BC 2011 10 17 Regular Meeting - Laserfiche WebLink

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October 17, 2011 (Regular Meeting) $22,800 Less 35% Operating Expenses 7,980 Net Operating Income (NOI) $14,820 Page 748 The net operating income usually takes into consideration the lease agreement presently in force to determine the dollar amount (income) to the investor and /or owner. The County also analyzes the leases of competitive properties to estimate contract rent, market rent, and other forms of income. Under General Statute 105 -317 (a) (2) which states in part that it shall be the duty of the persons making appraisals to determine the true value to consider in part: past income, probable future income and any other factors that may affect its value. Lease analysis is important and all characteristics of leases must be fully understood. DETERMINE INCOME PROJECTION PERIOD So far the emphasis has been on computing what the net annual income for a property would be. However, what must not be overlooked is that this net annual income is assumed to generate over a period of years during which the investor earns interest on his capital and also receives a proportionate return of his investment. In order to determine the duration of the income stream and /or the amount of time an investor has to recover his capital two things must be considered, the remaining economic life of the property and the typical holding or investment period depending on the valuation technique to be used. REMAINING ECONOMIC LIFE In order to apply any of the residual income techniques, it is necessary to estimate the remaining life of the improvements. By definition the economic life of improvements is the time period over which the improvements will be able to produce an income at a competitive rate of return on the portion of the investment represented by the improvements. Another term frequently used is capital recovery period. At the end of this time period, the improvements will be used up or depreciated to the point that they will no longer make any contribution to total property value over and above the contribution made by the site. Remaining economic life is directly related to the effective age of a given property. This is the difference between the total economic life less the remaining economic life. Remaining economic life and its complements, effective age, are dependent on tastes, standards - customs, and the effect of competition plus, perhaps most important to the property appraiser, the observed condition of the improvements. Elsewhere, in the discussion on depreciation, we have shown some typical building lives for various commercial improvement types. Reference to this table will give some indication as to the expected economic life new; however, the appraiser should look for buildings within the area that no longer produce income. The age of these buildings should give you some idea of the economic life of a building. INVESTMENT HOLDING PERIOD The Investment Holding Period is pertinent in the Ellwood or equity method; because of income tax considerations, it has been shown for instance, that most income producing properties are held by the average investor approximately twelve years. This, of course, can vary depending on specific properties and investor's requirements. A change in tax laws directly affects the holding period of all properties. DETERMINE DISCOUNT RATE: SELECT METHOD OF RATE ESTIMATION The Discount Rate, the basic building block in five is also called a RATE OF RETURN ON INVESTMENT. forces of supply and demand for investment funds. investment or "discount rate" is paid or offe2 investment capital. The Discount Rate is generally methods: Band of Investment or Build -up and the investor for: of the income approaches, It is determined by the A rate of return on an ed in order to attract estimated from one of two rate must compensate the 1) Overcoming time preference 3) Assuming investment management burdens 2) Giving up liquidity 4)Assuming the risks of investment and ownership