• Welcome to AppraisersForum.com, the premier online  community for the discussion of real estate appraisal. Register a free account to be able to post and unlock additional forums and features.

Gross Income Multipliers

Status
Not open for further replies.

Terrel L. Shields

Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
What classes of commercial property do you think GIMs are applicable for?

Apartments only? owner occupied commercial buildings? Warehouses? Complex mixed use properties? Franchise business buildings? Farms?

I personally think that a GIM is applicable when you are unable to obtain adequate or reliable expense data but have some reasonable expectation of a rent or income, even if you have to estimate the rents. It may be qualified in that it will be a weak approach...but that's nothing new. It could be, in my opine, applicable to any property where data is in short supply or unavailable.
 

Paul Ness MAI

Member
Joined
Jan 14, 2002
Professional Status
Certified General Appraiser
State
Pennsylvania
Any valuation method is weak if there is insufficient data necessary to employ it. I guess I take the opposite approach - if there is insufficient data to employ a certain valuation method, I will not use it. The best time to use GIM is when you know expense ratios are going to be similar among properties of a particular type. If you have no expense information on the comps, you need to be careful if your analysis stops at gross income, particularly with a property type that has myriad ways of treating expenses (gross, net, net net, triple net, modified net, net nauseum). A second way of looking at this question is – what does a potential buyer use in their analysis? In small 2-4 unit apartments where expenses are similar, I could see using the GIM, but I wouldn’t use it with larger more complex properties where the buyers are more sophisticated and will employ more intensive net income analysis.
 

Fred

Elite Member
Joined
Jan 15, 2002
Professional Status
Retired Appraiser
State
Virgin Islands
Terry,
In practice, for real property, I think the GIM is almost useless. It’s a case of simple arithmetic. If the expenses rate is the same on all the properties and you use the same “accounting” for each, then GIM produces essentially the same number as direct cap. If the expenses are not the same because the nature of the property or the accounting for income, then GIM and direct cap may well produce very different numbers – and guess which one is wrong.

Following on Paul’s idea.

Property 1 leases say $20/sf; and the landlord pays $6/sf in expenses.
Property 2 leases say $14/sf with 100% expense pass through and the landlord is “paying” zero in expenses.
Both properties sell for $140/sf and the cap rates are exactly 10%. What are the GIM’s? They’re all over the place even in this “perfect market.”

There is no “convention” among appraisers about what “accounting theory” to use. I call this the doubletalk of triple net. On property 2, you could see or create an op statement that says
‘$14 gross rent + 6 pass = $20 gross revenue - $6 landlord expenses = $14 noi’.
Or you might see or create an op statement that goes
'$14 rent less 0 expenses = $14 noi.'
And both would be "correct."
 

Paul Ness MAI

Member
Joined
Jan 14, 2002
Professional Status
Certified General Appraiser
State
Pennsylvania
I’m reviewing an appraisal of a shopping center right now where the appraiser used only the EGIM as a value indicator in the sales approach. Sales data is as follows (EGIM and Exp Ratio): (1) 7.16 and 29%, (2) 8.7 and 16%, (3) 9.49 and 8%, (4) 10.39 and 5%. The relationship between the two is clear. If the appraiser did not have the expense info to help in the analysis, he’d have a tough time reconciling an EGIM range of 7.16 – 10.39, this would equate to a value range of $1.1 - $1.6 million. The subject’s expense ratio is 29%. What EGIM would you use? In the leased fee valuation of such a property where income is the primary motivator for the buyer’s purchase price, EGIM is about the best you can do, and perhaps even a range should be concluded rather than a single point estimate in the sales approach.
 

Fred

Elite Member
Joined
Jan 15, 2002
Professional Status
Retired Appraiser
State
Virgin Islands
Paul,
I am not sure I would jump to the obvious answer in weighting the sales. Not enough info, yet. But if there is nothing else about these properties we need to know, I can prove you are right. You say, sale 1 because of expenses looks like the best comp and comes to $1.1 mil for subject.

