I. VALUATION

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

INCOME/VALUE RATIO

FORMULA:

1.

% of Mortgage to Value of Property
(Loan to value ratio)

X

Loan Constant for Mortgage
(Mortgage rate)

=

% Rate of Return to the Loan Portion of the Investment

+

% of Equity Raised

X

% Cash on Cash Return Desired By the Investor (Interest)

=

% Return on Equity

OVERALL RATE OF RETURN

=

% Amount (CAP)

2.

Net operating income

% Overall Rate of Return (CAP)

=

Total value of property

Example:

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

D. ESCALATORS

* 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

  1. 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

  1. Investigating Additional Market Data
  • Improvement Cost Data
  • Income & Expense Data
  • Capitalization Rates

  1. The Three (3) Valuation Approaches
  • Sales
  • Income
  • Cost

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:

  1. Stock of available vacant and improved properties.
  2. New Development.
  3. Occupancy Rates.
  4. Rent and Price patterns of existing properties.
  5. 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