WELCOMES AUSTIN BAY Author and syndicated columnist, professor, developmental aid advocate, radio commentator, retired reserve soldier, war game designer, principal in a training simulations and technology consulting company.
Evaluating Big Debt’s Feudal War on Innovative Civilization (and your wallet) Description: Austin Bay looks at the strategic implications of unpayable debt. Here’s the shot: John Stuart Mill’s Principles of Political Economy (1848) begins with this line: “In eve ry department of human affairs, Practice long precedes, Science; systemic enquiry into the modes of action of the powers of nature is the tardy product of a long course of efforts to use those powers for practical ends.” Mills then tells us his subject is “Wealth” which everyone understands, or, as Mills says “everyone has a notion, sufficiently correct for common purposes…” He elaborates: “All know that it is one thing to be rich, another thing to be enlightened, brave or humane; that the questions how a nation is made wealthy, and how it is made free, or virtuous, or eminent in literature, in the fine arts, in arms, or in polity, are totally distinct enquiries.” Then he qualifies distinct: “These things, indeed are all indirectly connected, and react upon one another.”
Here’s the chaser: This is a message from a genius who lived in the 19 th century, a man so smart he knew he had to qualify “distinct enquiries. ” No. Wealth, military capabilities, artistic eminence, political prestige, freedom -- there are multiple connections. Mr. Mill is so smart he deserves to be paraphrased. Based on my practical experience, everyone understands debt “sufficiently correct for common purposes. ” Both wealth and desperate necessity can spur innovation. But, over the “long course of efforts” (another steal from Mills) successful innovation tends to seed wealth creation. Moreover, wealth implies resources exist to experiment with innovative options. Desperate necessity? Well, in common parlance, that suggests fewer and fewer choices, like one loaf of bread left on the grocery shelf, or one last bullet in the chamber …
WELCOMES TOM TROLL NATIONAL REALTY CONSULTANTS It’s the Value, stupid!
Baseball is 90% mental. The other half is physical. - Yogi Berra
Tax Consulting is 90% ________? The rest is ________?
Tax Consulting is 90% process. The rest is ___________?
the Value. 8
Agenda 1. Value: Fact or Concept 2. Overview of Income Property Valuation 3. Cap Rate Sources & Challenges 3. Valuation Dilemma (Tax & Feasility): 1 Equation; Multiple Unknowns 4. Valuation Dilemma Solutions 5. Q & A 9
Get Your Mind Right 10
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Value: Fact or Concept? 12
Price versus Value Sale Price Value House $275,000 ? Apartment Complex $8,000,000 ? Office Building $4,500,000 ? Shopping Center $2,375,000 ? Warehouse $3,000,000 ? Price = Fact; Value? 13
Value Curve -- SELLERS $ Value Time 14
Value Curve -- BUYERS $ Value Time 15
Value Concept Curve No Sale Possible Seller Opinion > Buyer Opinion $ Value Time 16
Value is a Concept! Market Value Buyer & Seller Opinions of Value are IDENTICAL $ Value Time 17
Active Market: Sales Possible $ Value Active Market Range Buyer Opinions >= Seller Opinions of Value Time 18
Value Concept Curve $ Value Market Transactions Prices = Fact Time 19
Valuation Process Market Data NOT JUST SALES! $ Value Market Data Facts Abstract Yardsticks of Value from Market Data and Apply to Subject Property Time 20
Valuation Concept Abstract Yardsticks of Value from Market Data and Apply to Subject Property Sales Comparison: Price Per: sq ft, acre, room, etc. Cost Approach: Cost New & Depreciation Income Approach: Rents, Vacancy, Expenses, Cap Rate Yardsticks Reflect the Market 21
Relationship of Value Opinions to Active Market CAD Value $ Value BOTH Active Market Range WRONG!!! Consultant Value Time 22
All Market Value Opinions Correct in Active Range $ Value CAD Value Active Market Range Consultant Value BOTH CORRECT!!! Time 23
Valuation Process is Designed to??? Figure out $ Value what the Value Active Market Range IS NOT Time 24
