Transcript Document 7152586

Chapter 24
The Student Handbook to
THE APPRAISAL OF REAL ESTATE
Discounted Cash Flow Analysis and
Special Applications in Income
Capitalization
1
Applicability of Discounted Cash Flow Analysis



Both yield capitalization and direct capitalization require
an estimate of next year’s net income.
Discounted cash flow analysis requires more than one
year’s estimate.
Several years’ estimates of income, vacancy, collection
losses, and expenses are required.
Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24
2
Discounted Cash Flow Analysis of a Small Retail
Center
Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24
3
Discounted Cash Flow Analysis of a Small Retail
Center, continued
Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24
4
Discounted Cash Flow Analysis of a Small Retail
Center, continued
Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24
5
Calculating Net Present Value
Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24
6
Calculating Net Present Value
IRR = 0.0973208
Year
Cash flow
Discount Rate
Present Value
0
-$550,000
1.0000
-$550,000
1
$35,000
0.911311
$31,896
2
$40,000
0.830487
$33,219
3
$45,000
0.756831
$34,057
4
$50,000
0.689708
$34,485
5
$51,000
0.628539
$32,055
6
$56,000
0.572794
$32,076
7
$60,000
0.521993
$31,320
8
$61,000
0.475698
$29,018
9
$64,000
0.433508
$27,745
10
$65,000
0.395061
$25,679
11
$49,000
0.360023
$17,641
12
$54,000
0.328093
$17,717
13
$55,000
0.298994
$16,445
14
$60,000
0.272477
$16,349
14
$625,000
0.272477
$170,298
Net present value of the investment
$0
Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24
7
Payback Period
Amount invested = $1,250,000
Year
Annual Cash Flows
1
$142,589
2
$146,268
3
$150,042
4
$153,913
5
$157,884
6
$161,957
7
$166,135
8
$170,422
9
$174,819
10
$179,329
Running Total
$142,589
$288,857
$438,898
$592,811
$750,694
$912,651
$1,078,787
$1,249,208
$1,424,027
$1,603,356
Payback period
Payback point
Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24
8
Profitability Index
Discount rate = 8.00%
Purchase price = $1,250,000
Year
1
Cash flow
Year
2
Cash flow
Year
3
Cash flow
Year
4
Cash flow
Year
5
Cash flow
Year
6
Cash flow
Year
7
Cash flow
Year
8
Cash flow
Year
9
Cash flow
Year
10
Cash flow
10
Reversion
Sum of the present values of the CFs
Profitability index = $1,448,718/$1,250,000 = 1.16
$89,000
$97,500
$103,300
$109,800
$114,000
$116,300
$118,650
$119,850
$121,350
$123,850
$1,548,125
x
x
x
x
x
x
x
x
x
x
x
0.9259259
0.8573388
0.7938322
0.7350299
0.6805832
0.6301696
0.5834904
0.5402689
0.500249
0.4631935
0.4631935
=
=
=
=
=
=
=
=
=
=
=
$82,407
$83,591
$82,003
$80,706
$77,586
$73,289
$69,231
$64,751
$60,705
$57,367
$717,081
$1,448,718
Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24
9
Problems
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Suggested solutions begin on page 432.
Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24
10
Case Study: Analysis of an Office Building
Investment
Suite
100
Suite
101
Suite
112
Suite
114
Suite
205
Suite
210
Suite
215
Total
Other income & pass-throughs
Potential gross income
Estimated market (rollover) rate
Vacancy loss
Collection loss
Total V & C loss
Effect. gross income
Sq. Ft.
