Forecasting Property Value workbook example for Maegen's Magic Manor

This workbook has been designed to illustrate the process of forecasting the income and value of an investment property. Although its primary functionis to accompany the example in the text (Maegen's Manor), the worksheet is flexible enough to accommodate almost any income-producing real estateinvestment, including non-residential properties. Note that the individual worksheets are integrated and that they build upon each other. Inputs need only be made in yellow boxes; the inserted formulas will make all necessary calculations. More in-depth explanations of the numbers used here can be foundin chapters 6, 9, 10, 11, 12, 13, and 16.

Anticipated holding period: 6 (may be from 2 to 10 years)

Potential Gross Rent inputs: Units Monthly Rent Input in yellow cells only.Type 1: Two-Bedroom 50 $858 (input for purchase price is on the Sale worksheet)Type 2: One-Bedroom 150 $704Type 3: Studio Units 80 $528

Square Feet Annual Rent / SFNon-residential input:

0* 1 2 3 4 5 Increase in rents: 2.5% 5.0% 5.0% 3.5% 3.5% 3.5%

(to the following year) * fill in this box only if monthly rents above are current and need to be adjusted for the first year of operations

1 2 3 4 5 Estimated vacancy rates: (for each year) 7.5% 4.0% 4.0% 6.0% 6.0%

Other income: 4.7% (enter as a percentage of collectable rents)

Potential Gross Rent Estimate for first year:

Source: Dr. Greg Smersh, Florida State University

workbook example for Maegen's Magic Manor

This workbook has been designed to illustrate the process of forecasting the income and value of an investment property. Although its primary functionis to accompany the example in the text (Maegen's Manor), the worksheet is flexible enough to accommodate almost any income-producing real estateinvestment, including non-residential properties. Note that the individual worksheets are integrated and that they build upon each other. Inputs need only be made in yellow boxes; the inserted formulas will make all necessary calculations. More in-depth explanations of the numbers used here can be found

Input in yellow cells only.(input for purchase price is on the Sale worksheet)

Annual gross rent estimate: $2,288,900

6 7 8 9

* fill in this box only if monthly rents above are current and need to be adjusted for the first year of operations

6 7 8 9 10 6.0%

Potential Gross Rent Estimate for first year: $2,346,100

Operating Expenses (Chapter 6)

As discussed in the text, operating expenses for Maegen's Manor are expected to increase at an annual rate of 3.5% except for management expenses(which are 5% of EGI), and property taxes (which are expected to increase by 25% in year 4).

Annual Operating Expense Increase: 3.5% Management Fee (% of EGI):

0* 1 2 3 4 Increase in property taxes: 25.0%

(to the following and continuing years) * fill in this box only if property taxes below need to be adjusted for the first year of operations

Potential Gross Rent

Effective Gross IncomeCurrent Expense Estimates:

Operating Expenses (from Table 5.6) Management Fee (% of EGI) Salary Expense $ 197,100 Utilities $ 105,300 Insurance $ 35,500 Supplies $ 21,000 Advertising $ 32,000 Maintenance & Repairs $ 181,900 Property Taxes $ 300,000

Net Operating Income (NOI)

Less: Allowance for Vacancies

Plus: Other Income

As discussed in the text, operating expenses for Maegen's Manor are expected to increase at an annual rate of 3.5% except for management expensesInput in yellow cells only.

Management Fee (% of EGI): 5.0%

5 6 7 8 9

* fill in this box only if property taxes below need to be adjusted for the first year of operations

Table 6.1 First-year Operating Forecast

$ 2,346,100 176,000 $ 2,170,100 102,000 $ 2,272,100

113,600204,000109,000

36,70021,70033,100

188,300300,000 1,006,400

$ 1,265,700

Note: all numbers are annual and rounded to the nearest $100

Operating Statement (Chapter 6)

The annual operating statement for all years of the anticipated holding period are shown below as well as the operating expense ratio for each year. Not that allof the cells below contain formulas and changes should ONLY be made on the previous two worksheets.

