METHODOLOGY GUIDE- VALUING SHOPPING CENTRES · PDF fileMETHODOLOGY GUIDE VALUING SHOPPING...
Transcript of METHODOLOGY GUIDE- VALUING SHOPPING CENTRES · PDF fileMETHODOLOGY GUIDE VALUING SHOPPING...
METHODOLOGYGUIDEVALUINGSHOPPINGCENTRESINONTARIO
ValuationDate:January1,2016
AUGUST2016
August22,2016
TheMunicipalPropertyAssessmentCorporation(MPAC)isresponsibleforaccuratelyassessingandclassifyingpropertyinOntarioforthepurposesofmunicipalandeducationtaxes.
InOntario’sassessmentsystem,MPACassessesyourpropertyvalueeveryfouryears.Thisyear,MPACisupdatingthevalueofeverypropertyintheprovincetoreflectthelegislatedvaluationdateofJanuary1,2016.
MPACiscommittedtoprovideOntariopropertyowners,municipalitiesandallitsstakeholderswiththebestpossibleservicethroughtransparency,predictabilityandaccuracyinvalues.Aspartofthiscommitment,MPAChasdefinedthreelevelsofdisclosureofinformationinsupportofitsdeliveryofthisyear’sassessmentupdate.ThisMethodologyGuideisthefirstlevelofinformationdisclosure.
ThisguideprovidesanoverviewofthevaluationmethodologyundertakenbyMPACwhenassessingshoppingcentresforthisyear’supdateensuringthemethodologyforvaluingthesepropertiesiswelldocumentedandinalignmentwithindustrystandards.
Propertyownerscanaccessadditionalinformationabouttheirownpropertiesthroughaboutmyproperty.ca.Logininformationforaboutmyproperty.caisprovidedoneachPropertyAssessmentNoticemailedthisyear.AdditionalinformationaboutMPACcanbeaccessedatmpac.ca.
AntoniWisniowski
PresidentandChiefAdministrativeOfficer
RoseMcLean,M.I.M.A.
ChiefOperatingOfficer
TableofContents
1.0INTRODUCTION................................................................................................................41.1PROPERTIESCOVEREDBYTHISMETHODOLOGYGUIDE......................................................................41.2LEGISLATION.............................................................................................................................5
1.3CLASSIFICATION.........................................................................................................................5
1.4THEUSEOFTHISMETHODOLOGYGUIDE.......................................................................................7
1.5CONSULTATIONANDDISCLOSURE.................................................................................................7
2.0THEVALUATIONPROCESS.................................................................................................9
2.1OUTLINE..................................................................................................................................9
2.2APPROACH.............................................................................................................................10
2.3DATACOLLECTION...................................................................................................................10
2.4DATAANALYSIS.......................................................................................................................12
3.0THEVALUATION..............................................................................................................13
3.1DETERMININGPOTENTIALGROSSINCOME(PGI)...........................................................................13
3.2ESTABLISHINGEFFECTIVEGROSSINCOME(EGI).............................................................................14
3.3ESTABLISHINGNETOPERATINGINCOME(NOI).............................................................................15
3.4CAPITALIZINGNOIINTOVALUE..................................................................................................17
3.5CURRENTVALUEASSESSMENT...................................................................................................17
3.6POSTVALUATIONREVIEW.........................................................................................................18
3.7CONCLUSION..........................................................................................................................18
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1.0Introduction
TheMunicipalPropertyAssessmentCorporation(MPAC)–mpac.ca–isresponsibleforaccuratelyassessingandclassifyingpropertyinOntarioforthepurposesofmunicipalandeducationtaxation.
InOntario,propertyassessmentsareupdatedonthebasisofafour-yearassessmentcycle.In2016,MPACwillupdatetheassessmentsofOntario’snearlyfivemillionpropertiestoreflectthelegislatedvaluationdateofJanuary1,2016.Assessmentsupdatedforthe2016baseyearareineffectforthe2017–2020propertytaxyears.
