MGT 374Real Estate Analysis

College of BusinessAlfaisal

UNIVERSITY

Cost Approach

Can you estimate the value of your

property?

Name Building Land Size GBA NLA

Abdulaziz Alsaleh Granada Center 466,000 150,000 100,000Abdulrahman Alhabib AlNakheel MallAbdulrahman Altowirgi AlAnoud TowerAbdulrauf Binhussain Balsharaf's Apts. 2,400 1,700 1,650Ahmed Alabdulatif Nojoud Mall 23,000 10,800 7,200Ahmed AlhawaryAhmed Alobud Admas BuildingAlanoud M. AlsaudAlAnoud T. Alsaud Siracon BuildingAljohara Alsaud 2,242 10,654 3,168Aljohara Alsheikh Localizer MallAreen Alwabil Gallery Mall 120,000 180,000 126,000Bader Abdulkader Rabeeh SquareBadr Aldamer Mirah BuildingDana AlQahtani Hayatt Mall 155,873 147,038 98,000Dayl Almandil Panorama MallFahdah Alsaud Centeria MallFaisal Najm Green Hill Project 800 480 1,680Faisal Awamar Abdar Building 1,850 6,230 6,230Fhad Alrowaitee Al Mezan Tower 3,350 20,584 12,500Ghada Bahashwan AlFaisalia TowerHuda AlRasheedJumanah AlZughibiKhalid Alsaud Al Mohammadyah 3,250 21,600Khalid Hussein AldamerLama Aldamer Olaya MallMajed Alsemari Hitteen PlazaMashehor Ahmed Alsakkaf Alsallash 3,520 3,240 1,080Mohammed Alali Andalus Center 29,000 20,000 15,000Nora AlibrahimNoura AlsaudSaad Alnemer Alnemer Center 8,200 3,800 3,200Samy Jamali Tawaren Center 6,400 17,900 14,300Sarh Sami AlRasheed Kingdom TowerSaud A. Alsaud Alnimer Center 7,800 42,000 40,000

Land Area

100 x 75 = 7,500

Gross Building Area

60 x 50 = 3,000

Building Coverage

Ratio GBA ÷ Land Area

3,000 ÷ 7,500 =40%

100

75

60

50

Building Sizes

Gross Building AreaGBA

Net Leasable AreaNLA

60

50

Gross Building

Area 60 x 50 = 3,000

20 18 20

Net Leasable

Area 15 x 20 = 300 300 x 6 =1,800

15

15

15

common area

hallway

300 Building Efficiency Ratio

NLA ÷ GBA 1,800 ÷ 3,000

=60%

Measuring Buildings

Gross Building Area - GBA Cost Approach

Net Leasable Area - NLAIncome Approach

Chapter 8

Income Approach

Estimating Income and Expenses

ReconstructingAdding

Subtract

Net Operating Income

IncomeLess: expenses

= Net Operating Income (NOI)

Net Operating Income

more detailscan be complex

Estimating Income and Expenses

usually different than the owner’s statements

Potential Gross Income

If the property was 100% occupied at

market rent

Two loss deductions

vacancy losscredit loss

Vacancy Loss

no tenantno Income

Credit Loss

tenantnot paying rent

Effective Gross Income

potential gross incomeless: vacancy lossless: credit loss

Abbreviations

PGIless: CVL

EGI

Gross IncomePotential Gross Income (PGI)

10,000

Less: Vacancy Loss 4% 400

Less: Credit Loss 4% 400

8% 800

Effective Gross Income (EGI)

9,200

Operating Expenses

reimbursablenon-reimbursable

Operating Expensesmanagement

property taxesinsuranceutilities

reserves for replacementsmaintenance

other

Management

Must recognize even if owner operated4% to 10% of EGI

Reserves for Replacements

Prudent management will build a fund to

replace long-lived items

DifferencesOwner Reconstructed

Management 0 300

Property Taxes 500 500

Insurance 1,000 1,000

Utilities 300 300

Reserves for Replacements 0 500

Maintenance 100 100

Total Operating Expenses 1,900 2,700

Potential Gross Income 10,000 100%Less: Credit and Vacancy Loss

800 8%Effective Gross Income 9,200 92%Operating Expenses Management 300 3% Property Taxes 500 5% Insurance 1,000 11% Utilities 300 3% Reserves for Replacements

500 5% Maintenance 100 1%Total Operating Expenses 2,700 29%Net Operating Income 6,500 71%

Reconstructed Operating Statement

What is the property worth?

