Agenda - Council - 04/14/1981 - Laserfiche WebLink

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CONSIDERATIONS (cont.) In my opinion, a currently competitive internal rate of return which can be utilized in this valuation analysis for a 100~ interest in the subject real estate investment is 16.0~. This 16.0% is used in obtaining the appropriate discount or present worth factors which will be applied to the respective ~arOjected future investment proceeds. The present worth ctor can be obtained from several sources, one of which is the Financial Compound Interest and Annuity Tables as published by the Financial Publishing Company of Boston; and these appropriate present worth tables are utilized in the following valuation analysis. The projected net income for the subject real estate over the projection period is obtained from the income and expense analysis submitted elsewhere in this report, and these indi- vidual future net income projections are capitalized in the following valuation analysis through multiplication by the appropriate present worth factors. The net sales price ofthe subject real estate at the end of the projection period for utilization in this income approach to value is estimated to be the average of the previous maxket value estimates obtained from the previously discussed income valuation analyses Dincreased in value +5% per year. This projected future sales price equals $1,202,000 x 1.629 future worth factor at the end often years and equals $1,958,000. (See Valuation Chart) This $1,175,000 real estate investment if leveraged with a 60~ loan to value ratio conventional mortgage over 25 years would result in a first year equity investment cash flow divi- dend rate of [$133,500 less (60% x $1,175,000 x 14.45% constant)] divided by ($1,175,000 less 60% x $1,175,000) x 100 = 6.73%. This is Iow by historical standards but not the past yea' or so. The overall capitalization rate on t'u'st year's net income would be equal to $133,500 divided by $1,175,000 = 11.36% which is well below the 14A5% mort- gage constant. Recent disclosures by major local institutional investors reported the following IRR investment return requirements: In~estor A - Unleveraged 100% investment for 15 years incor- porating a +7% per year increase in net income plus 3¼% to 4% per yeas increase in property value for residual invest- ment recapture consideration resulting in current year capitalization rates of 9% to 10% and IRR of 14% to 15%. ln~eator B - 50% limited partnership interest vs. 50% general partner's interest in a 75% to 80% loan to value leveraged investment in exchange for a conventional fixed rate mort- gage at 2.00°~+- below market rate level for a typical amorti- zation term assuming at 10+- year ownership period with a +7% per year increase in net income plus 7% per year infla- tion of residual value from the hypothetical future sale of the 50% hypothetical interest resulting in a 16~% internal rate of return on the loan amount which is their investment position. Ineestor C - 100~ unleveraged investment in qualifying large real estate with an IRR/yield requirement of 15.5% assuming a 40 to $0 yea~ evaluation period representing economic life reflecting an annual increase in net income of 6% to 7% up to 20 years with a level income stream for the last 20 to 30 years incorporating a residual factor consisting only of the current land value recaptured at the end of the 19th year resulting in current year overall capitalization rates of about 10.50%. CONCLUSION Equity funds are placed in investments typically with respect to the anticipated yield or internal rates of return. Yields from real estate investment must be calculated for compari- son purposes on the same terms as yields on alternative forms of investment such as common stocks or discounted bonds. The yield on a common stock is equal to that rate .w. hic~h dis- counts the anticipated future stock dividends plus me xuture stock sale to a present worth equal to the current stock price. High quality real estate offering current annual returns of 9% to 10% and projected IR.R/yields of 15% to 16% must look good by comparison to the past performance of "Bine Chip" stock portfolios for many institutional investors. In the same vein, a discounted good quality corporate bond selling in say ten years with an annual below-market interest rate must typically yield less than the IRR/yield for real estate since the institutions are diversifying into real estate equities to a significant degree. Tax loss features from depreciation also are a plus factor. Investors, developers, appraisers and brokers should develop an awareness of this IRR]yield financial mode in order to best communicate with investors and lenders. If tiffs is the case, valid data should be offered to support: - IRR/yield rates for the investment. - Past and future inflation rates for net income. - Past and future inflation rates for market values for the type of investment being studied. - Feasibility of the proposed project or continued operation of the existing project. - Market research pertinent to the type of real estate being studied. This sounds lflce a lot of work and it is a lot of work. But demands are being made on the real estate professionals to communicate on the same level as the investors and theh' accountants/auditors. Possibly this review of IRR~yields will help your understanding of this changing real estate scene. Appraisers need input from investors, brokers and developers to sharpen their professional skills, l for one, appreciate the indust~'$ help in maintaining a current awareness of the real estate market, and I hope the members of NAIOP can use this input from a practicing real estate appraiser. _more PROGRAM COMMITTEE 1982 DATES JAN 19 NAIOP Factbook FEB 18 (Topic Open} MAR 16 Ali-Day ~rnin~' hear from anyone who may wish to suggest OFFICE PARK COURSE KICKOFF DINNER The Upper Midwest Chapter will be host foe' the Comprehensive Office Park Course Kickoff Dinner to be held on Monday even- lng, May 18. with Gerard Rau~hor~t as the keynote speaker. It will ur~luest[onably be a great evening for evewone -- watch our newsletter for the exact time and I~catZon. -- Dav~ Weir. Chairman NAIOP Program Committee NAIOP NEWSLETTER COMMITTEE HARRY YAFFE, Chairman Cindy Sirotkia Stun Johannes Norm Herbst