Now normally you look at leases and you do all that analysis particularly on properties like apartment buildings and hotels. So people say, I want to know what the cash stream is not in its history but when I own it. I get next year’s income, which is either going to be higher or lower than a million dollars depending on all those factors that we were just talking about. Well, that was a million dollars I don’t get. Well, yeah, you tell me you made a million dollars. You think of closing a building at the end of the year. When it’s not normal, then it can be very different.Īnd that’s why people generally do it off of forward and really think through. You’re in a situation where there’s a big rent bump. You’re in a situation where none of your leases are expiring. You’re in a situation where lots of your leases are expiring. But when situations are not normal– you’re in a recovering market. Now that is to say, in normal conditions if I know the past 12 months it will look something like the next 12 months. And the only thing is that there is usually a pretty good relationship between past 12 months and future 12 months. PETER LINNEMAN: Generally people are valuing it off of forward. Does this ever change in some market conditions or for certain property types where buildings are not valued off of forward earnings?ĭR. Specifically, loan points, amortization, and interest payments resulting from the use of debt financing all have an impact on the calculation of after-tax equity cash flow.īRUCE KIRSCH: What we learn in the book with respect to valuing an asset at sale is that the convention typically is to use this adjusted NOI number from a forward year, assuming that the building, the properties, in fact stabilize and growing at a relatively constant rate. To estimate cash flows to equity, one needs to incorporate debt and tax liabilities into their analysis. The resulting Unlevered Cash Flow reflects the net cash inflow from a property before any financing or tax liabilities. To determine Net Cash Flow, subtract total operating expenses, cap ex, TIs, and leasing commissions from total operating income. However, structures and building improvements can be depreciated according to well defined schedules. United States accounting rules do not allow land to be depreciated. It is important to note that depreciation is an accounting concept and does not relate to the physical capital expenditures needed in a financial reporting period. Many property owners hold reserves for such annual expenditures, and incorporate a reserve for normalized capital expenditures. The timing of some Capital Expenditures (cap ex) is predictable. Leasing commissions are the fees you pay to a broker or leasing company (sometimes a separate firm which you own) that leases your space to tenants. The negotiations over how much, if any, tenant improvements the landlord pays for are dictated by market conditions. In order to entice a tenant to occupy the space, the landlord will often agree to pay part of the tenant improvements. Tenant Improvements are improvements made to make leased space operational and acceptable to the tenant. It is important to note that Adjusted NOI differs from NOI by including deductions for Tenant Improvements, Leasing Commissions, and Capital Expenditures. Net Operating Income (NOI) is defined as total operating income less total operating expenses. Non-Reimbursable costs typically include insurance, utilities, and managerial services. Reimbursable costs are initially borne by the landlord, but the landlord expects full reimbursement for these expenses (typically all property taxes and Common Area Maintenance costs for occupied space). Operating Expenses are the costs required to effectively operate the property. The loss/expense will rise in weak economies. It is commonly estimated at 1-2% of expected revenues. Credit Loss/Bad Debt Expense must be included to reflect the anticipated non-payment of rent. Ancillary Income comes from all other activities conducted at the property. Tenant Reimbursements are payments specified in the leases, made by tenants to the landlord for specified property expenses, including insurance, property taxes, security, and utilities. Rent consists of both base rent and percentage rent (overage). There is some Vacancy in fully stabilized buildings that results from tenants moving in and out as part of turnover and some space that is non-leasable. Gross potential rental revenue is calculated as the base rent multiplied by the property’s total leasable square feet. Gross Potential Rental Revenue (GPR) is the revenue you would receive if the building’s leasable space was 100% occupied.
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