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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.
is to accompany the example in the text (Maegen's Manor), the worksheet is flexible enough to accommodate almost any
investment, including non-residential properties. Note that the individual worksheets are integrated and that they build upo
be made in yellow boxes; the inserted formulas will make all necessary calculations. More in-depth explanations of the num
in chapters 6, 9, 10, 11, 12, 13, and 16.
Anticipated holding period:

(may be from 2 to 10 years)

Potential Gross Rent inputs:


Type 1: Two-Bedroom
Type 2: One-Bedroom
Type 3:
Studio Units

Units
50
150
80

Monthly Rent
$858
$704
$528

Square Feet

Annual Rent / SF

Input in yellow cells only.


(input for purchase price is o

Non-residential input:
0*
Increase in rents:
(to the following year)

2.5%

1
5.0%

5.0%

3
3.5%

4
3.5%

5
3.5%

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

1
Estimated vacancy rates:

(for each year)

Other income:

4.7%

7.5%

2
4.0%

3
4.0%

4
6.0%

5
6.0%

(enter as a percentage of collectable rents)

Potential Gross Rent Estimate f

Source: Dr. Greg Smersh, Florida State University

s Magic Manor

lue of an investment property. Although its primary function


h to accommodate almost any income-producing real estate
egrated and that they build upon each other. Inputs need only
n-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:


6

$2,288,900

ed to be adjusted for the first year of operations

10

6.0%

otential 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% exce
(which are 5% of EGI), and property taxes (which are expected to increase by 25% in year 4).
Annual Operating Expense Increase:

Management Fee (% of EGI):

3.5%

0*

Increase in property taxes:


(to the following and continuing years)

25.0%

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

Potential Gross Rent


Less: Allowance for Vacancies
Plus: Other Income
Effective Gross Income
Operating Expenses
Management Fee (% of EGI)
Salary Expense
Utilities
Insurance
Supplies
Advertising
Maintenance & Repairs
Property Taxes
Net Operating Income (NOI)

Current Expense Estimates:


(from Table 5.6)

$
$
$
$
$
$
$

197,100
105,300
35,500
21,000
32,000
181,900
300,000

se at an annual rate of 3.5% except for management expenses


Input in yellow cells only.

nt Fee (% of EGI):

5.0%

to be adjusted for the first year of operations

Table 6.1 First-year Operating Forecast


$
$
$

113,600
204,000
109,000
36,700
21,700
33,100
188,300
300,000

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

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 operatin
of the cells below contain formulas and changes should ONLY be made on the previous two worksheets.
Table 6.2 Operating Forecast
1
2,346,100
176,000
2,170,100
102,000
2,272,100

2
2,463,400
98,500
2,364,900
111,200
2,476,100

3
2,586,600
103,500
2,483,100
116,700
2,599,800

4
2,677,100
160,600
2,516,500
118,300
2,634,800

5
2,770,800
166,200
2,604,600
122,400
2,727,000

113,600
204,000
109,000
36,700
21,700
33,100
188,300
300,000

123,800
211,100
112,800
38,000
22,500
34,300
194,900
300,000

130,000
218,500
116,700
39,300
23,300
35,500
201,700
300,000

131,700
226,100
120,800
40,700
24,100
36,700
208,800
375,000

136,400
234,000
125,000
42,100
24,900
38,000
216,100
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

3
41.0%

4
44.2%

5
43.7%

1.
2.
3.
4.
5.

Potential Gross Rent


Vacancy Allowance
Other Income
Effective Gross Income

6. Operating Expenses
7.
Management Fee
8.
Salary Expense
9.
Utilities
10.
Insurance
11.
Supplies
12.
Advertising
13.
Maintenance & repairs
14.
Property Taxes

Table 6.3 Forecasted Operating Expense Ratios


1
44.3%

2
41.9%

own below as well as the operating expense ratio for each year. Not that all
ous two worksheets.
No inputs on this worksheet.

6
2,867,800
172,100
2,695,700
126,700
2,822,400

7
0
0
0
0
0

8
0
0
0
0
0

9
0
0
0
0
0

10
0
0
0
0
0

141,100
242,200
129,400
43,600
25,800
39,300
223,700
375,000

0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0

1,220,100

1,602,300

6
43.2%

7
0.0%

8
0.0%

9
0.0%

10
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 monthl
interest rate of 8%. Inputs below calculate the annual debt service, portions due to interest and principal, and the mortgag
anticipated holding period.
Input in yellow cells only.

