Calculations (discounted flow model): income approach-used when there is significant rental component in the sub mkt

1. Whose interest? >Person/LH/FH

2. Expected future benefits? expected rental/sale
3. (Discount rate> required rate of return corresponding to the risk) convert expected to current

ex-post return vs ex-ante return: base on real data vs forecasted data

1
PVFe,n
(1 e) n PVAF (e%, n year) = (1-PVF/e)

4 years of NOI( $X per year)=> $X x (PVAF(e,4) (bring the value to current period)

4 years of NOI( $X)=> $X x (PVF(e,4) (bring the value to current period) divide by PVF to get FVF(future value of the current money)

Ri R
VFH i 1
n
Ri R
1 n
VLH n1
Property-related outgoings 13% (1 e) i
k FH i 1 (1 e) i
k LH
(OG). landlord is responsible
property tax 10% R e[(1 e)t (1 g )t ] k FH e[(1 e)t (1 g )t ]
k FH 1
n
k LH
fire insurance premium 3% 1 g
n
1 g n
VFH (1 e)t 1 1
1 e

(1 e) 1 1
t

repairs and maintenance of 1 e
premises If g 0, k FH e
NOI=amount paid(rent) -(OG) and non- If t 1, k FH e g
realty(not related to real estate space) Given e, t, n, and leasehold yield, we
T usually 3 years cycle can back out g via a trial and error
1
algorithm knowing that:
( e k FH )(1 e) k FH
t t

g 1
g<e

e g > (e leasehold initial yield)

Ceteris paribus, k FH k LH
n
Residual method for valuation of land with development Profit Method
Revenue from real estate development Forecasted (estimated) Current years Revenue
Compensation to labour, capital, and entrepreneurship Less
=Residual (i.e. attributed as Land Value) (a) Operating expenses incurred in the production of revenue
(excluding property related expenses such as property tax,
Residual(EOCP)=Land cost(EOCP) insurance, repairs & maintenance of buildings)
Land cost+ Cost during construction=Land cost@EOCP =net revenue
Less
Residual: gross domestic value (GDV) cost (b) Return on tenant's capital (moveable assets used in the business)
(Entrepreneurship-profit, (c) Return of tenant's capital(MA/econ life)
Capital, labour -construction cost, financing construction, property tax,mkt
legal fee) = Divisible Balance
Less
(d) Tenant's share (reward for entrepreneurship)
Land cost@EOCP: Hypothetical Gross Rental Value
land cost(x) + transaction cost(0.45x) +
financing purchase of land = (FVF) =(1+e)^n NOI= Hypothetical Gross Rental Value- OG (13%)

K from equations

V= NOI/k

Annual value= (5%) land value x (10% tax) FVF = 0.05 (x) 0.1 ((1+e)^n)

Progressive payment for financing> 0.5(sum)(1+0.06 interest per annual)^n

Stamp duty=3%