Gross Rent Vs Gross Income

[Paul Ness MAI]

I was recently told on a R.E. investor's forum (by another commercial appraiser) that gross rent multipliers refered to actual annual income and gross income multiplers refered to potential or effective. When I stated my definitions, he told me there are different definitions in different regions of the country (just as there are different definitions for net, triple net, and gross rental terms).

I always equated the term "rent" to monthly and "income" to annual, since the residential forms use the term GRM, which is always based on monthly. Around here we never use the term GRM in commercial appraising - only EGIM or PGIM. I never heard of using the two terms to distinguish between actual income versus potential/effective income.

I thought there were stated definitions of these terms. How do you all use them?

 

[Stephen J. Vertin MAI]

Paul:

I thought potential gross income multipliers refers to all potential income divided into the sales price before considering any loss (i.e., vacancy and collection). Some properties have potential income above and beyond rent, i.e., apartments may have income from washer/dryers, late payments, bounced checks, etc. While potential gross rent multipliers refer to potential rents only (before loss). A better distinction would be retail rents where potential income is paid above the base year rent according to gross sales figures. In some cases potential gross rent (which could be assumed to be base rent) may be substantially below potential gross income. Many times this is the case on the Magnificent Mile in Chicago. Potential gross rents and potential gross incomes are substantially different. The word potential refers to possible future monies not including vacancy and collection or other suspected loss (excluding operating expenses). The word effective refers to income with all of these extractions before operating expenses.

I am sure you know this and the above is not news to you. I only stated it for other readers and to clarify my point. I never heard of using the two terms to distinguish between actual income versus potential/effective income either. Both are "potential" and if not should be labeled effective. Further, if actual income is used, it should be labeled as such unless it is equal to potential or effective figures. That is why we have the terms potential and effective. It is my understanding potential and effective incomes are always market derived, actual income is a totally diferent concept. Personally, I see the terms (PGIM and PGRM) used interchangeably due to most properties having income and rents that are equal but appraisers can differentiate between the two as long as they are either potential or effective figures. The difference would be based on availability of data and its form, which could be market specific

As long as the appraiser was consistent within his/her definitions, in theory, I see no problems. With the exception that the terms are used in an unorthodox manner. However, the end results should be similar If the ratios are mixed or if the appraisers is using effective on one sale and potential on the other, than actual figures on another, etc., then there may be possible problems.

Steve Vertin

 

[George Hatch]

Paul,

I'm with you - GRMs are based off of the monthly and are used for 1-4s, an GIMs are annualized and used for 5+ and non-res work.

I've never heard it used the other way by anyone who actually does non-res work on a regular basis. Nor have I heard of using them to denote potential vs. actual.

I would agree that there are different variations of Gross, Modified Gross and Net expense terms, but I see those locally. I didn't think there were additional geographic variations. Around here, Modified Gross terms may or may not include insurance costs, for example. NNN terms may or may not include management reimbursement or reserves in with the CAMs. Gross terms may or may not include janitorial. That stuff varies by property type and lease specifics. Do you know of any additional variances by geography?

 

[Rick Kulman]

Steve:

You got it right! The apraiser must be consistent.

The definitions of the various terms as stated in the Appraisal of Real Estate, 12th ed., Pages 546-547

Gross Income Multiplier - GIM: "the relationship or ratio between the sale price or value of a property and its gross income from rent and other income sources"

Potential Gross Income Multiplier - PGIM: "the ratio between the sale price of a property and its potential gross income (PGIM =V / PGI)."

Effective Gross Income Multiplier - EGIM: "the ratio between the sale price (or value) of a property and its effective gross income; a single year's EGI expectancy or an annual average of several years' EGI expectancies (EGIM =V / EGI)."

Gross Income Multiplier..."some of the gross income from a property or type of property may come from sources other than rent."

Gross Rent Multiplier "applies to rental income only."


Rick

Richard A. Kulman, MAI, ASA
Prime Appraisal, Inc.
199 Main Street
P.O. Box 277
Woodbridge, NJ 07095
732-636-7474
732-636-7453 FAX

 

[Terrel L. Shields]

Paul you use them the way I use them.

I found out that is the way the state prefers them, too. When I co-signed with a person under state scrutiny, I made her change GRM to GIM and had to explain that to her. She was really inadequately prepared for commercial work. The state did not like her version for sure.

 

[Austin]

Let me ax you guys a question:
If the GRM is 60 and the rent is $500 per month, then the indicated value is $30,000.
Now if I divide the GRM by 12 it is equal to an annual multiplier of 5. If I multiply 5 times the annual income of $6,000 the value indication is $30,000.
My point is, if you clearly state what is included in the income ratio and use these factors consistently, then what difference does the definition make? You just defined it the way you are using it. The proof is in the consistency in my view and not in some arcane definition.

 

[Paul Ness MAI]

The question originally was posed by a real estate investor on another forum, who asked what GRM and GIM meant. A reply was posted by an appraiser (see my original post in this thread) providing definitions that were different from my use of the terms. In reality, there are a number of real estate terms inconsistenly used (in conversation and documents) by not only appraisers, but also realtors, buyers, sellers, lawyers, etc. It would be nice if we all sang off the same page, but we don't. Another area where I find this is in the use of cap rates, yield rates, discount rates, equity dividend rates, cash-on-cash rates, IRR's, etc. etc. etc.

 

[Austin]

Paul:
There is an MAI in SW Virginia that I use to see at chapter meetings. We were discussing this subject and he told me that when doing an appraisal for a client group that he used their definitions and methods. He said theirs were just as good ours. For example, motels sell for 3.5 times the gross. In my way of thinking that ratio assumes a lot that may or may not be true like condition, location, district trend etc., but that is the way motels are priced and sold.
About 10 years ago I went to a NASCAR race in Atlanta with my brother-in-law and his buddy. My brother-in-law told me this buddy of his was the biggest commercial broker in the Atlanta area. We picked him up at his house and it was a mansion. As we rode down the interstate he would point out the various high-rise buildings he had sold. I asked him what kind of cap rate or income ratio factors they used to price these buildings. His reply was: “Huh?” What are cap rates and ratio factors? I said well how do you determine the value of these buildings when you put them on the market. His reply was classic: “Well, I just ask them how much they want for the property and that is the price I ask for it.”
Then along comes a big shot appraiser who extracts the cap rates and ratio factors and argues over the definition of the term.
The thing that prompted me to write the above post was that a while back Terrell posted on another thread that a state investigator got on him for using the GIM and stated it was never appropriate if I remember correctly. Then above Terrell said he made some one change from GRM to GIM. What is the difference if they are used consistently? One is monthly and one is annual or you can take an annual and convert it to monthly. If the ratio and income stay the same what is the difference? Can you imagine some one going before the state board for using a GRM of 84 and the board says they should have used a GIM of 7? In NC, maybe, but I can't see it happening in a rational state.

 

[Bill_FL]

It would be interesting to find out the history between these two. If you think about the actual names, it implies that a GRM would only include revenues generated by rent. A GIM would include revenues from all sources of income.

I have only used them the way Paul has pointed out. I think the matter of consistency is not appropriate. We might consistently call V & C an expense, but that would not make it correct, it is an allowance.

 

[Austin]

Bill:
I don't mean consistency of the definition I mean consistency in the way the ratios are applied. By consistency I mean compare apples to apples and oranges to oranges. It doesn't matter what you want to call it, if you want to compare EGIM's just state what you are comparing be it rent or rent plus other income. If you do it correctly you don't have to call it anything but a ratio comparison.