REAL ESTATE CONSULTING AND ANALYSIS (REM 7)

1.1 Development of Real Estate Consulting Practice

In the U.S the real estate consulting practice, may have been formally recognized as a distinct real estate
practice by the organization of a society of counselors in 1953 by a group of Realtors, which affiliated itself
within the National Association Realtors in 1954. This society was founded for the purpose of meeting the
public need for competent, disinterested and independent real estate advice and guidance rendered by
qualified experts on a fee basis. In recognizing its obligations to the public, this society of counselors invited
into its membership only Realtors who have demonstrated their integrity and are qualified by experience,
training, and knowledge to develop and express sound judgment on diversified problems in real estate
business. In addition, the members subscribe to and pledge themselves to abide by the society’s standards
of professional practice and code of a professional ethics.

In the Philippines, the development and recognition of the professional consulting practice may have been
inspired by the U.S experience, with the organization of the Philippine Association of Realtors’ Board
(PAREB) in 1960, and of the Institute of Philippine Real Estate Consultants (IPREC) in 1976 as an affiliate. This
development of the practice was later on supplemented by the organization of the Philippine Association of
Realty Consultants and Specialists (PARCS) in 1992. There is one significant difference, though, between the
U.S practice and that of the Philippines: the Philippine consulting practice is subject to licensing regulations,
while that of the U.S counterpart is generally not.

Real Estate Consulting Relationship With and as Distinguished From Other Real Estate Service Practices

Consulting is the giving of objective and independent expert advice to a client, frequently before decision is
made concerning a real estate matter. Such advice is systematically researched and violated, even to the
extent of engaging the services of other specialists. The relationship between the consultant and the client is
similar to that of the CPA or lawyer and his client. The consultant, with his broad experience and knowledge
in real estate, enters into the decision-making process of the most sophisticated problems in the real estate
field.

The consultant is not in competition with the broker, appraiser, property manager, or with other realty
specialists. The consultant is in fact usually himself on expert in one or more such service practices, but he
recognizes that his relationship with the client as broker working for a commission, as an appraiser bound to
an object opinion of value, or an as property manager interested in training management of the client’s
property, might conflict with client’s need for objective unbiased advice pertinent to his problem or
objective.

The consultant’s relationship with his client tends to be more confident and professional than that of the
other real estate practitioners. Realty consulting is for persons who will approach the service on a
professional basis.

Relationship of Valuation to Consulting

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Valuation studies are primarily microeconomic analysis because they focus on valuing identified interests in
specified real estate as of a given date. On the other hand, consulting may include macroeconomic analysis,
microeconomic analysis, or a combination of both.

Just as appraisers must distinguish between valuation and consulting works, consultants must also
distinguish between market value and investment value. Market value is the value in the market place.
Investment value is the specific value of goods or services to a particular investor or class of investors based
on individual investment requirements or objectives.

1.2 PUBLIC PRACTICE OF REAL ESTATE CONSULTING

Realty Consulting: Definition and Coverage of Consulting Services

Real estate consulting is generally defined as the provision of advice, guidance, and support in real estate
matters, on a fee basis by qualified professionals, who subscribe to a suitable code of ethics. It is the giving
of competent and objective (disinterested and unbiased) advice and judgment on diversified problems in the
broad field of real estate, delimited only by the client’s needs.

Legal definition of real estate consultant as defined under Article 1, Sec. 3, g(1) of R.A. 9646 Real Estate
Service Act of the Philippines) is a “duly registered and licensed natural person who, for a professional fee,
compensation or other valuable consideration, offers or renders professional advice and judgment on: (1)
the acquisition, enhancement, preservation, utilization, or disposition of land and improvement thereon, (2)
the conception, planning, management and development of real estate projects.”

Consultancy is a form of professional service that answers the need for a completely detached but well
considered advice harmonized with the interest of the person seeking advice.

The characteristics of professional real estate consulting are:

1. Consultation advice and opinion are documented with reasoning in a written report (or supported by
an oral report), and for an agreed fee.
2. The consulting service is a separate and distinct undertaking, completely distinguished from that of a
broker, appraiser or an agent; the service he sells is the product of his mind out of right experience
and judgment, supported by facts.
3. In consulting, advice means considered judgment arrived at after careful investigation and
deliberation with the client, never given off-the-cuff, intuitively, gratuitously or impulsively.
4. The consultant treats each client or problem individualistically. His conclusion and opinion are not
generally applied, except to the particular client or problem at hand.
5. The consulting success is measured by the extent of acceptance and utilization of his services by the
client.

The consulting services may involve any of the following specific studies:

1. Feasibility studies
2. Development planning
3. Disposition planning
4. Evaluation of proposed transactions
5. Acquisition planning
6. Cost-benefit studies

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 7. Cost studies
8. Investment analysis
9. Risk analysis
10. Forecasting
11. Portfolio design and review
12. Technical analysis
13. Highest and Best Use (HBU) studies
14. Location analysis
15. Site selection analysis
16. Market analysis
17. Marketing assistance
18. Zoning assistance
19. Impact analysis
20. Property management review
21. Neighborhood/community analysis
22. Opinion testimony
23. Conflict management
24. Financial planning

Problems and Issues Addressed in Realty Consulting

Any one or more of the above services are sometimes informally provided by real estate brokers, appraisers,
real estate managers, mortgage bankers, and dealers, incidental to their main service relation. However,
they are considered consulting practice subject to licensing regulations when rendered in accordance with
a scope of work covered by prescribed standards and ethics, and on a professional fee basis, and not when
the services are rendered for salary, commission or profit.

Consulting services answer diversified questions related to real estate problems and issues from the
standpoint of any party to a proposed transaction. The following are examples of the subject of consulting:

1. What is the most appropriate made of disposition of our acquired assets? Who are the prospective
buyers?
2. What impact will a pending change in the community have on my property?
3. How can I improve the income from the property? How well is my marketing program performing?
4. What events are likely to affect my property? Should I keep, sell or rent it?
5. Should the property be developed? When?
6. How should I market the property? What is the fair price for the property?
7. What costs and benefits will result from proposed development? How can I get permission to
develop the property?
8. What impact on the community will the proposed use have?
9. How much compensation must I expect from a condemnation action?
10. How should I resolve the conflict involving the property?

Specific Consulting Cases

Real estate problems and objectives that can be the subject of consultation may come from property
owners, tenants, lenders, and administrators. In most instances, the client will ask the consultant for advice
on objectives and alternatives and how the client will decide about such problems as:

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1. Acquired asset A guaranty company has foreclosed on a partially completed residential
condominium project.
2. Liquidation The trust department of a small bank is required to dispose of an estate that includes
several large properties.
3. Development planning An investor planning the purchase of a large tract is concerned about how
the property should be developed, what use or uses should be completed, how development should
be timed, how the finished product should be marketed and the most desirable way to acquire the
tract.
4. Management planning A small investor has acquired an income-producing property. He is uncertain
about what the rent should be or how to draw up leases.
5. Development assistance The owners of a vocational training center wish to convert it to a medical
building. They need help in selecting then architect, builder, and management and in arranging the
necessary financing.
6. Investment advice An owner of a substantial landholdings in a distant province wants to know
whether to sell or hold the property, the tax consequences of a sale, and how to go about marketing
the property if he decides to sell.
7. Conversion services A newly formed limited partnerships is interested in acquiring a luxury
apartment building for conversion into a residential condominium. It seeks guidance with regard to
the value and physical soundness of the building, the tenant policies that should be adopted, the
amenities that should be provided, the pricing of the converted units, and the kind of investment
return that can be expected.
8. Impact analysis A city planning board is seeking advice regarding the economic impact of the
proposed zoning revisions, particularly with regard to the property tax revenue, employment, and
business development.
9. Management assistance An apartment development in another city is suffering from high tenant
turnover. The owners ask for assistance is stabilizing the tenancy without reducing rents.
10. Sales consulting The owner of the vacant lot in an urbanizing area wants to know whether he should
sell the lot, enter into a joint venture for development, develop the lot himself, or exchange all or
part of the lot for another property.
11. Use study The owners of a downtown lot building that has been vacated by its principal tenant need
to know whether the building should be demolished, left vacant or rented on temporary basis while
development of the property for other uses is awaited.
12. Assessing space needs A bank requires new quarters. Should the building be adequate for just the
bank, or should it provide additional office space for rental to other business? If additional space is
provided, how much should there be, and how should it be designed?
13. Conflict resolution A property owner and a lessee cannot agree on the rental to be paid over the
next ten years of a lease that contains a series of renewal every two years. The property owner and
the lessee seek a consultant mutually acceptable to help them ascertain the fair market rent by
agreement or established a procedure by which they can reach a rental amount without going to
court.
14. Need assessments A growing low firm requires larger offices. Each of ten partners seems to have a
different opinion about what would be the best office location.
15. Location analysis A distributor of bottled drinking water wants to know where to locate a
distribution center in relation to the total expected market area. This will require an analysis of the
alternative sites realistically available to the client and for each site, an assessment of delivery times,
toll fees, expected growth patterns within the market area, delivery expenses, and the tax structures
of each competing locality.
16. Property taxes A lessee who is in the eighteen year of twenty-year lease is required to pay all the
real estate taxes. He wants professional assistance to determine whether the taxes being charged
are excessive.

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 17. Neighborhood analysis The owner of an apartment complex is concerned about undesirable
changes in the neighborhood. She wants to know whether she should keep or sell the property and
whether it should be sold as an apartment complex or converted into condominium units and then
sold.
18. Evaluation An investor has been offered an income-producing property and wished to know what
risks are involved, what offer-tax cash flow is to be expected, how sound the property is, how the
purchase should be financed, and what advantages and disadvantages would be associated with
rehabilitation.
19. Facilities planning An industrial company needs to expand a plant and wants to know what it can
expect to get for the plant in the market, what it would have to pay for a suitable existing facility at
another location, how much it would cost to acquire a site and build a new building, what its moving
costs are likely to be, where suitable sites are likely to be available, where suitable facility might be
rented, and what the after-tax implications of these various possibilities would be.
20. Use study A developer has optioned a parcel of land suitable for development and wants advice on
the type of development best suited to the parcel, the likely pricing of the units built, the probable
rate of sales, and trends that are likely to affect the success or failure of the project.
21. Redevelopment planning A group of investors wants to consolidate streets and sites in an old
downtown warehouse district in order to create a high-rise office and hotel site. All of the investors
agree that a plan should be worked out to close the streets, create larger parcels, subdivide the
more usable properties after demolishing the buildings. Some of the investors wish to sell; other
wish to enter into joint ventures.
22. Portfolio review The owners of a large collection of the office buildings, hotels, apartments,
complexes, and industrial properties want to know what changes they should make in their portfolio
to improve its overall performance without increasing investment risks.
23. Cost-benefit studies A community that is contemplating the offer of a property tax abatement in
order to attract a new downtown hotel wants to know whether the anticipated benefits justify the
revenue sacrifice being contemplated.
24. Forecasting The owners of a downtown office building wonder what effects current trends in office
building construction, office space design, local business patterns, and area population
characteristics will have on their investment. They want to know how long they should hold the
property and what will eventually become of it.

Consulting Abilities to Provide Advice and Assistance to Clients

The solutions that the real estate consultant presents and the methods by which he reaches those solutions
are just diverse as the problems that confront real estate owners and users. Each problem requires
individualized treatment. To be rally helpful, the consultant needs special knowledge and skill in such fields
of investment analysis, operations research, statistics construction management, real estate economics and
finance, and income tax planning. But it is the broad experience and good judgment of the consultant that
focus such special knowledge and skills on the client’s problem.

Clients can benefit from the consultant’s ability to:

Analyze property values and facilitate transactions

Evaluate management performance
Conduct research and Forecast investment outcomes
Formulate plans to achieve objectives
Identify and define threats and opportunities
Investigate markets and Plan development

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 Draw model of investment scenarios
Negotiate and arbitrate between parties
Provide expert testimony
Train others to provide real estate services
Understand and simplify complex situations

Is the consultant a specialist? Yes and no. As a specialist, he possesses, and renders under separate
assignment or engagement, particular skills or skill, such as in brokerage, appraisal, town planning,
architecture, or engineering. As a consultant, he possesses special skills in rendering advisory service under a
specific engagement for a fee, in the real estate service practice and industry. However, in the practical
application of the consultant’s advisory service, the consultant applies his skill in the art of orchestrating
and coordinating the various special skills in real estate (development, marketing, finance, taxation, town
planning, land-use regulation, economics etc.) in this sense he becomes a generalist.

The principal difference between the real estate specialist and the real estate consultant lies in what
might be called consequences. A specialist’s skill is based on his ability to perform about precisely the
same series of actions or steps, assignment after assignment. The outcome of the efficient execution of a
predetermined series of steps is the sought consequences, market value as in the case of an appraiser.
Consultancy, on the other hand, is a skillful combination of art and science. Especially when we consider
the economic characteristics of land and variations of the client objectives and investment standards, no two
situations ever require exactly the same actions.

Licensing Regulations

History of Licensing Regulation Act 2728 was passed by the Philippine Legislature in 1938 authorizing the
Secretary of Trade and Industry, then Secretary of Commerce, to promulgate administrative orders to
regulate real estate practice, under its police power, to protect public interest. The first licensing was issued
on July 29, 1939 under Commerce Administrative Order No. 3-6 covering the licensing of real estate brokers.
The realty services practice regulations were revised by commerce Administrative Order No.60-1, issued on
April 28, 1960, which provided for the first time the licensing of real estate appraisers by requiring written
examinations for real estate brokers and appraisers. The regulation was later amended by Trade
Administrative Order No. 75-1 that extended the specialization of real estate practice to include the real
estate consultants.

In 1985, the realty service practice regulations were codified under Ministry Order No. 39 (issued by the then
Ministry of Trade and Industry) entitled Rules and Regulations Governing the Licensing and Supervision of
Real Estate salesman, Appraisers and Consultants and Realty Service Organizations.

REALTY SERVICE IS A PROFESSION: DOJ Opinion No. 113 Series of 1995 in an answer to queries as to do
whether or not a foreigner may be accredited as a realty service practitioner, the Department of Justice
issued an opinion that a really service practice is a profession, which is limited to Filipino citizens.

After several decades being governed by the Department of Trade and Industry, the real estate practitioners
will now under the Professional Regulation Commission (PRC) effective 30 July 2009 by virtue of R.A. No.
9646 otherwise known as the Real Estate Service Act of the Philippines (RESA) “An Act Regulating the
Practice of Real Estate Service in the Philippines, Creating for the Purpose of Professional Regulatory Board
of Real Estate Service, Appropriating Funds thereof and for Other Purposes.”

Pursuant to Section 42, Article V of RESA, the Professional Regulatory Board of Real Estate Service (PRBRES)
after the review and approval by the Professional Regulation Commission (PRC) adopts, issues, promulgates

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the Implementing Rules and Regulations (IRR) to carry out, administer and enforce the provisions of R.A.
No. 9646 on 21 July 2010.

Qualification for Real Estate Consultants

Qualification for Consultant’s License- Among other qualifications, an applicant for real estate consultant’s
license must have at least ten years experienced as a licensed real estate broker or five years’ experience as
real estate appraiser, and must pass an examination for real estate consultants given by the Professional
Regulation Commission (PRC).

The applicant for the licensure examination must possess the other qualifications at the time of filing of the
application for the examinations as outlined under Section 14 of Rule III of the Implementing Rules and
Regulations (IPR).

Rule on Conflict of Interest- As provided for I the RESA under Section 35 of Article IV, the Code of Ethics and
Responsibilities, the engagement of real estate consultant must not be contingent or independent upon
reporting of pre-determined findings or recommendations to be made. Also, when the consultant or relative
within the fourth civil degree owns not less than twenty percent propriety interest in the property subject of
consultancy, he must disclose such interest before accepting the consultancy engagement.

Violation of the rule on conflict of interest is a ground for revocation of a real estate consultant’s license.

Continuing Professional Education- Under Section 36 of Article IV, PRBRES shall develop prescribe and
promulgate guidelines on CPE upon consultation with the accredited ad integrated professional organization
(AIPO) of real estate service practitioners, affiliated association of real estate service practitioners and other
concerned sectors, and in accordance with such policies as may be have been prescribed by the PRBRES,
subject to the approval by the PRC. The primary purpose of the CPE is to maintain the high standards and
advancement of the real estate profession and for the realty service practitioners to keep abreast for the
development affecting their interest and of the industry.

Education, Experience, Standards of Practice and Ethics: Necessary Background for Consultants

As required by the law, the consultant should have a college degree on Real Estate Service. In order to be
admitted to the licensure examination for real estate consultant, a candidate shall, at the same time of filing
his/her application, establish to the satisfaction of the Board that he/she possesses the following
qualification:

-A citizen of the Philippines

-A holder of relevant bachelor’s degree from state university or college, or other educational
institution duly recognized by the CHED: Provided, that a course leading to a Bachelor’s Degree in Real Estate
Service is implemented by the CHED, the Board shall make this course as requirement for taking the
“licensure examination; and;
-Of good moral character and must not have been convicted of any crime involving moral turpitude:
Provided, that an applicant for the licensure examination for real estate consultants must show proof that
he/she has at least ten (10) years’ experience as a licensed real estate broker or an assessor, or as bank or
institutional appraiser or an
-employed person performing real property valuation, or at least five (5) years’ experience as a
licensed real estate appraiser.

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For the consulting service practice, the BTRCP, under the BUREAU ORDER NO. 03, S. 2006, has prescribed
syllabus, based on the syllabus outline recommended by Realtor Domingo D. de Vera in 2000. In January
2011, The Philippine Association of Realty Consultants and Specialists, Inc. (PARCS) has made representation
to PRBRES for the adoption of this syllabus for real estate consultant’s comprehensive course for licensure
examination.

The consultant must be analytical and intellectually curious about the current and future trends and changes
in the economic, social and political scene, both local and global.
The consultant’s experience, exposure and track record produce the kind of professional image in the
business community that leads to the enhancement of his stature of competency and credibility to wider
clientele. His experience in the various fields of real estate is all important, but may not necessarily draw all
the answers and solutions to all real estate problems.

As a necessary consequence of professional practice, and in order to assure the protection of public interest,
consultants (like licensed appraisers and certified public accountants) must develop and observe standards
of professional practice and ethics. PARCS has been the proponent of a Uniform Standards of Professional
Realty Consultants Practice (USPRCP) as adopted by the BTRCP for real estate consultants practitioners. In
January 2011, this USPRCP has been submitted to PRBRES for implementation. This standard prescribed the
rules of development and reporting the consulting engagement and assignments, as well as the minimum
rules of ethics to be observed by the consultant.

1.3 Defining and Establishing the Consultant-Client Relationship

As noted earlier consulting is not as much as a separate body of expertise or knowledge as a professional
relationship with the client. That relationship establishes the responsibility of the consultant to his client as
well as the client’s responsibility to furnish what the consultant needs in order to fulfill the consulting
engagement. The consultant’s responsibility to the client includes the following:

1. Know and understand the client’s business in relation to the subject of consultation,
2. Open the mind of the client as to the general nature of the client’s problem and the relevant and
related real estate aspects that may be require third-party specialists, such as appraiser, broker,
builder, environmentalist, mortgage banker or lawyer.
3. Guide the client in defining the issues involved in the problem, suggest alternatives and recommend
solutions after adequate analysis and study, including necessary consultations with other specialists.
4. Implement the engagement and render the report in accordance with generally accepted standards
of consulting practice and ethics and with the contract of consulting engagement.
5. Assist the client implement the decision or alternative action recommended as may be required by
the contract on the matter.

Client’s Responsibility Consulting is such a broad function that it’s understanding by the public and even by
those involved in real estate business and practice is often misused and misinterpreted. It is Imperative,
therefore, that the consultant explains to the client the information, data and documents needed by him
that are only available from the client such as the following:

1. Interview and qualify client, to determine if the client is willing, ready, and qualified to seek and
accept professional advice. Any indications that the client has ulterior motive to use his function
subjectively must discourage the consultant and avoid the consulting engagement which may result
in unethical relationship.
2. Necessary data and information, in order for the consultant to develop the right questions and
outline the nature of the problem and appropriate tools and techniques to be used to approach the

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 alternatives courses of actions and solutions. The client must be made to understand that such data
and information must be made available promptly to reduce the cost and time of obtaining the same
from other sources.
3. Confidentiality of the report, in whole or in part, must be observed by both the client and the
consultant. Any dissemination of the same must be mutually cleared beforehand so that both parties
can evaluate the merit or disadvantage of maintaining strict confidentiality of the report.
4. Necessary degree of trust and honesty, to avoid guesswork in obtaining information. The client
must furnish needed materials in a straightforward and sincere manner since the quality of the
worked of the consultant is in direct relation to the quality and quantity of data and information
obtained from the client.
5. Compliance to the terms and conditions of the consulting engagement, particularly the provision
on cost and expenses, and payment of progress and final billings. Client default on his provision of
the contract may affect materially the consultant’s quality of work.

Defining the Client Problem, Objective and Needs

Considerable effort and imagination is needed to capture the client’s immediate problems and needs and his
long-term goals and objectives. The following situation examples will help the consultant distinguished
between the immediate problem and the long-term goals of the client.

1. Immediate problem may involve a distressed property, proposed project, land-use conversion,
highest-and-best use analysis of an existing property, or expanding an existing residential
subdivision. Such current or immediate problems must be hurdled first before focusing the effort to
the long-term goals. However, the solution of the immediate problems must somehow consider its
effect to the long-term decisions can significantly affect long-term goals (and vice versa) and may
give rise to unexpected new problems.
2. Long-range goal problem require more complex analysis than would short-term problems. The long-
term horizon involves necessarily more imponderables and assumptions, and constant revisions in
many aspects of the feasibility studies made. For example, a big tract of property long-term mixed-
use development might involve solving current collateral problems sponsoring zoning ordinances,
encouraging public infrastructures and utilities, any indication of failure in solving these immediate
problems may alter the outcome of the long-term real estate investment goals and objectives.
3. Cash flow and accounts receivable level are very sensitive assets that affect both current and long-
term prospects. Close watch is required, and consulting may be in order if something grossly
unexpected has developed or is developing. If not properly handled, an immediate cash problem
may trigger uncomfortable creditor actions which may also jeopardize ongoing projects, and
ultimately place in question the client’s long-term goals. Certainly, the consultant’s final conclusions
on immediate problems would be meaningless unless he is cognizant of his client’s long-term goals.

The consultant’s understanding with the client should enable him to recommend and appoint third-party
specialists needed in the engagement. He should also be socially responsible enough to recognize decisions
and alternatives that are financially sound and investment desirable but may be detrimental to the
community, a situation that may encourage him to withdraw properly from the engagement. The respect of
the community and the reputation for professional integrity is distinguishing marks of the consultant’s
practice.

PROFESSIONAL FEE ARRANGEMENTS: Fixed Fee, Modified Fee, Performance Fees

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The different fee arrangements are influenced by the nature of the engagement, relationship with the client,
expertise of the consultant in general and in relation to the problem involved, the amount of time required,
and the complexity and importance of the problem involved. The long experienced and exposures to
diversified real estate problems are usually factored in the fee arrangement acceptable to the client. The
following are typical fee arrangements that may be practiced in the industry.

1. The straight or fixed fee usually applies whenever the scope of an engagement is clearly quantifiable
and the fee tends to be a lump-sum amount. The estimation of the fee usually certain firm
assumptions on the data available, the expertise required and the time needed to complete the
engagement. The client’s needs do not change during the engagement. If at all, such change will not
materially affect the reasonableness of the fee.
2. The modified fixed fee is a modification of the straight or lump-sum fee to provide for changes
during the course of the engagement of for factors that must be considered for the proper execution
of the consultant’s responsibility. Although the modified fee has many variations, it generally
provides for a minimum and maximum range. Acceptable to both parties. Frequently, the fee may be
based on a specific time and expense arrangement it is often found satisfactory to work on a time
and expense basis, with a compromise on the estimated and fixed maximum fee may provide for an
estimated maximum, not to be exceeded without further authority from the client.
3. The performance fee considers a type of bonus or incentive payment, which bears no relation to a
commission payment, especially in a sale or financing transaction as the main subject of the
consulting engagement. This method of charging is supplemental to a minimum fee payable whether
or not the transaction goes through, plus against a performance fee.