ThelastAssessmentUpdatewasbasedonaJanuary1,2012valuationdate.Increasesarephasedinoverafour-yearperiod.Anydecreasesinassessmentareappliedimmediately.
Itisimportanttoensurethatthevaluationmethodologyappliediscapableofprovidingarealisticestimateofcurrentvalueattherelevantvaluationdate,which,inturn,enablesallstakeholderstounderstandthevaluationprocessandhaveconfidenceinthefairnessandconsistencyofitsoutcome.
ThisMethodologyGuidehasbeenpreparedforthebenefitofMPACassessors,propertyownersandtheirrepresentatives,municipalitiesandtheirrepresentatives,AssessmentReviewBoardmembers,provincialofficials,andthegeneralpublic.
Thisguideoutlinesthevaluationprocesstobefollowedbyanassessor,includingstepsthatrequireappraisaljudgment.Itisincumbentupontheassessortomakeinformeddecisionsthroughoutthevaluationprocesswhenarrivingatestimatesincurrentvalue.
1.1PropertiesCoveredbyThisMethodologyGuide
ThisMethodologyGuideappliestoshoppingcentresinOntario.ThefollowingMPACpropertycodesareusedtocategorizethevarioustypesofshoppingcentresinOntario:
• 425Neighbourhoodshoppingcentre–aminimumoftwostores(underoneownership)withoneanchor,generallylessthan150,000squarefeet
• 426Smallboxshoppingcentre–aminimumofthreeboxstoresusuallywithoneanchor,generallylessthan100,000squarefeet
• 427Bigboxshopping/powercentre–twoormoremainanchors(suchasdiscountorgrocerystores)andacollectionofboxorstripstoresinacommercialconcentrationconcept,generallygreaterthan100,000squarefeet
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• 428Regionalshoppingcentre–atleastonedepartmentstoreoranchorofatleast100,000squarefeet,alargepopulationbase,generallygreaterthan300,000squarefeet
• 429Communityshoppingcentre–clustersofattachedretailunits(open-airand/orenclosed)withsignificantoff-streetpavedparkingsurroundingthebuilding(s)andwithaccessfromtwoormoresides.Theytypicallyofferproductsandservicesfocusedondailyshoppingneedsbutalsoofferawiderrangeofsoftgoodsandservicesthansmallerneighbourhoodcentres.Thesecentresaregenerallybetween100,000and400,000squarefeet.
• 430Neighbourhoodshoppingcentre–aminimumofthreestoresattached,underoneownershipandwithoutananchor,generallylessthan150,000squarefeet
• 438Neighbourhoodshoppingcentreswithofficesabove
Pleasenotethatthesearegeneralguidelinesthatvarydependingonthespecificcircumstancesofaparticularproperty.
AnassessormayalsomakereferencetoadditionalMethodologyGuidesforpropertiesthatdonotfallpreciselywithinthedescriptionofoneofthepropertycodeslistedabove.
1.2Legislation
ThemainlegislationgoverningtheassessmentofpropertiesinOntarioforpropertytaxpurposesiscontainedintheAssessmentAct.1
TheActcontainsimportantdefinitionsandstatesthatallpropertyinOntarioisliabletoassessmentandtaxation,subjecttosomeexemptions.Section19(1)oftheActrequiresthatlandbeassessedatcurrentvalue,whichisdefinedtomean,inrelationtoland,“theamountofmoneythefeesimple,ifunencumbered,wouldrealizeifsoldatarm'slengthbyawillingsellertoawillingbuyer.”
Inaddition,legislationgovernstheclassificationofshoppingcentresforpropertytaxpurposes.
