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: 6 (may be from 2 to 10 years)

Potential Gross Rent inputs: Units Monthly Rent Input in yellow cells only.
Type 1: Two-Bedroom 50 $858 (input for purchase price is o
Type 2: One-Bedroom 150 $704
Type 3: Studio Units 80 $528

Square Feet Annual Rent / SF

Non-residential input:

0* 1 2 3 4 5
Increase 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 o

1 2 3 4 5
Estimated vacancy rates: (for each year) 7.5% 4.0% 4.0% 6.0% 6.0%

Other income: 4.7% (enter as a percentage of collectable rents)

Potential Gross Rent Estimate f

Source: Dr. Greg Smersh, Florida State University

 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: $2,288,900

6 7 8 9

ed to be adjusted for the first year of operations

6 7 8 9 10
6.0%

Potential 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: 3.5% Management Fee (% of EGI):

0* 1 2 3 4
Increase 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 operati

Potential Gross Rent

Less: Allowance for Vacancies

Plus: Other Income

Effective Gross Income
Current Expense Estimates:
Operating Expenses (from Table 5.6)
Management Fee (% of EGI)
Salary Expense $ 197,100
Utilities $ 105,300
Insurance $ 35,500
Supplies $ 21,000
Advertising $ 32,000
Maintenance & Repairs $ 181,900
Property Taxes $ 300,000

Net Operating Income (NOI)

se at an annual rate of 3.5% except for management expenses
Input in yellow cells only.

nt Fee (% of EGI): 5.0%

5 6 7 8 9

to be adjusted for the first year of operations

Table 6.1 First-year Operating Forecast

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

113,600
204,000
109,000
36,700
21,700
33,100
188,300
300,000 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 operating e
of the cells below contain formulas and changes should ONLY be made on the previous two worksheets.

Table 6.2 Operating Forecast

1 2 3 4 5
1 Potential Gross Rent 2,346,100 2,463,400 2,586,600 2,677,100 2,770,800
2 Vacancy Allowance 176,000 98,500 103,500 160,600 166,200
3 2,170,100 2,364,900 2,483,100 2,516,500 2,604,600
4 Other Income 102,000 111,200 116,700 118,300 122,400
5 Effective Gross Income 2,272,100 2,476,100 2,599,800 2,634,800 2,727,000

6 Operating Expenses
7 Management Fee 113,600 123,800 130,000 131,700 136,400
8 Salary Expense 204,000 211,100 218,500 226,100 234,000
9 Utilities 109,000 112,800 116,700 120,800 125,000
10 Insurance 36,700 38,000 39,300 40,700 42,100
11 Supplies 21,700 22,500 23,300 24,100 24,900
12 Advertising 33,100 34,300 35,500 36,700 38,000
13 Maintenance & repairs 188,300 194,900 201,700 208,800 216,100
14 Property Taxes 300,000 300,000 300,000 375,000 375,000

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

Table 6.3 Forecasted Operating Expense Ratios

1 2 3 4 5
44.3% 41.9% 41.0% 44.2% 43.7%
own below as well as the operating expense ratio for each year. Not that all
ous two worksheets. No inputs on this worksheet.

6 7 8 9 10
2,867,800 0 0 0 0
172,100 0 0 0 0
2,695,700 0 0 0 0
126,700 0 0 0 0
2,822,400 0 0 0 0

141,100 0 0 0 0
242,200 0 0 0 0
129,400 0 0 0 0
43,600 0 0 0 0
25,800 0 0 0 0
39,300 0 0 0 0
223,700 0 0 0 0
375,000 0 0 0 0

1,220,100 0 0 0 0

1,602,300 0 0 0 0

6 7 8 9 10
43.2% 0.0% 0.0% 0.0% 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 month
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: $ 8,000,000

Mortgage Term: 20 (enter in years) Mortgage calculator:
Interest Rate: 8.00% (enter annual %) Monthly Debt Service:
Amortization: 12 (annual = 1, monthly = 12) Annual Debt Service:

Annual Debt Service (A

Table 9.6 Amortization Schedule

1 2 3 4 5 6
Interest paid 633,889 619,855 604,655 588,194 570,367 551,060
Principal paid 169,093 183,128 198,327 214,789 232,616 251,923
Total Debt Service 802,982 802,982 802,982 802,982 802,982 802,982

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: $ 66,915.21

Annual Debt Service: $ 802,982.47

Annual Debt Service (ADS): $803,000 (rounded)

7 8 9 10
0 0 0 0
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

1 2 3 4 5
Potential Gross Rent 2,346,100 2,463,400 2,586,600 2,677,100 2,770,800
Vacancy Allowance 176,000 98,500 103,500 160,600 166,200
2,170,100 2,364,900 2,483,100 2,516,500 2,604,600
Other Income 102,000 111,200 116,700 118,300 122,400
Effective Gross Income 2,272,100 2,476,100 2,599,800 2,634,800 2,727,000

Operating Expenses
Management Fee 113,600 123,800 130,000 131,700 136,400
Salary Expense 204,000 211,100 218,500 226,100 234,000
Utilities 109,000 112,800 116,700 120,800 125,000
Insurance 36,700 38,000 39,300 40,700 42,100
Supplies 21,700 22,500 23,300 24,100 24,900
Advertising 33,100 34,300 35,500 36,700 38,000
Maintenance & repairs 188,300 194,900 201,700 208,800 216,100
Property Taxes 300,000 300,000 300,000 375,000 375,000

Total Expenses 1,006,400 1,037,400 1,065,000 1,163,900 1,191,500

Net Operating Income 1,265,700 1,438,700 1,534,800 1,470,900 1,535,500
Debt Service 803,000 803,000 803,000 803,000 803,000

Before-Tax Cash Flow 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 7 8 9 10
2,867,800 0 0 0 0
172,100 0 0 0 0
2,695,700 0 0 0 0
126,700 0 0 0 0
2,822,400 0 0 0 0

141,100 0 0 0 0
242,200 0 0 0 0
129,400 0 0 0 0
43,600 0 0 0 0
25,800 0 0 0 0
39,300 0 0 0 0
223,700 0 0 0 0
375,000 0 0 0 0

1,220,100 0 0 0 0
1,602,300 0 0 0 0
803,000 0 0 0 0

799,300 0 0 0 0
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 anticipa
should ONLY be made on the Intro, Expenses, and Mortgage worksheets and in the yellow boxes below.

Marginal Tax Rate: 40% Input Input Cost

Depreciable Basis Recovery Period
Calcs for depreciation expense: 9,300,000 / 27.5

Tax Calculations 1 2 3 4 5
Net Operating Income 1,265,700 1,438,700 1,534,800 1,470,900 1,535,500
- Interest Expense 633,900 619,900 604,700 588,200 570,400
- Depreciation 324,100 338,200 338,200 338,200 338,200
Taxable Income (Loss) 307,700 480,600 591,900 544,500 626,900
x Marginal tax rate 0.40 0.40 0.40 0.40 0.40
Income taxes 123,100 192,200 236,800 217,800 250,800

Table 10.2 Projected After-Tax Cash Flows from Operations (table is condensed - click Format / Row / Unhide to expand)
1 2 3 4 5
Potential Gross Rent 2,346,100 2,463,400 2,586,600 2,677,100 2,770,800
Vacancy Allowance 176,000 98,500 103,500 160,600 166,200
2,170,100 2,364,900 2,483,100 2,516,500 2,604,600
Other Income 102,000 111,200 116,700 118,300 122,400
Effective Gross Income 2,272,100 2,476,100 2,599,800 2,634,800 2,727,000
- Operating Expenses 1,006,400 1,037,400 1,065,000 1,163,900 1,191,500
Net Operating Income 1,265,700 1,438,700 1,534,800 1,470,900 1,535,500
- Debt Service 803,000 803,000 803,000 803,000 803,000
Before-Tax Cash Flow 462,700 635,700 731,800 667,900 732,500
- Income Taxes 123,100 192,200 236,800 217,800 250,800
After-Tax Cash Flow 339,600 443,500 495,000 450,100 481,700
operations for all years of the anticipated holding period. Again, changes
yellow boxes below. Input in yellow cells only.

