GOOD LEASE PROTECTS THE VALUE OF A PROPERTY
- Quantity and Quality of the Cash Flow Stream is What an Investor Will Buy or a Financial Institution Will Lend
- The appraisal is on the reliable and quantity of the cash flow.
II. MEASURING INVESTMENT PERFORMANCE
Understanding and Calculating the Concepts of Value
A. Capitalization Rates
- Capitalization rate is an investor's subjective overall rate of return demanded from one specific property.
- Examples for Massachusetts Properties
B. Definition and Formula of Band of Investment Approach ( use BOI formula)
- Investors impose a capitalization rate to value investment property
- History of BOI
- Relevancy in a Deflationary Economy
- Industry Arguments For and Against Its Importance
- Using BOI for valuation and negotiating tool
- Income Stream vs. "Bricks and Mortar" Purchase
- Return on Equity
- Subjective Rates of Returns
- It's use by Institutional Investors
- Other Factors in Determining Value in addition to BOI
- Debt vs. Equity Financing
BAND OF INVESTMENT APPROACH
% of Mortgage to Value of Property
Loan Constant for Mortgage
% Rate of Return to the Loan Portion of the Investment
% of Equity Raised
% Cash on Cash Return Desired By the Investor (Interest)
% Return on Equity
OVERALL RATE OF RETURN
% Amount (CAP)
Net operating income
% Overall Rate of Return (CAP)
Total value of property
Assume you borrow 75% of the value of a property at 10.5% for 25 years
Your investor requires an 12% return on his equity invested.
If the net operating income of the property is $ 180,000 then what could the investor pay for this property?
Mortgage Constant Formula:
Annual Debt Service = Mortgage Constant
Total Loan Amount
C. APOD Sheet
- NOI/Cap Rate = Value
* Impact to Value
1. Why do we have escalators?
2. Consumer Price Index (CPI)
* Two U.S. indices
* Regional indices (Boston vs. Northeast)
3. Negotiated "Bumps" or Rent Increases
E. VALUATION PROCESS
- Sources and Investigation of Market Transactions/Valuations in Massachusetts
- Locating Sales Data
- Public Records
- Published News
- Massachusetts MLS
- Listings Offers
- Filing Sales Data
- Commercial Listing Services in Massachusetts
- Investigating Additional Market Data
- Improvement Cost Data
- Income & Expense Data
- Capitalization Rates
- The Three (3) Valuation Approaches
III. ELEMENTS AND ECONOMIC VARIABLES TO VALUE
A. Definition of Value: Interaction of supply and demand affects value. A function of the purpose for which an estimate of demand is sought.
* The value of real property reflects and is affected by the interplay of basic forces that motivate human activities.
B. Economic Variables To Be Familiar With:
1. Supply and Demand
* If the quantity of a product is high, price will be low
2. Highest and Best Use
3. Economic Variables include Primarily Demand-Side Economic Characteristics:
- Stock of available vacant and improved properties.
- New Development.
- Occupancy Rates.
- Rent and Price patterns of existing properties.
- Construction Costs.
C. Elements and Economics Variables Include:
1. Market Value
- Probable price in the open market
- Uses of the Property
- Asking price
- Offering Price
- Collateral for Loan
- Compensation for Condemnation
2. Assessed Value
3. Reproduction Cost
4. Value in Use
5. Investment Value
6. Value as a Function of Property Rights
7. Value in Amenity Properties Compensation to Value in Investment Properties
8. Value in Investment Properties
9. Functional Obsolescence vs. Economic Obsolescence:
10. All Types of Value Are Based on Anticipated Future Benefits
D. CASE STUDY: MASSACHUSETTS COMMERCIAL PROPERTY VALUATION