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

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

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