CHAPTER 9 INTRODUCTION TO INCOMEPRODUCING PROPERTIES AND VALUATION FUNDAMENTALS

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CHAPTER 9 INTRODUCTION TO INCOME-PRODUCINGPROPER
TIES AND VALUATION FUNDAMENTALS
Property Types Residential- Single
family Multifamily   Nonresidential-   Office
Retail Industrial Hotel/Motel Recreational
Institutional  Mixed use Developments
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Regional Economic Influences on Property Values
when undertaking a real estate analysis, the
analyst must identify the regional economic
drivers and make a judgment about whether these
drivers will provide a source of growth or
decline in a region.
Why do certain kinds of economic activity tend to
cluster more in some regions and urban areas
than others?
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Comparative Advantage
Comparative Advantage- some geographic regions
have a comparative advantage over other regions
in that certain goods/services can be produced
more efficiently and profitably in that region
than in other regions.
Reasons Transportation Natural
Resources Climate Leadership Labor
Force Educational Skills
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Economic Base Theory
Many analysts rely on employment data to evaluate
a regions comparative advantage. One widely
accepted approach in regional economic analysis
is to calculate what are referred to as location
quotients for a region. (Regional Employment
in a particular sector/Total Regional
Employment) (U.S. Employment in a particular
sector/Total U.S. Employment)  If this ratio is
greater than 1, then the sector would be
identified as a base or driver industry for a
region because it employs a greater than
proportionate amount of workers in that industry
than is the case for the U.S. as a whole.
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Economic Base Theory
 Employment Multipliers- Used to estimate how
total employment in the region is affected by
changes in base employment. Relate total
employment to base employment, calculate the
ratio estimate increase in base employment
estimate the increase in total employment.  Using
this type of macro analysis can help real estate
investors identify the potential demand for
various types of real estate.
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Supply and Demand Analysis
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Location and User-Tenants
Successful real estate investors and developers
realize that location as viewed by user-tenants
is also important to recognize. They must
understand the business operations of potential
tenant-users and how certain locations will
appeal to those users.
This process of profit analysis and competition
by many different firms for space in locations
that tend to maximize profits produces certain
general land-use results in real estate markets.
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Lease or Purchase ?
Most tenants find leasing to be more
cost-effective than owning. Why?   Owning
requires a large commitment of capital  
Owning puts the user in the real estate
business   Owning may reduce operating
flexibility   Owners must operate, maintain,
and repair the building
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Chapter 9 - ContinuedIntroduction to Leases,
Projecting Cash Flow and Investment Value
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Leases Longer terms than 1 year normally

• Base Rent - specified dollar amount of initial
  lease.
• Step-Up Provision - specify that rents will
  increase (step-up) periodically by predetermined
  amounts over term of lease.
• CPI Adjustment - periodic increases tied to CPI
  (protects landlord against inflation.
• Percentage Rent - Landlord shares in tenants
  sales - typical for shopping centers -
  Adv/Disadv? - Share in Gross, net, are what?-
  verifiable? - Min (called overage) - can be
  sliding scale.

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Who covers expenses on building? (property taxes,
insurance, utilities, maintenance)

• Gross Lease - Lessor (landlord) pays all expenses
  -gtrisky on L-T Leases that dont have escalation
  clauses.
• Net Leases - Lessee pays some or all of the
  expenses -
• Net - property taxes
• Net-Net - property taxes property insurance
• Triple Net - property taxes, insurance and
  maintenance. (or all expenses
  except debt service.

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• Expense Stops - Lessor pays operating expenses up
  to a specified amount, then expenses
  pass-through
• Expense Pass-Throughs - if tenant (s) lease only
  a portion of the building --gt their proportional
  share pass-through.

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Lease Considerations/Concessions

• Free Rent - used in tough times, high vacancy
  rates --gt Get them in the building and hope you
  can keep them.
• Tenant Improvements lessor usually pays for
  improvements.
• Face Rents/Asking Rents - Quote standard rates
  before discounts are given.
• Rent Premium or discounts- based on unit location
• Signage
• Non-Compete Clauses
• Lease renewal options - allows tenant to lock
  space in future at specified rate.
• Right of First Refusal
• Tenant Relocation Option - allows lessor to move
  tenant within building during lease terms
• Everything is negotiable!!

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Lease Terms by Property Types

• Hotel/Motel daily/weekend/weekly - the ultimate
  inflation protection
• Apartments 6/12 month terms, renegotiated at end
  of lease term.
• Office 3-5 years, options possible, may include
  rent increases or tied to CPI, may be net leases
  or expense pass-throughs.
• Retail vary considerably, smaller
  retailersshort terms (1-2 yrs.), larger
  retailers (1-20 yrs.). Malls often percentage
  leases with floors.
• Industrial Highly individualized. 3-5 years or
  longer. Typically triple-net leases.