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Apartment Appraisal - Laundry Income

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Bill Lansdowne

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Kansas
Recently, the owner of our appraisal company decided to change the way we handle laundry income on apartment appraisals. Historically, we have always included laundry income as other income, before VAC and expenses are considered, which means it is increases the NOI and is capitalized in the end. Now, he thinks we should not include laundry income, and we should just add the contributing value of the coin-op laundry machines to our final indication. I've never seen it done this way, and seems contrary to most methods I have been taught or read.

His statement is that a w/d unit that is generating $50/month or $600 is not worth its capitalized value of $6,315 (9.5% OAR).

Anyone care to provide any comments? Thanks.
 

Michigan CG

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I disagree. Investors are buying an income stream and laundry income is part of that income stream and should be capitalized.
 

Joker

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I concur with Mr. Evans but will attmempt to explain the rationale. It's not as if the W/D is worth that much money but the space it occupies is. Larger apartment complexes sometimes lease the laundry facilities to vending companies. How much would the laundry space be worth? If your boss is adding say $2,000 for the personal property, is he including a value for the square footage contained within the laundry? If so, great. If not, he may be undervaluing the property.
 

Caligirl

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Laundry income, parking, and any other miscellaneous tenant payments need to be included in the income stream.
 
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hastalavista

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I think your supervisor would have to prove his argument by showing that the buyers/sellers in your market react that way- that is to say they do not consider laundry income as "income" but as something else that contributes differently (from income) to the value of an apartment.

For all I know, that may be how buyers/sellers react in your market; if so, please share with us how the argument is made. :new_smile-l:
 

Brian Weaver

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It shouldn't be a blanket "policy" shift, but rather a shift based upon how the markets reacts to the coin-op income.
 

GCJim

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New Jersey
What Caligirl said......Income is Income, and must be capitalized.
 

Lost Cause

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New York
As always, it depends. But I am yet to see a market where laundry income is not capitalized.

The new policy would make more sense if the washer/dryer units were in each apartment, but not where they are an income generating portion of the real estate. As Doug noted, it's not a matter of the value of the equipment, but the potential rent the laundry can earn. It's most analogous to having a small retail unit in the apartment building.
 

Bill Lansdowne

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Certified General Appraiser
State
Kansas
follow-up

Thanks everyone for your responses. Briefly, I argued (with our owner):

1. The increased expenses of having laundry, reduce the net effect of the laundry income, before the NOI is capitalized.
2. A typical investor will consider the additional revenue. If you analyzed the financials of two properties, and one showed additional income (even a small amount) they will give a slightly higher value to the additional income producing property (barring no significant increases in additional expenses...see 1).
3. What about the value of the common area that the washer and dryer occupy?
4. I have not seen any examples of anyone else doing it the way he suggests...(I know...not the strongest arugement).

He listened to my arguments, disputed item #2 and said items #1 and #3 are splitting hairs. Still contended that we are over valuing two pieces of equipment that can be bought new for $1500-$2000, but ultimately said I have argued my point and can do it however I like.

In the end, I capitalized the income. Thanks for everyones thoughts.
 

Geo Gervasi

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Mar 2, 2005
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New Jersey
Hello Bill,

Very interesting subject to me.
I have thought about this many times myself.

I have a few thoughts on the subject as a whole, and
I'll make arguments on both sides.

One could argue that W/D's are purly FF&E,
(personal property) and not real estate, and certainly
not a major tangible asset.
That W/D's are not vital to the overall operation,
therefore, not concluded to be worth the potential capitalized value.

On the other hand, one could argue that
W/D's are an integral part of the operation in
the case of apartment buildings.
One could even go as far to say that such equipment
creates a type of underlying synergy to the operation.
Competing properties that have W/D's would be
potentially more attractive to prospective tenants - no?
In most cases yes. So to conform to accepted market conditions,
and appeal to the majority of tenants, usually all of the
apartment buildings would have W/D's either in a common area or each unit.

Regarding Machinery & Equipment valuations,
FF&E and M&E are capitalized in the Income Approach,
so why wouldn't the W/D's be included.
Capitalizing the potential earning capacity is a basic criteria.

For arguments sake, say one W/D costs $1,500.
The unit generates $600 per year. So even if the machines
were installed and never touched, and no additional monies
put out, each unit would recoup its intial cost in 30 months.
After 30 months any income is pure profit right?

No, not if the water and electricity is paid by the landlord -
which it probably is, usually common area utilities.
So now, you have to figure in the cost of operation
per kwh and gallon of water for each unit.

Computed over the year against the utility costs,
would render a longer recoup period. So now, it takes
longer to realize a profit as the machinery gets used
and worn out.

Although, the income stream is realized fairly immediately.
Perhaps that is a secondary factor that may offset the longer
time period to recover intial outlay.

You could also capitalize the income stream from the machines
then add that value as a component to the capitalized NOI.

Another aspect is that depreciation would have to be
factored in, and that can be time consuming in itself - i.e.
determining the current condition, how many hours of
operation per unit, per day, maintenance & repair history
and schedules, economic life, etc.

Technically, the W/D's represent a "value in continued use"
as well. yet another approach that may be considered.
Are the units owned or leased?
Are they household or commercial grade equipment?
Can the machines be written off as capital equipment?

But also something else to think about is that the cap rates of
FF&E would differ from those of entire real estate operations.
How much risk is involved in owning or leasing W/D's?
Probably not too much.

There is a lot to consider, and some of the applications can be overkill.
After all, they are only washer dryers! :icon_mrgreen:

In the end, it is like someone siad, if the market expects most properites to have
W/D's then conforming to what market demands are
makes sense. If purchasers expect a facility to have them,
then it would seem to be that they are a part of the income producing property. :laugh:

I'm not saying you are correct or incorrect, I'm just thinking out loud here. Have a good one Bill.

George
 
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