IntroForecasting Property Valueworkbook example for Maegen's Magic ManorThis workbook has been designed to illustrate the process of forecasting the income and value of an investment property. Although its primary functionis to accompany the example in the text (Maegen's Manor), the worksheet is flexible enough to accommodate almost any income-producing real estateinvestment, including non-residential properties. Note that the individual worksheets are integrated and that they build upon each other. Inputs need onlybe made in yellow boxes; the inserted formulas will make all necessary calculations. More in-depth explanations of the numbers used here can be foundin chapters 6, 9, 10, 11, 12, 13, and 16.Anticipated holding period:6(may be from 2 to 10 years)Potential Gross Rent inputs:UnitsMonthly RentInput in yellow cells only.Type 1:Two-Bedroom50$858(input for purchase price is on the Sale worksheet)Type 2:One-Bedroom150$704Type 3:Studio Units80$528Square FeetAnnual Rent / SFNon-residential input:Annual gross rent estimate:$2,288,9000*$1$2$3$4$5$6$7$8$9Increase in rents:2.5%5.0%5.0%3.5%3.5%3.5%(to the following year)* fill in this box only if monthly rents above are current and need to be adjusted for the first year of operations$1$2$3$4$5$6$7$8$9$10Estimated vacancy rates:(for each year)7.5%4.0%4.0%6.0%6.0%6.0%Other income:4.7%(enter as a percentage of collectable rents)Potential Gross Rent Estimate for first year:$2,346,100Source: Dr. Greg Smersh, Florida State University

ExpensesOperating 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% except for management expenses(which are 5% of EGI), and property taxes (which are expected to increase by 25% in year 4).Input in yellow cells only.Annual Operating Expense Increase:3.5%Management Fee (% of EGI):5.0%0*$1$2$3$4$5$6$7$8$9Increase in property taxes:25.0%(to the following and continuing years)* fill in this box only if property taxes below need to be adjusted for the first year of operationsTable 6.1 First-year Operating ForecastPotential Gross Rent2,346,100Less: Allowance for Vacancies$176,0002,170,100Plus: Other Income$102,000Effective Gross Income2,272,100Current Expense Estimates:Operating Expenses(from Table 5.6)Management Fee (% of EGI)113,600Salary Expense197,100204,000Utilities105,300109,000Insurance35,50036,700Supplies21,00021,700Advertising32,00033,100Maintenance & Repairs181,900188,300Property Taxes300,000300,000$1,006,400Net Operating Income (NOI)1,265,700Note: all numbers are annual and rounded to the nearest $100

OperatingOperating Statement(Chapter 6)The annual operating statement for all years of the anticipated holding period are shown below as well as the operating expense ratio for each year. Not that allof the cells below contain formulas and changes should ONLY be made on the previous two worksheets.No inputs on this worksheet.Table 6.2 Operating Forecast123456789101.Potential Gross Rent2,346,1002,463,4002,586,6002,677,1002,770,8002,867,80000002.Vacancy Allowance176,00098,500103,500160,600166,200172,10000003.2,170,1002,364,9002,483,1002,516,5002,604,6002,695,70000004.Other Income102,000111,200116,700118,300122,400126,70000005.Effective Gross Income2,272,1002,476,1002,599,8002,634,8002,727,0002,822,40000006.Operating Expenses7.Management Fee113,600123,800130,000131,700136,400141,10000008.Salary Expense204,000211,100218,500226,100234,000242,20000009.Utilities109,000112,800116,700120,800125,000129,400000010.Insurance36,70038,00039,30040,70042,10043,600000011.Supplies21,70022,50023,30024,10024,90025,800000012.Advertising33,10034,30035,50036,70038,00039,300000013.Maintenance & repairs188,300194,900201,700208,800216,100223,700000014.Property Taxes300,000300,000300,000375,000375,000375,000000015.Total Expenses1,006,4001,037,4001,065,0001,163,9001,191,5001,220,100000016.Net Operating Income1,265,7001,438,7001,534,8001,470,9001,535,5001,602,3000000Table 6.3 Forecasted Operating Expense Ratios1234567891044.3%41.9%41.0%44.2%43.7%43.2%0.0%0.0%0.0%0.0%

