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Income Estimation

Is the Process a

Forecast or a

Projection

Wayne Foss, MBA, MAI, CRE, Fullerton, CA USA Email: waynefoss@usa.net

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Two Terms

Projection: a mechanical extension of trends of the past into the future.

Forecast: considers the past amounts and trends, but also the current and likely future influences for change.

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The Income Components

Potential Gross Income (PGI)Less Allowances for

Periodic VacancyCollection Losses

Plus Other IncomeEffective Gross Income (EGI)

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Initial Data for Analysis

Income and Expense History Three to Five years for subject (if possible) From Competitive Properties

Recently Signed Leases, Proposed and Asking Rents

Actual Vacancy LevelsPublished operating data (IREM or

BOMA)

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Potential Gross Income

Scheduled Rent Stipulated in the Leases

Escalation Income Derived from lease escalation clauses

Market Rent Estimated for vacant and/or owner occupied space

Other Income Parking fees, vending machines, etc.

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Types of Rent

Market RentContract RentEffective RentExcess RentPercentage RentOverage Rent

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Types of Rent con’t...

Market RentRental Income that the property

would probably command in the open market

Contract RentActual Income specified by the

lease

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Types of Rent con’t...

Effective RentActual rent net of market

required concessions or atypical allowances

Excess RentThe Amount by which contract

exceeds actual market rent

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Types of Rent con’t...

Percentage RentRental income received in

accordance with the terms of a percentage clause in the lease

Overage RentPercentage rent paid over the

guaranteed minimum base rent

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LeasesTypes of Income Provisions

Types of Income Flows Flat Rental Variable Rental Step-up or Step-Down Revaluation Annual Increase Percentage

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Types of Leases con’t...

Flat RentalLevel Rent Throughout the

Duration of the LeaseVariable Rental

Periodic changes in rent, often tied to a specific index. (such as CPI)

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Types of Leases con’t...

Step-up or Step Downa.k.a. Graduated rental leasesRent Steps Up or Down a specific

intervals by specific amountsRevaluation Lease

Periodic adjustments based on revaluation of market rent

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Types of Leases con’t...

Annual IncreaseMost commonAnnual adjustment based on

specific amount stated in the leasePercentage Lease

Typical base rent, plus a percentage of gross business volume (sales)

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Lease Provisions to look for - Income or Expense may be affected

Date of the Lease Name of Lessor Name of Lessee Lease Term Occupancy Date Rent Amount & Type Concessions Options to Renew Escape Clause

Security Deposits Expense Caps Rent Escalations Expense Recoveries Casualty Loss and

Condemnation clauses Options to purchase Revaluation Clause Special Provisions

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LeasesTypes of Expense Provisions

Types of Expense Clauses Gross Lease Modified Gross Lease Net Lease Double Net Lease Triple Net Lease

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Types of Expense Sharing con’t...

Gross LeaseThe tenant pays rent; the

landlord pays all expensesModified Gross Lease

The tenant and landlord share in the expense payments

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Types of Expense Sharing con’t...

Net LeaseThe tenant pays utilities and

taxes or insurance; the landlord pays all remaining expenses

Double Net LeaseThe tenant utilities, taxes and

insurance; the landlord pays all remaining expenses

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Types of Expense Sharing con’t...

Triple Net LeaseThe tenant pays all expenses,

and the landlord pays only structural expenses

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Allowances for Vacancy & Collection Losses

VacancyPeriodic vacanciesNon-rentable spaceTenant Turnover

Collection LossDefault by the tenantConcessions in the lease

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The Expense Components

Effective Gross Income (EGI)Less Allowances for Expenses

Fixed ExpensesVariable ExpensesReserves for Replacement

Net Operating Income (NOI)

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Operating Expenses

Three Categories - - Fixed

Generally do not vary with occupancy

Variable Generally vary with occupancy

Reserve For Replacement Provide for periodic replacement of building

short-lived components

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Operating Expenses, con’t

Fixed Expenses Real Estate Taxes Insurance

Fire, Owner’s LiabilityMay include special insurance for elevators, plate glas,

etc.

Licenses (if required)

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Operating Expenses, con’t

Variable Expenses Management Charges

Contracted out or owner provided

Leasing Fees Utilities General Payroll

Onsite property manager(s)

Cleaning Maintenance and Repairs

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Operating Expenses, con’t

Variable Expenses, con’t… Decorating Grounds and Parking area maintenance Miscellaneous

SecuritySuppliesRubbish Removal and ExterminatingSnow Removal

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Operating Expenses, con’t

Reserves for Replacements An annual allowance for each component that is

expected to be replaced on a periodic basis over the remaining economic life of the structureExamples: Roof, Exterior painting, common area

refurbishment, mechanical equipment

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Categories of Expenses

Examples of Proper Expenses Accounting or Legal Fees Advertising Casualty & Liability Insurance Lawn Care (Gardening) Maintenance Real Estate Taxes Utilities

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Categories of Expenses, con’t

Examples of Improper Expenses Capital Expenditures

adding a room or a building

Debt ServicePrinciple and/or Interest payments

Depreciationaccrued from Cost Approach or accounting stmts

Owners personal and/or business expenses Owners Income Taxes

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So That’s Income Estimation

Wayne Foss, MBA, MAI, CRE, Fullerton, CA USA Email: waynefoss@usa.net