Income Estimation

1. Income Estimation Is the Process a Forecast or a Projection Wayne Foss, MBA, MAI, CRE, Fullerton, CA USA Email: waynefoss@usa.net

2. 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.

3. The Income Components • Potential Gross Income (PGI) • Less Allowances for Periodic Vacancy Collection Losses • Plus Other Income • Effective Gross Income (EGI)

4. 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 Levels • Published operating data (IREM or BOMA)

5. 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.

6. Types of Rent • Market Rent • Contract Rent • Effective Rent • Excess Rent • Percentage Rent • Overage Rent

7. Types of Rent con’t... • Market Rent Rental Income that the property would probably command in the open market • Contract Rent Actual Income specified by the lease

8. Types of Rent con’t... • Effective Rent Actual rent net of market required concessions or atypical allowances • Excess Rent The Amount by which contract exceeds actual market rent

9. Types of Rent con’t... • Percentage Rent Rental income received in accordance with the terms of a percentage clause in the lease • Overage Rent Percentage rent paid over the guaranteed minimum base rent

10. LeasesTypes of Income Provisions Types of Income Flows • Flat Rental • Variable Rental • Step-up or Step-Down • Revaluation • Annual Increase • Percentage

11. Types of Leases con’t... • Flat Rental Level Rent Throughout the Duration of the Lease • Variable Rental Periodic changes in rent, often tied to a specific index. (such as CPI)

12. Types of Leases con’t... • Step-up or Step Down a.k.a. Graduated rental leases Rent Steps Up or Down a specific intervals by specific amounts • Revaluation Lease Periodic adjustments based on revaluation of market rent

13. Types of Leases con’t... • Annual Increase Most common Annual adjustment based on specific amount stated in the lease • Percentage Lease Typical base rent, plus a percentage of gross business volume (sales)

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

15. LeasesTypes of Expense Provisions Types of Expense Clauses • Gross Lease • Modified Gross Lease • Net Lease • Double Net Lease • Triple Net Lease

16. Types of Expense Sharing con’t... • Gross Lease The tenant pays rent; the landlord pays all expenses • Modified Gross Lease The tenant and landlord share in the expense payments

17. Types of Expense Sharing con’t... • Net Lease The tenant pays utilities and taxes or insurance; the landlord pays all remaining expenses • Double Net Lease The tenant utilities, taxes and insurance; the landlord pays all remaining expenses

18. Types of Expense Sharing con’t... • Triple Net Lease The tenant pays all expenses, and the landlord pays only structural expenses

19. Allowances for Vacancy & Collection Losses • Vacancy Periodic vacancies Non-rentable space Tenant Turnover • Collection Loss Default by the tenant Concessions in the lease

20. The Expense Components • Effective Gross Income (EGI) • Less Allowances for Expenses Fixed Expenses Variable Expenses Reserves for Replacement • Net Operating Income (NOI)

21. 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

22. Operating Expenses, con’t • Fixed Expenses • Real Estate Taxes • Insurance • Fire, Owner’s Liability • May include special insurance for elevators, plate glas, etc. • Licenses (if required)

23. 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

24. Operating Expenses, con’t • Variable Expenses, con’t… • Decorating • Grounds and Parking area maintenance • Miscellaneous • Security • Supplies • Rubbish Removal and Exterminating • Snow Removal

25. 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 structure • Examples: Roof, Exterior painting, common area refurbishment, mechanical equipment

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

27. Categories of Expenses, con’t • Examples of Improper Expenses • Capital Expenditures • adding a room or a building • Debt Service • Principle and/or Interest payments • Depreciation • accrued from Cost Approach or accounting stmts • Owners personal and/or business expenses • Owners Income Taxes

28. So That’s Income Estimation Are there any Questions? Wayne Foss, MBA, MAI, CRE, Fullerton, CA USA Email: waynefoss@usa.net