Create a Microsoft® Excel® spreadsheet similar to Exhibit 13-9 in Real Estate Perspectives.
Include notes for assumption in the spreadsheet and any documents necessary to support those assumptions.
Determine the capitalization rate.
Create the spreadsheet and a 1-page draft outline of the final written report
Select the final property that fits within the given purchasing power parameters.
Prepare a valuation analysis of that property using the income approach.
Obtain and include in your analysis a statement of income and expenses for the property including a detail of each expense.
Exhibit 13.9
In the preceding section, the market value of the fee simple interest (as though unencumbered by leases) was estimated to be $986,500, and the market Ro was estimated to be 9.2 percent. Since both the market rent and expenses are expected to increase by 2.0 percent per year, the market NOI can be expected to increase at the same rate. Thus, for the 6th year, the market NOI is projected to be $95,613. Dividing this NOI by the terminal capitalization rate (RN) of 10.2 percent gives a reversion value at the end of the 5th year of $937,386. Subtracting a 4.0 percent cost of sale results in net resale proceeds of $899,891.
4This type of lease is termed a partially net lease, as contrasted with an absolutely net lease (or triple net lease), in which the tenants pay all expenses.
5Notice that the terminal cap rate RN is 1.0 point higher than the “going in” cap rate of 9.2 percent.
Next, all of the CFBDSs, including the market value of the fee simple interest at the end of the 5th year, are discounted to a present value at the market leased fee discount rate (yLF) of 10.0 percent. This produces a final estimate of the market value of the leased fee (VLF) of $874,000. Note that this value is $112,500 less than the value of the fee simple interest ($986,500), reflecting the lower-than-market rents called for in the leases. These calculations were made on a Microsoft Excel Spreadsheet, and are shown in Exhibit 13–9.
Since many, if not most, office and retail buildings are leased for periods ranging from two or three years to 10 years or more, the valuation of leased fee estates is a very common problem faced by both investors and appraisers. While long-term leases may increase the certainty attached to a property’s income, they also often limit the property’s income to below-market levels.
Also, of course, during periods of economic decline and for properties that may become subject to a changing neighborhood or market situation, they may also provide some resistance to the downward pressure on rents. Tenants in these situations who become subject to higher-than-market rents often try to abrogate or buy out their leases. And, if these efforts fail, they may resort to physically damaging the property in order to force the owner to break the lease.
Different Types of Property