TheMinisterofFinancefiledOntarioRegulation430/15onDecember18,2015,whichaddedadditionalrulesaffectingthevaluationandclassificationofpropertiesonwhichathird-partysign(billboard)islocated.Tocomplywiththeregulation,theincomeattributabletoathird-partysignwillnotbeincludedinthevaluationofanypropertyforassessmentpurposes.
1AssessmentAct,R.S.O1990,cA.31:https://www.ontario.ca/laws/statute/90a31.
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1.3Classification
MPAC’sroleistoaccuratelyassessandclassifyallpropertiesinOntarioinaccordancewiththeAssessmentActanditsassociatedregulationsestablishedbytheGovernmentofOntario.Theclassificationofapropertywilldeterminewhichtaxratewillbeappliedbythemunicipalityortaxingauthority.Allpropertiesareclassifiedaccordingtotheiruse,andOntarioRegulation282/98oftheAssessmentActsetsouthowvariouspropertyusesareclassified.
ShoppingCentresareincludedinthecommercialpropertyclassinaccordancewithSection5(1)1ofOntarioRegulation282/98as“landandvacantlandthatisnotincludedinanyotherpropertyclass.”2TheclassificationofshoppingcentresiscoveredinSection12(1)ofOntarioRegulation282/98.Theshoppingcentrepropertyclassonlyappliesifthecouncilofamunicipalitypassesabylawoptingtohavetheoptionalclassapply.Section12(1)ofOntarioRegulation282/98requiresthecouncilofamunicipalitytopassabylawestablishingthetaxratiosfortheshoppingcentrepropertyclasspursuanttoSection308oftheMunicipalAct,2001.3
Theshoppingcentrepropertyclassonlyappliestotheportionofthepropertythatexceedsthe25,000squarefeetthreshold.Asaresult,theeligiblepropertywillalwaysbeapportionedbetweencommercialandshoppingcentreasfollows:thecommercialclassificationisappliedtothefirst25,000squarefeetandtheshoppingcentreclassificationisappliedtotheportionofthepropertythatisinexcessof25,000squarefeet.Dependingonthepercentageincreaseoftheimprovementandthebuildingpermitissuancedate,ashoppingcentremayalsobeincludedintheNewCommercialPropertyClassunderOntarioRegulation400/98.
Irrespectiveofwhetherthemunicipalityhasadoptedtheoptionalshoppingcentrepropertyclass,MPACwillstillapplytheoptionalclasstotheportionsofthepropertythatmeetthelegislativerequirements.
Whendeterminingtheclassificationofashoppingcentre,theassessorwillalsobemindfulofexcesslandandofficepropertyclasses,taxexemptportionsofthepropertyaswellasanyotherappropriatetaxclass.
Ifaportionofthepropertyisusedforotherpurposes,itmaybenecessarytovaluethosecomponentsseparatelyandsumthecomponentvaluestoachievethecorrecttotalcurrentvalue.Itmayalsobenecessarytoapportionthetotalvalueofthepropertybetweenthevarioususestoensurethattheappropriatetaxrateisappliedtotherelevantpartsoftheproperty.2OntarioRegulation282/98,GENERAL:https://www.ontario.ca/laws/regulation/980282.3MunicipalAct,2001,S.O.2001,c.25:https://www.ontario.ca/laws/statute/01m25.
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1.4TheUseofThisMethodologyGuide
ThisMethodologyGuideisintendedto:
• EnsureMPAC’sassessedvaluesforthesepropertiesarefair,accurate,predictableandtransparent.
• Providedirectiontoassessorsandclearexplanationstomunicipalities,taxpayersandAssessmentReviewBoardmembers.
• EnsurethatMPAC’smethodologyforvaluingthesepropertiesiswelldocumentedandalignswithindustrystandards.
• Explainthethoughtprocess/decision-makingprocessthatanassessorshouldundertaketoapplythevaluationmethodology.
• Ensureaconsistentapproachtovaluingthesepropertytypes.