In summary, the consultant may base his fee on the following considerations:

1. Intricacy of the problem

2. Urgency of the engagement
3. Professional skills required
4. Savings affected
5. Time expended
6. Personnel employed
7. Results obtained
8. Responsibility fee or profit

The variation in fee arrangement reflects the personal opinion of the consultant about the importance or
weight he gives to the different considerations enumerated above. A final and important consideration that
will definitely influence the amount of fee is the personal and business relation of the consultant with the
client.

The consultant must never accept an engagement fee on a wholly contingent basis, nor must he share his
fee with a broker as a consideration in the procurement of a consulting engagement.

2.1 The Consultant’s Role in Decision Making

The unique role of the real estate consultant, unlike others who serve the real estate market incidental to a
main services (such as brokerage or appraisal), actually enters into the client’s decision-making situation
where the client’s objectives and criteria are applied (altered, modified, or restated) and a decision making is
made. The consultant simulates the decision-making process for the client, the client reacts to the plan with
the possible modification of original objectives and criteria, and finally decides, with continuing guidance and
advice from the consultant. The consultant’s significant service objective is to ensure that the client’s

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program in terms of objectives is clearly defined and alternative strategies or solutions are suggested and
analyzed and a course of action is selected.

The consultant is both a specialist and a generalist as he brings his own special expertise to the client’s
decision-making process and recognizes the potential need for capabilities beyond his own acting on or
implementing a decision on professionals for particular specialties that pertain to the questions at hand.
Such professionals might include lawyers, accountants, architects, engineers, economists, leasing agents,
brokers, appraisers, financial analysts, or other whose knowledge is pertinent and beyond the consultants
own expertise in any of these disciplines. It is the consultant’s responsibility to use any of these specialists to
coordinate their collective efforts on behalf of the client and to interpret the contribution of each specialist
to the client’s decision-making process and to the implementation of a decision.

The consultant’s area of expertise may be limited to some real estate expertise in the general areas of
marketing, management, or finance. The consultant who is highly specialized in a single area may require the
services of other consultants with other real estate-oriented skills. With the advances in decision theory,
consultants may find the need for modest retooling in their particular specialty, as well as others, to be able
to understand and interpret for the client the analysis of others and their input to the decision-making
process of the client.

Preliminary Analysis of Client Problems (Needs and Objectives)

A problem may be defined as a situation in which something has gone wrong without explanation. This
definition provides a distinction between problem solving and decision-making. Problems are historical in
nature, and problem solving involves finding the cause of a deviation from a normal situation. As such, a
problem in the strict sense of the word may not actually exist, as the client’s “difficulty” may be one of
making decision from among alternative courses of action (such as selecting from among alternative
investment opportunities or making a decision to buy, sell, lease etc.). The consultant’s role therefore, is
more often that of aiding the client in decision making rather than problem solving. Thus, it is important for
the consultant to make this distinction between problem solving and decision making at the outset in order
to serve the client’s need best. Historically, emphasis has been placed on identifying and solving “problems”,
for clients when the ultimate need to make a decision has been the main issue. Emphasis should be place
more on decision-making and on decision-making tools. Client “problems” are not problems at all. It is the
client objectives and their articulation, refinement and ordering that are central to the consultant’s role and
represent the foundation upon which the analysis of the alternative courses of action and ultimate decisions
are based.

Identification and Statement of Objectives

The most critical step to the client’s decision–making process is to identify precisely the client’s goals or
objectives to avoid the vague notion of objectives in his investment decisions, such as conflicting objectives
that requires articulation and resolution prior to the formation of a decision process or the analysis of that
process. This information is acquired in the initial information-gathering interview with the client. The goals
or objectives elicited from interview with client may require broadening or narrowing, refinement or
restatement in a more precise manner that may acquire more prioritizing their relative importance to the
client as well as to minimize or eliminate conflict.

Being the first step in the decision-making process, it is imperative that the consultant identify the precise
nature of the client’s “difficulty” in terms of his real objectives and how those objectives can be best
achieved within the context of investment opportunities. The major concern of the consultant at this stage is
to distinguish between the client’s perceived and real needs and to translate those needs into weighted
options for decision-making.

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Statement of clients objectives The ability of the client to explain his objectives in precise terms may be so
limited that the consultant must add precision to clients statements regarding to his goals. For example,
investment objectives may be stated in the form of cash flaw or yield and cash flow return objectives may be
in the forms of rates or pesos. The consultant provides the desired precision by separating the concepts and
applying specific pesos and/or percentage terms of each. The consultant has an obligation to resolve any
conflicts that result from more precise statements of client’s goals. For example, the client may state that
cash flow is relatively unimportant but that a high yield is required. That statement implies staying power, a
possible need for tax shelter, and an emphasis on capital gain. There objectives needs to be restated by the
consultant precisely as possible and reviewed, possibly revised, by the client before alternative courses of
action may be considered.

Nature of Investment objectives There are two categories of client objectives about his investment position.
Pride of ownership, specific location, design, accessibility and Fung Sui conformance are criteria that are
easily described but are non-quantifiable. The impact of such non-quantifiable objectives may influence the
level cash flow or return, but this is a consideration that consultant must decide on. The quantifiable and
measurable features of client objectives are usually less clear but which can be specifically qualified and
analyzed by the consultant. These objectives includes levels of cash flow in either peso amounts or rates,
level of investment by the client, capital recovery, tax shelter, leverage, profitability versus liquidity
requirements, and risk versus return. These more measurable objectives need to be defined and discussed
with the client before the consultant can proceed with the decision plan, utilizing these objectives as criteria
against which alternative courses of action may be evaluated.

Alternative course action Alternative courses of action or strategies are drown from client objectives
involving identification of needed data and tools analysis and decision making that might be applicable,
resource to carry implement the engagement and identification of the time and money constraints imposed
on the entire process. In hypothesizing alternative strategies or courses of action, the consultant sets the
work plan for establishing desirable action and implementing the decision. Based on the consultant’s
knowledge, experience, and judgment as well as the agreed objectives of the client, the decision may range
from no action at all to a complete change of the client’s investment position. All these steps are described
in the Consulting Process.

Scientific Steps in Decision Making

The scientific method of decision making starts with the client “problem” that needs definition and
solution. Problem solving and decision making are two separate processes, each one representing different
perspectives to the client and the consultant. While they may utilize similar tools of analysis, they will utilize
those tools differently, providing different forms of input and information into the process. Problem solving
requires finding a means for overcoming a barrier to an objective. Decision making is action oriented and
need not deal with a “problem” in the strict sense of the word. To repeat, too much emphasis is usually
placed on problem solving when in fact, clients have sought assistance in their decision-making process.

Decision-making process vs. Consulting process The following shows the decision-making process
incorporating the medication regarding definition of the problem. This decision-making process differs from
the consulting process. Although there are some similarities, the decision-making process focuses on a
decision being reached, whereas the consulting process is concerned with the consulting engagement that
covers the other terms and conditions that govern the client-consultant relationships. Further, and
perhaps more important, the use of more sophisticated technique by others may be understood and
countered if there is necessary and appropriate.

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STEPS IN REAL ESTATE DECISION MAKING The decision-making process in real estate consist of a series of
steps that gather real estate data and information, analyze the information, and then arrive at a decision
based on the analysis. The formal procedure is called the scientific method involving the following series of
steps:

1. Clearly identify and define the problem or purpose of the investigation. This step is critical, for
unless a real estate investor knows exactly what he is attempting to decide, the investor will not
acquire the information needed to make a sound decision. One clearly defined purpose might be to
decide if now is the time to purchase a particular real estate property, say property X.
2. Collect relevant date. With the problem purpose or clearly defined, the investor then gathers
information that would be useful in arriving at a decision it is equally important to avoid material
that is extraneous and irrelevant to the problem at hand. An investor would attempt to gather as
much economic, social, physical and political data relevant to property X as time and money allow.
3. Analyze the data collected. With the problem clearly defined and relevant data collected, an
investor must correlate, classify and analyze the data and arrive a preliminary decision- often called
a hypothesis. After analyzing the information, an investor may tentatively decide that property X is
the right property and that now is the time to buy.
4. Formulate and test the tentative decisions (hypothesis). At this point in most scientific
investigations, experiments are conducted to see if the tentative decision or hypothesis is correct.
For real estate, it is difficult to experiment without to make firm commitment in advance. In other
words, few sellers let an investor try the property before buying to see if the property produces he
desired results. Frequently, the only testing available is to determine how other similar parcel with
similar owners doing in the marketplace.
5. Arrive at a final decision or conclusion. Taking into consideration steps 1,2,3 and 4, the investor now
makes final decision by either accepting or rejecting the tentative decision (hypothesis), if an
investor decides to accept the tentative decision, say to buy a property now, it should be recognized
that there is a possibility that the investor is making a mistake. In other words, there is chance that
this is not the time to buy. So an investor should then estimate the probability of being wrong and
decide if he is willing to take the risk. If it is decided that the property is an acceptable risk, the
purchase takes place.

The scientific method is the rational way to approach real estate decisions. Unfortunately, too many people
make real estate decisions based on emotions. The role of the real estate consultant is to bring rational
behavior to a very emotional business. Below is the diagram of the steps in the scientific method.

STEPS IN THE REAL ESTATE DECISION MAKING PROCESS

(A Supplement to the Real Estate Consulting Process)

I. Preliminary Statement of Objectives

A. Investment-return analysis (ratios and relationship)
1. Sophisticated projections and historical figures analysis
2. Less sophisticated on-the-spot decision analysis (by bunch, intuition,
3. Judgment and logic of the consultant’s long experience and continuing education)

II. Refinement and Directing of Objectives

A. Express complex relationship in simple statements
B. Simplify large data sets into more comprehensible proportions for mathematical analysis
(modeling)
C. Verify and validate the on-the-spot judgment (of the consultant or client)

III. Identification and Analysis of Alternative Courses of Action

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 A. Decision-making Tools
1. Statistical Decision Tools (to identify and explain variability in data sets)

a. Collation, classification and interpretation of data

b. Decision on the basis of the analysis
c. Identify the limitations and applications of the statistical measures that evolve from
statistical analysis (that may fall short, particularly in real estate decision making)
such as:
1) Measure of central tendency
2) Measures of dispersion
3) Statistical inference and prediction
4) Regression and correlation of analysis

2. Financial Decision Tools (to provide the basis for achieving a balance investment risk and
investment return and between profitability and liquidity, and for making selections
from among investment opportunities); Recognize the valid criticism and problems on
the various tools for either simplicity or complexity, inconsistencies in ranking
investment alternatives, for wide ranging investment return calculations, for difference
in the timing and direction of cash flows, and the like. Distinguish ratio models vs. yield
models.

a. Profitability measures to recover capital and achieve return on capital

1. Net present value model (Decision rule: highest net present value)
2. Profitability index model (Rule: highest positive index)- IRR, AIRR, MIRR, FMRR.

b. Liquidity measures (Rule: shortest period to recover investment from cash flow)-
Payable period, current portfolio, D/E ratio.

3. Operations Research (an analysis of the efficiency of operations of one or more

investment vehicles to better ensure the long-term investment potential of the
investment in achieving explicit goals precisely expressed by the client) include
the following:

a. Linear programming, to determine the best allocation of scarce resources

(planning by mathematical techniques)
b. Monte Carlo simulation various combinations of the risk and return to make
more profitable decision over the long term.
c. Bayesian analysis, a form of statistical analysis where subjective probabilities
(referred to as prior probabilities) are assigned to the occurrence of some real
world phenomena.
d. Game theory (regardless of model) forces the participants to make a series of
interrelated goals-oriented decision regarding the disposition and development
of aspects abstracted from real world phenomena.

IV. Development of Decision Models/ Statement/ Plan

V. Selection of course of action that:

A. Best fits objectives
B. Minimizes conflicts
C. Can be implemented within the time and money constraints imposed

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 2.2 The Consulting Process
Definition
The realty estate consulting process may be defined as the professional tool in pursuing a real estate
consulting engagement to ensure an orderly method of solving a real estate problem or helping a client
reach decision on alternatives available. The Consulting Process is a distinct and systematic method by
which competent consultants apply their knowledge and skills to the solution of real estate problems. It is
one of the sources of standards for practice common to the different consulting disciplines and, therefore,
unifies the disciplines into a single profession.
The Consulting Process is a model for resolving all kinds of real estate problems, regardless of whether the
subject matter is real property, personal property, or a business. The Consulting Process provides the
framework for developing and reporting any type of realty consulting. The recommend standards steps
involved in this process are summarized in the accompanying outline or flowchart.

DEFINITION AND TERMS OF ENGAGEMENT

Identification of Problem and Objective Standard 1 addresses the concept of identifying the client’s
objective or purpose and the problems and issues raised for solution or decision-making. There is an
important difference between performing an impartial consulting service as a disinterested third party that
responds to the client’s stated objective and performing a consulting service that is intended to facilitate the
achievement of the client’s objective such as that performed by an appraiser, broker, or other licensed
specialist.

Defining the real estate engagement includes the initial identification of the client problem and statement
of the objective and purpose for which the consulting engagement is to be carried out. The consultant and
the client must determine as completely as possible the questions to be raised, the realty problems and
issues to be solved, and the ultimate goals to be achieved.

Initial interviews with the client by the consultant are necessary to determine as many of the client’s
objectives and acceptable alternatives. It is essential to know the client’s attitude about the project and the
problems. It is the attitude positive, or does the client have some doubts and questions about the
engagement? What long term or short term goal the client is attempting to achieve, and what priorities
should be considered? For example, the engagement may be to help the client decide what kind of building
should be built on the site and the probable market and the prospective tenants for the proposed project.
Finally, the consultant may assist in the planning of entire proposed project.

Financial, social and ethical issues At the start of the engagement discussions, it is important to know from
the client the financial status of the project. Is there adequate financing available from equity and mortgage
loan or will the project be financed entirely by mortgage loan? If there are equity partners, the consultants
may consider the after-tax impact to partners in different tax brackets. In the case of limited partnerships,
syndications, or institutional investors on a cash basis, the consultant’s concern becomes one of cash flow to
property than cash flow to equity. These matters relate directly to the time involvement of the consultant
and the final recommendations.

Constraints in the Engagement

Physical and Time Consideration At the beginning of the engagement process, it is necessary to determine
what kind of property is involved. It is proposed to constructions, an existing distressed project, project to be
improved, demolished, rented or sold?

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A proposed construction or property that is to be altered or expanded may be well involve a long-term
commitment on the part of the consultant. An existing project may involve only an investment analysis to
determine whether or not the financial goals of the client can be achieved in the projects. Any unique or
unusual features of the property might influence the issues to be solved and the questions to be answered.

In determining the time frame involved, considerations should be given also the time of submission of
various parts of the report and ascertain whether the entire engagement will be completed as a single and
final report.

A major project to be constructed in stages over a number of years would be involved detailed analysis in
the initial stage and consideration of the potential impact of the later stages. The consultants may be called
upon for analysis of the timing of the later stages.

FLOWCHART OF THE REAL ESTATE CONSULTING PROCESS

(For Licensed Real Estate Consultants)

I DEFINE THE ENGAGEMENT

Draw Client Profile Purpose Identify Subject Report Report Format
and Problem Property Time/Date

II FORMALIZE THE CONSULTING RELATIONSHIP

Agree on Purpose Preliminary Space Fee/Expense Sign Engagement
And Define Problem Or Work/ Budget Arrangement Contract

III PLAN THE ENGAGEMENT

Set Work Deadlines Assign Task Review In-house file Set Critique Points

IV EXECUTE THE PLAN OF ENGAGEMENT

Compile data Analyze Data and Develop Information Formulate Conclusions
Recommendations

V PREPARE THE REPORT WITH CONCLUSIONS AND RECOMMENDATIONS

CONSISTENT WITH:
Definition of Purpose Data Analyze and Info Report Format and Engagement Obligation
and Problem Developed Critique Points

VI REVIEW THE REPORT

Check Accuracy of Computations Check Logic and Reasonableness of Conclusions and
Recommendations

VII PRESENT THE REPORT

Presentation Meeting Authenticate/Distribute Written Post-Report Dialogue
Report

The Consultant as a Coordinator

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Coordination and Communication An engagement involving a proposed construction would with normally
require meeting with the client and the architect in the earliest stages of preliminary architectural scheme
and plans. Such meeting will determine the eventual success of the entire constructions and market
absorption program. The coordinating relationship is an important part of the definition of the engagement
as this will also affect the feels to be charged by the consultant.

The initial step of a consulting process also includes consideration of the resources and the personnel that
will be needed. Such personnel requirement includes the staff of the consultant and outside specialist such
as architects, accountants, engineers, contractor, management personnel, landscape architects, surveyors,
demographics, ecologists and lawyers. It is critical to have an understanding what data the consultant must
generate and what data the client will furnish. The set of the plans and specifications on proposed projects
or on projects to be altered or expanded must be available, though a final set of working drawings may not
be required. Copied of contracts with the lessees and other parties may affect the work or recommendations
of the consultant.

Planning and Budgeting the Engagement

The consulting process includes engagement budget for in-house manpower, outside specialists, special
tasks of individuals and a job plan and work flowchart.

Most experienced consultants have in-house data files on similar types of project where reference can be
had for demographic information, construction cost data on similar projects, revenue and expense data for
comparative analysis and information for the engagement come from such.

THE ENGAGEMENT CONTRACT: ESTABLISHING THE FORMAL CONSULTING RELATIONSHIP

In order to further to insure the satisfactory implementation of the engagement, it is important to establish
the consulting relationship with the client, particularly the agreement reached exactly as (1) what services
the consultant will provide (2) in-what form, and (3) at what time. This understanding will clearly define the
responsibility of the client and the consultant. Likewise, it is important to agree on the fee or fees for the
service contract and the incidental expenses to be borne by the client to avoid misunderstanding, the fee
may be in a lump sum or on a per diem or hourly basis. A retainer basis may be appropriate in some cases,
especially in major engagement involving long-term consultation or where the client’s credit and financial
standing is unavailable.

The schedule of fee payment may be in periodic retainer fee as part of the total fee, plus progress payments.
With well-establish clients or in small engagements the entire fee may be paid after completion of the
report.

PLANNING THE ENGAGEMENT EXECUTION

When the consulting engagement contract is signed, the consultant prepares the plan to implement the
engagement, beginning with the setting of deadlines and coordinating the effort of the staff and outside
services. It is desirable to set review points to see if the tasks are on schedule and to check the quality of the
works completed to date. This review technique will determine if mid-project changes are needed to
produce on time the desired quality results. A review technique frequently used for big engagements is the
so called PERT (Project Evaluation and Review Technique) or the CPM (Critical Path Method) network.

EXECUTING THE PLAN OF ENGAGEMENT

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Performance of the engagement calls for the compilation of all required data from both internal and
external sources and the development of relevant and useful information from such data. As necessary data
and information are complied, the analysis work of the engagement is undertaken. The data and information
are analyzed from the standpoint of the quality, quantity, and relevance to the engagement. Data processing
frequently involves computer analysis in the special program developed for the engagement. Unlike real
estate appraisers fairly standardized format, consulting works are rarely uniform with each other consulting
works done in the past. Although there may be a considerable degree of similarity among consulting
engagements, a particular real estate problem or issue will require the development of a specific program
for data and information analysis.
THE CONSULTING REPORT: PREPARING, REVIEWING AND REPRESENTING

Preparation The preparation of the actual report may begin early in the plan of execution with the
preparation of supporting tables, schedules and other illustrative materials. No part of the report may be
prepared until the completion of the relevant conclusions and supporting materials. The final report be
carefully prepared and edited to assure that it answers the main problem and issues, and that the
conclusions and recommendations will assist the client in a making prudent decision.

The report should comply with all the contractual obligations pertaining to the purpose of the engagement,
timing and the form of presentation. The volume of the data and information in the report is dependent on
the nature of the problem and issues, and that the conclusion less data but with reasonable explanation of
the kinds of data analysis used, with minimum but significant graphs, charts, photographs, and other visual
aids.

Reviewing All computations in the report should undergo accuracy tests, a final check of the logic and
reasonableness of the conclusions and recommendations should be made (by a review panel for big
engagement) to assure that the report and all its findings have considered the main purpose of the
engagement. Sometimes, the final report is preceded by meeting with the client before this is finalized and
submitted.

Presenting The written report is presented in pre-set appointment with the client. The presentation is given
completely but briefly, with adequate time allowed to accommodation any questions from the client. The
written report should adequately convey the findings in accordance with the definition of the agreement
and should always reflect the professional integrity of the consultant.

2.3 PROJECT FEASIBILITY STUDY

Definition and Purpose of Project Feasibility Study (PFS)

PFS is through and systematic analysis of all the factors that affect the possibility of success of a proposed
project or undertaking. The findings presented in the PFS serve as the basis for deciding whether the project
is to be abandoned, revised or pursued. The PFS is a tool or technique in the unification or synthesis of
individual studies on the market, technical, financial, socio-economic, and management aspects of the
project.

In developing a project feasibility study or analysis, a consultant must observe the following specific
guidelines when applicable: (a) prepare a complete analysis, (b) apply the results of the market analysis to
alternative course of action to achieve the client’s objective: consider and analyzed the probable costs of
each alternative, the probability of altering any constraints to each alternative, the probable outcome of
each alternative. (Standard Rule 1-6, USPRCP)

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An important step in the feasibility study or analysis is to prepare or obtain a complete market analysis. The
consultant should compare the following criteria from the client’s project to the results of the market
analysis: the project budget (all construction cost, fees, carrying costs, and ongoing property expenses); the
time sequence of activities (planning construction and marketing); the type and cost of financing obtainable;
and cash flow forecasts over the development and/or holding period; and yield expectations. The consultant
should have enough data to estimate whether the project will develop according the expectations of the
client and is economically feasible in accordance with client’s explicitly defined financial objectives.

A GOOD FEASIBILITY STUDY is a key to investment decision and helps avoid the pitfalls after the project has
been committed. A feasibility analysis focuses at how well a proposed project is likely to succeed for a
particular client investors objectives. Briefly, there are four major steps for good feasibility study:

1. Identify the objectives of the client investor or including the impact the investor wants the project to
make and the financial requirements of the investment.
2. Undertake a thorough market analysis that will indicate reasonable turnover.
3. Identify the constraints and costs of the project.
4. Apply the financial measures and techniques as the final determinant of feasibility, the stated
objectives of the client investor.

The credential and qualifications of the consultant will after the clues as to expertise and experiences in the
type of property under consideration.

PROJECT FEASIBILITY STUDY FLOWCHART

PROJECT PROPONENT

PRE-FEASBILITY

PRJOECT FEASIBILITY

MARKET TECHNICAL FINANCIAL MANAGEMENT SOCIO-ECONOMIC

TOTAL/EXCESS PRODUCT STUDY PRODUCT COST BUSINESS SOCIAL BENEFIT

DEMAND AND EXPENSES ORGANIZATION
DEMAND PRODUCT PROCESS INCOME MANPOWER & ECONOMIC VALUE
STATEMENT SPECIALISTS ADDED
MARKET SHARE PRODUCT VOLUME BALANCE SHEET LEGAL & AUDIT ENVIRONMENT
PROTECTION
PRICE/SALES MATERIALS FUNDS FLOW ADMINISTRATION COMMUNITY
FORECAST &HRD
MARKET MIX LABOR
STUDY

X X X
LEGEND Go x- Abandon

Basic Parts of a Comprehensive Project Feasibility Study

There are generally five major components of a comprehensive PFS, namely: the market study, the technical
study, the financial study, the management study, and social desirability study. The first four determines the
final feasibility level that will decide as to whether to go ahead or abandon the project.

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Market study Generally, an investor is attracted to invest in a business project with a minimum risk and a
higher rate of return on investment. However, the major consideration is whether there is an ample
effective demand for the product being produced or proposed to produce. If reasonable demand exists,
currently supply is then investigated to determine whether there is a substantial excess demand so that a
new project could enter into the industry. If it is discovered that there is not enough demand for the product
nor a new demand can be created, then the project may be abandoned; otherwise, unreasonable loss may
be incurred if the project is implemented.
On the other hand, if the findings indicate that there is sufficient effective demand for a product, the
competitive position of the firm in the industry is evaluated. Information on the prevailing prices of the
product are gathered and analyzed. Pricing for the project and the quality of the product relative to the
products of the current and potential procedures are carefully studied, followed by the examination of the
marketing program. The present marketing strategies of the competitors, selling organization, terms sales,
channels of distribution, location of sales outlets, transportation and warehousing, and other relative
information are taken into account.

Finally, conclusions drawn from the study specifically identify whether there is excess effective demand for
the product and that the project shall enjoy competitive marketing position.

