Investment Analyst - Our Approach to Real Estate Income Analysis

Investment Analyst offers the capability to perform a stabilized analysis and a lease analysis simultaneously. It can be as simple as estimating gross income ($20 per s.f. per year times 100,000 s.f.), estimating a frictional vacancy rate, and estimating an expense ratio. One can then evaluate the income stream instantly, under different conditions. For example, one can change the mortgage terms, alter the growth rate assumptions, or change the required rate of return. As these conditions are changed, Investment Analyst provides instant feedback on the cash on cash yield, the debt coverage ratio, the overall cap rate, the terminal value, and many other key indicators that are critical to a thorough understanding of the property.

Whether you are an appraiser, a banker, an investor, or a broker, using the macro view one can quickly determine whether the property meets your criteria. If it does, Investment Analyst provides the capability of "drilling down" to the lease detail by allowing you to enter detailed contract lease terms for all tenants or only selected tenants, as necessary. For example, most tenant spaces may be at "market" under relatively short term leases, but one anchor tenant may be under a long term lease that is above or below market. Detailed lease information can be entered for just this tenant and the effect upon value can be evaluated.

Our approach differs from most "DCF software" that is available. Other software typically takes the "bottom up" micro approach. Lease terms must be entered for each space and critical assumptions that affect the calculation of value are often hidden in the detail. This is also true for expenses. Once all detail is entered, the "magic" number is calculated by discounting the detail - a number that may, or may not, represent Market Value. This approach to data entry is, perhaps, good for property managers, but it is prone to user error or intentional manipulation. Furthermore, errors that have crept into the data entry are difficult to uncover, especially by a third party. The micro approach is best applied when one is analyzing the historical or actual cash flows that have already occurred, in order to calculate the actual yield of those cash flows. But the "bottom up" approach is not suited for estimating the value of a prospective income stream because of the inherent assumptions that must be made about the future.

Summary

In summary, Investment Analyst offers both the flexibility to quickly evaluate income producing property and the sophistication to evaluate complex lease terms of individual tenants, when necessary. Analyst is easy to use and its learning curve is short. Investment Analyst provides analysis tools that are not available in other income analysis products. Key indicators are at your fingertips. Assumptions are easily changed and the changes are instantly reflected in the value calculation. Both a stabilized analysis and a lease analysis can be performed simultaneously. Investment Analyst has a built-in Review tool that reviews the reasonableness of your inputs. The reports produced by Investment Analyst are presentation quality, they are easy to understand, and they are easy to explain

OUR APPROACH TO REAL ESTATE INCOME ANALYSIS Investment Analyst and Commercial Complete use a "top down" macro approach to income analysis. It is not always necessary or desirable to enter detailed lease information. Usually, the analyst of income producing property is better served by the macro view. For example, take a typical office building. Most tenants are under 3 to 5 year leases, the range of rental rates varies, different pass-throughs have been negotiated on a per tenant basis, and the leases expire at different times. Regardless of the present lease terms for individual spaces, all leases will tend towards market terms in a relatively short period of time. A prospective purchaser of the property does have an interest in this lease detail, but only after evaluating the long term potential of the property under market assumptions, from the macro view.		Other Topics The Great Fallacy of Real Estate Databases Occam's Razor and Income Analysis The Capitalization Process The Band of Investment The Mortgage Equity Technique The Discounted Cash Flow Method Your Benchmark - The Perfect Property Our Approach to Income Analysis Software Argus or Analyst? What you should Know about Income Analysis Software Understanding Income Analysis Software-Seminar

We always recommend that our clients first perform a "stabilized" analysis using market terms. The stabilized analysis becomes your benchmark. Then, as necessary, an analysis of the leases in place can be compared to this benchmark. This gives you greater confidence in your final evaluation of the value of the property. Please see our discussion of Occam's Razor to learn why our approach is usually a better way to perform an income analysis. Investment Analyst offers the capability to perform a stabilized analysis and a lease analysis simultaneously. It can be as simple as estimating gross income ($20 per s.f. per year times 100,000 s.f.), estimating a frictional vacancy rate, and estimating an expense ratio. One can then evaluate the income stream instantly, under different conditions. For example, one can change the mortgage terms, alter the growth rate assumptions, or change the required rate of return. As these conditions are changed, Investment Analyst provides instant feedback on the cash on cash yield, the debt coverage ratio, the overall cap rate, the terminal value, and many other key indicators that are critical to a thorough understanding of the property. Whether you are an appraiser, a banker, an investor, or a broker, using the macro view one can quickly determine whether the property meets your criteria. If it does, Investment Analyst provides the capability of "drilling down" to the lease detail by allowing you to enter detailed contract lease terms for all tenants or only selected tenants, as necessary. For example, most tenant spaces may be at "market" under relatively short term leases, but one anchor tenant may be under a long term lease that is above or below market. Detailed lease information can be entered for just this tenant and the effect upon value can be evaluated. Our approach differs from most "DCF software" that is available. Other software typically takes the "bottom up" micro approach. Lease terms must be entered for each space and critical assumptions that affect the calculation of value are often hidden in the detail. This is also true for expenses. Once all detail is entered, the "magic" number is calculated by discounting the detail - a number that may, or may not, represent Market Value. This approach to data entry is, perhaps, good for property managers, but it is prone to user error or intentional manipulation. Furthermore, errors that have crept into the data entry are difficult to uncover, especially by a third party. The micro approach is best applied when one is analyzing the historical or actual cash flows that have already occurred, in order to calculate the actual yield of those cash flows. But the "bottom up" approach is not suited for estimating the value of a prospective income stream because of the inherent assumptions that must be made about the future. Summary In summary, Investment Analyst offers both the flexibility to quickly evaluate income producing property and the sophistication to evaluate complex lease terms of individual tenants, when necessary. Analyst is easy to use and its learning curve is short. Investment Analyst provides analysis tools that are not available in other income analysis products. Key indicators are at your fingertips. Assumptions are easily changed and the changes are instantly reflected in the value calculation. Both a stabilized analysis and a lease analysis can be performed simultaneously. Investment Analyst has a built-in Review tool that reviews the reasonableness of your inputs. The reports produced by Investment Analyst are presentation quality, they are easy to understand, and they are easy to explain

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OUR APPROACH TO INCOME ANALYSIS

OUR APPROACH TO REAL ESTATE INCOME ANALYSIS