MortgageMortgage Borrowing(Chapter 9)For Maegen's Manor, a mortgage for $8 million is expected (based on roughly 70% LTV). Terms are 20 years with monthly amortization and an annualinterest rate of 8%. Inputs below calculate the annual debt service, portions due to interest and principal, and the mortgage balance for each year of theanticipated holding period.Input in yellow cells only.Mortgage Amount:8,000,000Mortgage Term:$20(enter in years)Mortgage calculator:Interest Rate:8.00%(enter annual %)Monthly Debt Service:$66,915.21Amortization:$12(annual = 1, monthly = 12)Annual Debt Service:$802,982.47Annual Debt Service (ADS):$803,000(rounded)Table 9.6 Amortization Schedule12345678910Interest paid633,889619,855604,655588,194570,367551,0600000Principal paid169,093183,128198,327214,789232,616251,9230000Total Debt Service802,982802,982802,982802,982802,982802,9820000Mortgage Balance7,830,9077,647,7797,449,4517,234,6637,002,0476,750,1240000

BTCFBefore-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 years of the anticipated holding period.Note that all of the cells below contain formulas and changes should ONLY be made on the Intro, Expenses, and Mortgage worksheets.No inputs on this worksheet.Table 9.5 Projected Before-Tax Cash Flows from Operations12345678910Potential Gross Rent2,346,1002,463,4002,586,6002,677,1002,770,8002,867,8000000Vacancy Allowance176,00098,500103,500160,600166,200172,10000002,170,1002,364,9002,483,1002,516,5002,604,6002,695,7000000Other Income102,000111,200116,700118,300122,400126,7000000Effective Gross Income2,272,1002,476,1002,599,8002,634,8002,727,0002,822,4000000Operating ExpensesManagement Fee113,600123,800130,000131,700136,400141,1000000Salary Expense204,000211,100218,500226,100234,000242,2000000Utilities109,000112,800116,700120,800125,000129,4000000Insurance36,70038,00039,30040,70042,10043,6000000Supplies21,70022,50023,30024,10024,90025,8000000Advertising33,10034,30035,50036,70038,00039,3000000Maintenance & repairs188,300194,900201,700208,800216,100223,7000000Property Taxes300,000300,000300,000375,000375,000375,0000000Total Expenses1,006,4001,037,4001,065,0001,163,9001,191,5001,220,1000000Net Operating Income1,265,7001,438,7001,534,8001,470,9001,535,5001,602,3000000Debt Service803,000803,000803,000803,000803,000803,0000000Before-Tax Cash Flow462,700635,700731,800667,900732,500799,3000000

ATCFIncome Tax Issues(Chapter 10)The next step in projecting an annual operating statement is to calculate taxes from operations for all years of the anticipated holding period. Again, changesshould ONLY be made on the Intro, Expenses, and Mortgage worksheets and in the yellow boxes below.Input in yellow cells only.Marginal Tax Rate:40%InputInput CostDepreciationIRS Mid-monthDepreciable BasisRecovery PeriodDeductionConvention*Calcs for depreciation expense:9,300,000/27.5=338,200324,100* applies to first and last yearTax Calculations12345678910Net Operating Income1,265,7001,438,7001,534,8001,470,9001,535,5001,602,3000000- Interest Expense633,900619,900604,700588,200570,400551,1000000- Depreciation324,100338,200338,200338,200338,200324,1000000Taxable Income (Loss)307,700480,600591,900544,500626,900727,1000000x Marginal tax rate0.400.400.400.400.400.400.400.400.400.40Income taxes123,100192,200236,800217,800250,800290,8000000Table 10.2 Projected After-Tax Cash Flows from Operations(table is condensed - click Format / Row / Unhide to expand)12345678910Potential Gross Rent2,346,1002,463,4002,586,6002,677,1002,770,8002,867,8000000Vacancy Allowance176,00098,500103,500160,600166,200172,10000002,170,1002,364,9002,483,1002,516,5002,604,6002,695,7000000Other Income102,000111,200116,700118,300122,400126,7000000Effective Gross Income2,272,1002,476,1002,599,8002,634,8002,727,0002,822,4000000Operating ExpensesManagement Fee113,600123,800130,000131,700136,400141,1000000Salary Expense204,000211,100218,500226,100234,000242,2000000Utilities109,000112,800116,700120,800125,000129,4000000Insurance36,70038,00039,30040,70042,10043,6000000Supplies21,70022,50023,30024,10024,90025,8000000Advertising33,10034,30035,50036,70038,00039,3000000Maintenance & repairs188,300194,900201,700208,800216,100223,7000000Property Taxes300,000300,000300,000375,000375,000375,0000000- Operating Expenses1,006,4001,037,4001,065,0001,163,9001,191,5001,220,1000000Net Operating Income1,265,7001,438,7001,534,8001,470,9001,535,5001,602,3000000- Debt Service803,000803,000803,000803,000803,000803,0000000Before-Tax Cash Flow462,700635,700731,800667,900732,500799,3000000- Income Taxes123,100192,200236,800217,800250,800290,8000000After-Tax Cash Flow339,600443,500495,000450,100481,700508,5000000

