Income Approach_US

Question 1

Valuation Methods

Answer 1

• Market or Sales Comparison
• Cost approach
• Income Approach

Question 2

Market or Sales Comparison

Valuation Method

Answer 2

• compare property being appraised to similar comparable properties or ‘comps’ that have sold recently or near the date of appraisal

Question 3

Cost Approach

Valuation method

Answer 3

compare property to coststs associated with:
building new - acrued depreciation for wear and tear and obsolence + value of the site at highest and best use

Question 4

Income Approach

Valuation Method

Answer 4

• discounted future benefits to own property using stabilized Net Operatin Income and a capitalization rate

Question 5

Which Valuation Method for Residential Property

Answer 5

• market or sales comparison method

Question 6

Which Valuation method for Income producing properties

Answer 6

Income Approach incl.
- Investment Approach (UK)
- DCF approach (US)
- Income Approach (GER)

Question 7

Valuation Method for Undeveloped Land

Answer 7

• sale comparison method
• residual method: Income Approach - construction cost

Question 8

Valuation method for Specialist, non-trading

Answer 8

Cost Approach

Question 9

Accuracy and Rounding of Market Value

Answer 9

• Value ≤ 10,000 € to full hundreds
• 10,000 € < value ≤ 500,000 € to full thousands
• 500,000 € < value ≤ 1,000,000 € to full ten thousands
• Value > 1,000,000 € to full* hundred thousands*

Question 10

Disadvantage of Income Approach

Answer 10

• computational complexity
• not suitable for properties not generating income

Question 11

3 Models for Income Approach

Valuation Method

Answer 11

• All-risks yield Approach (UK)
• DCF approach (US)
• Income Approach (GER) similar as UK but separate land and structure value

Question 12

2 types of Cash Flows in context of DFC Method (US)

Answer 12

• Operating (Net Operating Income NOI)
• Reversion (Sale of Property)

Question 13

PBTCF
Operating Cash Flow

DFC Method

Answer 13

Property before tax cash flow

PGI [Potential Gross Income]
-v [Vacancy Allowance]
-OI [Operating Income e.g. parking]
+OE [Operating Expenses]
= NOI [Net Operating Income]

Question 14

PBTCF
Reversion (last year & years of partial sale only)

DCF Method

Answer 14

V [Property Value at time of sale]
-SE [selling expenses, e.g. Broker]
= PBTCF

Question 15

PGI

DCF Method

Answer 15

Potential Gross Income
- cash that could be generated if property were 100% leased

Rent/SF * SF

Question 16

Vacancy Allowance [v]

Answer 16

• expected effect of vacancy in net cash flow of property
• usually % of PGI
  Estimation:
• project vacant periods / average tenant period
• long-term local market vacancy rate + spread between building vacancy and market vacancy

Question 17

Operating Expenses

DCF Method

Answer 17

Fixed
- property tax
- property insurance
- security
- management

Variable
- maintenance & repair
- utilities (not paid by tenants)

for Small properties: 5 - 10% of EGI
for Office properties: 2 - 3% of EGI

EGI = Effective gross income

Question 18

CapEx

DCF Method

Answer 18

Leasing Costs:
- tenant build-outs or improvement expenditures (TIs)
- leasing commissions to brokers

Property Improvements
- major repairs
- repalcement of major equipment
- major remodeling of building, ground & fixtures
- expansion of rentable area

**- 10 - 20% of NOI for office or
- annual 1 - 2% of property value

Question 19

Reversion Cash FLow

DCF Method

Answer 19

• sale price - transaction costs
• projected NOI next year of sale / terminal cap rate
• cap rate = capitalization rate
• Going-out cap rate = NOI (T+1) / sale price

Terminal cap rate (reversion cap rate, resale cap rate, going-out cap ra

Question 20

Going out Cap rate

Answer 20

NOI (T+1) / Sale Price

Question 21

Going In Cap Rate

Answer 21

NOI (T=1) / Capital Value

Question 22

How is property Management fee calculated?

Answer 22

GPI - V = EPI
- based on effective potential income taking into account vacancy allowance