Technical study This study identifies whether the product could be produced at the desirable volume and
standards of quality, with minimum cost. In a manufacturing firm, study focuses on the following:

1. The material component of the product and the sources of such material components are identified,
including the alternative raw materials, availability, current and prospective sources and cost, the
uses and other applications of the product and its by-product.
2. The production process, where the detailed flowcharts indicate materials and energy requirement at
each step, the normal duration of the process, the production processes used by the competitors
and the process or processes to be adopted.
3. The production machinery and equipment, their specifications, rated capacities, cost and balancing
of capacities of each major and auxiliary and equipment, availability of spare parts and repair
service, identification of machinery suppliers, their guarantees, delivery and in terms of payment.
4. Plant location and layout, distance to source of raw materials and markets, the effect of layout in
materials flow and materials handling and storage, provision for expansion, the structures to be
constructed or rented, improvements like roads, drainage facilities and their costs.
5. Utilities for waste disposal, specific facilities like electricity, fuel, water, supplies, and their respective
uses, quantity required, availability of sources and capacities, alternative source and costs, with the
usual environment impact assessment.
6. Recruitment and training programs of personnel as well as the status and timetable of the project.

Financial study This study determines the profitability level of the project that is generally defined as the
relationship of the net income after taxes to the total investment. It is mainly based on the available
opportunity cost in a particular period of time and place. This study also involves the following:

1. A thorough coverage of all the detailed monetary information on the total project cost, initial capital
requirements, sources of financing, financial statements and the financial analysis, and the validity of
assumptions used which are crucial in view of their impact on the variable factors of the study.
2. Identification of sources of financing indicating the currency, security, repayment period, interest
and other features, the status of financing from each source relating to actual release already made,
applications already approved applications pending and applications pending and applications still
be made including information on how the contingencies and seasonal peaks in working capital shall
be financed.

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 3. Analysis of the financial statements (balance sheets, income statements, funds flow) to show the
financial health of the business, financial information to provide operational measurement such as
break-even volume, sales and prices, amount of sales required to earn a certain amount of profit,
and the cash payback period and sensitivity analysis.

Management study The objective of the management feasibility study is to determine the appropriate
business organization, manpower required before and during the commercial operation of the project and
their functions. It covers the following:
1. Type of business organization, organization chart and, functions of each unit of management.
2. How the project shall be managed before and during the operating periods, identification of the
firma or persons involved or to be involved in the studying the different aspects as the of the
project.
3. Number of labors, skills, duties, and time to be devoted to the project, I compensations, fringe
benefits and manpower facilities.
4. Recruitment and training programs of personnel.
5. Status and timetable of the project.

Socio-economic study The project may be classified as a government or private project. To a government
project, socio-economic desirability is given priority over profitability. Therefore, feasibility is characterized
by the level of socio-economic desirability.

A private entity’s main priority, on the other hand, is profitability with socio-economic desirability as a
desired consequence of the profitability. Thus, feasibility is characterized mainly by profitability with socio-
economic as necessary consequence. In government feasibility studies, socio-economic desirability is given
distinct focus, while in private project studies, it is treated as part of the socio-economic aspect.

Socio-economic desirability is measured in terms of the volume and value of employment generated and
taxes paid to the government, public services, economic contribution and environment protection.

Steps (Pointers) in Preparing Project Feasibility Study

The following steps may serve as a general guide on how to prepare a PFS:

1. Identify and list down the technical people (and firms) who will be involved in preparing the various
aspects of the study. The list usually includes the project proponents and investors.
2. Investigate the market feasibility both by observations and by scientific research. Feasibility is
generally characterized by excess effective demand and a competitive and long term market position
of the project. If not feasible, abandon immediately the idea of putting up a new project to avoid
unnecessary losses. Investment options related to the same market may be considered, such as jus
joining the equity of an existing company.
3. If the market is feasible, proceed with the technical study which refers to sufficient availability of the
resources required on a long term basis and at the reasonable cost produce the product at the best
possible quality and price acceptable to the market. If not feasible abandon the project.
4. If technically feasible, proceed with the financial study which refers to the availability of the
necessary financing at reasonable cost and terms, and profitable operation that will satisfy the
desirable investment value.
5. If financially feasible, proceed with the management study which refers to the organizational set-up
that can perform its functions efficiently and effectively with available qualified labor. If not feasible
abandon the project.
6. In a case of government project, the next step is the assessment of the social desirability of the
project which refers to the reasonable economic benefits that will accrue to the people living in the

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 community and to the immediate vicinities. In the case of private project viability depends largely on
the project proponent’s concepts of values beyond profit, social viability is, therefore very relative to
the values equated to social benefits.
7. Prepare the Summary of the Project Feasibility, indicating a brief description of the project, the
highlights of the major assumptions made, such as effective demand projections, market share and
price, investment cost, method of financing, and other important factors and a summary of findings
and conclusions regarding market, technical, and financial feasibilities.

2.4 INVESTMENT MEASUREMENT TOOLS

In developing a cash flow and/or investment analysis, a consultant must be observe the following specific
guidelines when applicable: (a) consider and analyze the quality of the income stream, (b) consider and
analyze the history of expenses and reserves, (c) consider and analyze financing viability and terms, (c)
consider and analyze the cash flow return(s) and revision(s) to the specified investment position over a
projected time period(s). (Standard Rule 1-5, USPRCP)

MARKET VALUE AND INVESTMENT VALUE

The word value as applied to real estate must be qualified. The value of your property is P500,000 is a
statement not specific enough to be meaningful to real estate professionals. The statement “Your property
is estimated to have a market value of P500,000” conveys more explicit meaning. Of necessity, consultants
and appraisers refer to market value, insurable value, liquidation value, and other precisely identified and
defined types of value. Consulting assignments frequently call for estimates of the market value or
investment value as well as associated analysis that will enable a client to make one or more real estate
decisions.

Market value refers to the value in the marketplace. Investment value is the specific value of goods or
services to a particular investor or class of investor based on individual investment requirements. Market
value and investment are different concepts: the values estimated for each may or may not be numerically
equal depending on the circumstances. Moreover, market value estimates are commonly made without
reference to investment value, but investment value estimates are frequently accompanied by a market
value estimate to facilitate decision-making.

Market value estimates no assume no specific buyer or seller; the estimates considers a hypothetical
transaction in which both the buyer and the seller have the understanding and motivations that are typical
of the market for the property or interests being valued. Appraisers must distinguish between his own
knowledge, perceptions and attitudes and those of the market or the markets for the property in question.
The special requirements of a given client are irrelevant to a market value estimate.

In contrast, the goals of a specific investor are directly related to investment value, which reflects the
advantages or disadvantages of a particular property or real estate situation to the investor. A consultant
may be asked to analyzed a series of investment opportunities or possible business decisions and evaluate
them in terms of their benefits to a given client. Even decisions involving a single parcel of real estate may
require the evaluation of other possible decisions and on analysis of how each possibility may affect the
decision being considered.

Real Estate Investment Analysis

Investment analysis is a technique in determining if a particular investment opportunity is right to meet

the client’s objectives. This analysis involves at least three basic steps:

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 1. Define the client’s investment objectives and translate them into criteria that will allow rejecting
inappropriate investments and select the best among the appropriate ones.
2. Decide on the type of real estate investment: raw land acquisition, development, buying and selling,
income properties, foreclosed properties, mortgage securities, and joint venture.
3. Screen the available opportunities to eliminate those that don’t fit the criteria and decide the best
one by using detailed analysis that will project the investment how will likely to perform in the light
of the chance that something will go wrong and comparing the projected return with other
investment opportunities.
In terms of time horizon, the analysis can be classified as short-term analysis and long-term analysis. Short-
term analysis can be used to screen properties with the following indicators that can be calculated quickly
with available information based on current performance.

1. Gross rent multiplier- total gross rent divided by the price of the property. The lower the number,
the less the investor is paying for the gross income.
2. Overall rate of return or capitalization rate- the net operating income (rent less operating expenses
divided by the value of the property). The measures is preferred to the gross rent multiplier because
it accounts for operating expenses and it offers a percentage rate, which is a customary way to
express rate of return.
3. Cash-on-cash return or equity dividend rate- the cash flow divided by the required equity
investment. This is useful when how the property will be financed known. Either before tax or after
tax may be used. It after tax cash flow is used, adjustments should be made on the returns on
alternatives types of investment for taxes to make a meaningful comparison.

Long-term analysis requires more information and assumptions because it involves projecting several
years. This type of analysis is more applicable if the value of the property being considered is likely to
increase or decrease in the near future, or if inflation is significant. Long-term analysis requires projection of
the growth rates for rents, operating expenses, and the property value. Changes in debt service and taxes
are also considered. The result of the analysis can be measured of yield to maturity called the internal rate
of return, the projected annual rate of return over the entire holding period. Alternatively, the net present
value of the investment based on the required rate of return may be calculated. This is often useful when
comparing investment that require different levels of cash investment or when putting together a portfolio
of several investment. (Note that there are computer programs available to do long-term investment
analysis).

Real Estate Investment Objectives

Investors consider different objective according to their financial status, their access to credit, and their
investment motives. Obviously, not all investors seek to maximize net annual income. Besides real estate
varies in its ability to meet the various objectives, suggesting that real estate investment may not be
approached with simple measurement of the rate of return on invested capital. The investment analysis
must consider financing, capital gains, and income tax consequence.

Real estate consultant must first identify the client’s investment objectives and the real estate selected in
order to select the appropriate method of analysis. Investors emphasize seven objectives and may consider
a combination of them: (1) liquidity and cash flow, (2) maximum current income, (3) future income, (4)
protection from inflation, (5) tax shelter, (6) capital gains, and (7) safety of principal.

Liquidity is the ability to convert an asset to cash with a minimum loss. Generally, real estate is one of the
least liquid investments. A condo owner could convert his unit to cash immediately if sold at the prevailing
market value. But typical market condition do not allow immediate sale unless the unit is sold at an
attractive price discount and better broker’s commission. An investor who desire high liquidity may consider

23
buying a share in real estate investment trust in mortgage securities available in the stock exchanges. These
securities really converted to cash at a current market value. However, real estate investors generally
sacrifice liquidity in favor of other ownership benefits.

Maximum current income can be achieved by buying real estate in cash to avoid the cost of mortgage
payments, or invest in high return but risky investment such as in resort properties dependent on creation
and tourism industries. Compared to investments in government securities, real estate may give better
current income. Such property is judged by its current income and value, applying appraisal techniques
without regard to income taxes and financing.

Future income is preferred by some investors over current income, particularly persons in relatively high
income bracket and financing lower incomes at retirement or families investing a real estate for their
children. Investment in timberland or productive farmland requires a considerable capital outlay over 5 to 15
years before the yield increase to the point that reasonable returns are realized. Investment in residential
subdivision in growth areas or in shopping centers in anticipation or urbanization and population growth also
meets future income objective.

Protection form inflation is achieved by the upward movement of the market value of land and construction
costs in accord with the declining value of the peso. For example, residential lots in Ayala Alabang bought in
the early 80’s at about 600 per square meter are now valued at 10,000 to 15,000 which also reflected the
depreciation of the peso currency and the increase in the price of construction materials and labor.
However, not all real estate increase in value, not all real estate values move in sympathy with the consumer
price index, and not all real estate increase in value at the same time.

Tax shelter is primarily attractive to tax payers subject to high income taxes and for whom real estate has
the advantage of accelerated depreciation allowances that can offset other income. This investment motive
may override the investment objectives. Cash flow analysis will show the degree to which real estate serves
this objective.

Capital gains to some tax payers may be more favorable in terms of paying the final 6% capital gains tax on
gross sales than pay the normal income tax at very high bracket even after considering allowable deductions
form gross income. An investor may be willing to forego current income in anticipation of later savings from
much lower final tax.

Safety of principal, the main objective of trust institutions charged with preserving capital, can be achieved
by investing in prime real estate, such as commercial and properties leased to multinational and dividend
paying companies, government agencies and other tenants with the high credit rating. Investors are
sometimes willing to accept lower rentals or yield in favor of the security that such tenancy provides.

Common Measures of Investment Performance

Simple ratio for many years investors have used simple ratio relationships to compare and evaluate the
returns from investment properties. One of the most common relationships is the overall rate of return
which is the ratio between the net earnings of real estate investment and its price or value of. It is expressed
as R in the formula R= Income over Investments. Other formulas employ simply gross income or net income
multipliers. In these formulas the price or value of a property is expressed as a multiple of its potential gross
or effective gross earnings, or as a multiple of its earnings. This multiple is the reciprocal of overall rate.

Payback period As a measure of investment return, the payback is seldom used alone; it is commonly
employed in conjunction with other measure. The payback period is defined as the length of time required
for the stream of net cash flows produced by an investment to equal the original cash outlay. The

24
breakeven point is reached when the investment’s cumulative income is equal to its cumulative loss. The PB
period can be calculated from either before or after tax cash flows, so the type of cash flow selected should
be identified. The equation for PB period may be expressed as follows: PB=Equity Capital over Annual Net
Equity Cash Flows. This measure of performance is used by investors who simply want to know how long it
will take them to recapture the pesos they have invested. In theory, an investment with PB period of 5 years
would be preferable to one with PB period of 7 years, all else being equal. Similarly, an investment that will
return the investors’ capital in 10 years would be unacceptable to an investor who seeks investment PB
within 6 years. For an equity investment that is expected to produce equal cash flows, the PB period is
simple the reciprocal of the equity capitalization, or equity dividend, rate such that PB= I over RE.

If annual equity cash flows are not expected to be equal over the PB period, the equity cash flows for reach
year must be added until the sum equals or exceeds the equity capital outlay; this point indicates the year in
which PB occurs.

Investment Proceeds Per Peso Invested Investment proceeds per peso invested is a simple relationship
calculated as the anticipated total proceeds returned to the investment position dividend by the amount
invested. The resulting index or multiple provides a crude measure of investment performance that is not
time-weighted.

Profitability Index Although measuring investment proceeds per peso invested is too imprecise for general
use; a refinement of this technique is commonly applied. A profitability index (PI), or benefit/cost ratio is
defined as the present value of the anticipated investment returns (benefit dividend by the present value of
the capital outlay cost). Present value of the anticipated investment returns over present value of capital
outlay. This measure employs a desired minimum rate of return of a satisfactory yield rate. The present
value of the anticipated investment returns and the present value of the capital outlay are calculated using
the desired rate as the discount rate. If, for example the present value off the capital outlay discounted at
10% is 12,300 and the present value of the benefits is 12,399, the profitability index, based on a satisfactory
yield rate of 10% is 12,300 = 1.008.

A Pi greater than 1.0 indicates that the investment is profitable and acceptable in the light of the chosen
discount rate. A PI of less than 1.0 indicates that the investment cannot generate the desired rate of return
and is not acceptable. A PI of exactly 1.0 indicates that the opportunity is just satisfactory in terms of the
desired rate of return and, coincidentally, the chosen discount rate is equal to the anticipated IRR. The
discount rate used to compute the PI may represent a minimum desired rate, the cost of capital, or a rate
that is considered acceptable in the light of the risks involved.

Net Present Value (peso reward) is defined as the difference between the present value of all expected
benefits, or positive cash flows, and the present value of capital outlays, or negative cash flows. Net
present value (NPV) is simply the present value of anticipated investment returns minus the present value of
the capital outlay. This measure, like a profitability index, is based on a desired of rate of return. It is
computed using the desired rate as a discount rate and the result is viewed as an absolute peso reward. The
reward or penalty is expressed in total peso, not as a ratio.

A number of decision rules can be established for applying the NPV. For example, assume that a property
with an anticipated present value of 1,100,000 for all investments returns over a 10-year holding period can
be purchased for 1,000,000. If one investor’s NPV goal for an NPV of 100,000 but it would not qualify the
goal were 150,000.

NPV considers the time value of money and different discount rates can be applied to different
investments to account for general risk differences. However, this method cannot handle different

25
required capital outlays. It cannot differentiate between NPV on a 500,000 capital outlay. Therefore, this
technique is best used in conjunction with other measures.

Time-weighted Rate is technically an average of all actual, instantaneous rates over a period of time. It is
similar to the rate of growth for capital invested in a mutual fund in which all dividend income is
automatically reinvested. The time-weighted rate which is also known as unit-method rate of the share-
accounting rate, is used primarily to measure the performance of a portfolio manager, not the performance
of the portfolio itself.
Discounted Cash Flow (DCF) analysis provides investment analysis with the most detailed, precise means
of considering the amounts and timing of investment cash flows and outflows over the life of an
investment. With this procedure any series of cash inflows and outflows over any specified time frame at
any rate of return can be analyzed and present value of the investment’s anticipated performance can be
measured.

DCF techniques may be applied to cash flows before or after income tax in comparisons made with
profitability indexes or net present value methods. DCF can be applied on either a constant peso or
nominal-peso basis. If constants pesos are used, they are discounted with rates that do not include an
allowance for inflation. Consequently, investment performance is measured without considering the effects
of inflation. More often, nominal or actual pesos are measured for the cash inflows and outflows
anticipated. In this case the discount applied contains a component that accounts for inflation. However,
because the rate of inflation is an element of risk, a specific analysis of the future inflation rates or
components inflation is not usually included rate, although this may be done in more detailed analyses.

For income streams that extend over many years, such as those stipulated in long-term leases, DCF is
commonly performed for terms of 5, 10 or 15 years. Although these terms may be shorter than the term of a
given property lease, they offer two principal advantages; (1) buyers and sellers in many market develops
their expectations of future price changes over short or medium-length terms thus, the analyst can establish
market expectations regarding the terminal values of the investment and factor these expectations into
income analysis time frames that are consistent with market thinking and behavior, (2) the mathematics of
compound interest is data-specific and precise, but they sometimes lead to conclusions that are difficult to
accept.

Although DCF analysis can be applied to historical investment returns, it is usually applied to future
expectations. Therefore, DCF analysis frequently involves forecasting cash inflows and outflows.

DCF techniques have the advantages of being precise, persuasive, and time sensitive. They can be applied
to different income patterns and risk situations. They reduce the numbers of assumptions required for a
given analysis and explicitly consider both advantageous and disadvantageous investment expectations. DCF
techniques, however, have some disadvantages. They are based forecast estimates and the analyst must
consider and have access to historical data. The precision of DCF techniques can suggest greater accuracy
than is warranted and the rates applied in discounting may be highly subjective.

Internal Rate of Return (IRR) which is developed in the context of yield analysis, expands on present value
calculations and techniques. It represents a special case among investment performance measures. The IRR
is simple defined as that rate of discount that produces profitability index of one and a net present value is
zero. Measured separately, the IRR is the discount rate of which the present value of all net investment
returns, including any return of capital from disposal of the investments, exactly equals the capital outlay for
the investment.

In other words, the IRR calculation is a DCF analysis solved backward- i.e. all the cash flows and outflows are
analyzed to find what discount rate can be applied to make them exactly equivalent to the original capital

26
outlay. Thus, the IRR considers all positive and negative cash flows from the inception of the investment to
its termination and reflects the indicated return on the investment in addition to the return of the
investment.

The reinvestment resumption is a controversial aspect of IRR analysis. The presumption that money
received from the investment before its termination is actually reinvested is not essential to the IRR concept.
Nevertheless, the mathematical consistency can be demonstrated between the results of such an analysis
and the presumption that these funds are reinvested at the same rate of interest as the IRR. This controversy
and other weaknesses in the IRR has led to the development of alternative measures such as the financial
management rate of return (FMRR), the adjusted internal rate of return (AIRR) and the modified internal
rate of return (MIRR). These methods were created to address other factors or to compensate for the
reinvestment consideration.

Calculating on IRR is a process of successive series of calculations to establish a range for the IRR and this
range is refined to the required degree of precision. These calculations can be facilitated with financial
calculators and computers, but they can also be done manually because many variables involved, no formula
can calculate the IRR in a single step.

Although the IRR is of substantial importance in the analysis of investment properties, it has been subject
to abuse. When properly applied and interpreted, however, this measure may be given significant weight in
analyzing and comparing investment alternatives. Because the IRR normally deals with unknown factors in
the future, the forecast date required in its estimation should never misinterpreted as predictive. The IRR
can be of particular value to decision makers when the likelihoods and risks associated with each component
of data in the analysis can be fully assessed. Like other measures of investment performance, the IRR should
be used in conjunction with other techniques and considerations.

No single investment performance measure is the best…

…or most appropriate in all situation. Each has its advantages and disadvantages and all are more effective
when used in conjunction with other measures. Under certain circumstances one or more of these measures
should be given greater weight, but the analyst must always recognize the individual limitations of each
measure.

Omitting one or more of these measures in making a given real estate decision does not indicate the likely
failure of the investments; similarly applying appropriate measure is no guarantee of success. All decisions
are made under conditions of uncertainly, but the measures of investment performance discussed here
represent valuable tools that allow consultants and investors to weigh the facts, exercise sound judgment,
and make reasoned decisions. They also provide a framework for implementing on investment program and
monitoring investment decisions once they are made.

Judgment is the ability to draw on information and individual experience to make better decisions. As used
in consulting assignments, investments performance measures are not all inclusive solutions, but aids that
can be useful in developing, considering and explaining investment decisions and judgments.

Feasibility Analysis on Real Estate Investment

In order to sort the appropriate measures and risks involved in the investment analysis, another tool in
consulting may be used, the feasibility analysis or study. Feasibility analysis or study is a determination of the
likelihood that a proposed development will fulfill the technical, market and financial objectives of a
particular client investor. In judging feasibility, considerable care is taken in estimating (1) the projections

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of gross income less reductions and (2) expenses and other costs which must conform to the realistic
experience of like properties.

General steps in Making a Feasibility Analysis though subject to much qualification, feasibilities study
generally follow fairly uniform procedure. Certainly, they are more complex than the comparison of the
market value with the cost of development and their details vary for each project. A feasibility study for an
organized industrial park would emphasize marketability features not found a proposed residential
development.

Feasibility analysis or study can be undertaken by a consultant in different approaches and degree of
sophistication, depending on type of the property involved, nature of the investment involving the property,
time required to complete the study and recommendation, and the style of the consultant as influenced by
his experience and expertise. In the discussion on the subject project Feasibility Study two approaches or
steps are described. Generally, however, feasibility study for real estate would follow seven steps:

1. Determine the investment objectives

2. Select that type of analysis that will show whether the investment objectives will be realized.
3. Undertake a marketability study for the estimation of gross income or sales.
4. Analyze development costs, including planning, legal and initial financing costs.
5. Project net income from a realistic study of new incomes, vacancies and expensed of operation.
6. Capitalize net income according to the market rates of capitalization.
7. Present net income and cash flow data according to the investment objectives to be satisfied.

The main difficulty lies in identifying realistic costs of development and projecting net income. If the study
relates to income producing property, say an apartment house, the error in projecting gross income, vacancy
rates and expense allowance are common deficiencies. Further, investment feasibility depends on market
capitalization rates favourable financing.

Drawbacks in the Real Estate Investment

As there are advantages in investment is real estate there are also some serious drawbacks which are
reflecting some of the characteristic or nature of real estate as an economic good. However, these
disadvantages can also provide opportunities for wealth builders who can overcome them, as well as
opportunities to consultants and investments syndicators who can offer services to minimize of these
disadvantages. Some of the serious drawbacks are:

1. The big size of the investment required limits the field of real estate investment to fewer
investors. Syndicators overcome this problem by pooling a group of investors each of whom
purchases share in a partnership or joint venture in a large property investment.
2. Real estate is an illiquid investment. It is like mousetrap- once you are in, it is difficult to get out.
Market conditions may prevent a quick sale at reasonable price. Publicly traded syndications or
mortgage securities can provide more liquid investment.
3. Being a physical asset, real estate requires management. A property manager may be hired to
handle on many responsibilities related to real estate. Also, in a limited partnership, the investor can
leave the responsibilities to the general partner.
4. Being local in nature, real estate market information is not widely available. Real estate brokers
and consultants are good source for the market information.
5. Cost of purchasing a property is increased by transaction expenses. Brokers commission, legal and
documentation expenses, transfer and registration fees, appraisal and survey costs, and taxes. This
incidental expenses make real estate long term investment as short term sales may involve
substantial markup to offset the added cost.

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 2.4 Knowledge of Real Estate Economics

Economics Defined

Given that wants are unlimited and resources are scarce, economics can be defined as the social science
concerned with problem of using or administering scarce resources (the means of producing) so as to attain
the greatest or maximum fulfillment of society’s unlimited wants (the goal of producing). Economics is
concerned with “doing the best with what we have.” If our wants are virtually unlimited and our resources
are scare, we cannot satisfy all society’s wants. The next best thing is to achieve the greatest possible
satisfaction of these wants. Economics is a science of efficiency- efficiency in the use of scarce resources.