Table 6.2 Operating Forecast1 2 3 4 5

1 Potential Gross Rent 2,346,100 2,463,400 2,586,600 2,677,100 2,770,800

2 Vacancy Allowance 176,000 98,500 103,500 160,600 166,200

3 2,170,100 2,364,900 2,483,100 2,516,500 2,604,600

4 Other Income 102,000 111,200 116,700 118,300 122,400

5 Effective Gross Income 2,272,100 2,476,100 2,599,800 2,634,800 2,727,000

6 Operating Expenses

7 Management Fee 113,600 123,800 130,000 131,700 136,400

8 Salary Expense 204,000 211,100 218,500 226,100 234,000

9 Utilities 109,000 112,800 116,700 120,800 125,000

10 Insurance 36,700 38,000 39,300 40,700 42,100

11 Supplies 21,700 22,500 23,300 24,100 24,900

12 Advertising 33,100 34,300 35,500 36,700 38,000

13 Maintenance & repairs 188,300 194,900 201,700 208,800 216,100

14 Property Taxes 300,000 300,000 300,000 375,000 375,000

15 Total Expenses 1,006,400 1,037,400 1,065,000 1,163,900 1,191,500

16 Net Operating Income 1,265,700 1,438,700 1,534,800 1,470,900 1,535,500

Table 6.3 Forecasted Operating Expense Ratios

1 2 3 4 5

44.3% 41.9% 41.0% 44.2% 43.7%

The annual operating statement for all years of the anticipated holding period are shown below as well as the operating expense ratio for each year. Not that allof the cells below contain formulas and changes should ONLY be made on the previous two worksheets. No inputs on this worksheet.

6 7 8 9 10

2,867,800 0 0 0 0

172,100 0 0 0 0

2,695,700 0 0 0 0

126,700 0 0 0 0

2,822,400 0 0 0 0

141,100 0 0 0 0

242,200 0 0 0 0

129,400 0 0 0 0

43,600 0 0 0 0

25,800 0 0 0 0

39,300 0 0 0 0

223,700 0 0 0 0

375,000 0 0 0 0

1,220,100 0 0 0 0

1,602,300 0 0 0 0

6 7 8 9 10

43.2% 0.0% 0.0% 0.0% 0.0%

Mortgage Borrowing (Chapter 9)

For Maegen's Manor, a mortgage for $8 million is expected (based on roughly 70% LTV). Terms are 20 years with monthly amortization and an annual interest rate of 8%. Inputs below calculate the annual debt service, portions due to interest and principal, and the mortgage balance for each year of theanticipated holding period. Input in yellow cells only.

Mortgage Amount: $ 8,000,000

Mortgage Term: 20 (enter in years) Mortgage calculator:

Interest Rate: 8.00% (enter annual %) Monthly Debt Service:

Amortization: 12 (annual = 1, monthly = 12) Annual Debt Service:

Annual Debt Service (ADS):

Table 9.6 Amortization Schedule1 2 3 4 5 6

Interest paid 633,889 619,855 604,655 588,194 570,367 551,060

Principal paid 169,093 183,128 198,327 214,789 232,616 251,923

Total Debt Service 802,982 802,982 802,982 802,982 802,982 802,982

Mortgage Balance 7,830,907 7,647,779 7,449,451 7,234,663 7,002,047 6,750,124

For Maegen's Manor, a mortgage for $8 million is expected (based on roughly 70% LTV). Terms are 20 years with monthly amortization and an annual interest rate of 8%. Inputs below calculate the annual debt service, portions due to interest and principal, and the mortgage balance for each year of the

Monthly Debt Service: $ 66,915.21

Annual Debt Service: $ 802,982.47

Annual Debt Service (ADS): $803,000 (rounded)

7 8 9 100 0 0 0

0 0 0 0

0 0 0 0

0 0 0 0

Before-Tax Cash Flow (BTCF) (Chapter 9)

The next step in projecting an annual operating statement is to deduct the annual debt service (ADS) from NOI for all years of the anticipated holding period.Note that all of the cells below contain formulas and changes should ONLY be made on the Intro, Expenses, and Mortgage worksheets.No inputs on this worksheet.