SaleProperty 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 future selling price to use valuationmethods such as NPV and IRR. Inputs below (yellow boxes only) are for both the purchase and sales prices, their associated costs, and tax rates.Input in yellow cells only.Purchase price:11,444,500Selling price:17,800,000Table 11.2 Estimated Income Tax ConsequencesTransaction costs:150,000Selling costs:890,000Selling Price17,800,000Tax rate on capital gains:20%- Adjusted Basis (from Table 11.1)10,483,500Tax rate on depreciation recapture:25%Gain on Disposal7,316,500- Gain from depreciation recapture2,001,000Long-Term Capital Gain5,315,500Anticipated holding period:$6Tax on depreciation recapture500,300Mortgage balance:6,750,124Tax on capital gain1,063,100(from Table 9.6)Total Tax Liability on Sale1,563,400Table 11.1 Estimate of Investor's Adjusted Tax BasisTable 11.3 Estimate of After-Tax Equity ReversionPurchase Price11,444,500Selling Price17,800,000+ Transaction Costs150,000- Selling Costs890,000Initial Tax Basis11,594,500Net Sales Proceeds16,910,000- Cumulative Depreciation2,001,000- Mortgage Balance6,750,100Adjusted Basis Prior to Sale9,593,500Before-tax Equity Reversion10,159,900+ Selling Costs890,000- Taxes due on sale1,563,400Adjusted Basis at Time of Sale10,483,500After-Tax Equity Reversion8,596,500

Ratio1Ratio Analysis - Value(Chapter 12)Ratios are widely used to gauge the reasonableness of relationships between various measures of value and performance.Income multipliers express the relationship between market value and operating income. These multipliers can also beused to estimate market value.Input in yellow cells only.Income MultipliersGross Rent Multiplier:Market PriceGross Rents11,444,500/2,346,100=4.88Gross Income Multiplier:Market PriceEGI11,444,500/2,272,100=5.04Net Income Multilier:Market PriceNOI11,444,500/1,265,700=9.04Using Multipliers to Estimate Market ValueGross Rent Multiplier Method:Gross RentsInput GRM2,346,100x5.00=11,730,500Gross Income Multiplier Method:EGIInput GIM2,272,100x5.0011,360,500Net income Multilier Method:NOIInput NIM1,265,700x9.00=11,391,300

Ratio2Ratio Analysis - Financial & Profitability(Chapter 12)As shown in the text, ratio analysis also includes measures of financing ability (operating ratio, breakeven ratio, debt coverageratio, and loan-to-value ratio), and profitability (cap rate and equity dividend rate).Input in yellow cells only.Financial RatiosOperating Ratio:OEEGI1,006,400/2,272,100=44%Break-even Ratio:(OE + ADS)EGI1,809,400/2,272,100=80%Debt Coverage Ratio:NOIADS1,265,700/803,000=1.58Loan-to-value (LTV) Ratio:MortgageMarket Price8,000,000/11,444,500=70%Profitability MeasuresCapitalization Rate:NOIMarket Price1,265,700/11,444,500=11.06%Using Cap Rate to Estimate Market Value:NOIInput cap rate1,265,700/10.00%=12,657,000Equity Dividend Rate:BTCFInitial Equity(before-tax)462,700/$3,594,500=12.87%Equity Dividend Rate:ATCFInitial Equity(after-tax)339,600/$3,594,500=9.45%

DCFDiscounted 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 flowswith an initial equity investment. Alternatively, subtracting a initial equity investment from the present value of projected cash flows (discounted at a givendiscount rate) yields net present value (NPV).No inputs on this worksheet.Anticipated holding period:6Selling Price:17,800,000- Selling Costs:890,000Purchase price:11,444,500Net Sales Proceeds:16,910,000Transaction costs:150,000- Mortgage Balance:6,750,100Initial Investment Basis:11,594,500Before-tax Equity Reversion:10,159,900Mortgage:8,000,000- Taxes due on sale:1,563,400Initial Equity:3,594,500After-Tax Equity Reversion:8,596,500012345678910BTCF:462,700635,700731,800667,900732,500799,3000000BTER:0000010,159,9000000Total:(3,594,500)462,700635,700731,800667,900732,50010,959,2000000Before-tax IRR:31.31%012345678910ATCF:339,600443,500495,000450,100481,700508,5000000ATER:000008,596,5000000Total:(3,594,500)339,600443,500495,000450,100481,7009,105,0000000After-tax IRR:24.60%