Overview of Income Valuation 25
Income Analysis Potential Gross Income (All Sources) Less: Stabilized Vacancy & Collections Allowance Equals: Effective Gross Income (EGI) Less: Landlord Operating Expenses Equals: Net Operating Income Income = Value Rate I R V 26
IRV RVI IVR Income Income = Value = Rate Rate Value Rate x Value = Income 27
Direct Capitalization Sale Net Operating Income (I) = Cap Rate (R) Sales Price (V) Developed Directly from Sales Called Direct Because: Applied Directly to Subject Subject Net Operating Income (I) = Subject Value (V) Overall Capitalization Rate (R) 28
Band of Investments Weighted Average of Component Cash Flows Loan/Value Ratio x Loan Constant = Loan Contribution Equity/Value x Cash on Cash = + Equity Contribution Investment Yr 1 Cash Flow Rate = Overall Cap Rate 29
Band of Investments Market Financing: 75% loan; 30 yrs; 7% Initial Loan Constant: 7.9836% (0.0798363) Yr 1 Equity Cash on Cash Rate: 5% (0.05) Weighted Average of Component Cash Flows .75 x .0798363 = Loan Contribution to R = 0.059877 .25 x .05 = Equity Contribution to R = + 0.012500 Overall Cap Rate (7.2377%) = 0.072377 30
Overall Cap Rate IS / IS NOT Net Operating Income = Value Overall Cap Rate Overall Cap Rate NOT a Yield Rate Overall Cap Rate = Yr 1 Overall Investment Cash Flow Rate Overall Cap Rate = Income Analysis Yardstick of Value That Relates Net Income and Value 31
Cap Rate Sources & Challenges 32
PwC – Korpacz 33
PwC – Korpacz (usually on page 90 something) All of the Rest of the Cap Rates Here THEN THE FINE PRINT BELOW 34
PwC – Korpacz (usually on page 90 something) Method 1 Method 2 Method 3 NOI NOI NOI After Reserves Before After Reserves Before Reserves TIs & TIs & TIs & Leasing Leasing Leasing 35
PwC – Korpacz (usually on page 90 something) Method 3 Method 3 NOI Used by After Reserves Virtually TIs & Leasing NOBODY 36
PwC Blended Cap Rates???? Not in compliance with accepted valuation methodologies Not applicable to any valuation scenario Violation of the Texas Property Tax Code and USPAP 37
There is nothing so useless as doing efficiently that which should not be done at all. - Peter Drucker
CAD Cap Rate Studies CAD ESTIMATES Rent, Occupancy, Expenses, Reserves, TIs, & Leasing THERFORE, NOI & RESULTING CAP RATES [BOTH BEFORE/AFTER TIs & LEASING] ARE ESTIMATES, NOT FACTS 39
OFFICE CAP RATE STUDY JANUARY 2014 2012 - 2013 SALES Year Sale Sale PRICE NRA Cls Built Date Price PSF SF A 1998 Nov-13 $115,000,000 $231.18 497,447 A+ 1984 Oct-13 $245,449,050 $229.35 1,070,209 A++ 2012 Sep-13 $112,000,000 $370.20 302,536 A 1974 Aug-13 $38,000,000 $188.38 201,720 A++ 2008 Jun-13 $104,800,000 $284.52 368,340 A 2003 Jun-13 $18,250,000 $180.62 101,039 A 2006 Jun-13 $51,250,000 $248.35 206,362 A+ 2008 Jun-13 $46,000,000 $299.98 153,342 A++ 2008 May-13 $480,000,000 $493.22 973,192 A++ 1998 Apr-13 $48,750,000 $325.75 149,654 A 1981 Feb-13 $232,600,000 $181.75 1,279,759 A+ 1983 Jan-13 $412,000,000 $278.93 1,477,060 40 A 2008 Dec-12 $35,500,000 $245.57 144,563
Estim. Stab. EGI Gross Estim. Cap Estim. NOI Cap Mkt. Rnt Occ. PSF Exp. NOI PSF Rate NOI PSF Rate (Before TI & comm.) (After TI & comm.) (est.) $19.50 95% $31.41 $14.39 $17.02 7.36% $13.88 $6,902,851 6.00% $19.00 95% $32.49 $14.92 $17.57 7.66% $14.32 $15,326,463 6.24% $23.00 95% $40.42 $16.69 $23.73 6.41% $19.69 $5,957,009 5.32% $17.00 93% $28.66 $12.80 $15.86 8.42% $13.00 $2,621,791 6.90% $19.00 95% $32.49 $14.50 $17.99 6.32% $14.74 $5,429,700 5.18% $13.50 93% $25.11 $11.05 $14.06 7.78% $11.55 $1,166,899 6.39% $12.50 93% $23.83 $10.52 $13.31 5.36% $10.93 $2,255,150 4.40% $17.50 95% $29.93 $13.96 $15.97 5.32% $12.97 $1,989,229 4.32% $29.00 95% $50.97 $20.85 $30.12 6.11% $25.02 $24,349,994 5.07% $19.00 93% $32.21 $13.87 $18.34 5.63% $15.12 $2,262,467 4.64% $17.00 93% $28.82 $12.86 $15.96 8.78% $13.08 $16,734,924 7.19% $19.00 95% $32.49 $15.07 $17.42 6.25% $14.18 $20,937,326 5.08% $17.00 93% $28.82 $12.79 $16.03 6.53% $13.15 $1,900,515 5.35% 41
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