Economic efficiency is also concerned with inputs and outputs. Specifically, it is concerned with the
relationship between the units of scarce and resources that are put into the process of production and the
resulting output of some wanted product.

Full employment and full production Society wants to use its scarce resources efficiently, that is it wants to
get the maximum amount of useful goods and services produced with its limited resources. To achieve this is
must realize both full employment and full production.

Full employment means that all available sources should be employed. No workers should involuntary out of
work; the economy should provide employment for all who are willing and able to work nor should capital
equipment or arable land sit idle. Note we say all available resources should be employed.

Full production means that resources should be utilized efficiently so as to make the most valuable
construction to total output. Wes should avoid allocating astronomers to farming and experienced farmers
to space researched.

Introduction to Real Estate Economics

After reviewing briefly the foundation of economics in general, what then is the relationship of economics to
real estate? Why should we study real estate economics?

What is Real Estate Economics?

Real estate economics is a study that uses economics principles to analyze the impact that national,
regional, community and neighborhood trends have on real estate values. Real estate is bout people how
their actions affect real estate values. In our society, desire for goods and services frequently exceeds the
supply available. This scarcity gives rise to the idea of economic value.

What Real Estate Economics is Not?

Real estate economics is neither the study of general economics nor a course in the practice of real estate.
Rather, real estate economics is the link between general economic theory and applied real estate practice.
A course in general economic concentrates on how society attempts to use limited resources to satify the
want of this people. However, such as course does not examine how this affects local real estate markets.
On the other hand, a course in real estate practice concentrates on the specific techniques need to complete
a real estate transaction but spend little time discussing the economic influences that determine whether an
investment will be economically profitable over the years.

29
Real estate economics draws principles from both the general economics and real estate practice and the
combines them in order to study changes in real estate activity. The main thrust of real estate economics is to
help real estate students and practitioners become aware of future trends and what impact these trends will
have on local real estate values.

Why study Real Estate Economics?

Real estate economics helps you to understand what causes fluctuations in real estate activity and how
these changed can affect local real estate markets. With this information, you will be better equipped to
make real estate decisions that will benefit you, your clients and your entire community.
Real Estate Characteristics

The unskilled practitioners and lay persons may fail to understand or distinguish the difference between real
estate and real property, or between the physical aspects of real estate and the property rights associated
with real estate ownership. Others confuse the economic characteristics and the physical characteristics of
real estate.

Real Estate Ownership

Our system of land ownership is the allodial system, consisting of private ownership without the payment of
money or services to other persons. Under the allodial system it is necessary to distinguish among five
terms:

1. Real estate- land and its attachments or physical property

2. Real property- the legal rights associated with landownerships; the interests, benefits, and rights in
herein in the ownership of the physical real estate.
3. Land- economic concept: the surface with all to its characteristics (water, soil, mineral deposits, and
climate)
4. Personal property- movable items that are not permanently attached or affixed to the land or
building.
5. Fixtures- an article, formerly personal property, installed or attached to land or buildings in
permanent way so that it becomes part of the real estate.

The Concept of the Land

The developer looks at land as capital whereas the planner views land more in terms of space. Others refer
to land only in the physical sense, such as s former who considers the physical nature and productivity of the
soil.

1. The economic concept- land is defined broadly to include the surface with all its characteristics:
water, soil, mineral deposits, and other phenomena, including climate. Besides referring to these
natural characteristics, the economic concept refers to all man-made improvements such as
irrigation ditches, waterways, highways, and streets.
Land as space- ownership of property gives possession and control to a minted space. Some view of
the characteristic of space as the controlling element in landownership. In analyzing the feasibility of
a subdivision, judgments must be made with respect to the space proposed for conversion from, say
agriculture to residential hospital areas cases in point.

2. Land as resource- the real estate economist views land as a scarce resource that should be
maximized and allocated to the most efficient use. In considering a multi-family housing project,
questions arise as to the number of the apartments that would ideally be placed on a given tract. If

30
 population density is too high, traffic congestion and the utility of multi-family space would be
lowered by overcrowded facilities, which decrease the enjoyment of the property. On the other
hand, if too few units are allowed, land is not utilized in its most efficient manner.
3. Land as space- the essential problem in considering land as space is to provide for a system of
harmonious mutually attractive land uses. Owners and planners separate incompatible uses of
space, commercial districts and single-family dwelling. At the same time, land must be allocated to
the less desirable uses, such as garbage sites and landfills.

Economic Characteristics of Land

Land serves as both a consumption and an investment good, and is therefore, subject to the economic law of
supply and demand. However, the unique economic characteristics of land complicate the allocation of land
resources to the best possible use.

Immobility- because land is fixed in place, shortage of land in one location may not be compensated by a
surplus in another area.

Durability- land and buildings are relatively long-lasting assets. It is calculated that a building may last
virtually indefinitely if it is properly maintained and protected from wear and tear and action of the
elements.

Divisibility- because the physical asset land and building is not transferred physically from one buyer to
another, the right to possession, use and enjoyment may be divisible into rights.

Modification- while land is relatively scarce resource, it may be modified considerably. In fact, such
modification permits alternative uses of land as economic conditions change. Thus, a low-rise retail building
gives way to high-rise office building, land used for pastures assumes greater importance as a shopping
center or more dramatically, as population expand, low-density residences are replaced by multi-family
structures.

High capital value- the high value of land accounts for other market imperfections. Buyers and sellers are
not as free to enter and leave the r6eal estate market. The high cost of housing, which is probably the most
expensive single purchase of the typical family, restricts the number of families entering the buyers markets.

COMPARISON OF CHARACTERISTICS: PERFECT MARKET VS. TYPICAL REAL ESTATE MARKET

CHARACTERISTICS PERFECT MARKET REAL ESTATE MARKET

1. Number of buyers and Many participants; no monopoly, Few participants; seller controls
sellers oligopoly, or monopolistic during a “sellers” market, buyer
competition controls during a “buyers” market
2. Product knowledge and Buyers and sellers are highly Buyers and sellers are not
market exchange knowledgeable; the exchange knowledgeable; the exchange is
takes place with ease legalistic, complex and expensive
3. Standardized products All products are alike and Each parcel of real estate is
interchangeable; there is little unique and separate from all
difference between products of others; no two are exactly alike
different sellers
4. Mobility Product can be transported to The location is fixed; a real estate
capitalize on more lucrative parcel cannot be moved to
markets another more profitable location;
Real estate market is local, not

31
 regional or national
5. Size and frequency of The item purchased is small and Real estate is purchased
purchase relatively inexpensive; it is infrequently (rarely more than
purchased frequently four or five times in a lifetime); a
home represents the largest single
investment made by the average
family
6. Government’s role Government plays little, if any Government plays a dominant
role; laissez-faire prevails role in encouraging real estate
development through the use of
fiscal and monetary tools and by
use of other controls, such as
zoning, environmental and health
codes
7. Prices Prices are established by the Prices are influenced by the
smooth action of supply and interaction of supply and demand.
demand But this interaction is not smooth;
the lack of knowledge by either
the buyer or the seller can distort
the prices paid.

2.6 KNOWLEDGE OF MONEY AND SUPPLY CREDIT: A Tool for Understanding Real Estate Economics

The understanding of money and credit will allow the analysis to anticipate changes in the real estate
market and explain to his clients the relationship between current real estate market and conditions and
shifts in the money supply.

THE SUPPLY OF MONEY

Making money is more than just the minting or printing the process. Money in circulation consists of
currency in coins and bills and money in the form of demand deposits created by the banks. Understanding
the money supply is an important tool for understanding real estate economics.

What is Money?

1. Money is medium of exchange.

2. Money is a measure of value.
3. Money is a store of value.
4. Money is a standard of deferred payment.

Money in the Philippines

There are three types of money in the Philippines: coins, paper currency and bank money. Coins of different
denominations make up the coin system. The metallic value or intrinsic values of coins is less than their face
value. If the value of the metal should exceed the value of the coin, people would tend to hoard or keep the
coins and then illegally melt them down in order to sell the metal.

Paper currency (5, 10, 500, 1,000 and other bills) issued by BSP are essentially promissory notes guaranteed
by the Philippine government. BSP notes will continue to circulate as money for as long as people have faith
in the strength of the government. The paper money is no longer backed by gold but by the strength of the

32
government. The Iraqi dinar became worthless when the Saddam Regime was collapsed by the Iraqi War.
The biggest block of the money supply is the bank money consisting of checks drawn against checking
accounts. In economic terms, checking accounts are called demand deposits. When one writes a check, he is
transferring a portion of his bank deposit to a third party. The bank must pay this money upon demand. No
time delays are allowed, hence the term demand deposit.

BANKS CREATE MONEY

Only the national government may legally mint coins and print paper currency, but commercial banks can
legally create demand deposits. Banks create money because of a concept known as fractional reserve
banking. The average banks daily deposits and withdrawals tend to equal to each other. At this point, if a
person adds P10,000 to his account, the bank can take this P10,000 and grant a loan to someone else. Later,
when the depositor withdraws the P10,000 another depositor’s money will be used to cover the withdrawal.
Occasionally, daily withdrawals exceed daily deposits, so banks keep a certain portion of each deposit as a
reserve for abnormal withdrawals. Of the P10,000 deposited, perhaps P200 will be retained in reserve and
P800 will be loaned out. This fractional reserve system will work as long as depositors do not decide to
withdraw their funds at the same time.

TOO MUCH MONEY CAN CAUSE INFLATION AND HARM REAL ESTATE MARKETS

As the money supply expands, interest rates lend to drop and credit becomes easier to obtain. This
stimulates spending and increases the demand for resources, goods and services. But a point is reached
where additional increases in the money supply will stimulate demand beyond the ability of the economy to
increase supply. The result will be inflation- a rise in general prices- too much money chasing too few goods.

REAL ESTATE MARKETS AND INFLATION

Increase in inflation, hurts mortgage lenders because the money they receive from loan repayments is
worthless than the money they originally loaned. Thus, to protect themselves during periods of rapid
inflation, mortgage lenders increase interest rates. An increase in interest rates causes monthly payments to
increase, thereby preventing some potential real estate buyers from qualifying for loans. This reduces the
demand for real estate.

Inflation can cause depositors in thrift institutions (such as savings and loan associations) to withdraw their
funds and seek higher returns in other money market placements, thereby reducing the money available for
mortgages.

During the inflation, the cost component of construction (land, labor and materials) rises and drives some
people out of the housing market.

Increased prices also drive up the cost of purchasing the basic necessities of life. In effect, this reduces
discretionary income- money for luxuries and leisure. A decline in discretionary income is harmful to the
recreational and leisure real estate markets, such as vacation homes, hotels and tourist attraction.

THE IMPORTANCE OF CONTROLLING THE SUPPLY OF MONEY

Who controls our money supply and how it is done?

THE BSP RESERVE SYSTEM

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The BSP Reserve System controls the volume of the money supply, especially the money created by the
credit operations of the banking system, thru the regulatory tools available to the BSP. These tools can
counteract economic balance.

Purpose of the Bangko Sentral ng Pilipinas (BSP)

The BSP was established by Congress in 1993 by R.A No. 7653, The New Central Bank Act. The BSP is
governed by the Monetary Board and operates as an independent body to insulate the governors against
political pressures when making economic decisions.
The BSP provides policy directions in the areas of money, banking and credit, and supervises the
operations of banks and exercises regulatory powers over the operations of the finance companies and non-
bank financial institutions performing quasi-banking functions and institutions performing similar functions.

The primary objective of the BSP is to maintain price stability conducive to a balanced and sustainable
growth of the economy. It also promotes and maintained monetary stability and the convertibility to the
peso. In short the BSP regulates the supply of money and credit in order to achieve growth without inflation
and unemployment.

How BSP Attempts to Control the Money Supply?

The BSP attempts to control the money supply by manipulating bank reserves, using the following major
tools:

1. Changes in the reserve requirements.

2. Open-market operations.
3. Changes in the discount rate.

Changes in the Reserve Requirements All agent banks of the BSP are required to maintain a certain
percentage of each deposit as reserves. These reserves are kept at the BSP. If the BSP feels that easy money
and credit are feeding inflation, it can raise the reserve requirements which will force banks to restrict their
lending, as money must be diverted from loans to cover the shortage in reserves. This action is designed to
decrease the amount of money in the circulation, drive up interest rates, and eventually lessen inflation by
slowing down spending.

What will happen if the BSP decreases the reserve requirements? Will this increase or decrease the money
supply? Will this raise or lower interest rates?

Open-Market Operations As part of this money management tools, the BSP is allowed to buy and sell
government securities. This public (private citizens and financial institutions) also may buy and sell
government securities as a form of investment. When the BSP buys government securities from the public,
the seller of these securities (public) receives the BSP check, which the seller then deposits in a local bank.
The local bank forwards the check to the BSP for payment. When the BSP receives their own check, it
increases the reserves of the local bank by the amount of that check. The local bank now has more reserves
than is required and therefore can grant more loans. Thus, when the BSP buys government securities from
the public, it increases the money supply by increasing bank reserves, which in turn will support money from
more loans.

What happens to the money supply when the BSP sells government securities to the public? The money
supply tightens up, which increases interest rates and discourages borrowing.

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When government securities are sold, an individual purchases them by writing a check on his local bank. The
BSP receives the buyer’s checks and subtracts it from t[he reserve account of the local bank. The local bank
now has less reserve and therefore, must constrict its lending. So when the BSP sells government securities,
it decreases bank reserves, which in turn decrease the bank’s ability to grant loans. Note that the ultimate
effect is a change in the money supply by manipulating bank reserves. But the BSP has still another
important tool: changes in the discount rate.

Changes in the discount rate when one needs a loan, he frequently goes to his bank. Where does a bank go
when it needs a loan? One possible place is to the BSP, the banker’s bank. When a bank borrows from the
BSP, it is charged an interest rate known as the discount rate. By decreasing the discount rate, the BSP
encourages banks to borrow. The borrowed funds will increase the local banks deposits and reserves, which
allows for the expansion of loans. An increase in the discount rate discourages banks from borrowing which
decreases the amount of money available for loans.

A Summary of the Major BSP Tools

Changes in the reserve requirement, open market operations, and changes in the discount rate allow the
BSP to control or fine tune the supply of bank money. Of these tools, the most commonly used is that of
open market operations.

To increase the money supply, the BSP will decrease the reserve requirements, buy government securities,
decrease the discount rate, or use some combination of all three.

THE ACTIONS OF THE BSP AND THEIR EFFECT ON REAL ESTATE ACTIVITY

This section explains how the money supply and the BSP attempt to regulate it can influence the real estate
market. It also points out that the cycle of real estate will not always be in step with the general economic
trends.

Tight-Money Policies and Real Estate

The BSP institutes restrictive monetary policy to combat inflation. Inflation itself is frequently caused by
excessive private demand, government deficits, or excess money supply (excess liquidity).

When the BSP fights inflation, it tightens up the money supply, which in turn causes interest rates to rise as
government agencies and corporate borrowers bid against one another for the shrinking money supply.
Higher interest rates cause funds to flow out of savings and loan associations, as savers go elsewhere seeking
higher rates of return. Saving and loans mortgage lending decreases and the real estate market heads into a
recession. The economic term for the outflow of funds from thrift institutions into corporate and
government notes is called disintermediation.

Thus, when the BSP tightens money to combat inflation, housing is one of the first economic sectors to feel
the pinch. This frequently brings cries of discrimination from the real estate industry.

THE BSP BOES NOT DISCRIMINATE AGAINST HOUSING WHEN IT TIGHTENS MONEY

When the BSP decreases the money supply, it does not single out just the real estate market and restrain
only housing funds. In most cases, the real estate mortgages in tight-money markets are usually unattractive
investments because they are long-term loans bearing low fixed interest rates.

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During period of prosperity and inflation, interest rates for other investments tend to rise. Many savers and
institutional lenders refuse to loan on low-paying, long-term mortgages and instead are attracted to high-
yield, short-term business loans. As the demand for funds continues to exceed the supply, interest rates on
treasury and BSP instruments also increase and disintermediation takes place. The BSP does not specifically
discriminate against housing rather, the structures of the mortgage market tend to defeat itself in tight-
money situations.

Easy Money Policies and Real Estate

During periods of economic slowdown, the BSP attempts to head off a recession by easing the money
supply. An increase in money and credit may cause spending to increase, and this expansion will ideally bring
an increase in employment. As money and credit become more plentiful, interest rates tend to decline.
These lower interest rates do not immediately attract business borrowers because the economic downturn
still leaves a lingering feeling of pessimism. Meanwhile, private savings may increase as uncertainty causes
people to become cautious and restrict their spending.

RECOVERY IN THE REAL ESTATE MARKET NORMALLY PRECEDES A RECOVERY IN THE NATIONAL ECONOMY

Because of the size and impact of the construction industry, an increase in home building helps to lead the
economy out of a recession. As home construction picks up employment, income and spending increase.
This in turn generates even more activity and the general business cycle heads for recovery.

However, if spending and demand rise beyond the equilibrium point, inflation will recur. If this happens, the
BSP may tighten up the money supply and the mortgage market will start to lose funds, causing real estate
activity to decline.

The real estate market cycle in the short run tends to travel somewhat opposite the general business
cycle. When the general economy is at the top of a boom, real estate activity is usually already declining
because of a lack of credit. When the general economy slows down, real estate activity may increase as
funds flow back into the mortgage market.

3.1 REAL ESTATE MARKET ANALYSIS

Definition

A market analysis is the study of current supply and demand conditions in particular area of a specific type
of property, used (1) to identify the most likely users of the project, (2) to indicate how well a particular
piece of real estate will be supported by the effective market demand, and (3) to indicate how well the
market is being served by the existing supply of properties. Essentially, the study will show if there is a need
and effective demand for a new project, or if an existing project has a good long-term investment prospect.

Caution should be made when investing in an unbalanced market. When supply of a certain type of real
estate is short, rents and prices may be high, but only temporarily. New projects will add to supply and drive
prices down. By contrast, when a market is oversupplied the must be low enough to be an attractive
investment.

Market analysis is part of feasibility study to estimate the threat of the rent increase or sales for new
projects. This is called absorption rate. It may be expressed as an overall absorption rate (i.e. the market
needs 2,000 new units per year at the price range of P800,000 to P1,5000) or a specific rate for the project
(given current competition, the project should capture 200 new rentals per year). This absorption rate
estimate is important in projecting the revenue production of a property.

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In performing a market analysis, a consultant must observe the following specific guidelines when
applicable: (a) define and delineate the market area and supply appropriate market segmentation, (b) define
and analyze the current supply and effective demand conditions that make up the real estate market
segment, (c) identify, measure and forecast the effect of anticipated development or other changes and
future supply, (d) identify measure and forecast the effect of anticipated economic of other changes and
future demand. (Standard Rule 1-4, USPRCP)

The analysis of economic changes in the market in which the property is located may include the following
determinants of demand: population, employment and income characteristic; interest rates; zoning and
9other regulations; rents and/or sales; new construction planned or underway; vacant sites as potential
competition to the subject; transportation; taxes and the cost adequacy of sewer, water, power and other
utilities. Forecasting techniques should be relevant, reasonable, practical and supportable. Regardless of the
forecasting models employed, the consultant is expected to provide a clear and concise explanation and
description of the model and methodologies.

The consultant is expected to provide a comprehensive physical and economic description of the existing
supply of space for the specific use within the defined market area, an explanation of the competitive
position of the subject and a forecast of how anticipated changes in future supply (additions to or deletions
from the inventory) may affect the subject property.

The Nature of Real Estate Markets

REAL ESTATE BUSINESS is affected unpredictably b foreign, national or regional events, and by changes in
the local economic, the government policy and social pressures. However, real estate failures mostly result
from a misunderstanding of real estate markets and failure to undertake an analysis of the market. While
real estate market analysis do not guarantee a successful decision, it serves as useful information in real
estate highest and the best study and therefore, minimizes risks in real estate investment.

Knowledge of real estate economics is obviously essential in undertaking market analysis.

Supply and demand relationships An understanding of the nature of real estate markets. Such as those for
housing, commercial and industrial property will help explain the supply and demand relationships in the
operation of the real estate market.

In a real estate context, the principle of supply and demand states that the price of real property varies
inversely, but not necessarily proportionately with the demand and directly, but not necessarily
proportionately with supply. The interaction of suppliers and demanders or sellers and buyers constitutes a
market.

In a real estate supply is the amount of a type of real estate available for sales or lease at various prices in a
given market at given period of time, assuming production costs remain constant. Typically, more of an item
will be supplied at a higher price and less at a lower price. Therefore, the supply of an item at a particular
price at a particular time, at a particular place indicates that item’s relative scarcity.

In real estate, demand is the amount of a type of real estate desired for purchase or rent at various prices in
a given market for a given period of time, other factors such as population, income, future prices, and
consumer preferences remaining constant. Demand that is supported by purchasing power results in
effective demand, which is the type of demand considered by the market.

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The supply and demand forces do not of operate freely when the market is dominated by the state and
centralized planning is imposed or a command economy.

A distinction must be made between price equilibrium and short-term price distortion, focusing on the
characteristics of real estate markets, the influence of location and the principle of comparative advantage.

The inherent features of real estate preclude its diverse markets from being highly efficient. Relate the
following characteristic of an efficient market to the characteristics of real estate market:

1. In an efficient market, prices are relatively uniform and stable, often the primary consideration in
purchase or sale decisions because quality tends to be uniform at a set price.
2. An efficient market is self-regulating. Open and free competition is subject to few restrictions.
3. Supply and demand are never out of balance in an efficient market because the market tends to
move toward balance through the effects of competition.
4. Buyers and sellers in an efficient market are knowledgeable and fully informed about market
conditions, the behavior for others, past market activity, product quality and substitutability. Any
information needed on bids, offers is readily available.
5. Buyers and sellers in an efficient market are brought together by organized mechanism, such as the
PSE, and it is relatively easy for sellers to enter into or exit from the market in response to market
demand.
6. In efficient market, goods are readily consumed, quickly supplied and easily transported.

Real estate markets are not efficient and due to imperfections such as lack of product standardization and
the time required to produce a new supply, it is difficult to predict their behavior accurately. In view of this,
consultants must analyze the significant aspects of market activity that make real estate markets inefficient,
focusing on the motivations, attitudes and interaction of market participants as they respond to the
particular characteristics of real estate and to external influences that affect its value. This focus underscore
the need for objective real estate analysis in a free market economy and the responsibility of consultants
to the community and clientele they serve.

Characteristics of real estate markets Real estate markets have the following certain unique characteristics
that may cause market distortions:

1. Real estate is durable and fixed in location

2. Legal restrictions prevent orderly market adjustments
3. The project gestation period (the time between project planning and project completion) makes real
estate markets sluggish and slow to respond to changing markets resulting in a varying rates of land
absorption
4. Real estate markets are highly localized
5. Supply and demand are slow to adjust to new market conditions
6. Credit availability and its cost affect supply and demand

Factors that Create Demand

Market demand is the main concern of market analysis. People must want to use the property enough to
pay the rents being asked. If the demand to use the property is high, the demand for buying the property
will be high. High demand means top rents, low vacancies, and good resale prospects. Poor demand means
rent reductions, high vacancies, and a property that is difficult to sell.

The following are key items that produce demand for real estate:

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 1. Economic Growth New jobs and resident increase the need for developed properties. Rising income
means better rents and better prices, as well as more retail sales (see Local Economy).
2. Good quality The property should have all the standard features expected in the market, plus
something extra that the competition doesn’t have. Appearance, features, size, and services are
valued in today’s market.
3. Good location can make a poor quality property profitable while good property can suffer if in the
wrong place.
4. Competitive price if the property is less than ideal, it still may be able to competent on price. It is
important to know what segment of the market the project is intended to serve and price it
accordingly.
5. Cost of alternatives Apartments are popular when house prices are high. House sells better when
interest rates are low.
6. Room for more of that type of property in the market The demand for a specific property is
determined by looking at how it compares to other similar properties.

Analyzing the Housing Market

The national housing market being affected by numerous factors or variables, is highly segmented.
Segmentation results from market imperfections, public policy, and more important, it is a local market
classified by types of occupancy (rental or owner), type of design and structure, location and neighborhood
age.

Elements of the National Housing Market

The forces of supply and demand are partly economic, partly sociological, and partly related to government
housing policies.

