Income Approach_German Method

Question 1

**

When is German Method more accurate

Answer 1

• distinguishes between land value and structure value
• more accurate in theory compared to DCF method and ARY method
• but only more accurate in reality when structure only has a few years of useful lifetime left
• in case of new building all methods yield similar result

annuity over 70 years won’t be much different to perpetuity

Question 2

Gross Annual Income

Answer 2

= leasable are x 12 months x Sum of income (EUR/m2 per month)

Question 3

Land Value
vs
Structure Value

Answer 3

• Land Value using yield (Perpetuity)
• Structure value using multiplier (Annuity)

Question 4

Calculating Capital Value

Answer 4

= Land Value + Structure Value

Land Value = Rent on land / yield r

Question 5

How to calculate Structure Value

Answer 5

Rent on Structure x Multiplier
[Rent on Structure = Total Rent - Rent paid on Land x yield)

Question 6

Land Value Calculation

Answer 6

Rent paid on land / yield (r)

Question 7

What is sustainable income when calculating gross annual income

Answer 7

• current market rent considered sustainable income

Question 8

Property Management Costs

Bewirtschaftungskosten

Answer 8

• Adminstrative Costs
• Operating Costs
• Maintenance Costs
• Allowance for vacancy and collection loss (Mietausfallwagnsis)

**no depreciation considered, as not cash flow effective **

Question 9

Administrative Costs

Answer 9

• Costs for the administration of the site and buildings, for the installations and the required staff.
• Costs for supervision and administration work by the owner.
• Costs for the statutory or voluntary audits of the annual financial
  statements and the management.

Also include:
* Leasingaccounting
* Settlement of additional costs, operating costs, taxes and duties
* Administrative costs associated with rent adjustments and changes
* Creationofthebusinessplan
* Planning, commissioning, monitoring and billing of maintenance,
servicing and maintenance work
* Invoiceverification,paymenttransactions
* Setting up annual accounts
* Processinginsuranceclaims

Question 10

Administration Costs
according to Berechnungsverordnung

Answer 10

• The numbers are valid for 01.01.2023 to 31.12.2025. the costs should be adjusted using German consumer price index for every three years.
• 2% of gross rental income for commercial buildings

Question 11

Operating Costs

Answer 11

• costs arising for owing property or through regular use of property
• costs that are paid by tenant are not considered

Example:
* Property tax
* Plumbing and water costs
* Costs for heating
* Costs for the cleaning and maintenance of the heating systems on each floor
* Costs for operating the hot water supply installations and for the external supply with hot water

if no Operating Cost mentioned assume = 0

Question 12

Maintenance Costs

Answer 12

• Maintenance costs arise during the economic life of a property for remedies to damages due to wear and tear, ageing or weather
• include upkeep, inspection, repair
• **big difference to US: **Costs and revenues are always the same over whole time period (capex is amortized in mainteance costs) whereas in DCF method distinguishes these costs over time

Question 13

Mainteance Cost
Table

Answer 13

• table gives maintenance costs depending on age and other characteristics (elevator, parking)
• table is adjusted to inflation every 3 years
• for commercial buildings: maintenance costs are based on the percentage of maintenance costs for residential use (Ertragswertrichtlinie)

Question 14

Allowance for vacanvy and collection loss

Mietausfallwagnis

Answer 14

• Risk of reduced income due to written off payments, or vacant space allotted to letting
• incl. costs arising from legal claims in case of missing payments, cancellation of lease contracts or evictions
  *** 2% of gross annual income for residential
• 4% of gross annual income for commercial space **
• does not include the permanent or structural vacancy rate (considered as a special property-specific property feature)

Question 15

Property Yield

Liegenschaftszinssätze

Answer 15

• implicitly includes expectations of market participants on date of valuation

Question 16

When to use median property yield

Answer 16

• when no data is available
• For long-term rented residential properties (A1 - A5), property yield is recommended to be increased by approximately 0.25 to 0.50 percentage points [higher risk as property is occupied compared to owner occupied]