• SupportMPACassessorsinconductingtheirduediligencein:
Ø applyingOntario’slegislationandregulationsØ adheringtoindustrystandardsformarketvaluationinamassappraisal
environment
ItshouldbenotedthatthisMethodologyGuideisnotintendedtobeasubstituteforanassessor’sjudgmentinarrivingatamarketvalue–basedassessment(i.e.,currentvalue)foraparticularproperty.However,giventhattheMethodologyGuideexplainsindustrystandardsforpropertyassessment,conformstovaluationindustrynorms,andadherestoprovinciallegislationandregulation,MPACassessorsareexpectedtofollowtheproceduresintheMethodologyGuideandbeabletoclearlyandsatisfactorilyjustifyanydeviationsfromit.
1.5ConsultationandDisclosure
MPACiscommittedtoprovidingmunicipalities,taxpayersandallitsstakeholderswiththebestpossibleservicethroughtransparency,predictabilityandaccuracy.Insupportofthiscommitment,MPAChasdefinedthreelevelsofdisclosureaspartofitsdeliveryofthe2016province-wideAssessmentUpdate.
• Level1–MethodologyGuidesexplaininghowMPACapproachedthevaluationofparticulartypesofproperty
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• Level2–MarketValuationReportsexplaininghowthemethodologyoutlinedinLevel1hasbeenappliedatthesectorlevelforthepurposesofeachassessment
• Level3–PropertySpecificValuationInformationavailabletopropertytaxpayers,theirrepresentativesandmunicipalities
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2.0TheValuationProcess
Thevaluationprocessalwaysbeginswithadeterminationofthehighestandbestuseofthesubjectproperty.
Anyrelianceuponthisguideismadeonlyaftertheassessorhasdeterminedthatthehighestandbestuseofthesubjectpropertyisthatofashoppingcentre.
Assessorsdeterminethevalueofapropertyusingoneofthreedifferentapproachestovalue:
• thedirect(sales)comparisonapproach
• theincomeapproach
• thecostapproach
2.1Outline
Inthedirect(sales)comparisonapproach,valueisindicatedbyrecentsalesofcomparablepropertiesinthemarket.Inconsideringanysalesevidence,itiscriticaltoensurethatthepropertysoldhasasimilaroridenticalhighestandbestuseasthepropertytobevalued.
Intheincomeapproach(or,moreaccurately,theincomecapitalizationapproach),valueisindicatedbyaproperty’srevenue-earningpower,basedonthecapitalizationofincome.Thismethodrequiresadetailedanalysisofbothincomeandexpenditure,bothforthepropertybeingvaluedandothersimilarpropertiesthatmayhavebeensold,inordertoascertaintheanticipatedrevenueandexpenses,alongwiththerelevantcapitalizationrate.
Inthecostapproach,valueisestimatedasthecurrentcostofreproducingorreplacingimprovementsoftheland(includingbuildings,structuresandothertaxablecomponents),lessanylossinvalueresultingfromdepreciation.Themarketvalueofthelandisthenadded.
MPACprimarilyusestheincomeapproachtovalueshoppingcentres.Thevalueofanincomepropertysuchasashoppingcentreisbasedonthepresentworthofanticipatedfutureincome.
MPACusesthedirectcapitalizationmethodtoestablishcurrentvalueassessmentsinamassappraisalcontext.
Thismethodestimatestheannualfairmarketrentalincomeandotherpotentialincomethatcanbegeneratedbyashoppingcentre,deductsoperatingexpensesandthenappliesacapitalizationratetothenetincometoarriveatanestimateofcurrentvaluefortheproperty.
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Thedirectcapitalizationapproachinvolvesthefollowingsteps:
1. Determinethepotentialgrossincome(PGI)usingmarketrents.
2. Adjustfortypicalvacancyexpenseallowanceaccordingtothetypeandqualityofshoppingcentretodeterminetheeffectivegrossincome(EGI).