Factors of housing demand Most authorities relate housing demand to a set of five variables:

1. Migration of households
2. Net household formation
3. Family income
4. Housing demolitions
5. Relative price of housing services.

A decline in individual and family income [postpones household formation, results in more families sharing
space, more single person living with parents and more married persons living with in-laws. In periods of
increasing income, more individuals demand separate households.

The demand for new housing increases with the increase in the number of single retirees, separated persons
and unmarried singles. While the rate of population growth may be controlled slowly, the increase growth
rate in households increases the demand for housing.

Housing statistics are derived mostly from public records. New construction and the net change in housing
and inventory under construction are derived from local building permit records. The net change in housing
vacancies is taken from real estate companies or from the housing census. Demolitions and conversions to
non-housing use would also be determined from building permit records. New public housing construction
would be available from public records.

The increasing urbanized rate, or migration of households from rural areas to urban areas, usually results in
a net increase in the demand for housing.

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Factors of housing supply The more important variables affecting the supply of housing include factors that
affect the flow of saving, and investments into housing mortgage markets, government fiscal and monetary
policies, lender policies on interest and loans conditions, and cost of construction. The interaction of supply
and cost variables is highly complex, involving supply factors that affect single-family housing financed by
conventional private mortgages, houses under the government unified home lending program, houses
directly financed by the SSS, GSIS, and PAG-IBIG for the members, houses purchased by multiple-family units
and, manufactures homes.

As a consequence, the housing supply as of a given time depends on the quantity or volume resulting from:

1. New construction in the open market

2. The net change in inventory of finished units and under construction
3. The net change in housing vacancies
4. Demolitions and conversions to non-housing use.
5. New public housing construction and new construction of manufactured homes.

Estimating the demand for owner occupancy The potential market for new housing projects depends
largely on the demand for housing in a given neighborhood, community, or locality. National housing
statistics are available but may not be current enough to be useful. Housing consultants may use local
information to measure the demand for local housing.

Market analysis for socialized housing Local housing demand generally depends on four factors:

a. The rate growth in the number of households.

b. Income and employment patterns
c. Liquid asset holdings income
d. Space, convenience, and style requirements.

The demand for rental occupancy Compared to the owner occupancy market, rental housing is more
responsive to change in demand. Rental occupants as a group, tend to be more informed on the housing
rental market than the families in the owner occupancy market. The rental market satisfies the housing
demand of a special group whose housing needs are more nearly satisfied by rental units than by owner
occupied units. To predict the potential demand for rental housing, surveys of the potential demand among
selected groups must be undertaken.

Rental control Moderate rent control in the Philippines only restricts extreme rent increases. Moderate
controls could have little or no impact on new construction, maintenance, or the taxable value of rental
properties.

Rent controls have a different impact on affluent communities and the larger metropolitan areas. In the
more affluent communities, housing is in high demand with limited new construction. Since rent controls
keeps rents below the market, rent controls transfer windfall gains from property owners to tenants.

THE COMMERCIAL REAL ESTATE MARKET

Though there are many types of commercial real estate, office space and retails space dominate. The
demand for retail space is a derived demand- a demand derived from the potential volume of retail sales. In
turn, retail sales are dependent on the buying power of the market area population.

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Office space demands are more complex. The demand focuses on space for medical and dental clinics; local
service oriented business, such as accounting, real estate, and insurance and headquarters and branch
corporate offices.

Central business districts Historically the central business district (CBD) has played a multiple role: as a
center of city and municipal government and also served as financial community and as an office center for
those dependent on financial and government agencies. Originally it was the main retail center, allowing for
the greatest amount of comparable shopping. With high pedestrian traffic, stores selling convenience goods
found a ready market. In small towns, the CBD was typically the regional marketing center and in larger
cities, the CBD had a high concentration of cultural, entertainment, and recreational facilities. Observations
of downtown Manila emphasize problems facing most metropolitan centers, such as:

1. Declining sales in the large conventional middle-class oriented stores was caused by a shift in new
office locations and shift in retailing to lower-income population.
2. Vacant office space was found in order buildings with no immediate reuse.
3. Continuing social problems and physical deterioration of buildings endangered downtown
revitalization of commercial and office buildings.
4. Unfulfilled housing needs were observed in the downtown areas.

While favorable economic and industrial forces favored revitalization downtown Manila, most communities
face live main factors that limit the market for the CBD.

1. Diversified property ownership- central business districts are subdivided into relatively small lots
and blocks to enable each proprietor to build for a particular purpose. Each property is constructed
without regard to neighboring lots; buildings follow the architectural preferences of the owner.
Today, divided ownerships of buildings that follow no common architectural plan makes it difficult to
assemble land for development.
2. Inadequate parking- the issue is not entirely related to the number of parking spaces. Inadequate
parking encompasses traffic, congestion, parking space inconvenient to main traffic generators and
parking that is expensive relative to the parking costs of shopping center. Considered with other
handicaps of the downtown area, this factor contribute to the further decline of the CBD.
3. The change in population- virtually every city has lost population in central areas over the last
generation. As middle and upper-income groups have abandoned, minority groups, and the
unemployed have increasingly concentrated in central space, further lowering the volume of retail
sales.
4. Poor land utilization- since downtown blocks were largely developed by single proprietors, the land
use pattern follows no integrated planning scheme. While main street frontages are intensively
used, the center block and secondary streets are often poorly utilized.
5. Change in downtown functions- the automobile with its insatiable demands for space and access,
has led banks and financial institutions to considering abandoning CBD for sub-urban drive-in
facilities. Professional offices have moved to sub-urban office parks, and with the transfer of
department stores and shopping centers to the suburbs, less pedestrian traffics has the lowered
demand for retail space and decreased the number of costumers for remaining businesses. Thus, the
downtown has lost some of its attraction as a financial center as an office center, and as shopping
center. Today it is very clear that the downtown is not serving the same functions as it did before.

3.2 Market-Driven Strategy: A Practical Technique in Project Market Consulting

An important approach to gain competitive advantage in real estate marketing and distressed property
management is a continuous process in analyzing and strategically responding to the changing

41
environmental opportunities and threats. To do this, consultants must develop skills in effective strategic
analysis, planning, implementation, and control.

Successful real estate business strategies in general points to the importance of market-based strategies, to
clearly study the current real estate market and how it is likely to change. A market-driven orientation is the
basis for deciding how, when and where to compete.

Market-Driven Strategy and Performance

The market-driven approach is customer oriented in understanding the relationships between strategy and
performance, and stresses the ethical marketing behavior. A few important characteristics of market driven
strategy are:

1. The customer orientation- market driven strategy places the customer at the center of planning in
the organization (customer orientation), where the strategy decisions start with the market and the
objective matching of company capabilities with customers who expect value in what the company
offers.

The traditional approach in the competition is changing. Market-driven companies are increasingly
partnering to deliver more customer value by combining the strengths of two or more organizations.
For example, a developer’s notable success in the residential market may be partly achieved by
partnering with the marketing network of Realtors and brokers in the marketing and the
documentation of its residential inventory.

The real estate market is becoming more segmented and interrelated in some business aspects,
creating new opportunities and challenges for companies developing market-driven strategies.
Moreover, the interlinked product markets are experiencing rapid changes. For example, markets for
properties, construction materials and home decors, and realty services, are interlinked by digital
technology or information technology.

Strong organizational performance and partnering is essential to survival. Weak performers will be
acquired by their competitors or pursue other avenues to exit from the marketplace. Some
communication companies failure to recognize changes in telecommunications had a drastic impact
on these old companies. An encyclopedia publisher experienced similar problems by discounting the
potential impact of CD-ROM technology on the reference book market.

2. Strategy and Performance- there is persuasive evidence from business practice that superior
strategies lead to superior performance, regardless of the attractiveness of the business
environment. High performance is more difficult to achieve in a demanding environment but
organizations with sound strategies perform well in the market.

Environment clearly affects performance but companies with effective strategies are competitive
and perform better. For example, Ayala Land and a few others have impressive performance even
though many known developers report major losses.

3. Strategy and Competitive Advantage- competitive advantage results from offering superior real
estate value to consumers through lower prices for equivalent values and/or unique amenities and
benefits that more than offset a higher price. Competitive advantage often occurs within specific
segments rather than covering an entire product market. For example, a building material supplier
may quickly obtain a position in the market by targeting selected institutional buyers and sell via e-
commerce at competitive prices, offering money back guarantee and warranty, and guaranteed 24

42
 hour on-site service. These service features will give an important competitive advantage with small
and medium-size buyers. Other e-commerce marketers may not offer comparable services.

Reducing the times necessary to develop new and customized designs, enter new markets, keep
products in inventory, and sell through specialized networks offer a powerful competitive
advantage. Speed as an element of strategy is important because:

1. Changing environment imposes pressures to move products quickly in the marketplace.

2. Speed allows the companies to more quickly obtain profits from new products.
3. Competitive threats can be avoided or reduced by doing things faster.

Time reduction requires analysis of the activities that make up a process like new development and
construction systems. The objective is to eliminate unnecessary activities and to reduce the time required
to perform essential activities. For example, a developer substantially cut development time for plans and
constructions designs by eliminating paper drawings and testing by use of a computer-aided design process.
A fresh plan/garden soil retailer moves from growers to projects/clients in the less than three days
compared to nine or more days via conventional plant distribution. The company receives orders by phone
from catalog displays and the order is transmitted to t7he grower and picked up the next day by express
delivery.

Marketing Strategy (in general)

The four step process of designing and managing a marketing strategy are:

1. Situation analysis considers market and competitor analysis, market segmentation, and continuous
learning about markets.
2. Designing a marketing strategy entails customer targeting and positioning strategies, marketing
relationships strategies, and planning for new products.
3. Marketing program development (product/service, distribution, price, and promotion strategies are
designed and implemented to meet the needs of targeted buyers).
4. Strategy implementation and management look at organizational design and marketing strategy
implementation and control.

Marketing Situation Analysis

Marketing management needs the marketing situation analysis to guide the design of a new strategy or to
change an existing strategy. The situation analysis is conducted on a regular basis to guide strategy changes.

Analyzing Markets and Competitions Market needs to be defined so that the buyers and competition can be
analyzed. As an example, for a resident7ial market to exist, there must be income groups with particular
housing needs and wants and one or more house designs that can readily satisfy these needs. More
importantly, the buyers must be both willing and financially capable to purchase house design in a specific
location that satisfies their needs and wants.

In general, a product market consists of a specific product or service that can satisfy a set of needs and
wants for the people (or organization) willing and able to purchase the product. Analyzing product markets
and forecasting how they will change are vital information for marketing planning.

Decisions to enter new product markets are critical strategic marketing objectives to:

1. Identify and describe the buyers.

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 2. Understand their preferences for products.
3. Estimate the size and rate of growth of the market and,
4. Find out which companies and product are competing in the market.

Evaluation of competitors strategies strengths, limitations and plans are also a key aspect of the situation
analysis. Analysis includes evaluating each key competitor, highlighting the competitions important strengths
and weaknesses and what the competition is likely to do in the future.

Market Segmentation- defines the nature and diversity of buyers needs and wants in a market and further
classified in significant terms so that the organization can focus its business competencies on the
requirements of one or more specifics groups of effective demand. Each segment includes buyers with
similar needs and wants for the product category of interest to management, the reasons that they buy or
use certain products, and their preferences. Segments for business product markets may be formed
according to the type of industry, the uses for the product, frequency of the product purchase and various
other factors.

Designing Market Strategy

The situation analysis identifies market opportunities, defines market segments, evaluates competition, and
assesses the organization strengths and weaknesses, all needed in designing marketing strategy consisting
of:

1. Market targeting and positioning analysis

2. Building marketing relationships and
3. Developing and introducing new products

Market targeting and positioning- market targeting determines the people for organizations that
management decides to pursue with the marketing program. The targets typically consist of one or more
market segments.

The targeting decision sets the stage for setting objectives and developing the positioning strategy. The
options range from targeting most of the segments to targeting one or few segments in a product market,
considering the markets maturity, the diversity of the buyer’s needs and preferences, the firms sizes
compared to the competition, corporate resources and priorities, sales potential and financial projections.

Market positioning- seeks to place the product in the eyes and mind of the buyer and distinguish the
company, the product, or brand from the competition. This strategy also called the marketing mix, is t7he
combination of product, channel of distribution, price and promotion strategies a firm uses to position itself
against its key competitors in meeting the needs and wants of the target market.

Market Relationship Strategies- are intended to create high levels of customers satisfaction cope with a
rapidly changing business environment through partnering. Partners may include end users customer,
marketing channel members, suppliers, competitor alliances and internal teams.

Forging relationships with suppliers, channel of distribution members, and sometimes competitors help to
provide competitive advantages and superior customer value.

New Product Strategies- are needed to consider replace old products due declining sales and profits.
Developing and positioning new market entries require closed coordination of functions to satisfy customer
requirements and produce high quality products at competitive prices. New product decisions include

44
finding and evaluating ideas, selecting the most promising for development, designing marketing programs,
market testing the products and introducing them to the market.

Development of Marketing Program

Marketing targeting and positioning strategies for new and existing products sets guidelines for the choice of
strategies for the marketing mix components (product, distribution, price and promotion strategies) to form
the positioning strategy selected for each market target. The objective is to achieve favorable positioning
while allocating financial, human and production resources to markets, customers, and products as
efficiently as possible.

Product/Service Strategy- needs the following information on current and anticipated performance of the
products/services to guide product strategy decisions:

1. Consumer evaluation of the company’s products, particularly their strengths and weaknesses vis-à-
vis competition. (i.e. product positioning by market segment information).
2. Objective information on actual and anticipated product performance on relevant criteria such as
sales, profits, and markets shares.

Product Strategy includes:

1. Developing plans for new products.

2. Managing existing products and,
3. Deciding what actions to take on problem products (i.e. improve product performance, lower cost,
and reposition).

Distribution Strategy decision includes:

1. The type of channel organization to use

2. The intensely of distribution appropriate for the product of service

Market target buyers may be contacted on a direct basis using the firms sales force or instead through s
distribution channel of marketing intermediaries (i.e. wholesalers, retailers, or dealers). Distribution
channels are often used in linking producers with end user household and business markets.

Price Strategy involves choosing the role of prices in the positioning strategy, including the desired
positioning of the [product or brand as well as the margins necessary to satisfy and motivate distribution
channel participants. Customer reaction to alternative prices, the cost of the product, the prices of the
competition and the various legal and ethical factors establish management flexibility in setting prices.

Implementing and Managing a Marketing Strategy

The final stage of a marketing strategy considers the design or modification of the marketing organization
and implementation and control of the strategy. Selecting the customers to target and the positioning
strategy for each target moves marketing strategy development to implementation shown Exhibit 1.

The Marketing Organization design matches people and work responsibilities in a way that is best for
accomplishing t7he firm’s marketing strategy. Deciding how to assemble people into organizational units and
assigning responsibility to the various mix components that make up marketing strategy are important
influences on marketing performance. Restricting and reengineering lead to numerous changes in the
structure of the marketing units.

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Implementing and Assessing Marketing Strategy consists of 1 preparing the marketing plan and budget, 2
implementing the plan, 3 managing and assessing the strategy on an ongoing basis.

The typical marketing plan shows the details concerning targeting, positioning, and marketing mix activities
indicates what is going to happen during the implementing period, which is responsible, how it will cost and
expected results (i.e. ]sales forecasts).

Several factors contribute to implementation effectiveness, including the skills of the people involved,
organizational design, incentives and the effectiveness of communication within the organization and
externally.

Marketing strategy is an ongoing process of making decisions, implementing them and gauging their
effectiveness over time. In terms of its time requirements, evaluation is far more demanding than planning.
Evaluation and control are concerned with monitoring performance and, when necessary, altering plans to
keep performance on track. Evaluation also includes looking for new opportunities and potential threats in
the future. It is the connecting link in the strategic marketing planning process of Exhibit 1.

Preparing the Marketing Plan

The market target serves as the planning unit. The marketing plan spells out the marketing strategy. Plans
vary widely in scope and detail, but all plans need to be based on analysis of the product market and
segments, industry and competitive structure, and the organization’s competitive advantage.

An outline for a typical plan is shown in Exhibit 2, with the following brief discussion of the major parts of the
outline, highlighting the nature and scope of the planning process.

The Situation Summary describes the market and its important characteristics, size estimates, and growth
projections. Market segmentation analysis indicates the segments to be targeted and their relative
importance. The competitor analysis indicated the key competitions (actual and potential), their strengths
and weaknesses, probable future actions, and the organizations competitive advantages in each segment of
interest. The situation summary is brief supported by information placed in an appendix or separate analysis.

Description of each Market Target includes size, growth rate, end users characteristics, positioning strategy
guidelines, and other available information useful in planning and implementation. When two or more
targets involved, it is important to assign priorities to aid in resource allocation.

Objectives for the Market Targets describes what the marketing strategy is expected to accomplish
(objectives) during the planning period for each target market in terms of financial, market position and
customer satisfactions targets. Objectives are also usually included for each marketing mix component.

Marketing Program Positioning Strategy statement indicates how management wants the targeted
customers and prospects to perceive brand. Specific strategies for product, distribution, price, and
promotion are explained in this part of the plan, indicative actions to be taken, responsibilities, time
schedules, and other implementation information.

Forecasting and Budgeting includes forecasting revenues and profits and cost estimates necessary to
implement the marketing plan. The people responsible for market target, product, geographic, area or the
other units may prepare the forecast. Comparative data on sales, profits, and expenses for prior years are
useful to link the plan previous results.

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 3.3 Highest and Best Use Analysis

An understanding of market behavior is essential to the concept of HBU. Market forces create market value
so the interaction between market forces and HBU is of crucial importance. Therefore, HBU is a market
driven concept. HBU analysis is typically provided by consultants. However, the nature of the engagement
sets limits on the extent of HBU analysis to be undertaken, and the characteristics of the property limit the
number of the alternative uses to be considered.

Definition

Highest and best use may be defined as the reasonably probable and legal use of vacant land or an
improved property, which is physically possible, appropriately supported, financially feasible, and that
results the highest value. The HBU of a specific parcel of land is not determined through subjective analysis
by the property owner, the developer or the consultant, but by the competitive forces within the market
where the property is located. Therefore, HBU is an economic study of market forces focused on the subject
property. The benefit a real estate development produces for a community or the amenity contribution by a
project (like a pubic waiting shed along the city road) is not considered in the HBU analysis; HBU is driven by
economic considerations and market forces, not by t7he public interest.

HBU Compared to Market Analysis and Feasibility Analysis

Market analysis- purpose is to identify demand for alternative uses, through supply and demand analysis to
forecast absorption rate and probable rents for specific uses considered.

Feasibility analysis- is to determine respective values based on criterion variables (i.e. residual land value,
rate of return, capitalized value of overall property), through calculation of NOI/cash flows and selection of
appropriate cap r6ate/discount rate to determine property value based on criterion variables for specific
uses considered.

HBU analysis- purpose is to determine the use resulting in the maximum value through specifications in
terms of use, timing and market participants (i.e. user of the property, equity investor and debt investor).

The three analyses are interrelated. However, feasibility analysis may involve data and considerations that
are not directly related to HBU determinations. Such analysis may be more detailed, have different focus,
and/or require additional research. Generally, the feasibility of developing real estate under a variety of
alternative uses is studied. The use that maximizes value represents the HBU.

HBU of Land as though Vacant vs. HBU of Property as Improved

The consultant should distinguish between HBU as though vacant and HBU as improved in the analysis. The
consulting report should clearly identify, explain and justify the purpose and conclusion for each type of use.

HBU of Land as Though Vacant there are three reasons to identify the HBU of Land as though vacant in
valuation: to estimate a separate land value: to identify comparable sales of vacant land: and to identify
external obsolescence.

The value of land is generally estimated as though vacant. When land is already vacant, the reasoning is
obvious: value the land as it exists. When land is not vacant, however, its value depends on how it can be
utilized. Therefore, the HBU of land as though vacant must be considered in relation to its existing use and
all potential uses.

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Land value can be based on potential, rather than actual use. Example, consider a valuable commercial site
in an excellent location that is currently improved with a service station that is free of any negative
surroundings. An investor who wants to build a high rise mixed-use building on the site may pay a price for
the property that includes no value, or even negative value, for the existing improvements. The potential
use, not the existing use, usually governs the price that will be paid.

HBU of Property as Improved The HBU of property as improved is analyzed for two reasons:

1. To identify the property use that can be expected to reproduce the highest overall return for each
peso of capital invested. This is important to informed buyers who are economically motivated.
Example, a property is currently being used as rental apartments. A buyer would want to know if this
use will continue to produce maximum benefits. If not, would the rate of return be increased by
converting it to an apartment hotel? The value of the property will differ under these two use
assumptions.
2. To estimate the HBU of the property as improved to help identify comparable properties. Both the
HBU of land as vacant and as improved should be the same or similar for each comparable property
for the subject property. Example, it may be inappropriate to use a comparable property that has a
HBU as an office building in considering a property that has a HBU as hotel.

Example: HBU of Land as though Vacant

Single-Family Residence is in an area zoned for detached, single-family home, some of which have already
been built. The first HBU question is whether the site should be develop or left vacant. Since the residual
value of the site as though residentially improve is positive, the HBU of the site as vacant is to develop it.

The second HBU question is what type of residence to construct on the site. The builder has narrowed down
the development alternatives to two types of houses, both of which are compatible with other houses in the
neighborhood. Use 1 call for the construction of large house with estimated market value of P250,000,
including the lot value. Use 2 calls for the construction of a more model house which would be worth
approximately P200,000 with the lot. Similar sites in the area have been selling to builders for approximately
P32,000 to P33,000. The estimated costs of constructing the t6wo houses and their respective value
estimates can be used to identify t7he HBU of the land. Below are the calculations:

Use 1 Use 2
Market Value P250,000 P200,000
Cost to Construct New -187,000 -150,000
Builder’s fee -30,000 -24,000
Land value P33,000 P26,000

The answer to the HBU question as to which improvement should be build is use, the use that results in the
higher residence land value. Similar sites can be expected to sell for about P32,000 to P33,000. Thus, if
P33,000 was paid for the lot and the smaller house was built, the builder would incur financial loss.

Example: HBU of Property as Improved

Capital expenditure Required a warehouse property can be rented for P175,000 total net to the owners.
However, the owners are considering converting some of the warehouse space into office space and
increasing the rent. The conversion would cost approximately P125,000 and would probably add to the
market value of the property, which is currently P600,000. An appraisal estimates that with the new office
space, the annual rent could be increased to P185,000, even though the amount of the warehouse space
would be reduced. The calculations used for HBU analysis are shown below:

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 w/house use only w/house with office
NOI P175,000 P185,000
Overall cap rate 15% 15.5%
Capitalized NOI P1,167,000 P1,194,000
Conversion cost 0 -350,000
Property value P1,176,000 P844,000

Conclusion: The warehouse without offices is the HBU of the property as improved.

Criteria in HBU Analysis

The HBU of both land as though vacant and property as improved must meet four criteria. The HBU must be
(1) legally permissible, (2) physically possible, (3) financially feasible, and (maximally productive, often
considered sequentially). The tests of legal permissibility and physical possibility must be applied before the
remaining tests of financial feasibility and maximal productivity. Although the criteria are considered
sequentially, it does not matter whether legal permissibility or physical possibility is addressed first, provided
both are considered prior to the test of financial feasibility. Many analysis view the HBU analysis as a
process of elimination. The test of legal permissibility is often applied first because it eliminates most
alternative uses and does not require a costly engineering study. It should be noted that the four criteria are
interactive and may be considered in concert. Matrix analysis can be used to plot their interaction.

3.4 Location Analysis is Real Estate Study

Location analysis is defined as thorough study of location in terms of a specific use, environment, time and
anticipated pattern of change. The specific use, in turn, is supported by the highest and best use analysis,
which is defined as a thorough study of the reasonable and probable use that results in the highest present
value of the land after considering all legally permissible, physically possible and economically feasible use.

Location and site are not synonyms. Location in real estate is defines “as economic characteristics of real
estate composed of immobility, constant change, dependence and elements of special distribution. Location
is an economic concept even though a particular location (a site) may be described in physical and legal
terms.” Site is defined as “a parcel of land which is improved to the extent that it is ready for use for the
purpose for which it is intended.”

Selection of the Optimum Site

The optimum site for one enterprise may be totally unworkable for another. The site is selected on the basis
of its desirability for the individual enterprise. Agglomerations of similar enterprises create economies as
distances between suppliers of material, products, and services are reduced.