Depreciation IRS Mid-month

Deduction Convention*
= $ 338,200 $ 324,100
* applies to first and last year

6 7 8 9 10
1,602,300 0 0 0 0
551,100 0 0 0 0
324,100 0 0 0 0
727,100 0 0 0 0
0.40 0.40 0.40 0.40 0.40
290,800 0 0 0 0

d - click Format / Row / Unhide to expand)

6 7 8 9 10
2,867,800 0 0 0 0
172,100 0 0 0 0
2,695,700 0 0 0 0
126,700 0 0 0 0
2,822,400 0 0 0 0
1,220,100 0 0 0 0
1,602,300 0 0 0 0
803,000 0 0 0 0
799,300 0 0 0 0
290,800 0 0 0 0
508,500 0 0 0 0
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 future
methods such as NPV and IRR. Inputs below (yellow boxes only) are for both the purchase and sales prices, their associa
Input in yellow cells only.

Purchase price: 11,444,500 Selling price: 17,800,000 Table 11.2 Estimated Income Tax Co
Transaction costs: 150,000 Selling costs: 890,000
Selling Price
Tax rate on capital gains: 20% - Adjusted Basis (from Table 11.1)
Tax rate on depreciation recapture: 25% Gain on Disposal
- Gain from depreciation recapture
Long-Term Capital Gain
Anticipated holding period: 6
Tax on depreciation recapture
Mortgage balance: $ 6,750,124 Tax on capital gain
(from Table 9.6) Total Tax Liability on Sale

Table 11.1 Estimate of Investor's Adjusted Tax Basis Table 11.3 Estimate of After-Tax Equity

Purchase Price $ 11,444,500 Selling Price

+ Transaction Costs $ 150,000 - Selling Costs
Initial Tax Basis $ 11,594,500 Net Sales Proceeds
- Cumulative Depreciation $ 2,001,000 - Mortgage Balance
Adjusted Basis Prior to Sale $ 9,593,500 Before-tax Equity Reversion
+ Selling Costs $ 890,000 - Taxes due on sale
Adjusted Basis at Time of Sale $ 10,483,500 After-Tax Equity Reversion
 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

$ 17,800,000
sted Basis (from Table 11.1) $ 10,483,500
$ 7,316,500
from depreciation recapture $ 2,001,000
m Capital Gain $ 5,315,500

epreciation recapture $ 500,300

$ 1,063,100
Tax Liability on Sale $ 1,563,400

.3 Estimate of After-Tax Equity Reversion

$ 17,800,000
$ 890,000
$ 16,910,000
$ 6,750,100
ax Equity Reversion $ 10,159,900
$ 1,563,400
x Equity Reversion $ 8,596,500
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: Market Price Gross Rents
11,444,500 / 2,346,100 =

Gross Income Multiplier: Market Price EGI

11,444,500 / 2,272,100 =

Net Income Multilier: Market Price NOI

11,444,500 / 1,265,700 =

Using Multipliers to Estimate Market Value

Gross Rent Multiplier Method: Gross Rents Input GRM

2,346,100 x 5.00 =

Gross Income Multiplier Method: EGI Input GIM

2,272,100 x 5.00

Net income Multilier Method: NOI Input NIM

1,265,700 x 9.00 =
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 EGI
1,006,400 / 2,272,100

Break-even Ratio: (OE + ADS) EGI

1,809,400 / 2,272,100

Debt Coverage Ratio: NOI ADS

1,265,700 / 803,000

Loan-to-value (LTV) Ratio: Mortgage Market Price

8,000,000 / 11,444,500

Profitability Measures
Capitalization Rate: NOI Market Price
1,265,700 / 11,444,500

Using Cap Rate to Estimate Market Value: NOI Input cap rate
1,265,700 / 10.00%

Equity Dividend Rate: BTCF Initial Equity

(before-tax) 462,700 / 3,594,500

Equity Dividend Rate: ATCF Initial Equity

(after-tax) 339,600 / 3,594,500
 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: 6 Selling Price: 17,800,000