Mortgage Amount: $
Mortgage Term:
Interest Rate:
Amortization:

8,000,000
20
8.00%
12

(enter in years)
(enter annual %)
(annual = 1, monthly = 12)

Mortgage calculator:
Monthly Debt Service:
Annual Debt Service:

Annual Debt Service (A

Table 9.6 Amortization Schedule


1

Interest paid
Principal paid
Total Debt Service

633,889
169,093
802,982

619,855
183,128
802,982

604,655
198,327
802,982

588,194
214,789
802,982

570,367
232,616
802,982

551,060
251,923
802,982

Mortgage Balance

7,830,907

7,647,779

7,449,451

7,234,663

7,002,047

6,750,124

rms are 20 years with monthly amortization and an annual


and principal, and the mortgage balance for each year of the

Monthly Debt Service: $


Annual Debt Service: $

66,915.21
802,982.47

Annual Debt Service (ADS):

$803,000 (rounded)

10

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 yea
Note that all of the cells below contain formulas and changes should ONLY be made on the Intro, Expenses, and Mortgag
No inputs on this worksheet.
Table 9.5 Projected Before-Tax Cash Flows from Operations
Potential Gross Rent
Vacancy Allowance
Other Income
Effective Gross Income
Operating Expenses
Management Fee
Salary Expense
Utilities
Insurance
Supplies
Advertising
Maintenance & repairs
Property Taxes
Total Expenses
Net Operating Income
Debt Service
Before-Tax Cash Flow

1
2,346,100
176,000
2,170,100
102,000
2,272,100

2
2,463,400
98,500
2,364,900
111,200
2,476,100

3
2,586,600
103,500
2,483,100
116,700
2,599,800

4
2,677,100
160,600
2,516,500
118,300
2,634,800

5
2,770,800
166,200
2,604,600
122,400
2,727,000

113,600
204,000
109,000
36,700
21,700
33,100
188,300
300,000

123,800
211,100
112,800
38,000
22,500
34,300
194,900
300,000

130,000
218,500
116,700
39,300
23,300
35,500
201,700
300,000

131,700
226,100
120,800
40,700
24,100
36,700
208,800
375,000

136,400
234,000
125,000
42,100
24,900
38,000
216,100
375,000

1,006,400
1,265,700
803,000

1,037,400
1,438,700
803,000

1,065,000
1,534,800
803,000

1,163,900
1,470,900
803,000

1,191,500
1,535,500
803,000

462,700

635,700

731,800

667,900

732,500

bt service (ADS) from NOI for all years of the anticipated holding period.
on the Intro, Expenses, and Mortgage worksheets.

6
2,867,800
172,100
2,695,700
126,700
2,822,400

7
0
0
0
0
0

8
0
0
0
0
0

9
0
0
0
0
0

10
0
0
0
0
0

141,100
242,200
129,400
43,600
25,800
39,300
223,700
375,000

0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0

1,220,100
1,602,300
803,000

0
0
0

0
0
0

0
0
0

0
0
0

799,300

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 anti
should ONLY be made on the Intro, Expenses, and Mortgage worksheets and in the yellow boxes below.
Marginal Tax Rate:

40%

Input
Depreciable Basis

Calcs for depreciation expense:

9,300,000

Tax Calculations
Net Operating Income
- Interest Expense
- Depreciation
Taxable Income (Loss)
x Marginal tax rate
Income taxes

1
1,265,700
633,900
324,100
307,700
0.40
123,100

2
1,438,700
619,900
338,200
480,600
0.40
192,200

3
1,534,800
604,700
338,200
591,900
0.40
236,800

Table 10.2 Projected After-Tax Cash Flows from Operations


Potential Gross Rent
Vacancy Allowance
Other Income
Effective Gross Income
- Operating Expenses
Net Operating Income
- Debt Service
Before-Tax Cash Flow
- Income Taxes
After-Tax Cash Flow

1
2,346,100
176,000
2,170,100
102,000
2,272,100
1,006,400
1,265,700
803,000
462,700
123,100
339,600

2
2,463,400
98,500
2,364,900
111,200
2,476,100
1,037,400
1,438,700
803,000
635,700
192,200
443,500

3
2,586,600
103,500
2,483,100
116,700
2,599,800
1,065,000
1,534,800
803,000
731,800
236,800
495,000