The objective of the location analysis is to determine whether the client’s specific project or program can
be profitable in an area and on a specific site. Sites are compared on the basis of a matrix of details,
including physical, geographic, political, economic, and even emotional elements.

The optimum site should be selected on the basis of the best set of present and perceived future measures
of these multiple influences. The consultant will usually base his location recommendations on his analysis
of factors such as:

1. Physical characteristics
2. Utility features

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 3. Zoning features
4. Economic factors

The criteria or standards differ each site selection process for the specific types of use such as office, retail,
industrial, and other special purpose real estate use so that the location for the site may have either a
significant or nominal impact on the cost of the enterprise.

Regional Analysis

Since investment in real estate is made long before sales begin, sustained effective purchasing power in the
market is important, particularly at the regional level because many factors that will ultimately influence the
success of an enterprise are determined by regional economic well-being. Thus, it is necessary to analyze
the following components of a region:

1. Employment level employment

2. Economic change
3. Economic boundaries
4. Population changes
5. Census data demography
6. Transportation
7. Public services
8. Zoning

Special Location Objectives

Although the analysis that the consultants performs is usually broad in scope, the client may only need
answers to limited and direct questions. Not all location analysis require the study of a region or even a
broad neighborhood.

Market Identification

The delineation of a market is a process that identifies a location for a use or users and the area that the use
or uses will serve. Considerable study is needed in order to identify the market that the client is trying to
serve.

Surveys, interviews and questionnaires may be used to measure the pricing, physical features, amenities,
and services that are a part of the unsatisfied market potential in the area.

Sophistication of the competition should be considered in the analysis, in the midst of keen competition, one
would expect rents to be increasing rapidly with low vacancies when strong demand is present.

Market Penetration

Since real estate development is a slow process, it is rare for one enterprise to scoop the market. While
planning is proceeding, the potential for completing development should be considered.

The prime ingredient of a successful real estate operation is location. In this context, the term location
includes physical as well as economic attributes. Location is the one element in a real estate development
that cannot be duplicated exactly by competition.

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Where public water service is not available, underground water level for water sourcing must be established
preferably at the time when the land is being considered.

Utilities for public service a qualified engineer must check the availability and cost of sufficient water and
sewer service.

Building Design

Consultants can provide valuable input in the development and the preparation of preliminary architectural
designs. The Right Building? Highest and best use is an overused phrase deeply embedded in the vocabulary
of the real estate analyst. However, it is truly the hallmark in the study of a proposed development.

It is the consultant’s function to carefully study various development plans and finally identify the type of
project that holds the greatest prospects in terms of the client’s investment objectives. The real estate
industry even in good times, is replete with stories of project failures and financial disasters.

Business prudence calls for competent consultant from the start of the basic design concept to establish
certain basic design features. Architects specializing in particular types of building may have the ability to
design an attractive, well-functioning building that will receive good market response.

Financial Feasibility

Financial feasibility study involves the following major studies and analyses:

1. Analysis of demand and supply situation

2. Cost study
3. Income and expense projection
4. Evaluation of the cost-benefit relationship

Analysis of demand and supply situation- the methods applied and the statistical used in forming an opinion
concerning the market outlook for a proposed development will depend on the type of property. Any
forecast is affected by unforeseeable economic conditions and especially the financial market situations.

The task of projecting the effective demand for most other types of real estate is extremely difficult, as the
decision of the potential consumer is frequently affected by extraneous conditions that cannot be foreseen
at the time the analysis is made.

In connection with office buildings, it is not feasible to quantity future demand by segmenting the market
and pinpointing how much of the demand for space will be generated by certain types of users, such as
lawyers, accountants and financial institutions.

Another factor that can adversely affect absorption is emergence of outlying competitive developments that
siphon off the “backroom” activities of large corporate and financial tenants into sub-urban location with
substantially lower occupancy costs, communication systems. Series absorption projections are inexact by
their very nature, it is advisable to make a series of assumption illustrating a range of possibilities and
thereby highlights the risk element connected with the project.

Cost Study – in the cost analysis of the project, the principal cost classification are:

1. Direct Cost- these are the cost of construction (labor, material, overhead, and contractor’s profit),
including site work, parking and tenant improvements.

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 2. Indirect Cost- these costs can be broken down into the following two major categories:
a. Construction- related
b. Development- related
3. Developer’s profit- although not strictly a cost item, developer’s profit is customarily provided for in
a financial study.

Income and expense projection- Two basic method for evaluating the economics of proposed development
are available to the analysis.

Cash flow method- the starting point in this analysis is the time of completion of the building usually the
date the certificate of occupancy is issued. The study will typically cover a ten-year time frame requiring the
following inputs:

1. Related to income
2. Related to expenses
3. Related to investment characteristics
4. Related to other materials

Adjusted stabilized capital value analysis relates the total cost of the project to its economic value. It is
simplified in that the cash flow phase is limited to the rent-up period from the date of completion until a
stabilized occupancy level has been achieved.

Major Distinctions Between Sale and Rental Projects

Consulting takes on a different aspect when it is related to investment properties primarily for sale to owner-
occupants, such as single-family dwellings and commercial/residential condominium projects. The
consultant’s function is to conduct a comprehensive market survey to identify sources of demand and to
investigate the track record of competitive developments, including price trends and absorption.

Another real estate consulting pertains to the speculative builder of investment type properties such as
apartment building, shopping centers, office building, industrial facilities. Frequently, a developer will de-
emphasize the quality of construction in order to meet competitive rent level and to achieve a profit on
sale.

Development and Marketing

The investment feasibility analysis resulted in a positive outlook for the project indicating an area risk
acceptable to the developer, the real estate consultant may then be engaged to participate in the
development process. It may entail some or all of the following activities:

1. The consultant will participate in the selection of the architect and review preliminary and final
plans, outlines, and detailed specifications.
2. Following final approval of the project, a team will be organized.
3. Concurrently with these activities, loan negations will be under way.
4. Upon the approval of the plan and specification and confirmation of the funding arrangements,
construction documents will be prepared final construction schedule established.
5. Depending on the consultant’s experience, he may be involved in the supervision of construction.
6. In conjunction with real estate brokerage firm, the consultant will, the case of rental project,
develop a price schedule at which the units will be old, develop he standard from lease, and
establish rental rates, tenants allowances, and on overall leasing strategy.

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 7. Again, depending on the type of project, the consultant may be instrumental in choosing a property
management firm and may assist in the staffing of permanent building personnel and the
appointment service companies.

It is quite obvious that in order to render the entire spectrum of development-oriented consulting services.
A broad range of experience and capabilities is needed, typically requiring the services of an organization
rather than an individual.

3.7 Consulting In Property Management

Property management may be defined as the planning, coordinating and control of the physical and
administrative operations of a building such as residential, commercial or industrial, income or non-
income. Since all improved real estate must be managed, property management is a field of considerable
and significant activity.

The physical management of a property covers all the physical components of the building. The
administrative management covers the financial, accounting, budgeting, and reporting functions.

The Subject of Property Management Consulting

How does consulting fit into this management area? Obviously, the consulting works do not refer to the
routine activities undertaken by the company or individual responsible for the property management
function. Rather, the consultant service supplements or supports the property management function.
Consider the following situations:

1. A company tries to determine whether property management responsibilities should be handled by

an in-house staff or by an outside professional property manager.
2. An owner of an income producing property needs an evaluation of the property’s net income
performance with suggestions as to how the property could be more efficient in its net earning
capability.
3. An agent charged with the disposition of a property needs to determine its highest and best use.
4. A developer consider a leasing policy for a new building and require up to date analysis of market
condition and of the building plans and specifications to ensure that the building will perform
efficiently.
5. A building owner who had engaged the services of a property management company desires to
evaluate its management program and performance to see any improvement needed in relation to
his investment objectives.
6. A government-owned guaranty company considers completing a foreclosed partly built commercial
mail located on a prime site and requires a review of the property use as originally conceived when
the original owner obtained a bank for the project.

There are great opportunities for consulting in property management, with the above list offering just a few
examples of the possibilities. Let us review the types of consulting activities that would be involved in each
of these situations.

3.5 PROJECT FINANCING: A flexible financing option for Real Estate Development and Marketing

Project financing, a recent innovation in long term debt financing, permits a project sponsor or proponent to
tie a debt issue to a specific asset. In long term debt financing, it involves complicated provisions and can
take many forms. It can be used to finance big ticket projects like infrastructures and big real estate
developments. Most often, a separate legal entity is formed to operate the project, putting up the required

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equity capital, while the remainder of the financing is furnished by lenders and lessors, or property owners
as in the case of real estate development. In one type of project financing, each sponsor guarantees its share
of the project’s debt obligations. Here the creditors would also consider the creditworthiness of the sponsor
in addition to the project’s own prospects.

Project financing offers several potential benefits over conventional debt financing such as the following:

1. Project financing usually restricts the cash flows, which means that the lenders rather than the
managers can decide whether to reinvest the excess cash flows or to use them to reduce the loan
balance by more than the minimum required thus, reduces the lender’s risk.
2. Advantages for barrowers are first, because risks to the lenders are reduced, the interest rate built
into a project financing deal may be relatively low, second since suppliers of project financing have
no recourse against the project proponent’s other assets and cash flows, project financing insulate
the firm’s other assets from risks associated with the project being financed.
3. Project financing increases the number and type of investment opportunities hence, they make
capital markets “more complete.” At the same time project financing reduces the costs to investors
of obtaining and monitoring the barrower’s operations.
4. Project financing permits firms whose earnings are below the minimum requirements specified in
their existing bond indentures to obtain additional debt financing. In such support additional debt
even though the firm’s existing assets would not.
5. Project financing permits managers to reveal proprietary information to a smaller group of investors
hence, project financings increase the ability of a firm to maintain confidentiality.
6. Project financing can improve incentives for key managers by enabling them to take direct
ownership stakes in the operations under their control. By establishing separate projects, companies
can provide incentives that are much more directly based upon individual performance than is
typically possible with a large corporation.

In practice, it would be very cumbersome to actually calculate the future total cash flows to the project
proponent’s firm with and without the project. The consultant should first need operating information on
income and expenses during the last few years, and a projects operating budget for the coming year or
years.

The consultant’s report would include a management plan setting forth the stages of implementation and
describing and documenting the steps leading to the completion and occupancy of the new facility.

4. New Building Construction

Our next property management consulting opportunity centers on a developer who is proposing the
development of a new building and needs considerable assistance in a number of areas. First, he
requires a close liaison with his architects and engineers in the creation of the plans and
specifications for the project.

Optimum Building Design the consultant’s input should relate, not only to the physical components of the
building but also to such areas as the external module of the building that is the distance between window
mullions on the perimeter of the building which affects the flexibility to the interior space layout.

Setting Lease Terms in creating a leasing for a new building the counselor will be working with the
developer, his mortgage lender, his attorney and representatives of the entity responsible for leasing the
space in the new project. Were we will determine based on the market analysis, the rental rate per square
foot to be offered. This rate may be uniform throughout the building or it may vary with the available views,
the floor height and location or the quantity of space to be leased.

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The shorter the lease contract is better: twenty page contract should not spoil a marketing program when a
five-page contract is sufficient. Less sophisticated tenants react negatively to a long legalistic contract.

5. Assistance In Loan Negotiations

Retaining a consultant early in the mortgage lending process improves the credibility of borrowers in
loan negotiations. Since consultants have a wealth of experience and intimate knowledge of the
marketplace, lenders generally view their findings and recommendations as significant input and
improvement the overall development plans.

6. Evaluating the Property Management Plan

Another important area of property management consulting is the evaluation of the performance of
a property management contractor in meeting an investor client’s needs. A client retains a
consultant to determine the agent’s level of performance and to recommend ways for improving the
client’s return on investment.
3.8 Consulting In Lease-Or-Buy decisions

Supplementary measures are frequently helpful in the decision process, but these may be incomplete
descriptions of economic consequences and as a rule should not supplant the analysis of least cost at the
opportunity rate.

THE USE OF PROPERTY, plant or equipment can be obtained by buying, renting or leasing. Most of the
different benefits and costs of each alternative can be evaluated in economic terms. However, since on-
economic factors may bear heavily on the decision, some comments on such considerations must be made.

NON-ECONOMIC sometimes there is no alternative to leasing. Philippine laws allow land lease for long
periods of time, under terms that have all the characteristics of ownership but do not allow transfer of title.
The lessee may develop the land, erect buildings, sublease, and do other uses substantially equivalent to
ownership.

Some users want convenience in acquisition and disposals and pay a premium to the owner for these
services. A rental contract offers flexibility in planning for the time and cost of replacement and additions
that is less true of purchase.

Economic considerations The lease or rental fee substantially represents the profit and financing cost of the
lessor. Unless the lessor’s financing costs and profitability standards or demands are lower than the lessees’,
it will be unusual for a lease to demonstrate an economic advantage. Some situations, however consistently
favor a lease.

A lease is useful if the user needs only a part of property for example, office space in a building or such rights
as or air space or needs an asset for less than useful life.

The periodic lease payment is generally deductible for tax purposes. If alternatively, the user barrowed the
funds directly to finance a project, only the interest portion of the installment would be tax deductible, not
the principal payment.

Finally, the lessor may be in a better position to assume ownership risks because he pools them. A single
computer user who has the latest in computer technology for example, assumes the risk of obsolescence
when we bought.

When a lease appears to have an economic advantage, an evaluation is made to measure the advantage.

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Difference Between Renting and Leasing

Some authors offer distinction between the terms “renting” and “leasing” although many continue to use
the terms interchangeably. When a user buys an asset he makes a long-term investment decision and makes
an initial outlay in the expectation that the asset will provide a stream of earnings in the form of either
increased profits or reduced costs.

In a rental agreement, the user pays rent only as long as he wants to use the property but it’s not obliged to
make payments beyond a short or nominal period, say three months.

A lease is like a rental agreement but for longer period, long enough for the owner to recover, effectively his
purchase price and financing costs, which generally means for a significant part of the life of the asset.

A user who buys then makes an investment decision: he assumes ownership risks and makes an initial
capital outlay in order to increase profits or reduce costs. A user who rents makes an expense decision: he
avoids ownerships risks and incurs a series of expenses in order to increase profits or reduce costs. A user
who leases makes a combination of investment and financing decision to make a series of payments that is
the same as a combination of buy-and-borrow.

In some cases it is difficult to distinguish a particular agreement as either a rental or a lease. To lease- is that
your final answer? Or to buy?

But few more difficult to distinguish a particular questions confront decision makers. There are three basic
and major considerations that have important in any lease or buy decision-making case, such as the
following items:

Company ownership
The financial strength of the company
The basic objectives of ownership

Company ownership in the past companies usually owned rather than leased real estate facilities. This was
true when sale-leaseback transaction evolved due to changes in tax laws and financing possibilities that
emerged from the recessionary years.

Type of Ownership real estate today is no longer viewed primarily as “housing” corporate operations. Real
estate economics have recognized that real estate serves as an excellent hedge against inflation and in time,
become a prime income producing asset.

Distribution of Ownership in some instances, the distribution of corporate influences real estate planning
and management. Corporations with many shareholders usually have the parent company or its real estate
subsidiary owns the real estate assets. An in-house property manager takes charge of real estate matters. In
corporations with relatively few stockholders, partnership in real estate often exists.

The number of the stockholders influences ownership decisions. For example, with 50 or more shareholders,
accounting and logistics problems make it difficult to transfer real estate ownerships to a partnership and
therefore, a less practical approach.

In summary, in tightly held corporation real estate ownership rather than leasing provides an additional
economic advantage. Real estate has been used as a vehicle for the transfer of both property and income to
succeeding generations.

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FINANCIAL POSITION OF COMPANY

Asset Position the decision to lease or buy is usually dictated by the financial position of the company
sometimes the extensive real estate holdings of major corporations can create an imbalance and induce
financial trouble when management dreams beyond the organization’s financial resources. Whims of
management have been known to override sound corporate planning.

Market conditions very often govern lease or buy decisions as they impact a company’s asset position. In the
early 90s, the demand for space exceeded the supply and a strong seller’s market existed.

The asset position of a company owning real estate is weakened if the real estate is a special purpose
building.

Liability Position where real estate is company held, the acquisition of land and buildings can be funded out
of cash flow from the depreciation or purchased using the credit of firm with periodic payment from
corporate earnings. Thus, real estate is simply a means for housing an enterprise tied to the manufacture of
products and the profits generated.

Net Worth Position corporate lease or buy decision is strongly influenced by the return on capital. This issue
is less important for a major corporation than for a smaller company with considerable working capital
requirements. Smaller companies usually leases real estate particularly under sale-leaseback arrangement
since this reduces working capital needs.

The Value of Space where long-term lease of fixed market tent exists, the lessee holds a very valuable
leasehold interest which in turn the lessee could sublease for profit or sell his interest in the marketplace.
Thus, real estate becomes an intangible asset in the net worth position of such lessee corporations.

Return on Capital a lease or buy decision is dictated primarily by t7he issue of return on capital. Major
growths companies often prefer to lease rather than own certain facilities as the return on their own capital
against their net worth position substantially exceeds the effective rental cost of these facilities.

Certain ratio exists as to the typical percentage of total sales that a firm can afford to pay for rent. Rent may
be measured in the form of either lease payment or debt service.

The advantages and disadvantages of leasing may be summarized as follows:

Advantages of leasing

Flexibility The lessee can move out at the end of the lease: the landlord has the
vacancy problem
Capital Leasing does not require long-term capital investment beyond the
tenant’s improvements
Credit Major credit strength and being the first tenant in anew property can
result in a below market rent
Freedom of choice A policy of short or intermediate lease terms can allow movement
from location to location and the consolidation of operations

Disadvantages of Leasing

Control of decisions Leasing results in a landlord-tenant relationship that can sometimes be divisive;
this can limit internal space alterations or renovations

57
Loss of advantages of
ownership
Loss of expansion option
Cost
These advantages can include equity buildup through mortgage financing,
depreciation and the tax benefits of owning real estate
Owned facilities can easily be expanded, particularly if excess land is involved
On an after-tax net present value basis, ownership is less expensive than
leasing

Client Objectives the objectives of clients vary, depending on whether they are in an expansion mode or a
contraction mode.

Expansion Stage in the expansion mode, the first step in judging space needs is to project growth in sales
and space requirements over a forecast time period, which can be as much as ten years. Management’s
sales projections are converted to number of people required. This in turn, is measured on a per employees
space need basis. There are standard ratios of space requirements for various categories of employees
(office employees, service employees, industrial employees etc.) the skills of employees are important in
scheduling space needs.

Basic employees cost is another consideration. Some corporations operate in several cities.

Likewise, corporate policy can override everything else in the choice of a company’s real estate site.

All of the above factors [interface and become a study of options and alternatives that relate to the cost of
moving, renovating, converting, cost of money, and other costs of operation that overall corporate
objectives. From these costs develops a real estate strategy that can be adapted to short-term and long-term
purpose. In general, short-term objectives are handled by leasing. As objectives become longer term and
with costs being equal, the preference is to own.

3.9 Consulting in Distressed Property

Definition of distressed property

Distressed property may be particularly defined as the property that does not generate income or benefit
sufficient to support the investment objectives and the funds obtained to develop it. This definition refers
to the financial aspect, the common subject in distressed real property. However, properties may be in
various stages of development or distress. An existing fully tenanted, income producing may become
property distressed; a fully developed property and not producing sales income may be distressed; older
buildings developed property may be distressed. Quick or easy solutions should not be expected. However,
there are guidelines and assistance available for most distressed situations.

UNDERTAKING the turnaround of distressed properties is one of the most difficult but challenging
consulting engagements. Skills and long experience should enable the consultant to promptly put the
distressed property in a proper context. Creative and workable solutions for distressed properties are more
multi-faceted than those for most other problem areas are consulting. There are no standard solutions for
the variety of the clients and the types of property but the use of the Real Estate Consulting Process and the
analysis tools and techniques may be applied to distressed situations to understand the subtle differences
and create the best solutions for the problems.

When a property is in distress, the lender will take actions to protect his position. Often the lenders don’t
move the in-house capability to perform a turnaround program do that outside helps is sought, especially if
the property is outside the lender’s coverage area.

Project Analysis

58
The project feasibility study prepared for the subject property in distress is a most important source for
information and data analysis. What went wrong can be shown by the PFS, and can help the consultant
decide at the outside how the project will be analyzed. Prompt decisions and careful analysis are necessary
in every case.

Inspection checklist the first step is to evaluate the profile and extent of a property’s distressed condition by
reviewing records, such as loan and lease contracts, financial data and other documents relevant to the
property and is default, foreclosure or involuntary acquisition. Any advertising, public relations or market in
information originally or currently being used should be studied for clues of the markets being pursued.

No single part of the analysis should become so important (or negative) that an objective perspective of the
distressed property cannot be maintained. Almost every property can eventually be bought back to useful
service. In the development of any property sensible reasons are used to bring the property back to market.
Often it takes only careful analysis to find a particular use that will make the property productive again.

Physical inspection the characteristic of the property and its basic engineering, structural and architectural
design must be often studied. While a property is falling into a distressed state, the owner defers
maintenance to pay other bills.

Roof inspection usually comes first in the exterior inspection to see whether the expansion joints were
properly installed and the flashing is properly attached and whether all ventilations, skylights, and
mechanical equipment have been properly installed. Exterior walls may show some signs s to the condition
of the roof depending on downspouts, flashing and firewalls.

Interior inspection of the mechanical components of the building includes the ventilation and air
conditioning for their condition, adequacy and fuel conservation. Rust on water lines, improper electric
wiring and block or misdirected ducting, and non-working air-con units are primary causes of problems.

Condition and load-bearing capacities of the floors as determined by wear patters, cracking, lifting,
deterioration of the flooring material and adequacy of column spacing.

Financial review and record check- determine what leases are in place with the owner’s standards lease
form, not with the tenants’ own forms. Standard form makes the analysis easier than when the owner has
permitted tenants’ forms to be used, allowing the owner ton giving to others. A tenant who learns that
others have favorable lease terms will want them too. Collection problems exacerbate other financial
problems.

The level of maintenance and the notices regarding tenant policy provide indications of the quality of a
property management experiences.

Analysis of budget versus the actual figures, mortgage loan amount and initial equity available, overrun cost
early in the project may indicate signs of project weaknesses that grew over time. Analysis of mortgage debt
repayment history is an area may reveal problems early.

Location and HBU analysis the precise predetermined and current use of the project office building,
housing, industrial, and shopping or mix use and project location can often tell at an early stage whether the
present use of the project is right for the location. Consider demographic studies, zoning requirements,
neighborhood attitudes and adaptability.

59
Tenant interviews will reveal property related problems and the perceived solutions to these problems. The
consultant should always be attuned to the tenants needs but should make no commitment.

Highest and best use analysis is t7he most sensitive factor why a property is distressed. Was the site and
location properly selected by the developer-owner in the first place? Will today’s use be appropriate for the
property in the future?

Tax effects on the project in most instances, newer properties in distressed situations have to be kept within
the bounds of existing financing and local tax structure. However, there are a number of advantageous local
and national tax programs that might be considered when making a decision about whether a distressed
property can be revamped into a profitable venture.

Value “as is” versus completed value this analysis is important for a project that is in an early stage of
development or has not been substantially completed. As a project draws closer to completion, the use and
reuse analysis become much more limited due to the structural improvement that have been made.

RECOMMENDATIONS when the analysis is completed, the important alternative actions that may be
included in the recommendations are:

Continue “as is” a properly conceived project which is going along an orderly process of development and
the solutions to the problems are somewhat easy to implement, it may be recommended that the project
takes its present cause “as is”.

Continue after redesigning or renovating with architectural and engineering assistance, simple or complex
solutions can improve the basic design of the project. Guided by the on-site inspection list described earlier,
a recommendation can be made to modify the design of the facility to such a degree that additional cost will
help ensure the complete and successful workout.

Sell partial or full interest it may be necessary to get the present owner out of the project and bring in
investors with new concepts and additional investments. Again, the financial determination from pro-forma
analysis will help show what needs to be done to rescue the project and perhaps the owner’s financial
health.

Modify marketing program problems usually occur because of the lack of tenants or insufficient sales. After
the location and HBU analysis, identification of the probable tenant mix or buyer’s market is most important.

Apply computer analysis the current information technology has developed computer programs with which
the real estate professional can create “what if” models for a project. If computer analysis was not done
previously, it should be now. The consultant should create a desired return on investment model employing
realistic time spans, properly estimated rent-up periods, and income expense that can go from the low and
to the high end of the spectrum.

