DISCUSIÓN DE RESULTADOS
6.1. Contrastación de hipótesis con los resultados
As you may recall from the introduction to this course, the income approach consists of a series of steps to determine net operating income and in turn capitalizing the NOI into value using IRV. Below is a summary outline of the income approach.
Outline of the Income Approach
Potential Gross Income (PGI) Less Vacancy and Collection Loss Plus Miscellaneous/ Other Income Equals Effective Gross Income (EGI)
Less Operating Expenses Equals Net Operating Income (NOI)
Less Annual Debt Service (ADS) Equals Cash Flow (CF)
The proper income amount is then treated by the capitalization process for conversion into a value estimate.
Potential Gross Income
The first step in the income approach is to estimate the potential gross rental income the subject property can command. Potential gross income is the total rental income that the property can generate at 100% occupancy before deductions for vacancy loss and operating expenses. Typically, we express potential gross rental income on an annual basis.
potential gross income (PGI) - The total income attributable to real property at
full occupancy before vacancy and operating expenses are deducted.
For assessment purposes, we are concerned with estimating the market rent for the subject property. The following is a list of potential sources to identify market rent for a property.
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Sources of Market Rent
Historical and current performance of the subject property Interviews with landlords, tenants, leasing agents or brokers
Rent surveys performed by appraisers, planning agencies, other parties Requests for rental information mailed to property owners
Published rental surveys "Apartment Guides", "Office Rental Survey." Newspaper or magazine articles
Property websites, broker websites or online listing data When evaluating a lease, carefully review the following areas:
Rent: From all sources including base rent, percentage rent or escalation clauses.
Concessions: Is there free rent, above market tenant improvements or other incentives at this property.
Expense
Responsibilities: Who pays the expenses for heat, utilities or maintaining the property?
Lease Term/
Renewal options: Is the lease month-to-month, short term (5 years or less) or long term (10 years or more)? Can the term be extended through renewal options? Are their purchase options or cancellation provisions within the lease?
The analysis of potential gross rental income begins with examination of the rent schedule of the subject property. An inspection of existing leases and interviews with management and tenants is important to verify the accuracy of current rent schedules. A review of several past years rent history is helpful in estimating trends or patterns in the income stream. Once obtained, the rental data can be reduced to common units of measurement called units of comparison for purposes of analyses.
units of comparison - The components into which a property may be divided
for purposes of comparison, e.g., price per square foot, front foot, cubic foot, room, bed, seat, apartment unit. These units usually facilitate analysis even when the properties are not very comparable.
The following list contains units of comparison for some common property types.
Apartments Rent per month
Rent per room
Rent per SF/net leasable area/month
Office Buildings Rent per SF
Rent per office suite
Retail Rent per SF
Industrial Rent per SF
Rent per cubic foot
Rent per door/warehouses Rent per dock/truck terminals Special Use Restaurants/dollars per seat
Theaters/dollars per seat
Parking garage/rent per car space Hotels/rent per room
Mobile home parks/rent per pad or site
Example: Units of Comparison 8-1
A 24 unit apartment project has 16 one bedroom apartments containing (4 rooms and 700 SF each) with current monthly rents of $700 and 8 two bedroom apartments (5 rooms and 850 SF each) with current monthly rents of $800. What are the rent per room and the rent per SF per month for each type of unit?
1 Bedroom $700/month $175/room per month
4 rooms
2 Bedroom $800/month ______/room per month
5 rooms
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1 Bedroom $700/month ______/SF per month
700 SF
2 Bedroom $800/month ______/SF per month
850 SF
In this example, the rent per SF is the unit of comparison.
A 12,000 square foot strip center has two 2,000 SF bays which lease for $1,375 per month and five 1,600 SF bays which lease for $1,200 per month. What is the rent per SF for each type of unit?
$1,375 x 12 mos. = $16,500 = $______/SF for the 2,000 SF units
2,000 SF
$1,200 x 12 mos. = $14,400 = $_____/SF for the 1,600 SF units 1,600 SF
In this example the $/SF is the unit of comparison.
A 25,000 SF industrial building leases for $7,500 per month or $90,000 annually. What is the rent per SF?
$90,000 = ______/SF
25,000 SF In this example the $/SF is the unit of comparison.
Rents from comparable properties provide the information necessary to estimate market rent for the subject property. The appraiser gathers information on rental properties which compete in the same market. It may be necessary to apply market based adjustments to the comparable rentals to account for differences between them and the subject property.