3. Deducttypicalnon-recoverableexpensestodeterminethenetoperatingincome(NOI).
4. Establishthecapitalizationratefromsalesdata.
5. CapitalizetheNOIintoanestimateofcurrentvalue.
2.2Approach
TherearefourmainphasesintheprocessusedbyMPAC:
• datacollection
• analysisofthedatacollected
• valuation
• propertyvaluereview
2.3DataCollection
Thedatarequiredforshoppingcentrevaluationscomefromanumberofsources:
• MPACconductsperiodicinspectionsofshoppingcentres.
• PropertyownersarerequiredtoprovideMPACwithdetailsincludingtheactualincomeandexpensesthroughthePropertyIncomeandExpenseReturn(PIER)forms.
• MPACalsocollectsinformationaboutsalesandtransfers.
MPACgenerallycollectsthefollowingtypesofdataforshoppingcentres:
• generaldata(tenantlist,occupancy,leasetypes,etc.)
• financialdata(rent,vacancy,expenses,retailsales,etc.)
• propertydescription(siteplans,floorplans,etc.)
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• salesdata(whereapplicable)
• grossleasablearea(GLA)
• Furthertotheabove,MPACwillreviewthirdpartyreportsfromvariousreputablesourcessuchasCoStarandAltusInsite.
Confidentiality
Asoutlinedabove,itisimportanttobeawarethat,inordertoenableMPACtoproduceanaccuratevaluationofthepropertyconcerned,informationneedstobeobtainedfromavarietyofsources.
ThiswillincludeinformationfromMPAC’srecords,fromtheowneroroperatoroftheproperty,fromthemunicipalityinwhichthepropertyislocated,fromtheassessor’svisittotheproperty,andfromothersources.
AllstakeholdersinthepropertyassessmentsystemhaveaninterestinensuringthatthecurrentvalueprovidedbyMPACiscorrect;inordertoachievethis,itisnecessaryforallpartiestocooperateintheprovisionofinformation.
Itisappreciatedthatsomeoftheinformationoutlinedabovemaybeofacommerciallysensitivenature.MPACrecognizestheneedtoensurethatanyinformationprovidedtoitisproperlysafeguardedandonlyusedforthepurposeforwhichitissupplied.Assessorsmustappreciatethenatureofthisundertakingandensuredataistreatedaccordingly.
If,afteranappealhasbeenfiled,MPACreceivesarequestforthereleaseofactualincomeandexpenseinformation,orothersensitivecommercialproprietaryinformation,theusualpracticeistorequirethepersonseekingtheinformationtobringamotionbeforetheAssessmentReviewBoard(ARB),withnoticetothethirdparties,requestingthattheARBorderproductionoftherequestedinformation.ThereleaseofsuchinformationisatthediscretionoftheARBandcommonlyaccompaniedbyarequirementforconfidentiality.
TheAssessmentActoutlinesinSection53(2)thatdisclosedinformationmaybereleasedinlimitedcircumstances“(a)totheassessmentcorporationoranyauthorizedemployeeofthecorporation;or(b)byanypersonbeingexaminedasawitnessinanassessmentappealorinaproceedingincourtinvolvinganassessmentmatter.”
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2.4DataAnalysis
ForMPACtogainfullvaluefromthedatacollected,thedatahastobeorganizedinsuchawaythatmeaningfulcomparisonscanbemadeandconclusionsdrawnthroughstatisticalanalysis.
Theanalysisprocessinvolvesseveralsteps.Thefirsttaskistovetthedata(i.e.,checkforaccuracy)beforeitisusedtohelpestablishthefairmarketrentsandfactorsthatwillbeusedtovaluetheproperties.ThesecondstepistoenterthedataintoMPAC’sdatabase.Next,MPACclassifiesthedatasothatitcanbesortedintoappropriatemarketareas,whichreflectconditionswheredatacomparisonscanbemadeandconclusionsdrawn.Finally,MPACdevelopscertainvaluationparametersthroughthemodelprocessthatcanbeusedinthevaluationofshoppingcentres.Aftercollectingfairmarketrentdatafrompropertyowners,thenextstepsinclude:
1) Classifyandconfirmthetypesoftenantsbymarketarea,propertycodeandoccupancycode.