- Selling Costs: 890,000
Purchase price: 11,444,500 Net Sales Proceeds: 16,910,000
Transaction costs: 150,000 - Mortgage Balance: 6,750,100
Initial Investment Basis: 11,594,500 Before-tax Equity Reversion: 10,159,900
Mortgage: 8,000,000 - Taxes due on sale: 1,563,400
Initial Equity: 3,594,500 After-Tax Equity Reversion: 8,596,500

0 1 2 3 4 5 6 7 8 9 10
BTCF: 462,700 635,700 731,800 667,900 732,500 799,300 0 0 0 0
BTER: 0 0 0 0 0 10,159,900 0 0 0 0
Total: (3,594,500) 462,700 635,700 731,800 667,900 732,500 10,959,200 0 0 0 0

Before-tax IRR: 31.31%

0 1 2 3 4 5 6 7 8 9 10
ATCF: 339,600 443,500 495,000 450,100 481,700 508,500 0 0 0 0
ATER: 0 0 0 0 0 8,596,500 0 0 0 0
Total: (3,594,500) 339,600 443,500 495,000 450,100 481,700 9,105,000 0 0 0 0

After-tax IRR: 24.60%

 Risk-Adjustment Methods (Chapter 16) Assumptions:

As discussed in the text, several different methods are Anticipated holding period: 6 Selling Price: 17,800,000
available to assess the risk inherent in any real estate - Selling Costs: 890,000
investment. This worksheet contains formulas to help Purchase price: 11,444,500 Net Proceeds: 16,910,000
illustrate the methods. Input in yellow cells only. Transaction costs: 150,000 - Mortgage Balance: 6,750,100
Initial Investment Basis: 11,594,500 Before-tax Reversion: 10,159,900
Mortgage: 8,000,000 - Taxes due on sale: 1,563,400
Initial Equity: 3,594,500 After-Tax Reversion: 8,596,500

Payback Period
0 1 2 3 4 5 6 7 8 9 10
ATCF: 339,600 443,500 495,000 450,100 481,700 508,500 0 0 0 0
ATER: 0 0 0 0 0 8,596,500 0 0 0 0
Total: 3,594,500 339,600 443,500 495,000 450,100 481,700 9,105,000 0 0 0 0
Cummulative: 3,594,500 3,254,900 2,811,400 2,316,400 1,866,300 1,384,600 7,720,400 0 0 0 0
Initial Calc: 1 2 3 4 5 - - - -
Payback Period: 5.06 years

Sensitivity Analysis
Discount rate: 10.00% PV of Equity $ 6,793,214 Note: discount rate applies to the calculations below as well.

Variation in NOI % change in Equity Value

Equity Value with - 10 % variation expected with + 10 % variation
Input % variation: 10.00% 5.61% 6,411,888 6,793,214 7,174,541

Variation in Sales Price with - 10 % variation expected with + 10 % variation

Input % variation: 10.00% 14.05% 5,838,689 6,793,214 7,747,740

Calculations for Sensitivity Analysis DO NOT CHANGE !!

Calcs for change in NOI:

After-Tax Cash Flow 415,570 529,770 587,080 538,390 573,850 604,630 0 0 0 0
After-tax Equity Reversion 0 0 0 0 0 8,596,500 0 0 0 0
Total Cash Flow 415,570 529,770 587,080 538,390 573,850 9,201,130 0 0 0 0
 Change in Equity Value: 7,174,541 - 6,793,214 = 381,326

Calcs for change in Sales Price:

After-Tax Cash Flow 339,600 443,500 495,000 450,100 481,700 508,500 0 0 0 0
After-tax Equity Reversion 0 0 0 0 0 10,287,500 0 0 0 0
Total Cash Flow 339,600 443,500 495,000 450,100 481,700 10,796,000 0 0 0 0

Change in Equity Value: 7,747,740 - 6,793,214 = 954,525