Chapter 14
Income Estimation And Analysis

Gross income

u   Expected vs actual

u   Previously operating property

u   Newly placed in service (or proposed)

u   Contract vs market rentals

Lease analysis

Lease concessions

u   Free rent

u   Tenant improvements

u   Restrictive clauses

u   Renewal and escape options

Lease types

u   Flat rate

u   Step-up or graduated

u   Index

u   Percentage or participation

u   Reappraisal or revaluation

Gross Income Multiplier

u    Types of properties

u   Small

u   Plain-Jim(Jane)

u    Assumptions and limitations

u   Income realization motive for market

u   Market uses multiplier or derivative

u   Neighborhood and community standards of comparability

u   Neighborhood in stable phase of life cycle

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

u    Mechanics of GIM analysis

Gross Income Multiplier Example

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

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

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

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

u   Market analysis indicates that the expected annual gross income is $19,000.  What is the expected sales price?

u   $19,000 x 8.3 = $157,700

Net operating income

u   Identifying operating income and expenses

u  Income

u  Business related income

u  Ancillary income

u  Expenses

u  Specific to operation of property

u  Recurring costs

u  Property tax

u   Inclusion of additional value-related income and expenses

Forecasting Income and Expenses

u   Absorption Period

u   Examine likely changes in the competition

u   Projection of expenses related to occupancy

u   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

u   Anticipated not actual

u   Based upon “average” (stabilized) Income and Expenses

Income Analysis

u   Quantity

u   Quality

u   Duration

Operating Expenses

u   Typical not necessarily actual

u   Utilities

u   Taxes

u   Insurance

u   Maintenance

u   Reserves

u   Management

u   Refurbishing

Reconstructed Operating Statement Problem

u    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)

u     Gross collections                                     $48,960

u     Expenses:

u    Utilities                             2,400

u    Real estate taxes   2,530

u    Garbage collection            1,200

u    Supplies                               400

u    Mortgage interest            17,052

u    Property insurance            1,250

u    Maintenance                    3,157

u    Depreciation                     7,620

u    Lawn service                    1,200

u    Janitorial               2,400

u     Total expenses                     39,209       (39,209)

u     Net income before taxes                           $9,751

The Reconstructed Operating Statement for Real Estate Analysis:

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

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

u      Effective Gross Income                                           $49,215

u      Less Expenses:

u      Management                           $3,199 = 6.5%*49,215

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

u      Utilities                                      2,400

u      Real estate taxes                       2,530

u      Garbage collection                   1,200

u      Supplies                                       400

u      Property insurance                   1,250

u      Maintenance                             3,157

u      Lawn service                             1,200

u      Janitorial                                  2,400

u      Total expenses                        19,705                     (19,705)

u      Net Operating Income (NOI)                                   $29,510