2) Analyzedatatoreachconclusionsforallowances.
3) Establishrentsbytenanttypeforeachclassofshoppingcentrethroughmultipleregressionanalysis.
4) Establishtypicalmarketvacancyratesforeachclassofproperty.
5) Establishtypicalnon-recoveredoperatingexpenseallowances.
6) Establishthecapitalizationrates.
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3.0TheValuation
3.1DeterminingPotentialGrossIncome(PGI)
Indeterminingthepotentialgrossincome(PGI)forashoppingcentre,MPACreviewsopenmarketrentstakenfromcurrentrentrollinformationforthepropertyprovidedbythepropertyowner.InestablishingthePGI,itisassumedthereistypicalandcompetentmanagementandleaseswereestablishedbyawillinglessorandlesseewhowerebothknowledgeableandfreefromduress.Thisdataisthenanalyzedtoarriveatanestimateoffairmarketrent(FMR).
ItisimportanttonotethatwhentheanalystisdevelopingFMRsfromactualrentalinformation,athoroughreviewoftherentrollsisconductedtoensuretheyarereflectiveofcurrentmarketconditions.
Itemstoconsiderandreview:
• overalleconomiccircumstancesofgeographicalareaandpropertytype
• whetherrentsreflectexistingmarketconditions
• thelengthandtimeoftheleasetransactions
• rentspaidforothersimilar-sizedrentalspaces
• fullfloorrentstothatofpartialfloorrents
AspertheAssessmentAct,whenvaluingshoppingcentrepropertiesasunencumbered,itisimperativethattheanalystestimateFMR,reflectiveofthemarketplaceasoftheeffectivevaluationdateandinclusiveofallinterestsintherealproperty.TheFMRsareappliedtotheshoppingcentregrossleaseableareas(GLA)toarriveatanoverallPGIfortheproperty.
ThenationallyrecognizedstandardandapproachtomeasuringshoppingcentrebuildingFMRsanddeterminingGLAhasbeenestablishedbytheBuildingOwnersandManagersAssociation(BOMA).
AdditionalincomegeneratedfromthepropertyforsuchitemsasparkingorstoragefeesshouldalsobeaddedtothePGI.Thisadditionalincomeshouldreflectthesamemarketconsiderationsastheshoppingcentregeneratedrevenue(i.e.,shouldbedeterminedfromopenmarketrates).
InestimatingthepropertiesPGI,thepropertyshouldbeconsideredasthoughfullyleasedandoccupiedandoperatingatitsmaximumpotential.
In instances where current rent roll information has not been supplied, is not complete or is not available for a shopping centre, typical market rents can be established by analyzing the rent roll returns from similar properties in the vicinity. The analyst may stratify properties by location, age, classification, etc. in the vicinity. The resulting stratified FMRs are then applied to similar or comparable properties to determine the PGI for those properties.
Figure 3.1 – Example of PGI
Unit Type of Space GLA FMR Income
1 Anchor 100,000 $16.00 $1,600,000
2 Retail 5,000 $25.00 $125,000
3 Retail 1,000 $32.00 $32,000
4 Storage 700 $10.00 $7,000
5 Retail 1,180 $30.00 $35,400
6 Retail 500 $35.00 $17,500
Total PGI $1,816,900
It should be noted that rates and other information shown are for illustrative purposes only.