Table 9.5 Projected Before-Tax Cash Flows from Operations1 2 3 4 5

Potential Gross Rent 2,346,100 2,463,400 2,586,600 2,677,100 2,770,800

Vacancy Allowance 176,000 98,500 103,500 160,600 166,200

2,170,100 2,364,900 2,483,100 2,516,500 2,604,600

Other Income 102,000 111,200 116,700 118,300 122,400

Effective Gross Income 2,272,100 2,476,100 2,599,800 2,634,800 2,727,000

Operating Expenses

Management Fee 113,600 123,800 130,000 131,700 136,400

Salary Expense 204,000 211,100 218,500 226,100 234,000

Utilities 109,000 112,800 116,700 120,800 125,000

Insurance 36,700 38,000 39,300 40,700 42,100

Supplies 21,700 22,500 23,300 24,100 24,900

Advertising 33,100 34,300 35,500 36,700 38,000

Maintenance & repairs 188,300 194,900 201,700 208,800 216,100

Property Taxes 300,000 300,000 300,000 375,000 375,000

Total Expenses 1,006,400 1,037,400 1,065,000 1,163,900 1,191,500

Net Operating Income 1,265,700 1,438,700 1,534,800 1,470,900 1,535,500

Debt Service 803,000 803,000 803,000 803,000 803,000

Before-Tax Cash Flow 462,700 635,700 731,800 667,900 732,500

The next step in projecting an annual operating statement is to deduct the annual debt service (ADS) from NOI for all years of the anticipated holding period.Note that all of the cells below contain formulas and changes should ONLY be made on the Intro, Expenses, and Mortgage worksheets.

6 7 8 9 10

2,867,800 0 0 0 0

172,100 0 0 0 0

2,695,700 0 0 0 0

126,700 0 0 0 0

2,822,400 0 0 0 0

141,100 0 0 0 0

242,200 0 0 0 0

129,400 0 0 0 0

43,600 0 0 0 0

25,800 0 0 0 0

39,300 0 0 0 0

223,700 0 0 0 0

375,000 0 0 0 0

1,220,100 0 0 0 0

1,602,300 0 0 0 0

803,000 0 0 0 0

799,300 0 0 0 0

Income Tax Issues (Chapter 10)

The next step in projecting an annual operating statement is to calculate taxes from operations for all years of the anticipated holding period. Again, changes should ONLY be made on the Intro, Expenses, and Mortgage worksheets and in the yellow boxes below.

Marginal Tax Rate: 40% Input Input CostDepreciable Basis Recovery Period

Calcs for depreciation expense: 9,300,000 / 27.5

Tax Calculations 1 2 3 4 5

Net Operating Income 1,265,700 1,438,700 1,534,800 1,470,900 1,535,500

- Interest Expense 633,900 619,900 604,700 588,200 570,400

- Depreciation 324,100 338,200 338,200 338,200 338,200

Taxable Income (Loss) 307,700 480,600 591,900 544,500 626,900

x Marginal tax rate 0.40 0.40 0.40 0.40 0.40

Income taxes 123,100 192,200 236,800 217,800 250,800

Table 10.2 Projected After-Tax Cash Flows from Operations (table is condensed - click Format / Row / Unhide to expand)

1 2 3 4 5

Potential Gross Rent 2,346,100 2,463,400 2,586,600 2,677,100 2,770,800

Vacancy Allowance 176,000 98,500 103,500 160,600 166,200

2,170,100 2,364,900 2,483,100 2,516,500 2,604,600

Other Income 102,000 111,200 116,700 118,300 122,400

Effective Gross Income 2,272,100 2,476,100 2,599,800 2,634,800 2,727,000

- Operating Expenses 1,006,400 1,037,400 1,065,000 1,163,900 1,191,500

Net Operating Income 1,265,700 1,438,700 1,534,800 1,470,900 1,535,500

- Debt Service 803,000 803,000 803,000 803,000 803,000

Before-Tax Cash Flow 462,700 635,700 731,800 667,900 732,500

- Income Taxes 123,100 192,200 236,800 217,800 250,800

After-Tax Cash Flow 339,600 443,500 495,000 450,100 481,700

The next step in projecting an annual operating statement is to calculate taxes from operations for all years of the anticipated holding period. Again, changes should ONLY be made on the Intro, Expenses, and Mortgage worksheets and in the yellow boxes below. Input in yellow cells only.

Depreciation IRS Mid-monthDeduction Convention*

= $ 338,200 $ 324,100

* applies to first and last year

6 7 8 9 10

1,602,300 0 0 0 0

551,100 0 0 0 0

324,100 0 0 0 0

727,100 0 0 0 0

0.40 0.40 0.40 0.40 0.40

290,800 0 0 0 0

(table is condensed - click Format / Row / Unhide to expand)

6 7 8 9 10

2,867,800 0 0 0 0

172,100 0 0 0 0

2,695,700 0 0 0 0

126,700 0 0 0 0

2,822,400 0 0 0 0

1,220,100 0 0 0 0

1,602,300 0 0 0 0

803,000 0 0 0 0

799,300 0 0 0 0

290,800 0 0 0 0

508,500 0 0 0 0

Property Disposition (Chapter 11)

At some point in the future, a real estate investor may want to sell the property. Indeed, the analyst must estimate a future selling price to use valuationmethods such as NPV and IRR. Inputs below (yellow boxes only) are for both the purchase and sales prices, their associated costs, and tax rates.Input in yellow cells only.