Developing Units of Comparison
When using the square foot unit of comparison for office buildings, shopping centers and retail properties, the appraiser should use care in developing rent comparisons. Some leases refer to rentable area also known as gross leasable area (GLA), while other leases are negotiated on the basis of usable area also called net leasable area (NLA).
rentable area or gross leasable area - is the actual space occupied by the
tenant plus a pro rata percentage of common area. This additional area is obtained by applying the appropriate load factor.
load factor - A measure of the relationship of common area to usable area and
therefore the quality and efficiency of building area layout, with higher load factors indicating a higher percentage of common area to overall rentable space than lower load factors; calculated by subtracting the amount of usable area from the rentable area and then dividing the difference by the usable area: Load Factor = (Rentable Area – Usable Area)/Usable Area. Also known as add-on
factor.
usable area or net leasable area - is the space actually occupied by the
tenant.
The rentable area or gross leasable area of a building includes all common areas, such as halls, restrooms, and entryways. The rentable area does not include elevators, stairwells and shafts penetrating the floors of a building. A tenant's GLA and rent includes its pro rata share of these common areas.
The usable includes only the actual floor area occupied by the tenant. Another term used to describe this measurement is net leasable area (NLA).
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Below is a floor plan of a one-story office building containing 4,800 SF. This exhibit demonstrates the proper method to develop rentable and usable SF units of comparison. The common areas are shaded. Eight units measure 16’ x 25’ containing 400 SF each and one unit measures 16’x20’ containing 320 SF.
Rentable or Gross Leasable Area
Example: The building contains 4,800 SF of rentable area and is leased on a rentable basis of $12.00 per SF per year. Calculate the annual rental income generated by this property.
Number of SF (Rentable Area): 4,800
Annual Rent per SF x $12.00
Usable or Net Leaseable Area
The offices in the same building are leased to 9 separate tenants at a rate of $16.37 per usable SF per year. Calculate the annual rental income generated by this property.
Number of SF (Usable Area) 3,520 SF
Annual Rent per SF x $16.37/SF
Annual Rental Income $57,622
With usable SF as the rental basis, only the actual area leased to the tenant is used to develop the annual rent. If the usable area rent of $16.37 per SF is multiplied by the rentable building area, the incorrect indicated potential income of $78,576 would result. This is a significant error in the value estimate if utilized in the capitalization process. Consistent methodology must be used when developing the rent per SF unit of comparison. For clarity it is necessary that all rents be expressed in terms of either rentable (gross leasable area) or usable (net leasable area).
Example: Estimating Market Rent 8-2
You have the assignment to appraise a suburban office building. The purpose of the appraisal is to estimate market value of the property. The subject is a two story building containing 6,500 square feet of rentable area per floor. Current lease rates at the subject and comparables are based on rentable area. The subject rent includes janitorial services with the individual tenants paying utility charges. You have surveyed rental rates from several competitive buildings. Based on this data, what is the subject’s market rent per SF?
Rental Number 1 is a 12,000 SF office building in an inferior location to the subject.
Current lease rates are $11.50 per SF including utilities and janitorial service.
Rental Number 2 is a 14,800 SF two story office building in an inferior location. Current
lease rates in this building are $10.00 per SF and include janitorial service. Tenants pay utility charges.
Rental Number 3 is a 10,500 SF office building in a similar location to the subject
property. This building includes neither utilities nor janitorial service in the rental rate. Current rents are $9.70 per SF.
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Rental Number 4 is a 12,000 SF office building in an inferior location to the subject
property. Rental rates are $9.20 per SF. The tenants pay for both utilities and janitorial service.
What adjustments derived from the market are appropriate for the differences between the comparable rentals and the subject property? Major differences appear to be janitorial service, utility charges and location.
Identifying Adjustment Amounts
An adjustment for janitorial service can be derived by comparing properties 2 and 4. Both properties have a similar location to one another (though inferior to the subject) and both do not include utility charges in their rental rates. The difference between these properties is that rental number 2 includes janitorial service and rental number 4 does not. Otherwise the properties are nearly identical. The difference in rental rates is $.80 per SF ($10.00 - $9.20). Based on this comparison, the adjustment for janitorial service is reasonably supported at $.80 per SF. This comparison is an example of paired data analysis.
paired data analysis - A quantitative technique used to identify and measure
adjustments to the sale prices or rents of comparable properties; to apply this technique, sales or rental data on nearly identical properties is analyzed to isolate and estimate a single characteristic’s effect on value or rent.