Input Cost
Recovery Period
/

4
1,470,900
588,200
338,200
544,500
0.40
217,800

27.5

5
1,535,500
570,400
338,200
626,900
0.40
250,800

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

4
2,677,100
160,600
2,516,500
118,300
2,634,800
1,163,900
1,470,900
803,000
667,900
217,800
450,100

5
2,770,800
166,200
2,604,600
122,400
2,727,000
1,191,500
1,535,500
803,000
732,500
250,800
481,700

operations for all years of the anticipated holding period. Again, changes
yellow boxes below.
Input in yellow cells only.
Depreciation
Deduction
=

IRS Mid-month
Convention*

338,200

324,100

* applies to first and last year

6
1,602,300
551,100
324,100
727,100
0.40
290,800

7
0
0
0
0
0.40
0

8
0
0
0
0
0.40
0

9
0
0
0
0
0.40
0

10
0
0
0
0
0.40
0

7
0
0
0
0
0
0
0
0
0
0
0

8
0
0
0
0
0
0
0
0
0
0
0

9
0
0
0
0
0
0
0
0
0
0
0

10
0
0
0
0
0
0
0
0
0
0
0

d - click Format / Row / Unhide to expand)

6
2,867,800
172,100
2,695,700
126,700
2,822,400
1,220,100
1,602,300
803,000
799,300
290,800
508,500

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 fu
methods such as NPV and IRR. Inputs below (yellow boxes only) are for both the purchase and sales prices, their ass
Input in yellow cells only.

Purchase price:
Transaction costs:

11,444,500
150,000

Selling price:
Selling costs:

17,800,000
890,000

Tax rate on capital gains:


Tax rate on depreciation recapture:

20%
25%

Anticipated holding period:

Mortgage balance:

$
6,750,124
(from Table 9.6)

Table 11.2 Estimated Income Ta


Selling Price
- Adjusted Basis (from Table 11.1)
Gain on Disposal
- Gain from depreciation recapture
Long-Term Capital Gain
Tax on depreciation recapture
Tax on capital gain
Total Tax Liability on Sale

Table 11.1 Estimate of Investor's Adjusted Tax Basis

Table 11.3 Estimate of After-Tax Equ

Purchase Price
+ Transaction Costs
Initial Tax Basis
- Cumulative Depreciation
Adjusted Basis Prior to Sale
+ Selling Costs
Adjusted Basis at Time of Sale

Selling Price
- Selling Costs
Net Sales Proceeds
- Mortgage Balance
Before-tax Equity Reversion
- Taxes due on sale
After-Tax Equity Reversion

$
$
$
$
$
$
$

11,444,500
150,000
11,594,500
2,001,000
9,593,500
890,000
10,483,500

analyst must estimate a future selling price to use valuation


e and sales prices, their associated costs, and tax rates.

1.2 Estimated Income Tax Consequences

sted Basis (from Table 11.1)

from depreciation recapture


m Capital Gain

epreciation recapture

Tax Liability on Sale

$
$
$
$
$

17,800,000
10,483,500
7,316,500
2,001,000
5,315,500

$
$
$

500,300
1,063,100
1,563,400

$
$
$
$
$
$
$

17,800,000
890,000
16,910,000
6,750,100
10,159,900
1,563,400
8,596,500

.3 Estimate of After-Tax Equity Reversion

ax Equity Reversion

x Equity Reversion

Ratio Analysis - Value

(Chapter 12)

Ratios are widely used to gauge the reasonableness of relationships between various measures of value and performanc
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 Multipliers
Gross Rent Multiplier:

Gross Income Multiplier:

Net Income Multilier:

Market Price
11,444,500

Gross Rents
2,346,100

Market Price
11,444,500

2,272,100

Market Price
11,444,500

1,265,700

Input GRM
5.00

Input GIM
5.00

Input NIM
9.00

EGI
=

NOI

Using Multipliers to Estimate Market Value


Gross Rent Multiplier Method:

Gross Income Multiplier Method:

Gross Rents
2,346,100

EGI
2,272,100

Net income Multilier Method:

NOI
1,265,700

s of value and performance.


se 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 cove
ratio, and loan-to-value ratio), and profitability (cap rate and equity dividend rate).
Input in yellow cells only.
Financial Ratios
Operating Ratio:

