VALUATION

INCOME APPROACH
Exercise 1:
 Property consists of 10 office suites, 4 on the first floor and 6 on the second.
 Contract rents: 2 suites at $1,500 per month, 2 at $3,600 per month, and 6 at
$1,560 per month.
 Market rents: 2 suites at $2,635 per month, 2 at $3,200 per month, and 6 at
$1,862 per month.
 Vacancy and collection losses: 10% per year
 Operating expenses: 40% of effective gross income each year;
 Capital expenditures: 5% of effective gross income each year;
 Expected holding period: 4 years;
 PGI increasing 3 percent per year. Selling expenses are forecasted to be 4
percent of the expected sale price.
Using DCF approach to estimate the value of the property.

Comparable Sale Price NOI1

A $500,000 $55,000

B $420,000 $50,400

C $475,000 $53,400
Note:

Year 1 2 3 4

Interest expense 125,000 125,000 125,000 125,000

Mortgage balance 1,250,000

Cost of Sale 4% of Sale price

1. Using the information provided, calculate the overall capitalization rate by direct
market extraction assuming each property is equally comparable to the subject.
2. Using cap rate in Question 1, compute a value for the property using direct
capitalization.
3. Using cap rate in Question 1, the property will be held by a buyer for four years,
compute the value of the property based on discounting unlevered cash flows.
4. Using cap rate in Question 1, the property will be held by a buyer for four years,
what is the present value of the levered cash flows?

GVTH: TS. LÊ BẢO THY 1

 VALUATION

Exercise 2:
Given the following owner’s income and expense estimates for an apartment property
which including 10 two-bedroom suites, formulate a reconstructed operating
statement. The house’s owner provides you with this 12-month income and expense
statement prepared for income tax purposes by his accountant.
Gross revenue for last year (12 months) $235,000
Operating expense for the same period:
Realty taxes $7,185
Depreciation $24,000
Leasing commission $7,200
Water $3,680
Heating and air conditioning $2,127
Minor repairs and maintenance $4,580
Electricity for common areas $1,700
Landscaping design $1,800
Purchase of 2 stoves and 3 refrigerator $19,500
Annual janitor’s salary $20,000
Mortgage payment $9,950
Mortgage balance (10-year loan) due in 2030 $2,325,000
Painting of halls and common areas $2,500
Carpeting halls and public areas $2,500
After inspecting the subject property and analyzing relevant market data, you conclude
that:
 Comparable suites in the area rent at $1,980 monthly;
 Vacancy and collection lost is 5%;
 The owner manages the property. However, typical management fees are 3.5%
of effective gross income;
 Halls and common areas are painted every five years;
 Fire insurance (3-year premium) paid is $2700;
 CAPX is 40% of Effective Gross Income;
 The owner applied a loan contract at Bank of Florida with lending rate 12%/year;
 The sale prices and estimated first-year net operating incomes of comparable
properties were as follows:
 Comparable 1: Sale price $800,000; NOI $85,000
 Comparable 2: Sale price $820,000; NOI $80,400
 Comparable 3: Sale price $875,000; NOI $83,400
 Comparable 4: Sale price $800,000; NOI $89,000
Estimate the value of the property using the direct capitalization approach.

GVTH: TS. LÊ BẢO THY 2