An adjustment for utility charges can be estimated from comparing rental numbers 1 and 2. Both properties are inferior in location to the subject property. Rental 1 at $11.50 per SF includes both utility charges and janitorial service. Rental 2 at $10.00 per SF includes janitorial service but not utilities. By comparing these two properties the adjustment of $1.50 per SF ($11.50 - $10.00) can be attributed to utility charges.
An adjustment for location can be estimated from comparison of rental numbers 3 and 4. Rental number 4 has an inferior location to rental number 3 and the subject property. Both properties have the tenant responsible for janitorial and utility charges. Comparing the difference between rent comparable #3 and #4 ($9.70/SF - $9.20/SF = $0.50/SF) identifies the amount of a location adjustment.
The grid which follows summarizes the adjustments applied to the comparable rental properties. What is the indicated rent per SF for the subject property?
Subject Rent #1 Rent #2 Rent #3 Rent #4
Rent ? $11.50/SF $10.00/SF $9.70/SF $9.20/SF Location Suburban Inferior Inferior Similar Inferior
Location Adj.
+$0.50/SF +$0.50/SF $0.00/SF + $0.50/SF
Janitorial Yes Yes Yes No No
Janitor Adj. $0.00/SF $0.00/SF +$0.80/SF +$0.80/SF Utilities No Yes No No No Utilities Adj. -$1.50/SF $0.00/SF $0.00/SF $0.00/SF Total Adj. -$1.00/SF +$0.50/SF +$0.80/SF +$1.30/SF Indicated Rent $10.50/SF $10.50/SF $10.50/SF $10.50/SF
Example: Developing Potential Gross Income 8-3
Your assignment is to appraise a newer strip retail center. The center has 22,500 SF of usable area with tenant spaces ranging from 1,800 to 4,500 SF. There are 2 corner spaces with 3,600 SF each, an interior anchor space with 4,500 SF and 6 smaller tenant bays with 1,800 SF each.
Your research of the local strip center market indicates rents are based on usable area and are typically on a total net rent basis with differences according to size and corner visibility. Market rents are $11.00/SF per year for smaller spaces under 2,000 SF, $10.00/SF for spaces up to 5,000 SF and $11.50/SF for corner spaces.
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Develop a projected rent schedule and an estimate of potential gross income for the subject property. What is the indicated average rent per SF for the subject property? The first step is to calculate the rent per unit per year and then multiply this by the number of spaces for each unit style. The table below summarizes the data.
Unit Size
Rent $/SF
Rent/Unit
Bays
Annual Income
1,800 x
$11.00 =
$19,800 x
6 =
$118,800
4,500 x
$10.00 =
$45,000 x
1 =
$45,000
3,600 x
$11.50 =
$41,400 x
2 =
$82,800
$246,600
Unit Size
Spaces
Total SF
1,800 x
6
=
10,800
4,500 x
1
=
4,500
3,600 x
2
=
7,200
22,500
The potential gross income for this property is $246,600. The average rent per SF is $246,600 / 22,500 SF = $10.96/SF
Example: Estimating Market Rent 8-4
You have been retained by a local bank to appraise a 60 unit apartment project. Your inspection of the subject property indicates there are five 12 unit apartment buildings with 8 one bedroom and 4 two bedroom apartments in each building. The one bedroom apartments contain 650 SF and the two bedroom apartments contain 780 SF. Each apartment unit contains appliances. Heating is provided by the landlord as part of the monthly rent. There are no carports but there is a swimming pool at the property.
To assist you in estimating the market rent of the subject property you have gathered information on four other apartment properties. Each of these properties is located in the subject property neighborhood and considered direct competition.
Rental number 1 contains 72 apartment units in four buildings. There are 36 one
bedroom apartments containing 650 SF and 36 two bedroom apartments with 785 SF. The one bedroom apartments currently lease for $575 per month while the two bedroom apartments lease for $665 per month. Each apartment unit has appliances similar to the subject property. Heating costs are the responsibility of the tenant in addition to the monthly rent. There are carports available; however, the landlord charges an additional $25 per month for that amenity. A swimming pool is available for the resident's use.