Purchase price: 11,444,500 Selling price: 17,800,000 Table 11.2 Estimated Income Tax ConsequencesTransaction costs: 150,000 Selling costs: 890,000

Selling PriceTax rate on capital gains: 20% - Adjusted Basis (from Table 11.1)

Tax rate on depreciation recapture: 25% Gain on Disposal

- Gain from depreciation recapture

Long-Term Capital GainAnticipated holding period: 6

Tax on depreciation recaptureMortgage balance: $ 6,750,124 Tax on capital gain

(from Table 9.6) Total Tax Liability on Sale

Table 11.1 Estimate of Investor's Adjusted Tax Basis Table 11.3 Estimate of After-Tax Equity Reversion

Purchase Price $ 11,444,500 Selling Price

+ Transaction Costs $ 150,000 - Selling Costs

Initial Tax Basis $ 11,594,500 Net Sales Proceeds

- Cumulative Depreciation $ 2,001,000 - Mortgage Balance

Adjusted Basis Prior to Sale $ 9,593,500 Before-tax Equity Reversion

+ Selling Costs $ 890,000 - Taxes due on sale

Adjusted Basis at Time of Sale $ 10,483,500 After-Tax Equity Reversion

At some point in the future, a real estate investor may want to sell the property. Indeed, the analyst must estimate a future selling price to use valuationmethods such as NPV and IRR. Inputs below (yellow boxes only) are for both the purchase and sales prices, their associated costs, and tax rates.

Table 11.2 Estimated Income Tax Consequences

$ 17,800,000

- Adjusted Basis (from Table 11.1) $ 10,483,500

$ 7,316,500

- Gain from depreciation recapture $ 2,001,000

Long-Term Capital Gain $ 5,315,500

Tax on depreciation recapture $ 500,300

$ 1,063,100

Total Tax Liability on Sale $ 1,563,400

Table 11.3 Estimate of After-Tax Equity Reversion

$ 17,800,000

$ 890,000

$ 16,910,000

$ 6,750,100

Before-tax Equity Reversion $ 10,159,900

$ 1,563,400

After-Tax Equity Reversion $ 8,596,500

Ratio Analysis - Value (Chapter 12)

Ratios are widely used to gauge the reasonableness of relationships between various measures of value and performance.Income multipliers express the relationship between market value and operating income. These multipliers can also be used to estimate market value. Input in yellow cells only.

Income MultipliersGross Rent Multiplier: Market Price Gross Rents

11,444,500 / 2,346,100 =

Gross Income Multiplier: Market Price EGI11,444,500 / 2,272,100 =

Net Income Multilier: Market Price NOI11,444,500 / 1,265,700 =

Using Multipliers to Estimate Market Value

Gross Rent Multiplier Method: Gross Rents Input GRM

2,346,100 x 5.00 =

Gross Income Multiplier Method: EGI Input GIM

2,272,100 x 5.00

Net income Multilier Method: NOI Input NIM

1,265,700 x 9.00 =

Ratios are widely used to gauge the reasonableness of relationships between various measures of value and performance.Income multipliers express the relationship between market value and operating income. These multipliers can also be

4.88

5.04

9.04

$ 11,730,500

$ 11,360,500

$ 11,391,300

Ratio Analysis - Financial & Profitability (Chapter 12)

As shown in the text, ratio analysis also includes measures of financing ability (operating ratio, breakeven ratio, debt coverage ratio, and loan-to-value ratio), and profitability (cap rate and equity dividend rate). Input in yellow cells only.

Financial RatiosOperating Ratio: OE EGI

1,006,400 / 2,272,100

Break-even Ratio: (OE + ADS) EGI1,809,400 / 2,272,100

Debt Coverage Ratio: NOI ADS1,265,700 / 803,000

Loan-to-value (LTV) Ratio: Mortgage Market Price

8,000,000 / 11,444,500

Profitability MeasuresCapitalization Rate: NOI Market Price

1,265,700 / 11,444,500

Using Cap Rate to Estimate Market Value: NOI Input cap rate

1,265,700 / 10.00%

Equity Dividend Rate: BTCF Initial Equity

(before-tax) 462,700 / 3,594,500

Equity Dividend Rate: ATCF Initial Equity

(after-tax) 339,600 / 3,594,500

As shown in the text, ratio analysis also includes measures of financing ability (operating ratio, breakeven ratio, debt coverage Input in yellow cells only.

