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Old 12-20-2011, 12:23 PM
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justinschroeder justinschroeder is offline
 
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Default build-out cost

How do you handle build-out cost in the income approach. I have seen different ways. One way was to, value as the build-out was complete and then deduct the build-out cost and maybe incentive (depending) from the final value, which seems simple and I like simple. The other was to amoritize the cost of the build-out as an expense, which seems like it would have a-lot of guessing involved. (term, rate, money down)
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Old 12-20-2011, 12:30 PM
Mountain Man Mountain Man is offline
 
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Deduct the build-out cost and incentive from the indicated value is more reasonable.
  #3  
Old 12-20-2011, 12:49 PM
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Howard Klahr Howard Klahr is offline
 
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TI in the income approach does not necessarily represent the actual cost to perform the build out, It is an allocation of the cost between the landlord and the tenant. In performing the DCF you need to account for the amount expended by the Landlord in the period in which the expenditure occurs.

Amortization of the TI allowance is a reimbursement mechanism whereby the Landlord receives payment from the Tenant over time of the amount spent by the landlord on the Tenants behalf.

These are opposite ends of the cashflow spectrum - one is an expense the other is a revenue. You may even have both within the same analysis. Hope this helps
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Old 12-20-2011, 02:29 PM
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justinschroeder justinschroeder is offline
 
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The way it was presented in the report was:

$25 TI for 2,320 square feet = $58,000

$58,000 was then amortized through a bank loan at 5% for 8 years leaving a payment of $9,340 per year. This was then deducted from the income as an expense.

It seems different and very speculative.
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Old 12-20-2011, 05:22 PM
stedios stedios is offline
 
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If you capitalize the noi with the $9k as an expense you're basically saying that the expense will exist "forever". Get your value and deduct $58k, plus (minus...) some incentive.

If you are doing a dcf deduct in year expense is expected.

(sent from iPad; excuse typos)
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Old 12-20-2011, 07:58 PM
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Howard Klahr Howard Klahr is offline
 
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Justin,

Based on what you described that is not an appraisal but rather an investment analysis. It would be like trying to value the property based on the after tax cash flow. You should just deduct the $25 per sq ft in the period that the lease occurs.

Just for grins however, I assume that this is for a new lease. How long is the term of the lease?
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Old 12-21-2011, 12:40 PM
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Its an active listing and they are trying to get at least a five year lease. There are three units in the building, two of which are built-out and leased. The third is stripped down and needs finished before it can be leased. They want the value of the whole building.
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