3.2 Establishing Effective Gross Income (EGI)
Once the PGI from a property has been established, the next step is to determine an effective gross income (EGI). EGI is the amount of income the owner expects to receive over the long term; this is the EGI reduced as a result of expected vacancy and bad debt. Effective Gross In-come = Potential Gross Income – Vacancy and Collection Loss
Market Vacancy
Market vacancy reflects the amount of space that is typically vacant in a particular type of shop-ping centre. Three issues arise when considering vacancies:
• A vacancy estimate is intended to reflect the likely average for a property type over a typical holding period and recognizes that, because of economic cycles, there will be periods when demand is good and periods when demand softens.
• Vacancy rates at individual shopping centres may differ from the norm.
• The vacancy and collection loss is an allowance for reductions in PGI attributable to vacancies, tenant turnover and non-payment of rent.
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EstablishingtheTypicalMarketVacancyRate
MPACassessorsapproachthevacancyrateusingthepercentageoflossofincometypicallylostduetovacanttenancies.Whencalculatingvacancybasedonlostincome,theassessorwillcalculatethelossofincomeasapercentageofthetotalpotentialrentalincomethatwasreportedonaproperty’sincomeandexpensereturn.
OncelostrevenuehasbeenconvertedintoapercentageofthePGI,thepropertiesarethenstratifiedbylocation,ageandqualitytoproducerangesofvacancypercentages.Themeanvacancyrateisthenselectedandappliedtotheentireinventoryofsimilarproperties.
Baddebtrepresentsrentalandotherpaymentsthatthelandlordcannotcollectfromthetenants.Itistypicaltoincludevacancyandbaddebtasasingleblendedrate.
DeterminingEGI
TodeterminetheEGI,theassessorstartswiththePGIanddeductsvacancyandcollectionlossallowance.TheresultistheEGI.
Figure3.2–ExampleofEGICalculation
TotalPGI $1,599,100Vacancy -7.0% -$111,937TotalEffectiveGrossIncome $1,487,163
Notethatunlessthereareextenuatingcircumstances,whichwillbenotedbytheassessor,marketvacancyratesshouldbeusedasopposedtoactualvacancyratesinordertoderivetheappropriatedeductionforvacancy.
Itshouldalsobenotedthatratesandotherinformationshownaboveareforillustrativepurposesonly.
3.3EstablishingNetOperatingIncome(NOI)
Theobjectiveoftheincomeapproachistodetermineaproperty’snetoperatingincome(NOI).TheprocessbeginsbyestablishingtheexpectedPGI,thendeterminingtheeffectiveincomebymakingadeductionfortypicalvacancy.Thefinalstepistoadjusttheincomeforexpensesthatcannotberecoveredfromthetenants.
NetOperatingIncome=EffectiveGrossIncome–Non-recoverableOperatingExpenses
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Non-recoverableoperatingexpenseisthedifferencebetweenthetotaloperatingexpensesandthetotalincomerecoveredfromtenants.
Non-recoverableOperatingExpenses
Non-recoverableoperatingexpensesareexpensestothepropertyownerthatarenotrecoveredfromtenantsinordertomaintainandgenerateanincomestream.Inatypicalshoppingcentre,tenantsareonnetleasesandtheoperatingcosts,suchasrealpropertytaxes,heating,airconditioning,andcleaning,arecollectedfromthetenant,independentoftherentpaidfortheoccupiedspace.
Therearetypicallytwoareaswherethepropertyownerhastocoverexpenses:
• non-recoverableoperatingexpenses,whicharenotpassedontothetenants,suchaslegalandauditfees,advertisingandpromotionalfees;and
• expensesassociatedwithoperatinganyvacantspace.
Itispossibletoexpressallnon-recoverableoperatingexpensesasapercentagereductionfromtheEGI.AstudyofthetypicaldifferencebetweenoperatingrecoveriesandoperatingexpensesproducestheexpecteddifferencebetweenEGIandNOI.Ifthisdifferenceisfairlyuniformandconsistent,thenitisappliedasaone-timededuction,muchlikethevacancydeduction.
