Agenda - Council - 04/11/2017 - Laserfiche WebLink

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INCOME CAPITALIZATION APPROACH The Income Capitalization Approach determines the value of a property based on the anticipated economic benefits.The principle of"anticipation" is essential to this approach, which recognizes the relationship between an asset's potential future income and its value. To value the anticipated economic benefits of a property, potential income and expenses must be projected, and the most appropriate capitalization method must be selected. The most common methods of converting net income into value are Direct Capitalization and Yield Capitalization. In direct capitalization, net operating income is divided by an overall capitalization rate to indicate an opinion of market value. In the yield capitalization method, anticipated future cash flows and a reversionary value are discounted to an opinion of net present value at a chosen yield rate (internal rate of return). Depending on certain factors, each of the Income Approach methods has merit. Considering all of the aspects that would influence an investment decision in the subject property, we conclude that only the Direct Capitalization Analysis is appropriate in this assignment, and necessary for a credible value indication. Potential Gross Income— "AS-STABILIZED"BASIS Potential gross income is generated by a number of distinct elements: minimum rent determined by lease agreement; reimbursement of certain expenses incurred in the ownership and operation of the real estate; and other miscellaneous revenues. Minimum base rent is a legal contract between landlord and tenant establishing a return to investors in the real estate.The lease terms also dictate specific expense reimbursement charges that can be billed to the tenant. Finally, miscellaneous income can be generated from a variety of sources.The first step in this appraisal is to analyze all potential gross income, starting with an analysis of the subject's tenancy. Subject Tenancy The subject property has been demised for multi-tenant occupancy, but could be occupied by a single tenant as well. In our highest and best use conclusion,we determined that renovating the improvements into a general retail use would be the maximally productive use. Therefore, we will analyze the subject as a single general retail property for our income analysis. On the following pages we will discuss the subject's occupancy, lease structure and rent levels, and we will contrast this information against comparable properties in the market. Expense Structure It is our expectation that typical lease terms for current and future vacant space at the subject would be on a net lease basis with most expenses being paid by the tenant. 941 Page