RiskRisk-Adjustment Methods(Chapter 16)Assumptions:As discussed in the text, several different methods areAnticipated holding period:6Selling Price:17,800,000available to assess the risk inherent in any real estate- Selling Costs:890,000investment. This worksheet contains formulas to helpPurchase price:11,444,500Net Proceeds:16,910,000illustrate the methods.Input in yellow cells only.Transaction costs:150,000- Mortgage Balance:6,750,100Initial Investment Basis:11,594,500Before-tax Reversion:10,159,900Mortgage:8,000,000- Taxes due on sale:1,563,400Initial Equity:3,594,500After-Tax Reversion:8,596,500Payback Period012345678910ATCF:339,600443,500495,000450,100481,700508,5000000ATER:000008,596,5000000Total:-3,594,500339,600443,500495,000450,100481,7009,105,0000000Cummulative:-3,594,500-3,254,900-2,811,400-2,316,400-1,866,300-1,384,6007,720,4000000Initial Calc:$1$2$3$4$50.00.00.00.0Payback Period:5.06yearsSensitivity AnalysisDiscount rate:10.00%PV of Equity6,793,214Note: discount rate applies to the calculations below as well.Variation in NOI% change inEquity ValueEquity Valuewith -10% variationexpectedwith +10% variationInput % variation:10.00%5.61%6,411,8886,793,2147,174,541Variation in Sales Pricewith -10% variationexpectedwith +10% variationInput % variation:10.00%14.05%5,838,6896,793,2147,747,740Calculations for Sensitivity AnalysisDO NOT CHANGE !!Selling Price:19,580,000Assumptions:- Selling Costs:979,000Purchase price:11,444,500Net Proceeds:18,601,000(contains links from other pages and above)Transaction costs:150,000- Mortgage Balance:6,750,100Initial Investment Basis:11,594,500Before-tax Reversion:11,850,900DO NOT CHANGE !!Mortgage:8,000,000- Taxes due on sale:1,563,400Initial Equity:3,594,500After-Tax Reversion:10,287,500Marginal Tax Rate:Depreciable BasisRecovery PeriodDepreciationMid-month40%9,300,000/27.5=338,200324,10012345678910Potential Gross Rent2,346,1002,463,4002,586,6002,677,1002,770,8002,867,8000000Vacancy Allowance176,00098,500103,500160,600166,200172,10000002,170,1002,364,9002,483,1002,516,5002,604,6002,695,7000000Other Income102,000111,200116,700118,300122,400126,7000000Effective Gross Income2,272,1002,476,1002,599,8002,634,8002,727,0002,822,4000000Management Fee113,600123,800130,000131,700136,400141,1000000Salary Expense204,000211,100218,500226,100234,000242,2000000Utilities109,000112,800116,700120,800125,000129,4000000Insurance36,70038,00039,30040,70042,10043,6000000Supplies21,70022,50023,30024,10024,90025,8000000Advertising33,10034,30035,50036,70038,00039,3000000Maintenance & repairs188,300194,900201,700208,800216,100223,7000000Property Taxes300,000300,000300,000375,000375,000375,0000000- Operating Expenses1,006,4001,037,4001,065,0001,163,9001,191,5001,220,1000000Net Operating Income1,392,2701,582,5701,688,2801,617,9901,689,0501,762,5300000- Debt Service803,000803,000803,000803,000803,000803,0000000Before-Tax Cash Flow589,270779,570885,280814,990886,050959,5300000Net Operating Income1,392,2701,582,5701,688,2801,617,9901,689,0501,762,5300000- Interest Expense633,900619,900604,700588,200570,400551,1000000- Depreciation324,100338,200338,200338,200338,200324,1000000Taxable Income (Loss)434,270624,470745,380691,590780,450887,3300000x Marginal tax rate0.400.400.400.400.400.400.400.400.400.40Income taxes173,700249,800298,200276,600312,200354,9000000Calcs for change in NOI:After-Tax Cash Flow415,570529,770587,080538,390573,850604,6300000After-tax Equity Reversion000008,596,5000000Total Cash Flow415,570529,770587,080538,390573,8509,201,1300000Change in Equity Value:7,174,541-6,793,214=381,326Calcs for change in Sales Price:After-Tax Cash Flow339,600443,500495,000450,100481,700508,5000000After-tax Equity Reversion0000010,287,5000000Total Cash Flow339,600443,500495,000450,100481,70010,796,0000000Change in Equity Value:7,747,740-6,793,214=954,525