OE
1,006,400

EGI
2,272,100

(OE + ADS)
1,809,400

2,272,100

803,000

Market Price
11,444,500

Market Price
11,444,500

1,265,700

Input cap rate


10.00%

Equity Dividend Rate:


(before-tax)

BTCF
462,700

Initial Equity
3,594,500

Equity Dividend Rate:


(after-tax)

ATCF
339,600

Initial Equity
3,594,500

Break-even Ratio:

Debt Coverage Ratio:

NOI
1,265,700

Loan-to-value (LTV) Ratio:

EGI

ADS

Mortgage
8,000,000

Profitability Measures
Capitalization Rate:

NOI
1,265,700

Using Cap Rate to Estimate Market Value:

NOI

tio, breakeven ratio, debt coverage


put 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 flows
with an initial equity investment. Alternatively, subtracting a initial equity investment from the present value of projected cash flows (discounted at a given
discount rate) yields net present value (NPV).
No inputs on this worksheet.
Anticipated holding period:
Purchase price:
Transaction costs:
Initial Investment Basis:
Mortgage:

Initial Equity:

BTCF:
BTER:
Total:

Selling Price:
- Selling Costs:
Net Sales Proceeds:
- Mortgage Balance:
Before-tax Equity Reversion:
- Taxes due on sale:
After-Tax Equity Reversion:

11,444,500
150,000
11,594,500
8,000,000
3,594,500

17,800,000
890,000
16,910,000
6,750,100
10,159,900
1,563,400
8,596,500

10

(3,594,500)

462,700
0
462,700

635,700
0
635,700

731,800
0
731,800

667,900
0
667,900

732,500
0
732,500

799,300
10,159,900
10,959,200

0
0
0

0
0
0

0
0
0

0
0
0

Before-tax IRR:

ATCF:
ATER:
Total:

31.31%

10

(3,594,500)

339,600
0
339,600

443,500
0
443,500

495,000
0
495,000

450,100
0
450,100

481,700
0
481,700

508,500
8,596,500
9,105,000

0
0
0

0
0
0

0
0
0

0
0
0

After-tax IRR:

24.60%

Risk-Adjustment Methods

(Chapter 16)

Assumptions:

As discussed in the text, several different methods are


available to assess the risk inherent in any real estate
investment. This worksheet contains formulas to help
illustrate the methods. Input in yellow cells only.

Anticipated holding period:


Purchase price:
Transaction costs:
Initial Investment Basis:
Mortgage:

Initial Equity:

Selling Price:
- Selling Costs:
Net Proceeds:
- Mortgage Balance:
Before-tax Reversion:
- Taxes due on sale:
After-Tax Reversion:

11,444,500
150,000
11,594,500
8,000,000
3,594,500

17,800,000
890,000
16,910,000
6,750,100
10,159,900
1,563,400
8,596,500

Payback Period
0
ATCF:
ATER:
Total:
Cummulative:
Initial Calc:

10

339,600

443,500

495,000

450,100

481,700

508,500

8,596,500

3,594,500

339,600

443,500

495,000

450,100

481,700

9,105,000

3,594,500

3,254,900

2,811,400

2,316,400

1,866,300

1,384,600

7,720,400

Payback Period:

5.06 years

Sensitivity Analysis
Discount rate:

10.00%

PV of Equity

Variation in NOI

6,793,214

Note: discount rate applies to the calculations below as well.

Equity Value
expected

% change in
Equity Value

Input % variation:

10.00%

with - 10 % variation

5.61%

Variation in Sales Price

6,411,888

with - 10 % variation

Input % variation:

Calculations for Sensitivity Analysis

10.00%

14.05%

with + 10 % variation

6,793,214

expected

5,838,689

7,174,541

with + 10 % variation

6,793,214

7,747,740

DO NOT CHANGE !!

Calcs for change in NOI:


After-Tax Cash Flow
After-tax Equity Reversion

415,570

529,770

587,080

538,390

573,850

604,630

8,596,500

Total Cash Flow

415,570

529,770

587,080

538,390

573,850

9,201,130

Change in Equity Value:

7,174,541

6,793,214

381,326

Calcs for change in Sales Price:


After-Tax Cash Flow
After-tax Equity Reversion

339,600

443,500

495,000

450,100

481,700

508,500

10,287,500

Total Cash Flow

339,600

443,500

495,000

450,100

481,700

10,796,000

Change in Equity Value:

7,747,740

6,793,214

954,525