Rental number 2 contains 48 apartment units in three buildings. There are 36 one
bedroom and 12 two bedroom apartments. The one bedroom apartments contain 640 SF and lease for $599 per month. The two bedroom apartments contain 770 square feet and lease for $700 per month. All appliances similar to the subject property are included in each apartment unit. Heating is furnished by the landlord. There are no carports but the property does have a swimming pool.
Rental number 3 contains 80 apartment units in five buildings. There are 60 one
bedroom apartments and 20 two bedroom apartments. The one bedroom apartments contain 660 SF and currently lease for $625 per month. The two bedroom apartments contain 790 SF and lease for $725 per month. The monthly rent includes heat and a carport. All appliances similar to the subject property are included in the apartment unit. The property has a swimming pool on the site for tenant use.
Rental number 4 is a 60 unit apartment project in five buildings. There are 36 one
bedroom apartments containing 650 SF and 24 two bedroom apartments containing 780 SF. The one bedroom apartments currently lease for $600 per month and the two bedroom apartments lease for $690 per month. The monthly rent includes the use of a carport but the tenant is responsible for paying the heating bill. All appliances similar to the subject property are included in the apartment unit. A swimming pool is located on the site for use of the apartment residents.
From the information presented complete the grids on the following pages which illustrate the features of these rental properties compared to the subject property.
What units of comparison can be utilized for these properties?
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What adjustments should be considered when comparing these properties to the subject property?
What dollar amounts would you estimate for these adjustments?
Based on these four rental properties what would you estimate the market rent to be for the subject property one bedroom and two bedroom apartments?
What is the potential gross income for this property?
1 Bedroom Grid
Subject Rent #1 Rent #2 Rent #3 Rent #4
Monthly Rent
?
$575
$625
Unit Size
650
650
640
650
Heat Included
Yes
Yes
Yes
No
Carports
No
No*
Yes
Pool
Yes
Yes
Yes
Yes
2 Bedroom Grid
Subject Rent #1 Rent #2 Rent #3 Rent #4
Monthly Rent
?
$665
$725
Unit Size
780
770
780
Heat Included
Yes
Yes
No
Carports
No
No*
Yes
Pool
Yes
Yes
Yes
Yes
Rent / SF
?
.85
.88
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What units of comparison can be utilized for these properties? Rent $ per apartment per month
Rent $ per SF per month
What is the range of rent per month for both one and two bedroom apartments? 1 BR Range $575 to $625 per month
2 BR Range $665 to $725 per month
What adjustments should be considered when comparing these properties to the subject property?
Heating Expense and Carports
No need to adjust for pools because all are similar
What dollar amounts would you estimate for these adjustments?
The carport adjustment is easy. Comparable #1 charges a $25/month premium for the use of a carport. This is good market support for the amount of a carport adjustment.
To isolate the amount of heat adjustment we have to look for candidates for paired data analysis. For a heat adjustment, comparables #1 and #3 can be used after an interim step of adding the value of the carport to comparable #1. For the one bedroom units the difference due to heat is $25/month or about 4 cents per SF per month. For the two bedroom units the amount is $35/month and also about 4 cents per SF per month. This is shown on the next page. One could also have compared comparable 3 and 4 to extract the adjustment.
1 Bedroom Heat Adjustment
1 BR Units
Rent #1 Rent #3
Monthly Rent
$575
$625
Add Carport
$25
0
Monthly Rent
$600
$625
Unit Style
1 BR
1 BR
Unit Size
650
660
Heat Included
No
Yes
Pool
Yes
Yes
2 Bedroom Heat Adjustment
2 BR Units
Rent #1 Rent #3
Monthly Rent
$665
$725
Add Carport
$25
0
Monthly Rent
$690
$725
Unit Style
2 BR
2 BR
Unit Size
795
790
Heat Included
No
Yes
Pool
Yes
Yes
Based on these four rental properties what would you estimate the market rent to be for the subject property one bedroom and two bedroom apartments?
You need to adjust the comparable properties to liken them to the subject. Fill in the amount of the adjustments on both the one bedroom and two bedroom adjustment grids.
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1 Bedroom Adjustment Grid
Subject Rent #1 Rent #2 Rent #3 Rent #4 Monthly Rent ? $575 $599 $625 $595
Unit Size 650 650 640 660 650
Heat Included Yes Yes Yes
Carports No No
Pool Yes Yes Yes Yes Yes
Net Adj. Adjusted Rent