Two Methods

Direct Capitalization

Discounted Cash Flow

Direct Capitalization

Convert an annual income into a value

with a capitalization rate

IRV

Income = Rate x ValueRate = Income ÷ ValueValue = Income ÷ Rate

Getting Rates

MarketBuilt Up

Market

Sales Analysis

Market

Retail Rental Rates

What can youafford to pay for the

land?

Income ApproachCost Approach

Hitteen Square Majed Alsemari

For Sale 4,500 per SM

Hitteen Square Majed Alsemari

Sale Price 1,000,000

Net Operating Income 75,000

Multiplier Rate 13.33 Years to Recover Investment

Capitalization Rate 7.50% Yield on

Investment

Rates

Why are rates different?

Risk Factorschange in market

managementliquidity

Built UpRisk Free RateUS.Treasury Bond

1.5%

Management 3.0%

Illiquidity 3.0%

Volatility 2.0%

Capitalization Rate 9.5%

Net Operating Income 6,500

Rate Value

5% 130,000

6% 108,333

7% 92,857

8% 81,250

9% 72,222

10% 65,000

11% 59,091

12% 54,167

What is the

property worth?

Selecting a ratequality and quantity

stabilizedvolatilityjudgment

Sales Comparisoncalculate rate

adjust for differencesweigh

apply rate

Deriving Cap Rates

CalculateAdjustWeightApply

CalculateIV

R =

IncomeValue

Rate =

Calculate

IncomeSale Price

Rate =

Adjust

Similar - No adjustmentInferior - DeductSuperior - Add

Weight

Best - mostPoor - leastMust add up to 100%

Apply

Value = Income

Rate

Sale 1 Sale 2 Sale 3Sale Price 750,000 5,500,000 287,000

Net Operating Income 60,000 721,000 12,000

Multiplier 12.50 7.63 23.92

Capitalization Rate 8.00% 13.11% 4.18%

Comparability Similar Inferior Superior

Adjustment 0.00% -5.00% 5.00%

Adjusted Rate 8.00% 8.11% 9.18%

Average 8.43%

Rates

Sale 1 Sale 2 Sale 3 Average

Adjusted Capitalization Rate 8.00% 8.11% 9.18% 8.43%

Weighting 70% 20% 10% 100%

Weighted 5.60% 1.62% 0.92% 8.14%

Weighted Rates

IndicationNet Operating Income 6,500

Capitalization Rate 8.14%

Indicated Value 79,853

Rounded To 80,000

Discounted Cash FlowDCF

Present value of all future benefits

Discounted Cash FlowDCF

Return on capitalReturn of capital

Discounted Cash FlowDCF

1. Estimate amount of NOI for each period2. Select a discount rate3. Calculate PV factor for each period4. Apply the PV factor to each cash flow5. Add up the present value of all cash flows

the present is worth more than the future

the future is worth less than the present

time is money

money is time

compensated to wait

patience is rewarded

time value of money

money value is relative to time

Assumptions

money value is relative to time

Assumptions

time value of money

money is worth different based on the

time

Finance

Time and Riskhow long how much

(1 + rate)Number

of periods

(1 + r)N

Key Formulas

(1+r)N

r = rate N = number of periods

Compounding Future Value or FVmultiplying

Discounting Present Value or PVdividing

(1+r)N1

Tomorrow

One Year

Ten Years

Discount the future

Today is worth more than tomorrow

Growin the Future

Today

One year

Ten Years

Grow by a percentage each year,

not a fixed amount

Compounding

Compounding

The process of finding the future value of a

present sum of money

multiplying

Discounting

The process of finding the present value of a future sum of money

dividing

compounding is the inverse of discounting

discounting is the inverse of compounding

Discount Rate 7%

1 2 3 4 5 Total

NOI 6,200 6,500 6,800 7,200 7,500 34,200

PV Factor 0.9346 0.8734 0.8163 0.7629 0.7130 0.8147

Present Value 5,794 5,677 5,551 5,493 5,347 27,863

DCF of the NOI

ReversionNet Operating Income 7,500

Capitalization Rate 8.14%

Indicated Value 92,138

PV Factor 0.7130

Present Value of the Reversion

65,694

DCFFaceValue

PresentValue

Net Operating Income 34,200 27,863

Reversion 92,138 65694

Summary 126,338 93,557

Rounded To: 94,000

Years - 5 Rate -7%

Income Approach

Direct Capitalization 80,000

Discounted Cash Flow 94,000