= 44%

= 80%

= 1.58

= 70%

= 11.06%

= $ 12,657,000

= 12.87%

= 9.45%

Discounted Cash Flow (DCF) Analysis (Chapter 13)

As discussed in the text, an internal rate of return (IRR) is the discount rate that will exactly equate the present value of a projected stream of cash flowswith an initial equity investment. Alternatively, subtracting a initial equity investment from the present value of projected cash flows (discounted at a givendiscount rate) yields net present value (NPV). No inputs on this worksheet.

Anticipated holding period: 6 Selling Price: 17,800,000

- Selling Costs: 890,000

Purchase price: 11,444,500 Net Sales Proceeds: 16,910,000

Transaction costs: 150,000 - Mortgage Balance: 6,750,100

Initial Investment Basis: 11,594,500 Before-tax Equity Reversion: 10,159,900

Mortgage: 8,000,000 - Taxes due on sale: 1,563,400Initial Equity: 3,594,500 After-Tax Equity Reversion: 8,596,500

0 1 2 3 4 5 6 7 8 9 10 BTCF: 462,700 635,700 731,800 667,900 732,500 799,300 0 0 0 0

BTER: 0 0 0 0 0 10,159,900 0 0 0 0

Total: (3,594,500) 462,700 635,700 731,800 667,900 732,500 10,959,200 0 0 0 0

Before-tax IRR: 31.31%

0 1 2 3 4 5 6 7 8 9 10 ATCF: 339,600 443,500 495,000 450,100 481,700 508,500 0 0 0 0

ATER: 0 0 0 0 0 8,596,500 0 0 0 0

Total: (3,594,500) 339,600 443,500 495,000 450,100 481,700 9,105,000 0 0 0 0

After-tax IRR: 24.60%

Risk-Adjustment Method (Chapter 16) Assumptions:

As discussed in the text, several different methods are Anticipated holding period: 6 Selling Price: 17,800,000available to assess the risk inherent in any real estate - Selling Costs: 890,000investment. This worksheet contains formulas to help Purchase price: 11,444,500 Net Proceeds: 16,910,000illustrate the methods. Input in yellow cells only. Transaction costs: 150,000 - Mortgage Balance: 6,750,100

Initial Investment Basis: 11,594,500 Before-tax Reversion: 10,159,900

Mortgage: 8,000,000 - Taxes due on sale: 1,563,400Initial Equity: 3,594,500 After-Tax Reversion: 8,596,500

Payback Period0 1 2 3 4 5 6 7 8 9 10

ATCF: 339,600 443,500 495,000 450,100 481,700 508,500 0 0 0 0

ATER: 0 0 0 0 0 8,596,500 0 0 0 0

Total: 3,594,500 339,600 443,500 495,000 450,100 481,700 9,105,000 0 0 0 0

Cummulative: 3,594,500 3,254,900 2,811,400 2,316,400 1,866,300 1,384,600 7,720,400 0 0 0 0

Initial Calc: 1 2 3 4 5 - - - - Payback Period: 5.06 years

Sensitivity AnalysisDiscount rate: 10.00% PV of Equity $ 6,793,214 Note: discount rate applies to the calculations below as well.

Variation in NOI % change in Equity Value

Equity Value with - 10 % variation expected with + 10 % variation

Input % variation: 10.00% 5.61% 6,411,888 6,793,214 7,174,541

Variation in Sales Price with - 10 % variation expected with + 10 % variation

Input % variation: 10.00% 14.05% 5,838,689 6,793,214 7,747,740

Calculations for Sensitivity Analysis DO NOT CHANGE !!

Calcs for change in NOI:After-Tax Cash Flow 415,570 529,770 587,080 538,390 573,850 604,630 0 0 0 0

After-tax Equity Reversion 0 0 0 0 0 8,596,500 0 0 0 0

Total Cash Flow 415,570 529,770 587,080 538,390 573,850 9,201,130 0 0 0 0

Change in Equity Value: 7,174,541 - 6,793,214 = 381,326

Calcs for change in Sales Price:After-Tax Cash Flow 339,600 443,500 495,000 450,100 481,700 508,500 0 0 0 0

After-tax Equity Reversion 0 0 0 0 0 10,287,500 0 0 0 0

Total Cash Flow 339,600 443,500 495,000 450,100 481,700 10,796,000 0 0 0 0

Change in Equity Value: 7,747,740 - 6,793,214 = 954,525