ExcludedExpenses
Thereareseveralexpenseitemsthataretypicallyexcludedfromanyoperatingexpensestudy,astheydonotformpartoftheday-to-dayoperationorongoingmaintenanceofaproperty.Theseitemsinclude:
• incometaxandtaxesassociatedtothebusiness
• mortgageordebtservice
• depreciationonthebookvalueofthebuilding
Notethatstructuralrepairsandcapitalcostitems(notregularbuildingmaintenance)aretypicallyexcludedfromleasearrangementsmadewithtenants.
ThedeterminationofNOIshouldnotbeundulydistortedbylarge,one-timeorinfrequentexpenseitems,suchasmajorstructuralrepairsorcapitalcosts.However,ifadeductionisdeterminedappropriateforsuchexpenses,theassessormayproratetheexpenseamountoverthelifeexpectancyoftheitem.
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Figure3.3–ExampleofNOICalculation
Totaleffectivegrossincome $1,487,163
Totalnon-recoverableexpenses –5% $74,358
Netoperatingincome $1,412,805
Itshouldbenotedthatratesandotherinformationshownareforillustrativepurposesonly.
3.4CapitalizingNOIintoValue
OncetheNOIhasbeenestablished,thefinalstepfortheassessoristoapplytheappropriatecapitalizationratetoconverttheincomeintoapresentvalue.Theassessorwillestablishthecapitalizationratebystudyingsalesofpropertiesthatpresentsimilarinvestmentopportunitiesandthereforesimilarincomeprofiles.Anincomeprofileisthedegreeofrisk,aswellasthepotentialforgrowth,associatedwiththeincomestream.
SelectinganAppropriateCapitalizationRate
Selectionofanappropriatecapitalizationrateisessentialtotheproductionofanequitableandfairvalueforaproperty.Selectinganappropriaterateconsiderssuchfactorsasage,stateofrepairandlocationoftheproperty,incomparisontotheaverageortypicalproperty.
Figure3.4–CapitalizationofNetIncomeintoValue(V=I/R)
NetOperatingIncome(I) $1,373,083
CapitalizationRate(R) 8.0%
IncomeValuation(V) $17,164,000(Rounded)
Itshouldbenotedthatratesandotherinformationshownareforillustrativepurposesonly.
3.5CurrentValueAssessment
Thefinalstepintheprocessistoconsolidateacurrentvalueassessmentfortheproperty.Oncethedeterminationofincomevaluehasbeencompleted,theassessorwillconsiderwhetherthereisanyothervalueintherealestatethathasnotbeencapturedbytheanalysisofincome.
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ExcessLand
Excesslandisundevelopedlandthatissurplustocurrentneeds.Thislandisnotcapturedbytheincomeapproach,astherentsandotherpaymentsmadegotosupportalltherealestateelementsneededtooperatetheshoppingcentre.Landthatisnotrequiredtooperatetheshoppingcentreissurplusorexcesstocurrentneeds.Thevalueofexcesslanddependsonitslocationwithinthesiteandhowwellitsuitsfuturedevelopmentsorexpansion.
3.6PostValuationReview
Havingarrivedatthevalueoftheshoppingcentrethroughtheaboveprocess,MPACassessorswillconductadetailedreviewofthevaluationandaddressanyanomaliesthroughaprocesscalledpostvaluationreview.Throughthisprocess,theassessorwillreviewthepropertyspecificdatatoensureaccuracy,compareresultstosimilarpropertiesandensurethevalueisreflectiveoflocalmarketconditions.
3.7Conclusion
ThisguidesetsouthowMPACassessorsapproachthevaluationofshoppingcentresforpropertyassessmentpurposes.
Althoughitoutlinesthegeneralapproachadopted,itdoesnotreplacetheassessor’sjudgmentandtheremaybesomecaseswheretheassessoradoptsadifferentapproachforjustifiablereasons.
ForfurtherinformationaboutMPAC’srole,pleasevisitmpac.ca.