Abstract
In the aftermath of the “Yes Era”, we believe that investors must return to fundamental analytical tools in order to help ensure that a property has the desired characteristics which allow an investor to achieve their required rate of return. Investing in non-speculative properties will help the investor in obtaining financing at a bank, as lenders are less willing to take risks than they were only a few years ago.
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Appendices
Mini-Case #1: Rent Roll Analysis
You have received two rent rolls for two different investment properties. You are interested in assessing the strength of these two properties as an investment by starting with an analysis of the rent rolls.
Your first potential investment is a retail shopping center located in your hometown.
The listing of tenants is as follows:
Tenant | Unit # | Sq. ft. | Monthly rent | Lease maturity |
---|---|---|---|---|
Food Lion | #100 | 25,000 | $31,250 | 11/15/2014 |
Family Dollar | #101 | 5,500 | 5,500 | 1/15/2015 |
Lucie’s Nail Salon | #102 | 2,000 | 2,700 | 3/15/2015 |
Szechuan Palace | #103 | 3,000 | 4,000 | 7/15/2021 |
Vacant Space | #104, 105 | 4,000 |
Your second potential investment is an office building also located in your hometown.
The tenant listing is as follows:
Tenant | Unit # | Sq. ft. | Monthly rent | Lease maturity |
---|---|---|---|---|
Dr. Ricardo, DDS | #100 | 3,000 | $5,000 | 01/01/2014 |
Galbraith and Friedman, Attorneys at Law | #101 | 4,000 | $6,000 | 03/15/2014 |
Novant Health | #102 | 12,000 | $16,700 | 1/1/2021 |
Dr. Mudd and Dr. Sick, M.D. | #103 | 1,000 | $1,850 | 01/01/2021 |
Dr. Sen’s Acupuncture | #201 | 3,000 | $5,000 | 04/15/2017 |
Veblen, Hirschman, and McNeely, PLLC | #202 | 4,000 | $5,000 | 05/30/2016 |
We (really) care, not-for profit | #203 | 3,000 | $3,800 | MTM |
Vacant Space | #204–206 | 10,000 |
Questions for Discussion
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1.
Is there anything that seems troubling about the durability of the income stream for either property given an investment horizon of 3, 5, or 7 years?
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2.
What are your thoughts about the tenant mix for both properties?
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3.
What specific questions would you ask the seller concerning each property?
Mini-Case #2: Operating Expense Analysis
When evaluating an existing investment property, it is common that the last 3 years financial statements are analyzed in order to determine the most likely level of operating expenses on an on-going basis. The following exercise will serve to facilitate discussion on what expenses to include, and what assumptions to make when evaluating the historical operating performance of an investment property.
Consider the following investment property that has achieved the following level of operating expenses over the last 3 years:
Fiscal year end | Year 1 | Year 2 | Year 3 | Pro-forma |
---|---|---|---|---|
General and administrative | 76,819 | 65,323 | 68,134 | |
Repairs and maintenance | 54,000 | 75,652 | 51,000 | |
Utilities | 85,729 | 87,242 | 88,926 | |
Depreciation/amortization | 75,000 | 75,000 | 75,000 | |
Salaries and commissions | 153,000 | 157,500 | 161,000 | |
Management fee | 50,000 | 50,000 | 50,000 | |
Property taxes | 73,500 | 75,425 | 77,800 | |
Insurance | 12,500 | 18,754 | 21,315 | |
Interest expense | 115,700 | 121,100 | 128,762 | |
Advertising | 4,500 | 7,200 | 8,995 | |
Total operating expenses | 700,748 | 733,196 | 730,932 |
Questions for Discussion
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1.
In the space under the pro-forma column, indicate your assumptions for the “going-forward” operating expenses.
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2.
Where might it not be prudent to take an average of the last 3 years in terms of expense calculations?
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3.
Which expenses should not be included in a pro-forma operating statement for an investment property?
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4.
What questions might you ask of the owner or property manager in order to aid you in this process?
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5.
How are good results determined here?
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© 2012 Springer-Verlag Berlin Heidelberg
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Goddard, G.J., Marcum, B. (2012). Finance and Real Estate Valuation. In: Real Estate Investment. Springer Texts in Business and Economics. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-23527-6_3
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