Lesson 12 Exercises – Valuation of Property Using Overall Rates (The Income Approach to Value)

Appraisal Training: Self-Paced Online Learning Session

• Lesson 1
• Lesson 2
• Lesson 3
• Lesson 4
• Lesson 5
• Lesson 6
• Lesson 7
• Lesson 8
• Lesson 9
• Lesson 10
• Lesson 11
• Lesson 12
• Lesson 13
• Lesson 14
• Lesson 15
• Lesson 16
• Lesson 17
• Lesson 18
• Lesson 19
• Lesson 20
• Exam

Check Your Knowledge

1. The subject property is a 1,500 square foot retail store. It recently sold for $250,000. Twenty percent of the purchase price was paid as a down payment at the close of escrow. The buyer anticipates a monthly income from property rents of $2,200 per month. The buyer anticipated the following expenses:
   • Management Expenses$ 500
   • Annual Insurance$1,500
   • Maintenance and Repair$2,250

   The buyer states that she owns other properties in the area and she expects a five percent vacancy and collection loss per year. She also said that the county was limited to one percent of the purchase price for property taxes.

   In addition to the sale of the subject property, the following properties have recently sold:

   Sale	Sale Price	Anticipated Monthly Income	Anticipated Expenses (including V&CL)	Anticipated Taxes
   1	$200,000	$2,100	$9,000	$1,500
   2	$275,000	$2,400	$6,200	$3,000
   3	$245,000	$2,350	$8,050	$2,000

   An analysis of recently negotiated leases indicates that a market rent for the subject property is $1.50 per square foot per month. Various operating statements indicate that similar properties experience a five percent vacancy and collection loss per year; and, annual expenses, excluding ad valorem property taxes, are typically 16½ percent of the effective gross income. The local effective property tax rate is one percent of the assessed value.

   Based on all of the above information, use the income approach to determine the value indicated for the subject property.

Solution:

2. Your supervisor just handed you an assessment appeal file. The applicant filed, seeking a reduction pursuant to section 51(b)(2) of the Revenue and Taxation Code. The taxpayer feels the current market value of his property, as of the lien date, is less than the current assessed value. The taxpayer purchased the property three years ago for $700,000, and the assessor enrolled the sales price as indicative of market value. The assessed value, as of the current lien date, is $742,846; the effective tax rate is 1.1 percent

   The subject property is improved with a 12,000 square foot retail building. The building is divided into three separate stores of equal size. Two of the units are currently occupied while the third unit is vacant.

   1. Unit # 1: Fourth year of a five-year lease; rent of 55 cents per square foot per month.
   2. Unit # 2: Third year of a five-year lease; rent of 60 cents per square foot per month.
   3. The previous tenant leased unit # 3, currently vacant, on a month-to-month basis at 90 cents per square foot. The owner just leased this unit at 80 cents per square foot per month, on a five-year lease.

   All rents are on a "net" basis – the tenants pay all expenses except property taxes, which are paid by the owner.

   Included in his appeals application, the owner has submitted a copy of his income and expense statement for the last year:

   Owner's Income and Expense Statement

   • Actual Rents Received$87,600

     Expenses

     • Utilities:$ 1,000
     • Janitorial:1,200
     • Maintenance and repairs:1,500
     • Management:2,200
     • Insurance:2,500
     • Depreciation:6,500
     • Reserves for replacements:7,500
     • Property Taxes:8,500
     • Mortgage Interest:35,000
   • Total expenses-$65,900
   • Net Operating Income [NOI]$21,700

   The property owner is aware that mortgage interest expense is not allowable as an expense when valuing the property. He feels that a capitalization rate of 10 percent is appropriate for the property. Based on his assumptions, he feels that the property is only worth $567,000, which is why he is appealing the assessed value.

   You research your office's commercial property database and find the following information as of the current lien date. Typical vacancy and collection losses are seven percent of potential gross income. The sum of all expenses, except for property taxes, is six percent of effective gross income.

   Rent Comparables:

   TENANT	AREA [SF]	RENT/SF	DATE OF LEASE	LEASE TYPE
   shoe repair	4,000	75 ¢	one month old	"net"
   Radio Shack	4,500	72½ ¢	current	"net"
   Hallmark	8,500	80 ¢	current	"net"
   candy store	4,150	75 ¢	two months old	"net"
   clothing store	12,000	70 ¢	current	"net"

   Comparables for Overall Rate Derivation:

   TYPE	AREA [SF]	NIBR | NOI	SALES DATE	SALE PRICE
   retail	10,000	$104,000	one month ago	$1,100,000
   retail	8,500	$75,000	one month ago	$775,000
   retail	14,000	$132,000	one month ago	$1,400,000
   retail	25,000	$200,000	six months ago	$2,200,000

   Based on the information presented above, what is the estimated market value of the subject property? In addition, what is your recommendation for the resolution of the assessment appeal?

Solution:

3. The subject property was purchased 15 years ago. The property is an eight-unit apartment complex. The local bank has recently gained title to the property through foreclosure proceedings – a change in ownership.

   During the last ten years, there have been very few sales of apartments in the neighborhood. The neighborhood is somewhat blighted and the crime rate is higher than the average for the rest of the town.

   Because the previous owner performed all normal maintenance and repairs, the twenty year old improvements are in average condition. The Replacement Cost New Less NORMAL Depreciation for the improvements is $415,000. Vacant lots that are of the same size and located in similar locations as the subject are selling for $95,000. This indicates a value of $510,000. However, you feel that, cognizant of the property's location, it may be suffering a loss in value due to the outside obsolescence.

   Six months ago, the local bank refinanced a comparable ten-unit apartment complex. The property is located in the same neighborhood as the subject property. The improvements are also very similar to the subject's improvements. The ten units rent for $650 per unit per month. Because of the neighborhood conditions, the bank would only loan 60 percent of the value indicated by their appraisal – $400,000 for the entire complex. The effective interest rate on the monthly payment, fully amortizing, loan was 11 percent; the term was 25 years. The property taxes on this complex last year were $3,500. The borrower/buyer expected the income and expenses, including the property taxes, to remain the same for now.

   The subject's units are renting for $650 per month. This appears to be typical for the neighborhood. A review of other complexes within the neighborhood indicates that the vacancy and collection losses are approximately 10 percent per year. Expenses, except for property taxes, appear to consume approximately 25 percent of the effective gross income.

   Similar apartments across town rent for $775 per month, and only experience a 3 percent vacancy and collection loss; the expense ratio, not including property taxes, is 10 percent. Banks will make 80 percent monthly payment loans, with an 8 percent interest rate, in this more stable neighborhood.

   The local property taxes are based on 1 percent of the annually enrolled taxable value. The subject's taxes last year were $3,500.

   What is your opinion of the market value of the subject property?

Solution: