rents and sales prices:

*   Sale 1:GI= $18,000; S/P= $149,400; GRM=8.3

*   Sale 2:GI= $16,500; S/P = $138,600; GRM=8.4

*   Sale 3:GI= $19,500; S/P = $159,900; GRM=8.2

*   Market analysis indicates that the expected annual gross income is $18,500. What is the expected sales price?

*   $19,000 x 8.3 = $157,700

Net operating income

*   Identifying operating income and expenses

*   Income

*   Business related income

*   Ancillary income

*   Expenses

*   Specific to operation of property

*   Recurring costs

*   Property tax

*   Inclusion of additional value-related income and expenses

Forecasting Income and Expenses

*   Absorption Period

*   Examine likely changes in the competition

*   Projection of expenses related to occupancy

*   Examination of expense areas for likely future changes in prices (For example, computerization is reducing some prices, an oil embargo would increase some prices.)

Reconstruction of Operating Statement

*   Anticipated not actual

*   Based upon "average" (stabilized) Income and Expenses

Income Analysis

*   Quantity

*   Quality

*   Duration

Operating Expenses

*   Typical not necessarily actual

*   Utilities

*   Taxes

*   Insurance

*   Maintenance

*   Reserves

*   Management

*   Refurbishing

Reconstructed Operating Statement Problem

*   The following slide is the seller-owner's operating statement for an apartment being offered for sale, priced at the market value of $253,000. The complex contains 10 two-bedroom apartments which will rent for their fair market value of $425 per month. The I. M. Tuff property management company agrees to manage the complex for the prospective buyers at the prevailing market rate of 6.5% of the adjusted gross rental. The prevailing market vacancy and collection losses rate for this size of complex in the market is 3.5% of the gross potential income. Examination of comparable properties indicate that a reserve for replacements of 4% of adjusted gross was appropriate.

Owner's Operating Statement
(From owner's tax accountant)

*   Gross collections                    $48,960

*   Expenses:

*   Utilities                                  2,400

*   Real estate taxes                  2,530

*   Garbage collection    1,200

*   Supplies                                 400

*   Mortgage interest    17,052

*   Property insurance 1,250

*   Maintenance 3,157

*   Depreciation              7,620

*   Lawn service 1,200

*   Janitorial                    2,400

*   Total expenses          39,209 (39,209)

*   Net income before taxes                 $9,751

The Reconstructed Operating Statement for Real Estate Analysis:

*   Gross potential income                                            $51,000 = $425*10*12

*   Less vacancy & collection                             (1,785) = 3.5%*51,000

*   Effective Gross Income                                          $49,215

*   Less Expenses:

*   Management $3,199 = 6.5%*49,215

*   Replacements Reserve                    1,969 = 4%*49,215

*   Utilities                                  2,400

*   Real estate taxes                  2,530

*   Garbage collection               1,200

*   Supplies                                 400

*   Property insurance             1,250

*   Maintenance             3,157

*   Lawn service             1,200

*   Janitorial                                2,400

*   Total expenses                      19,705                      (19,705)

*   Net Operating Income (NOI)                                $29,510