2,500
3,900
4,600
4,000
5,000
5,000
5,000
30,000
Leased
2,500
3,900
4,000
5,000
5,000
5,000
25,400
Rate
25.00
26.50
25.00
21.00
24.00
23.50
22.00
84.67%
Year 1
62,500
103,350
115,000
84,000
120,000
125,000
110,000
Year 2
62,500
103,350
115,000
100,000
120,000
125,000
110,000
Year 3
66,307
103,350
115,000
100,000
120,000
125,000
132,613
Year 4
66,307
103,350
115,000
100,000
120,000
125,000
132,613
$49,000
768,850
$25.00
-5%
-1%
-6%
$722,719
$49,000
784,850
$25.75
-5%
-1%
-6%
$737,759
$49,000
814,253
$26.52
-10%
-1%
-11%
$724,685
$49,000
815,813
$27.32
-10%
-1%
-11%
$726,073
Year 5
66,307
103,350
115,000
100,000
140,689
140,689
132,613
$49,000
853,796
$28.14
-10%
-1%
-11%
$759,879
Year 6/Resale
66,307
103,350
133,317
100,000
140,689
140,689
132,613
$49,000
873,767
$28.98
-5%
-1%
-6%
$821,341
Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24
11
Case Study: Analysis of an Office Building
Investment, continued
Effect. gross income
Expense item Rate of increase in expenses =
All utilities
Management expense
Maintenance salary
Taxes, insurance & licenses
Maintenance (snow, trash, etc.)
Contract cleaning, etc.
Supplies (HVAC, janitorial, etc.)
Total expenses from operations
Operating expenses per sq. ft.
Build out and leasing expenses
New space build-out
Leasing commissions
Capital replacements (HVAC, roof)
Total build-out reserves exp.
Build-out per sq. ft. GFA
Total all expenses
Income overall (I O)
3%
$1.50
5.00%
$0.50
$1.25
$0.75
$1.50
$0.50
/Occ. sq. ft.
of EGI
/sq. ft.
/sq. ft.
/sq. ft.
/Occ. sq. ft.
/sq. ft.
Year 1
$722,719
Year 2
$739,141
Year 3
$724,685
Year 4
$726,073
Year 5
$759,879
Year 6/Resale
$821,341
42,750
36,136
15,000
37,500
22,500
42,750
15,000
$211,636
$7.05
44,033
39,757
15,450
38,625
23,175
44,033
15,450
$217,722
$7.26
42,966
36,234
15,914
39,784
23,870
42,966
15,914
$217,648
$7.25
44,255
36,304
16,391
40,977
24,586
44,255
16,391
$223,159
$7.44
45,583
37,994
16,883
42,207
25,324
45,583
16,883
$230,456
$7.68
49,559
41,067
17,389
43,473
26,084
49,559
17,389
$244,520
$8.15
$92,000
$23,000
$0
$115,000
$3.83
$326,636
$396,083
$60,000
$20,000
$25,000
$105,000
$3.50
$322,722
$416,419
$112,500
$39,784
$35,000
$187,284
$6.24
$404,932
$319,753
$0
$0
$0
$0
$0.00
$223,160
$502,913
$150,000
$56,275
$42,000
$248,275
$8.28
$478,731
$281,147
$46,000
$0
$0
$46,000
$1.53
$290,520
$530,822
Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24
12
Value Opinion – Case Study
Income overall (I
)
O
Year 1
$396,083
Year 2
$416,419
The reversion of the property is estimated via terminal cap rate of:
7% selling costs
Cash flows with reversion
Discounted @ 8.0%
Present value
$396,083
0.925926
$366,744
$416,419
0.857339
$357,012
Discounted @ 9.0%
Present value
0.917431
$363,379
0.814680
$350,490
Year 3
$319,753
Year 4
$502,913
Year 5
$281,147
Year 6/Resale
$530,822
9.00% of the last year's income less selling expenses
Reversion of property =
$5,485,157
$319,753
$502,913
$5,766,305
0.793832
0.735030
0.680583
Value
$253,831
$369,656
$3,924,450
$5,271,693
$175.72
0.772183
$246,908
0.708425
$356,277
0.649931
$3,747,703
Value
$5,064,758
Student Handbook to THE APPRAISAL OF REAL ESTATE
Chapter 24
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