Part of the point, I was trying to get to is the "circularilty" of certain calculations. We are dealing with different ratios, but they involve the same numbers, so yu can get to the bottom line. For example, how can you know these GIM's and expense ratios and not know the cap rate. Here's what I get.
Code:
Sal 1	Sal 2	Sal 3	Sal 4
9.9%	9.7%	9.7%	9.1%

Proof:
Sale 1, assume EGI = $1 (so that numbers are per "cent"), then NOI must be, $0.71, and the purchase price must be $7.16. Therefore, the cap rate must be .71/7.16 or 9.9%, etc.

This is what I was indicating before. The cap rates give values close together because there is a sane market, but the GIM's can be all over the place. Given the magnitude of variance of the GIM's versus the magnitude of variance of the overall rates, I would conclude that GIM variance makes it unreliable.

Based on your numbers of $1.1 mil at 7.16 EGIM, I get a subject EGI of 153.6k and for $1.6 mil at 10.39 EGIM, I get subject EGI of 153.9k. And using your 29% expense for subject, I get $109,000 for subject NOI. That's $1.1 mil to $1.2 mil (capped at 9.9% and capped at 9.1% from sale 1).

Unless I screwed up, that proves us both right. Your pointed to sale 1 as similar by expenses and its EGIM came to 1.1mil. I said that GIM and overal call would produce the same number, and it did, 1.1mil.

This is why I argue GIM is almost useless. If the expenses are the same, GIM and the overall cap rate give the same number. If the expenses are not the same from sale to sale to subject, GIM produces a lot of noise.
 

George Hatch

Elite Member
Gold Supporting Member
Joined
Jan 15, 2002
Professional Status
Certified General Appraiser
State
California
I agree that income multipliers in their various guises (PGIM, EGIM, NIM, etc.) are useful only to the extent that you either know or have reason to assume that the expense ratio's will be similar or otherwise reconcilable. Other than that, their main attributes seem to be that in some market segments the buyers and sellers use them in their analyses, and they are a lot easier for us to explain and for users to understand than an OAR. Lookit how many brokers try to multiply net income by 10.0 instead of dividing by .1000 (okay, scratch that; use 9% instead). Makes about as much sense as always assuming the discount rate in a DCF will be 12%.

Since a multiplier as a factor is a value indicator of the income stream, it should have similar results as OARs or other quantitative indicators when used properly. Obviously, the farther down the income stream you go (PGI, EGI, NOI) to derive your indicators, the more variables are being accounted for and the more accurate the results should be. But the participants in many market segments do rely on GIMs to divine value. Kinda similar to them using (only) price/door to value apartments, apparently not realizing that all doors are not created equal.

I guess it's not the method that's in question, it's the execution.
 

Terrel L. Shields

Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
The reason I ask is due to the misfortune of having to deal with a state board investigator, a CG appraiser in her own right, who (talking about another appraiser's report) argued that GIM was not credible for use in a poultry farm appraisal.

My reasoning is that it COULD be provided you have some kind of idea that income / expenses ratios will be uniform between comparables. Some poultry companies will share their compiled information of their growers. It estimates the expenses which are weighted heavily to utility costs (electric and gas) SInce almost no farms lease in my area, I use a reconstructed Owner-operator NOI statement.

Poultry farmers are paid (usually) by performance and this is in brackets. The most efficient (lowest feed conversion...ie-you grew the most pounds for the least feed) are top....There are 4 brackets. Your man might routinely be in the top bracket, but in Owner-op, I prefer to use Average performance which is compiled in that statement I mention. Likewise, within small ranges, utilities run much the same, insurance runs much the same,,,,etc. etc. so that I can confidently predict most operators will run between 35-45% Expenses against an 'average' performance. That is not a typical condition among most commercial property classes obviously.

While I personally calculate a cap rate, I see no reason why a GIM would not be fairly accurate with the one caveat that also affects your Cap rate calculation...namely the land to building ratio. Chicken barns may be on 5 acres or 500. But typically are on 20 - 40 acres in my area. Again that is adjustable, I see no reason that someone who does it properly could not justify this method.

Dealing with poultry barns (again there are few rentals- I am aware of none presently operating as rent farms) direct methods seem appropriate. They are based on historic, deterministic data - the history of the property and the history of the integrators growers.