Estimate the time for recovery the owner and the lender will want to know how long it will take to bring the
project turnaround. Because the difficulty of a distressed property situation, all concerned will want a quick
simple solution that may not be possible. However, it is necessary to estimate the realistic time for recovery.

RECOVERY PLAN

A recovery plan is the next service engagement that the consultant must present to the owner/lender of a
distressed property. Assuming that all reasonable assumptions have been made and that successful recovery

60
is deemed possible by the consultant and that the necessary outside experts, a plan for recovery can now be
drafted.

Retain or change management this recommendation is based on thorough knowledge of the physical
condition of the property and the current management’s performance and physical control over the
property. A lender may demand for a complete management change. Factors such as maintenance, rent
collection, and tenant’s relations will be studied in evaluating whether the present management has been
committed to make the property successful.

Institute management controls if new management is taking over, sufficient controls must be initiated. If
the present manager is retained, controls can be imposed for his own good and the benefits of the owner
and the lender. It is usually necessary to cut operating costs, manage exposures, assures prompt rent
collection, reduce vacancies and turnovers.
Restricting mortgage financing since lenders usually desire work-out, the consultant should ask for
adjustment in the present debt service and perhaps for a larger loan. Determining whether new capital in
the project is going to be “good money thrown after bad” must be carefully judged, but it is often preferable
for a lender to put more money into a viable project than to have it foreclosed.

Improve the maintenance program improving the physical condition of the property may be necessary due
to maintenance deferral problems. A turnaround may be accelerated by cleaning up small items and
upgrading amenities. Spending initially rather than just talking about future changes can improve tenant
morale and help to retain occupancy.

Redirect the marketing efforts when a project is determined to be ready for renewal and the physical and
economic problems have been addressed, the marketing program for the project may require some changes
before recovery is initiated.

Initiate a training program if the present management stays with the project, some changes will be
required. With the help of a consulting property manager or through the excess of common sense and good
business practices, the present management can often be retained in order to manage the property more
effectively. All books and records must be brought up-to-date.

Once workout plans have been decided, they must be put into effect promptly. The tenant turnover and
occupancy level must be monitored. Projections must be made as to the timing of new tenants and the
retention of old ones.

4.1 COMMERCIAL PROPERTY CONSULTING

Commercial properties are those where goods and services are sold. This discussion covers the classifications
of commercial property, the steps involved in selecting or analyzing commercial sites, how the consultant
assists in lease negotiation, and a case study that illustrates the consultant’s role in commercial property
consulting.

Classifications of Commercial Property

Neighborhood center typically has 10,000 to 12,000 square meters. Its anchor locator may be a drugstore
and a small food store which can be of the 7-11 type. Its trade community is typically being about
2,000 households. Its tenant center will provide goods and services that people want within easy reach. They
will go to the neighborhood center to pick up the laundry, to buy drugs, or to buy canned goods.

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Community center typically has 35,000 to 45,000 square meters. A food store and a drugstore will be the
anchors, but both will be large. In many ways, a community center often called a convenience center, is an
oversized neighborhood center. A community center probably needs a 5,000b household trade area. The
trade area will consist of several identifiable neighborhoods and will be the neighborhood shopping center
for the nearby household.

Regional center has about 90,000 square meters, but most regional centers have in excess of 150,000
square meters. The major anchor will be one or more department stores. The center needs 30,000
households. A regional center will often have a food store, drugstore, laundry and cleaners and the like in a
somewhat separate area on its perimeter. In other words, the regional center may have a community or
neighborhood center adjoining it.

Super-regional center has about more than 300,000 square meters. There will be about three major
department stores with about 30,000 square meters each.
The above definitions are intended to be general guidelines. Therefore, one should not be too concerned if a
parcel of real estate or a proposed used does not fit these definitions. The seat of a small rural community
may easily provide most of the retailing of the entire community. Thus, it is a regional shopping center even
though it may only have 15,000 sqm of retail space. The central business district in a city may lose its
department stores and become in effect, a huge neighborhood center for a daytime neighborhood. Small
trips commercial developments in order neighborhoods are neighborhood centers without parking.

Steps in Selecting a New Commercial Site

The objective there are many reasons for studying retail potential such as seeking a site for a given use, s use
for given site, tenants for a given building or combinations of these. The study tends to identify who lives in
the trade area and what and how much they can consume or purchase. In selecting a site for a particular
store, the necessary type of prospective consumes is known and the task is to identify them. If a particular
site has been selected this process is reversed. The problem in any event is to determine the number of
buyers and to forecast the purchasing power for certain goods or services.

The Local Economy an urban area will have people who are engaged in the production of goods and services
both for local consumption and for export. These goods do not have to be physical goods like shoes, milk or
vehicles. For instance, the goods sold by a beach front are recreation that is exportable by way of the boat
riders and scuba divers from outside the areas and spend money into the local economy. A bowling alley
sells r6ecreration that is consumed locally. A bank in large financial centers sells services that are essentially
for export, whereas a bank in small rural town sells primarily for local consumption.

The level of unemployment, the level of education, and the percentage of jobs in various classifications can
all assist in depicting the nature of local economy. There is hardly any substitute to experienced judgment in
this analysis. Perhaps the most important item to remember in analyzing economic conditions is that if they
are good they will eventually get bad and that if they are bad they will eventually get better. As to when and
to what extent such charges will occur may be partly answered by long experience.

Demographics much of what is studied in the local economy will be repeated in the study of a trade area.
The level, of unemployment, the types of employment, the literacy level, and household incomes will all help
to reveal the retail potential.

The analysis is more than just numbers. The consumer lifestyle and activities may be miles apart and yet the
household incomes of both types of consumer can be the same. Accurate trade area data may be generated
by going from door to door interviews.

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If a particular business succeeds, there will soon be competition. If there is vacant ground available,
somebody is going to develop it. Vacant or underdeveloped commercial ground represents sources of
potential competition.

New retail centers often go after the business of badly managed competitors. This strategy is fine, but those
competitors can turn around and recover their original trade. Generally speaking, a business has a higher
likelihood of succeeding when there is enough market for all.

Objective Recommendation to Client

An objective consultant informs the client what must be told, not what the client wants to hear. The essence
of the consultant’s professional advice is t7o present a well-founded qualitative and quantitative information
to support recommendations and also useful for the client to make decision. For example, objective
recommendations about a client’s plan may include:
1. Abandon the plan entirely
2. Consider the plan but not here
3. Consider the plan but not yet
4. Consider the plan now but somewhere else
5. Consider the plan here and now, but with revision
6. Consider the plan entirely, implement it

Lease Negotiations

There are some consistencies in tenant negotiations that are worth listing. Prospective tenants have several
standards remarks that they usually make. The list includes, but is not limited to the following:

1. I don’t like your center

2. I don’t like your location
3. I can’t afford rent
4. The rent is cheaper at better locations
5. I should not have to pay percentage rents
6. I am doing you a favor by considering four facility
7. I will provide traffic that will help your center
8. Business is terrible anyway, and I shouldn’t be considering another store

Note that in some cases one or all of the above statements may be true. As is the case in any negotiation, it
is best to know which if any, of them are true and which of them the prospective tenant knows to be true. If
there are cheaper and equal locations, you will have to cut the rent or do without the prospective tenant. If
the prospective tenant does not know about the alternatives, you will not have to make as many
concessions. If there are not cheaper and equal locations but the prospective tenant thinks there are, he
must be educated.

Tenant Selection getting a shopping center fully leased is in many cases easier than keeping it full. If the
consultant believes that the trade area is wrong for a tenant, the center or building is usually better off
without that tenant. A tenant that attracts no traffic fails in business, and leaves a vacancy that makes a
whole shopping center look bad. Avoid fads. Running shoes, tanning centers, and western clothes shops may
be short-lived. In short, avoid a building with short-lived tenants.

Percentage Leases the small specialized shops will usually pay higher percentages. The large stores are the
anchor t7enants and pay very low percentage rentals. If any percentage rentals may vary from 2 percent to

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15 percent and often may be in range of 5 percent to 10 percent localized research will provide a starting
point in retail counseling.

The base rent in most shopping centers does not usually make the center look too good economically. The
average (percentage gross of sales) collected above the base rent is often the factor that determines
whether center is viable. The percentage is a means for helping the income of the real estate rise in
inflationary times or when sales rise and a means for allowing the merchant some breathing room if sales
are less favorable. The percentage is not a means for the landlord to get in the tenants pockets.

Tenant Improvements the most typical tenant improvement agreement has the landlord providing
replacement for worn-out walls and the tenant spending for his own leasehold improvements. The landlord
must retain control over improvements; the quality and the type of interiors must conform to the image of
the center.

Most of the tenants may not have strong financial statements. However, some tenants are likely to sink
what they have into improvements; even though the actual amount may be small, the commitment is
substantial for such tenants. Family retails work hard to protect their investment, and they are often the
most productive tenants in a center.

CASE STUDY: Consulting for a Shopping Center

The case presented below is a hypothetical illustration of a consulting work. As with most consulting works,
the information available is imperfect, and some analysis is omitted, and perhaps other analysis is
unnecessary.

The property subject of consulting is a shopping center of about 250,000 sqm built in a prime location
roughly five years too early. The owner-client had been able to carry the years of losses, although something
is being done about it. At the time of consulting study, even though the center showed a positive cash flow,
for all practical purposes it had failed in investment objectives. However, it was financed at an interest rate
that was then acceptable. The center is on a ground leased with a fixed term that extended well into the
2000 and has no renewal options. There is excess land at the site. The consultant has these six major steps
and studies to make in this engagement:

1. To find out what is presently going on within the center- finding out what was going on was not
complicated, but was messy. It required roughly 100 working hours to produce the schedule of
tenants, of which part is shown in schedule 1. A large proportion of the tenants were paying no
common area charges and there were limitations on these charges for a number of a remainder. The
lease showed clear signs of deals having been made in a tenant’s market.

Getting all of the appropriate pieces of paper in the proper files took many of the hours spent. There
were instances of leases that were apparently signed by a national credit, but in fact the national
credit had been released by separate agreement. One of the retail anchors had an option on some
space that was leased as offices; this was about to cause a P200,000 annual declines in gross income,
completion of this compilation and lease review function permitted the consultant to go on the step
2.

2. To project the future income and expense of the center- it was appropriate to identify a sub area
within the total trade area. Some interviewing in the mall, a sample of the checking accounts used at
one of the anchors, and a consumer report that a local newspaper published at that time all
suggested that this smaller trade area was of a crucial importance to the center. This comparatively
small trade was relatively more affluent than the total trade area (see schedule 2 and schedule 3).

64
 However, the household sizes of the two areas were not significantly different. The single family
residences tended to be the second or third home purchased by the families, homeowner turnover
was moderate, and the families tended to be the older than average. The apartment projects in the
area were generally occupied by younger versions of the same people who occupied the single-
family residences.

There was a pretty good much between housing costs and household income. In other words, this
was not an area where families tended to make themselves house poor in order to climb socially.
The trade area was developing, it has been roughly half-developed ten year earlier, and it was 82
percent developed at the time of the study. Retail space in the trade area was slightly overbuilt, but
this excess would disappear as the remaining residential ground developed. Not much vacant
ground was either zoned or planned for more retail space do the potential for significant increases in
retail space was limited.

It was concluded that the area was stable. It was fairly well insulated from economic cycles. The
proportion of total sales captured by the subject center was not as high as desirable, but it was
substantial and growing slightly. The stability of the future income to the property was excellent.

The projections for the future income behavior of the center are shown in schedule 4 and schedule
5. A check with the owners five years after the completion of the assignment confirmed that the
projections were reasonable. The increasing net income stream shown in this figure became the
basis for the yield calculations to the owner and the propose sales price.

3. To work with agents for the owners in determining how much the center is worth to the owners’
portfolio- determining the value of shopping center to the owners turned out to be a wasted effort.
They preferred to be involved in ventures with a significantly higher earning potential than is
typically offered by a shopping center and they had no desire to develop such expertise. Essentially,
the excess land was worth nothing to the owners. It also became clear that they were tired of the
center and really wanted to dispose of it.
4. To identify the logical buyer- in this case, potential owners were not difficult to identify. The net
income was conservatively projected and safe. The property needed improved management but not
a dramatic turnaround. There was potential for some additional development. The center was
leveraged but still required substantial amounts of cash. The center had institutional investor written
all over it. Major life insurance companies such as Prudential, Equitable, and Aetna were the
potential buyers for this property.
5. To determine a reasonable selling price. Obviously, if this price equaled or exceeded the amount
arrived at in No. 3 a sales, would probably takes place- establishing a sales price often becomes
more a matter of philosophical agreement between the seller and the counselor than a matter of
mathematics. Asking P100 million worth of real estate can be a perfectly valid procedure if the
potential purchase is an Arabian oil sheikh. However, if the purchaser is an American insurance
company, that attitude will simply cause you to spend several months in unsuccessfully marketing
the property. It was decided that the sales price should be based on the most sensible projection
that could be made and on proper marketplace yields.

The yields sought by institutions are easy to determine and they tend to be relatively consistent
from one organization to another. With the projections that had already been made, the calculations
were not complicated.

6. To assist the agents for the owners in selling the property and closing the sale- the marketing of
the center became genuinely bizarre. Six organizations had been identified, all of which were
capable of owning the property and would want to do so. If because fairly evident that the

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 counselor’s assessment of these six institutions was shared by others. Without authorization, the
brokers have offered the center to all six organizations. It had been offered at least twice and as
many as 14 times. The eventual buyer had been offered the property 3 times. In total, 25 brokers
had offered the property. Several were local brokers; the most distant one was in Singapore. The
prices the brokers were using ranged from 60 percent of the actual asking price to double the asking
price, and the broadcast conceivable range of terms of sale had been offered.

One unanticipated aspect of this consulting engagement is that the consultant has to spend several
days contracting brokers and telling them to discontinue their sales efforts. First, the brokers were
not going to be paid. Second, they were running some potential buyers (two organizations said that
they refused to consider a property that apparently had such a hashed-up marketing program).
Third, many of the brokers were representing themselves as agents of the owners which raised the
real possibility that the owners would initiate legal action.

The eventual buyer was brought on track. As is often the case, he wanted a 6 month option to study
the real estate. The counselors thought that 48 hours was sufficient. Eventually a mutually agreed
upon option period was set. The final purchase price was off by less than 2 percent of the asking
price.

Closing a shopping center sale can be an organizing process. Tenants may pay their percentage rents
and/or their common area fees at different times- monthly, quarterly, semi-annually, or annually.
The seller may attempt to get a pro rata share of the upcoming Christmas season income. The buyer
will attempt to keep it all. Common areas fees will often reimburse substantial expenditures made
before the sale. The seller will try to get it all back; the buyer will attempt to give the seller only a
pro rata share. Reasonable parties can usually agree on what is right and proper, but the agreement
must be reached before the property transfer closes. In effect, the seller is going to be involved in
the real estate for up to a year beyond the closing and the buyer and seller must not be arguing late
over who gets how much of the percentage rentals and common area fees. This closing took roughly
20 hour over 3 days, but it did close.

Getting his deal organized and made was a 350 to 400 assignment spread over an 8 months period
of time. The hours were well spent. None of the effort was expended on routine matters. Every step
required concentration. The final result was a sale that was fair to both the buyer and the seller.

Schedule 1: Partial Schedule of Tenants

(SAMPLE FORM )
RENEWAL LEASE TERM
TENANT R SQUARE M FROM TO OPTIONS

Alex R 3,655 03/10/00 07/31/04 2-5 yrs.

Department
Pilipino R 759 07/15/00 07/14/04
Insurance
Servit Loan 1,056 03/01/00 02/28/04
Bubble Bath R 741 04/01/00 03/31/04
Bed and bath R 1,024 (portion 08/01/99 07/31/03
Fashions omitted)
Modern R 3,234 03/10/99 03/09/03 1-5 yrs.
Department
Carnation Ice R 4,428 03/09/99 03/09/03
Cream

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 Weligreen R 17,305 03/01/66 02/28/95
Furniture
Wood R 53,320 07/21/64 01/31/86 4-5 yrs.
specialists
All Restaurant R 11,554 03/10/66 03/09/86 4-5 yrs.
Vale Jewelry R 1,914 03/10/66 03/09/81 2-5 yrs.
Brenda R 1,579 04/01/76 03/31/86
diamond
Onieda Optical, R 514 02/15/76 02/28/79
Inc.

Total Retail 781,943

Total Non- 41,889
Retail
Total 823,832

Schedule 3: Comparison of Primary and Total Trade Areas

TOTAL TRADE AREA PRIMARY INFLUENCE AREA
Land area (square miles) 79 28
Percent urbanized 93 82
Median household income P14,000 P17,000
Retail sales per household 9,700 11,000

At full urbanization
Population 275,000 70,000
Households 92,000 23,000
Total retail sales P892 million P253 million

Schedule 4: Shopping Center Income Projection

Year
2004 2005 2006 2007
Sales/sqm in 2000 peso P95 P125 P125 P125
Sales/sqm in inflated 100 181 231 275
peso
Gross sales (000) P78,600 P142,300 P181,600 P216,200

Income (000)
Retail P2,100 P3,984 P5,085 P6,053
Common area 160 182 213 240
Fixed 172 172 172

Total P1,039 P1,387 P2,145 P2,546

Net P1,393 P2,951 P3,325 P3,919

4.2 INDUSTRIAL PROPERTIES CONSULTING

Market analysis for industrial properties is complicated by three factors:

1. The market areas for these properties are more widely scattered.
2. Demand is more limited and;

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 3. Supply is highly differentiated according to the operation of the enterprise.

The market for industrial real estate reflects the unique characteristics of the property type. High priced
industrial machinery is generally custom built and except for the flex space in multi-tenanted research and
development (R&D) facilities, industrial plans are typically custom designed to the needs of the particular
production line.

The consultant must be familiar with:

1. The characteristics of immediate industrial districts and

2. The type of industry and complementary land uses found in an area.
3. Other essential information includes local assessment rates, the principal type of ownership, and the
level of recent sales activity of foreclosure.

Industrial Districts

To arrive at an inform conclusion about the value of an industrial [property, the consultant must obtain
pertinent data on the following influences on land and building values in an industrial district:

1. The nature of the district

2. The labor supply
3. Transportation facilities
4. The economics of bringing in raw material and distributing finished products
5. The political climate
6. The availability of utilities and energy and,
7. The effect of environmental controls.

Industrial districts range from heavy industries (steel plants, foundries, and chemical companies) to house
assembly and other clean operations. In most urban areas, heavy and light industry districts are established
by zoning ordinances, which may limit uses and place controls on air pollution, noise levels, and outdoor
operations.

Availability of labor- a district is desirable to industry if only it has an adequate and suitable labor, so the
appraiser must ascertain whether there is an acceptable labor supply. The characteristics and pay levels of
the labor force are important, as is the recent history of labor-management relations.

Availability of materials- manufacturing operations need a convenient, economical source of and

inexpensively. The desirability of a district or site depends greatly on its access to raw materials.

Distribution facilities- the size, weight, and nature of commodities and the distance to their destination
determine how they are shipped- by air, rail, truck, or water. Access to major highways, adequate ingress
and egress and on-site parking and maneuvering areas are crucial considerations for most manufacturing
and warehouse operations.

Environment impact- the environment liabilities incurred by industrial properties are considerably more
complex than those that affect other property types. Industrial properties may contain underground storage
tanks for a broad range of chemicals. The presence of asbestos and PCBs may be more widespread. Long-
term contamination tends to be more severe and cleanup costs can be very high.

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Like all properties, an industrial property must have a site, building and equipment that function as an
operating unit. Inutility is measured against the standard of optimal efficiency for similar properties in the
market.

Industrial properties must have land to building ratios that allow plenty of space for parking, truck
maneuvering, yard storage, and expansion. Other location considerations include reasonable real estate
taxes, available supply of labor, adequate utility service, beneficial zoning, proximity to supply sources and
customers and ease of transportation which is vital to the receipt of raw materials and the distribution of
finished products.

The popularity of the business parks combining industrial and commercial uses in recent years has been
detrimental to traditional industrial parks which are characterized by groups of industrial buildings with
similar uses. In addition to industrial uses, business parks often have research and development buildings
and office and commercial space occupied by banking facilities, r6estaurants, and day-care centers.

The basic function of industrial properties is to provide space for the production, storage, and distribution of
economic goods and services.

INDUSTRIAL PROPERTY is one of the most interesting and complex assets in the world of real estate because
of its immense importance in the economic activity of a country. Industrial production accounts for over a
third of the national employment and the gross national product.

Types of Industrial Property

There are three types of buildings for industrial property (1) general purpose properties, (2) limited
purpose or special purpose properties, and (3) single purpose properties.

General-purpose properties are those that can be adapted to a wide range of alternative uses with minimal
expense and difficulty. Such properties are often constructed on a speculative basis and are usually
adequate for office and service uses, light manufacturing, general storage, and or/ assembly.

General-purpose properties are those that can be adapted to a wide range of alternative uses with minimal
expense and difficulty. Such properties are often constructed on a speculative basis and are usually
adequate for office and service uses, light manufacturing, general storage, and/or assembly.

Limited-purpose or special-purpose properties are properties have physical characteristics that restrict their
use to a small range of industrial activities. Such properties have customized features to accommodate an
original or a subsequent user.

Single-purpose properties are useful for only one industrial activity, such as chemical factories, diaries
(processing units), refineries, grain storage silos, and railroad yards. Some convertibility to alternative uses is
always possible at a price.

Property Site/Location Selection Procedure

The selection of the appropriate site or finished facility for industrial site or location is a common consulting
situation. Corporations want expert advice on this aspect of their business, decisions and because many
corporations do not have such capability on their staff, they often hire the outside realty consultant for
guidance.

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The election of the appropriate site or finished facility for a company is a decision that is extremely
important for the future success of the firm, as well as a very complex decision.

THE SITE SELECTION PROCEDURE is a common consulting subject as corporations seek expert advice on this
aspect of their business decisions and because many corporations do not have such capability, they often
hire the outside consultant for guidance, even when they have in-house property location specialists, a
consultant is often hired as a “local expert”.

COMMUNITY FACTORS

Among the community factors that should be considered when selecting an industrial property are economic
trends, available transportation, education and vocational training programs, governmental attitudes, the
level of the public services, local and national taxation, and support services. In order to property evaluate all
of these factors; the consultant should have a community survey for the client.

The community factors that should be considered are not equally important to different firms. The local
economy may be less important than broader economic trends if the site is to be developed for an assembly
plant for a national corporation.

Before deciding to relocate, prospective employees from other areas will consider not only the standard
services of the city but other cultural, leisure, and educational facilities as well. Therefore, other community
factors that should be reviewed are police and fire protection, hospitals, utilities, zoning, building codes,
parks, golf courses, theaters, and other entertainment and leisure’s facilities are important especially if the
business needs to attract skilled workers from other cities and region.

Checklist of Community Factors

(Sample Form)

1. Are the attitudes of national and local government favorable to a new industry and generally
conducive to community progress?
2. Will the school system be acceptable to management employees, transferred into the community?
3. Is the community structured to furnish an acceptable level of services to a new industry?
4. Are the social, cultural, recreational, and shopping facilities adequate to support to a quality of life
that will attract employees to the community?
5. Aspects of the community that might interfere with the industry’s minority employment objectives
consistent with national and local laws and policy? Does the community contain or have convenient
access to the supportive services require for day to day plant operation?
6. Are there residential neighborhoods of the quality normally desired by the levels of technical and
management personnel who will staff the plan? Is speculative residential construction common?
(availability of developed r6esidential sites)
7. Does it appear that the proposed plan can conform to its hiring schedule and build a labor force
without compromising its skill and productivity requirements?
8. Does the community offer vocational and industrial training programs which will be beneficial to the
proposed plan?
9. Propriety questions relating to specific employee relations considerations.
10. Are there union practices, chronic stages of material, an adequate number of general contractors or
subcontractors, or similar problems peculiar to this community which might adversely affect the
design and construction phase of the project?
11. Is the community served by transportation and utilities adequate to support the industry?
12. Are wage rates and benefits at a level which will enhance the industry’s competitive position in the
marketplace? (rates and benefits of other industries, union contracts of other industries)

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 13. What governmental economic development incentives are available?
14. How will state and/or local environment considerations affect the site selection, cost of plant
construction and operating cost? (see following list of environmental questions)

Some Environmental Questions for Community Profile

1. General
What major industries are located in the area?
What is the nature of their operation (chemical manufacturing, metal fabrication, metal finishing,
textiles, etc.)?
What is the status of the state implementation plan(SIP)?
Does the community have an environmental commission? Who is the [primary contact person?
Does t7he state or commu9nity require an environmental impact statement (EIS) for new project?
2. Liquid waste
3. Air
4. Solid waste

Site Consideration

Of paramount importance to the client are the physical features of the site. The major site factors are listed
in figure 15-1. If the physical features of a site do not meet the requirements for the given industrial use, the
site must be rejected immediately. Problems with financing or similar matters can be negotiated, but
physical deficiencies can rarely be adequately solved. One important factor is the site size that does not
allow for expansion at a later date and may force a growing client to move earlier.