On the other hand I find yield capitalization rates to be a joke. How do you derive a discount from a non-existent market (i.e.- poultry landlords)? Interviews with farm owners reveal little except they are buying a job. This approach is probablistic, you must forecast some future action that is not happening in the market and may not happen in the future (leasing). Yet I see a large number of appraisers using yield capitalization in estimating poultry farm cap rates. They make vague references to market participants, but who? I cannot think of a person, save one, who ever leased a poultry farm. Comments anyone?

Ter
 

Bill_FL

Senior Member
Joined
Aug 23, 2002
Professional Status
Certified General Appraiser
State
Florida
Too me, first, a GIM is more useful as a unit of comparison in a market approach, not an income approach. It is something that needs to be "adjsuted". If you do not have similar expense ratios I would not use one, without adjsutments.

Secondly, I would use it when the market indicated that this is how the typical investor buys this type of property. If yoru research indicates that the typical poultry farm investor buys the property based on a " 3x the gross" then I would use it.

Now a dumb question. And Terrell, I have never done a poultry farm, so perhaps you can educate some of us. Why does the appraiser consider the income from the poultry? Is that not valuing the business? Should the income not be what the farm and buildings would rent for to a typical farmer?
 

Terrel L. Shields

Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
The income is not really "from the poultry"...i.e.-the farmer does not own the bird. In effect he is leasing his labor, building, and utilities to the intergrator under contract and how well the birds do determines his income.

Some do argue this is a BEV (Business Enterprise value), but the deed stamps invariably show the gross amount of the sale. How can you relate this total amount to the value of the buildings without considering the value of the contract - which in effect sets the highest and best use of the property. In the absence of a poultry contract the value of the barns drops to near zero...they actually can become a liability. The "lease" might be $4 per SF under ideal conditions, less than zero in a bad year (i.e.-expenses exceed gross income.)

This is also a closed market. There are a limited number of available integrators and their specifications are so exacting, the buildings are not leasable to other integrated companies except with expensive modifications. And integrators do not solicit other integrators contract farmers...kindofa gentlemans agreement to not poach on each other. There are no third party leases...i.e.- a person does not lease a barn from a farmer then make a contract with the growers (intergrators). The intgrator will not go along with it either. They want someone who has an investment in the property to run the show.

Any effort to put the square peg in the round hole and make the farmer a
typical poultry farm investor
suggests that the farmer is sophisticated enough to put a pencil to his operation, at which point 90% of all poultry farmers would quit. There are no poultry farm "investors" in my book.

I see this concept taught by FSA however. The results, invariably, are that the FSA appraiser undervalues the property by 1/3rd or more. They split the income in two...(Lord only knows where they picked that figure up) with one-half going to the "investor", the other one-half as labor (owner.) This depresses the cap rates to 4-7% from what I typically use (12-16%.) Often I see the numbers "jimmied" to avoid negative returns in FSA appraisals.

The last such appraisal I saw was $710,000. The appraiser deliberately under-reported the utilities to avoid a negative return to the owner. The property eventually sold and closed for $845,000. Since then, similar farms with identical contracts have closed for $1,050,000; $950,000; and $1,100,000, respectively. All gross $165,000 per year ±. The $845,000 barns were a bargain and the sellers reduced the price to $845,000 largely because that low appraisal "queered" FSA financing. Frankly, they probably lost a $100,000 because of a stupid appraiser doing it "by the FSA book." They threatened a suit at one point and should have. Mind you this appraiser is a long time appraiser with a set of credentials a mile long including Farm Credit loan officer, ASFRMA member, etc.
 

Fred

Elite Member
Joined
Jan 15, 2002
Professional Status
Retired Appraiser
State
Virgin Islands
Terry,
"Inegrator"? A middle man?
 
Status
Not open for further replies.
Find a Real Estate Appraiser - Enter Zip Code

Copyright © 2000-, AppraisersForum.com, All Rights Reserved
AppraisersForum.com is proudly hosted by the folks at
AppraiserSites.com
Top

AdBlock Detected

We get it, advertisements are annoying!

Sure, ad-blocking software does a great job at blocking ads, but it also blocks useful features of our website. For the best site experience please disable your AdBlocker.

I've Disabled AdBlock
No Thanks