Location studies are a major area of interest in real estate and regional-urban economics. Accordingly,
studies are done on how site location should proceed and what should be considered. Location studies are
common to of industrial real estate consultant. The consultant may be hired to perform only part of a
location study, simply coordinates the efforts of numerous other persons who are performing specific
functions.

Surveys may be conducted to determine the most important locational desired by industry. The results are
largely what a person would expect for a business; included are availability of workers, availability or raw
materials and supplies, inexpensive utilities, transportation facilities (usually rail, truck and air), growing
regional markets, and proximity to customers.

Checklist of site Factors

(Sample Form)

1. Location
a. Surrounding areas
b. Specific site
2. Utilities
a. Sanitary sewer
b. Storm water management
c. Water supply-community
d. Water supply-from rivers or lakes
e. Water supply-from wells
f. Electric power
g. Fuel (natural gas, propane or LPG, fuel oil, other fuels)
h. Telephone

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 i. Waste disposal (gaseous, liquid and solid)
3. Transportation
a. Air
b. Water
c. Railroad-freight
d. Railroad-passenger
e. Highway-trucks
f. Highway-automobiles
g. Public

Property acquisition costs are of major importance. Often land has to be acquired for special-purpose and
single-purpose buildings, which have to be constructed when existing facilities fail to meet space
requirements. Existing general-[purpose buildings can be purchased and ready for occupancy.

Single-tenant vs. Multi-tenant Buildings

A variety of challenging assignments to the consultant relate to the complexity of single-tenant versus multi-
tenant buildings. The development of modern single-story, multi-tenant or incubator buildings increased in
t7he recent years, but there is also continued construction of buildings designed for the single tenant and
frequent conversions of multi-story, single-tenant facilities to multi-tenant properties.

In the case of older multi-story buildings, subdivision has taken place, with separate tenants occupying
different floors of the building. Assisting a property owner in such a conversion can be a great challenge to
provide valuable services to the clients.

New multi-tenant industrial buildings are rarely designed as multistory structures. They are mostly single-
story structures that have been designed with maximum tenant leasing flexibility so that each tenant has
individual shipping, parking, and entrances.

In industrial part, the utilities, transportation facilities, and access to markets, labor and supplies available to
all equally, combined with the economy of scale obtained from the construction of larger multi-tenant
facilities; provide the tenant with better services and possibly lower rent than would be provided by a
freestanding single occupancy property located elsewhere.

The real estate consultant should examine carefully the many factors determining a single tenant versus
multi-tenant facility. Flexibility for expansion is a factor in determining the choice between single tenant and
multi-tenant buildings.

INDUSTRIAL REAL ESTATE AS AN INVESTMENT

Popular in the recent decade is investment in industrial real estate. The three basic categories of equity
investors in industrial property are; User investor, Nonuser investor, and Combination of user and investor.
The user-investor is the industrial tenant that chooses to own rather than lease a property. The consultant
should be familiar with the primary factors in advising a client to buy or lease discussed earlier. Assuming
that the desired facility can be either purchased or leased; the primary consideration will be the alternative
uses of capital and return on capital investment. Every “for profit” industrial enterprise requires a return on
its invested capital. In general, if a higher return can be realized through investment in equipment or product
development than through ownership of real estate, it may not be advisable for the client to own the real
estate as an investment.

Owning investment versus leasing affects the company’s balance sheet as direct mortgage indebtedness
has undesirable effects on the balance sheet as compared to leasing obligations. This can unnecessarily

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impair a company’s ability to create further leverage. There are other consideration involving the degree of
flexibility that affect the decision to own invest or lease depending on the client’s needs and requirements.

The nonuser-investor includes institutions, REITs, individuals and groups of individuals (partnerships and
syndications) both domestic and foreign that considers industrial property desirable and finds that it
provides an adequate rate of return on investment. Industrial real estate is a popular investment property
vehicle.

Before the mid-1997 financial crisis most investors seek leases of no more than five years unless they have
full inflation protection. Since then, however, the trend has moved towards longer leases because of lower
inflation and higher vacancy rates.

Methods of analyzing yield (ROI) in industrial property are constantly changing as a reflection of the short
and long term economy, a process that also affects alternative types of investment property. The industrial
economy in the market area in which the investment is taking place must be studied very carefully. What is
the absorption rate of industrial space? How much vacant exist?

The consultant in advertising the investor client should have a thorough knowledge of local market trends.
Like the user-investor, the nonuser investor must decide whether it is best to purchase a single tenant
facility or a multi-tenant facility.

The combination user-investor is the company that invests in industrial real estate for use and of
independent investment. This user buys a property with excess space, which it then leases to another
tenant. The considerations that apply to the investment analysis of the user investor and the nonuser-
investor and the key occupancy questions pertaining to the user aspects of the property should be applied to
the combination user-investor, a combination very beneficial is the two purposes do not conflict with each
other. The consultant must thoroughly consider the factors for both property use and investment analysis.

4.3 RECREATION AND RESORT PROPERTY CONSULTING

The unique seasonal attraction of resort properties must be identified at the outset. If a resort is on the
share of Boracay or in a cold place like Baguio in the Mountain Province, then its potential income stream
comes during summer. Resort operations must lengthen the patronage season by alternative or added
attractions that will keep their operations open during the off season. Necessarily, it is imperative that t7he
consultant first determines the duration of a resort’s seasonal characteristics.

The attraction of a recreational property often means different value to different people. An inland resort
place like Hidden Valley in Laguna may provide a fine recreational experience to a person who lives on
humid seashore, yet that same seashore may provide en enjoyable recreational experience to one who lives
in inland urban area.

The recreational and resort properties may include swimming pool, golf course, tennis court and popular
indoor games like bowling and billiard. Mix use development may include farm lots, vacation and retirement
homes, and even residential development depending on the location of the resort property. The optimum
mix of both use and amenities will determine the feasibility of the resort and leisure project.

Characteristics of Recreational land: Good and Bad

Trees and plants provide a good ground cover on recreational property; the standing timber provides
permanent natural beauty that makes the property attractive for recreational development. Again Hidden
Valley Resort in Laguna is a good example. Sometime the timber and excess big plants like coconut trees can

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be cut and sold or used in the project without adversely affecting the recreational value of the property. The
consultant may retain a professional forester to assist in determining the local forest regulations and
practices, assessing the utility of the species located on the property and estimating the quantity, quality,
and value timber.

Minerals can create conditions that adversely affect highest and best use for recreational purposes. In
mining areas, noise and pollution can disturb the value of the resort property.

A major attribute to recreational property is proximity to water, like spring, lake, rivers, stream, or ocean.
The size, reputation, safety of such water, and the opportunities for fishing, swimming, sailing, water skiing,
and natural view add value to the resort residential and commercial [ventures on nearby land.

The consultant should have adequate information about the characteristics of the water body concerning
trends in pollution levels, regulations in use of water surfaces, the monthly cycle of water levels, the
reputation of the area for water spots, and likely competing uses as a source of water for a major population
center.

Some lakes are operated for hydroelectric purposes. In the inland waters like lakes and rivers, water supply
may build up during rainy season and run dry during summer. The water level of such lakes is therefore
constantly changing unless other factors are present.

Soil condition affects the stability of adjoining lands and the development costs. In some areas geological
fault lines may be present or filling may be needed creating a problem on construction and development
costs. Geological survey maps and local forestry offices can usually provide necessary information regarding
the geology of the area in question.

Popularity of Area

The popularity of an area obviously determines its drawing power of a purchasing public. Many large
recreational areas scattered across the Philippines draw visitors from local and foreign tourists. Other
recreational areas attract a more regional clientele. For example, many of the smaller vacation hotels and
townhouse in the Baguio City area are used primarily by Central Luzon visitors who drive a few hundred
kilometers to take a summer vacation. Baguio golf and country club is popular tourist and recreation
destination. Due to the size of this market area, its reputation is concentrated within a few adjoining
provinces and cities.

There are many major resorts in the Visayas and Mindanao regions which have developed regional and
national recognition on the area. The success of such resorts often enhances the development potential of
adjoining lands. As noted earlier, the main characteristic of r6ecreational and resort property is the cyclical
on-season of its business. Mixed use development can be an opportunity for non-resort real estate
investment on nearby land.

Accessibility is another major attribute that should be evaluated. Iot would be difficult for a major island
resort to develop a national reputation unless there is airport or super ferry service for incoming tourist.
Admittedly, highway access will provide business to population centers that are within a couple of hundred
kilometers, but it soon becomes difficult to entice a sufficient number of users into t7he area if driving
distances are more than a day trip away.

Key Concerns with Recreational and resort Properties

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The real estate consultant can provide most valuable services to developers of prospective recreational or
resort projects in alerting the developer to the unique problems of such projects and to the marketing
strategy that can be lear6ned only through experience with or research of an area. He will invariably provide
the client with information on such matters as complying either regulation, identifying a specific target
market, and preparing a marketing strategy to capture a particular segment of that market. Other consulting
services include project design, amenity presentation and facilities management.

Scuba Diving Areas and Marinas

Scuba diving is fast becoming a popular summer outdoor activity with a good number of foreign enthusiasts.
A score of new scuba diving facilities have been developed areas that can provide summer destination at
reasonable duration and that are accessible by vehicle and within reasonable proximity to a large body of
population. The distance from major airports and seaports facilities is important in the success of a given
facility. This is perhaps more important for scuba resorts than the other types of recreational developments.

A marina is a boat basin that has dock, moorings, storage, supplies, and other facilities for boats. Marinas
come in all sizes. Shapes, and design and in several parts of the Philippines they are commodity that is in
short supply. In areas that have a large number of visiting boats like Manila and Cebu there may be an
abundance of dry storage but a shortage of wet berths.

In recent years increasing use of recreational boats has increased the demand for facilities to service their
needs. There appears to be an ever growing need for new slips and boat ramps to service boats of all sizes,
ranging from the small fishing boast that are trailered to the boat ramp closet to the favorite fishing spot up
to the large oceangoing sailboats and powerboats that are increasing in number in our coastal communities.

Marinas on inland lakes and waterways are designed for use by trailer able boats. At a marina of this type
the facilities are usually oriented toward boat rentals and fishing with summertime uses for water skiing,
sailing, and picnicking. This type of marina is often limited to summertime operation. Int7he south, however,
year round operation can be developed quite successfully.

Most marina construction abroad seems to be along the creeks, rivers, bays, and ocean entrances that are
identified as being navigable bodies of water. Boats that are 25 feet and larger in size, which are fairly
cumbersome to trailer are usually stored in the water year round in the southern latitudes.

A marina may be built and owned by a private yacht club or a site owned by the club or leased from a
municipality berth space also available for nonmembers.

A marina construction may be built by municipalities and through government ownership or subsidy. The
long permit processing, the high cost of private mortgage funds and high cost of construction make it very
difficult for a private investor to lie up a site, pay for the experts needed to get approval for environment
impact statement built in the marina, and then pay for it with present day revenues.

This problem of revenue shortfall may be solved if the marina that constructed as part of a new residential
community with water orientation where the facilities for such a marina development can be a good profit
center for the project.

The market value of a privately owned marina is essentially the same as that of most other businesses. The
consultant must look at the basis of interest on the land, the cost of that interest, the condition of the
operation, the present and probable future annual operating costs, and the costs of maintenance for
breakwaters, docks, riprap, parking lots and etc. and then analyze whether the current expenses are likely to
continue at a reasonable level.

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Obtaining a permit for a new marina is not an easy matter but such permits can be obtained since marinas
are generally considered desirable by the public and most government.

Resort Conversion

A resort conversion is prompted either by financial distress or by the recognition that a rental approach
may prove more attractive financially. When residential sales are slow at a private recreational community,
the developer may consider converting the project to resort rentals. Slower than anticipated sales may result
from unsound market analysis, an upward shift in mortgage interest rates, a lack of discretionary family
income, inadequate promotional effort by the developer, poor timing, or a combination of factors.

Failure of a project to generate enough lot or home sales to cover his operating costs and debt service, may
pressure the developer to consider converting some of the unsold inventory to resort rentals. The consultant
must weigh the financial feasibility of such a conversion because it will involve both risks and the problems
that may relate to the resort conversion are:

1. Giving favorable treatment to the permanent property owners while allowing the guests reasonable
access to golf course and other amenities.
2. Dealing fairly with those persons who have already purchased lots or home for more privacy, and in
anticipation of living in a private development without tourists. Solving this problem requires
diplomacy, tact and time.
3. R6ecruiting qualified staff to handle reservations, maintenance, room and food service, linen, maid
service, security and possible internal transportation.
4. Providing an equitable and appropriate rental system for the developer’s unsold inventory and the
individual property owner’s home.
5. Providing a variety of attractive and diversified activities. Whereas minimum activities are required
for a private development, a paying public expects continuing resort activities that appeal to the
different age groups. Additional and specialized staffing is needed to carry out these expanded
activities with care taken to avoid offending the permanent property owners.
6. Property promoting the resort properties is generally easier to resolve than to resolve the problem
of promoting a private community since travel agents and travel newspapers can be enlisted to
promote the resort. Such free outside assistance would not be available for a private development.

Before considering a move, a study the property’s marketing potential. If it has this potential among the
advantages of the resort conversion are:

1. Prospective property buyers are attracted to the development. A person has visited and enjoyed a
resort may seriously consider buying a property to ensure continued enjoyment at the same
location.
2. Generating revenue from unit rentals, food service, and recreational facilities. This revenue will be
beneficial in reducing the negative cash flow of the private development/resort although it may be
insufficient to generate a profit.

4.4 GOLF COURSE DEVELOPMENT

A golf course is a significant property to a residential community, but it is not something to be entered into
lightly or without proper consulting. Golf course can be a nine-hole course or an eighteen-hole course, each
of which has a variety of configurations, nine-hole course is not as popular in private development as the
full-size courses. Just as important as the length of the course is the amount of area that must be set aside
for a nine-hole course; an eighteen-hole course can generally be a champion course.

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Demand e key question in providing a golf course in a development is whether the cost of the course and
the land allocated 9lost or sunk) for it is more than offset by the increased demand and sales revenue for the
lots, homes, hotels and adjacent to the course. There is some fundamental demand factors that should be
considered carefully by the consultant in the evaluation stage.

With a golf course project are other types of development. The four types of com munities frequently
developed with golf courses are; first-class communities, semiretirement communities, second class
recreational communities and resort communities. The type of development will influence the course
design.

Also, various demographic characteristics of the prospective occupants must be analyzed to determine the
probable success of a golf course. How much demand for a particular golf course does it take to support it?
Demographic analysis will to determine whether the personnel income of prospective buyer is adequate to
support the golf facilities as well as to afford the residential or resort development planned for the area. Age
influences the design and the eventual success of the proposed development. Young people may be unable
to afford the property. On the other hand, older people who are able to afford the property may require an
interesting but not a difficult golf course.

As with other types of real estate developments, the study must take into account such factors as location,
accessibility, and the present and probable future competition. Terrain, soil conditions, and water supply
are more important for the golf course community than foe other types of developments. The presence of
high winds adversely affects the popularity of a golf course and thus impairs property sales or income from
transient facility uses.

Design the market analysis reveals sufficient demand in the target market. The golf course must be designed
skillfully by a golf course planner designer. Market information from the consultant can provide invaluable
guidance for the design. Some key design considerations are to have the greens large enough and the
fairways wide enough to prevent the greens from lacking sufficient interest because the holes cannot be
relocated.

Effects of golf course on project success golf are not an end in itself; it provides attractive amenity to the
adjoining community. Non-golfers as well are attached to an address near the country club. Golf courses
residential communities sell homes and cause homes overlooking the course to sell at a premium. Such
premium may vary over the prices of interior lots of similar size. In shore, a well-designed course properly
integrated into a residential community creates a highly desirable prestige address. Also, people from long
distances come and to stay at resorts with courses that have earned outstanding reputations.

An important dis between development type golf course and clubs and those that relate to real estate
developments is that the former are usually owned by the developers and are used for promotional.

There are three approaches or methods to set club membership fees are:

1. Clubs will regular golf dues only

2. Clubs with regular golf dues and entrance fees
3. Clubs with regular golf dues, entrance fees, and proprietary membership cost

A minimum maintenance cost is a key objective in designing a golf course. To achieve this, the designer will
try to minimize grades and will space trees for enough apart to allow machine mowing. Also, shading trees
may be preferable but leafy trees necessitate frequent leaf cleanup.

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A very significant operation is the management of the clubhouse; which can either make or break a golf
course project. The greatest single mistake is to have too many golfing members. What would be the ideal
number of golfing members for a specific golf course? Any error on this can adversely affect the surrounding
real estate.

Case study

This case study briefly illustrates common situations in consulting practice. Note the few but significant
studies and recommendations from the consultant.

An opportunity to acquire a partially developed resort to a developer is [presented by a bank that recently
foreclosed after the development effort failed. The subdivision has been planned for 300 single-family lots
oriented around an eighteen-hole golf course. The [following work was completed before construction was
halted:
1. Main entrance and lineal meters of roadway
2. Installation of sewer and water lines more than sufficient for the entire development
3. Rough clearing of fairways for an eighteen-hole golf course

The developer has a proposed agreement with private golf club to build and operate the golf course and a
small clubhouse in the property. The developer asks his real estate consultant to examine the property and
development plan in light of current market conditions, to determine whether he should undertake this
project. From a series of conferences and interviews by the consultant with the client the following
information were gathered and validated.

1. The present club membership is already large for an 18 hole course so that an additional 18-hole golf
course is needed.
2. The developer will deed to the club for free cost the land required for the course and the clubhouse.
The club in turn will accept for club membership the home buyers in the proposed subdivision. The
agreement will provide for a reduced entrance fee for such new members. This arrangement will
permit the developer to concentrate on the development of lots and yet assume the successful
construction and operation of the golf facilities.
3. The developer has expertise in building subdivisions and selling lots to two home builders. The lot
inventory in his existing subdivisions is running low so he is poised to start new project.
4. The r6esidentila market in the proposed resort subdivision appears very strong; the five home
builders express definite interest.

However, in spite of the favorable information above the project is not financially attractive based on the
bank’s asking price for the project “as is”. Since the price is firm, the consultant decides to study the golf
course development plan and the lot pricing scheme to determine whether higher price yield can be
obtained.

The consultant’s preliminary findings are:

1. There is sufficient market demand for the 300 lots to ensure full absorption within six months after
completion of development plans.
2. The original developer’s project ted average lot price of P10,000 per square meters is obtainable
based on a careful market analysis.
3. The development cost estimate is realistic based on the cost experience of comparable subdivisions.
4. The arrangement with the golf club for the golf facilities is favorable for the developer.

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While the consultant’s research and analysis supports the revenue and expenses projections of the client
developer, the fixed acquisition cost effectively negate any potential profit as shown by a break-even
analysis of computer generated sensitivity analysis. The consultant notes that the land plan shows several
parallel and adjoining fairways, thereby limiting the number of lots actually adjoining the golf course. He
suggests that the golf course to be redesigned to maximize the number of lots with fairways views to add
premium on the price by 20% or the average. A new site plan is drafted that separates the adjoining fairways
and rearrange the street system, thus increasing the number of lots on the golf course.

The consultant calculates revenue and expenses projections based on the new lot locational configurations.
The revised plan still yields 330 lots and with the increased number of lots with fairways view raises the
average lot price to P12,000 with negligible change in development costs. This increase in revenue with cost
essentially constant appears sufficient to make the development feasible on the overall. Moreover, a
realistic discounted cash flow of all forecast development costs and sales revenue over the development
marketing period provides more assurance as to the financial feasibility of the project.

Considering positively the consultant’s analysis and recommendations, the developer decided to purchase
the property and complete the subdivision. Lot sale was faster than originally projected because of the
strong demand for lots on the gold course. The shortened absorption period and increased lot prices provide
the developer with an attractive return on his investment.

4.5 TIMESHARING: A SPECIAL FORM OF REAL ESTATE OWNERSHIP

Fractional interests created by timesharing have been marketed extensively in recent years. Timesharing
involves the sale of either limited ownership interests in or rights to use and occupy residential or hotel
rooms.

There are two forms of timesharing and it is imperative that the appraiser distinguish between them when
appraising timeshare projects or analyzing timeshare comparable. The first form is known as fee
timesharing. The purchaser of a fee timeshare receives a deed that conveys title to a unit for a specific part
of a year, thereby limiting the ownership interest. The purchaser has the right to sell, lease, or bequeath this
real property interest. The interest can be mortgaged and title can be recorded. The second form of
timesharing is called non-fee timesharing, which does not convey a legal title in the property. Typically a
purchaser receives on the right to use a timeshare unit and related premises.

There are sub-categories fo both types of timesharing. These two types of timesharing are timeshare
ownership and interval ownership. In timeshare ownership the purchasers receive s deed to an undivided
interest in a particular unit as tenants in common. Each purchaser agrees to use the unit only during the time
period stipulated in his or her deed. In interval ownership, owner receives and terminable fee in the form of
a tenancy for years (the unspecified time period) which may lose for the duration of the project. At the end
of tenancy for years, the fee interest is conveyed or reverts to the interval owners as tenants in common.
Then they have the option of selling and dividing the proceeds or continuing as tenants in common and
renewing the interval estate.

Timeshare owners and interval owners play operating expenses, including a proportionate share taxes,
insurance, and other costs and a fee for common area maintenance (CAM) and management. In many
projects, 50 one week intervals are created; the remaining two weeks of each year are reserved for
maintenance and major repairs.

The three types of non-fee timesharing are known as leasehold interest, vacation license, and club
membership.

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TIMESHARE HOMES

Timeshare, a form of partial or interval ownership is relatively a new concept in the Philippines Developers
have not worked had broaden the buyer market for second homes in resort areas. Families who can afford
prefer full ownership of a vacation home, however, if more and more middle-income families are planning
annual and holiday vacation trips with family friends and friends, the market for timeshare homes may start
to grow.

The number of potential buyers for a particular property is greatly expanded by dividing the ownership[p
expense among several owners. The interval ownership concepts is simple instead of buying a house or
condominium for 52 weeks a year, you buy a share of the property for the period during which you wish to
use it. Therefore, timeshare a “vacation” concept where the amenity package is very important. Project with
golf, tennis, fishing, and swimming=g and other water sports reach a broader market than is reached by
development that lack a wide range of vacation activities. Some notable exceptions may be located in water
ski and scuba diving area, campgrounds, and protected mountain areas.
At an early stage in the timeshare planning process, the consultant must address the issue of off-season
weeks. A developer cannot afford to sell all in-season weeks without properly planning the marketing of the
less desirable intervals. Price differentials among the intervals can partially alleviate the problem. However,
a better strategy is to package a good week with a poor week in the sales program. In this way, the seasons
well out on a uniform basis.

The developer will typically sell 52 weeks leaving a week or two for until refurbishing and maintenance. The
units suffer normal wear and tear. Management will clean and inspect each unit between users so that
major repairs may be charged back to the interval owner. Nonetheless, the yearly rehabilitation weeks are
necessary to ensure that the unit is in good habitable condition. Management’s role is a difficult one as it is
not easy to satisfy the varying needs of interval owners with respects to the level of desired occupancy. The
continuing success of a timeshare development is greatly dependent on the ability and efforts of the
management group. Management must also work with the owner’s association, collect and invest the fund
for major replacements and handle the annual refurbishes.

There are many forms in timeshare ownership. Usually, the buyer purchases a timeshare unit in fee simple
interest for the term of his purchase. Other ownership forms are:

1. Fee simple- perhaps understood form of ownership from the buyer’s standpoint, and is also the
safest from the standpoint of avoiding legal complications.
2. Right to use interest- a contract between the developer and the buyer that is set for a specific term
of years.
3. Club membership with right to use- where this is used in interval, the buyer combines the benefits
of club membership with a right to use the property for the interval period.
4. Vacation lease- is a lease for a term of years and the relationship is simply that of landlord and
tenant. These arrangements can be for periods of five to ten years. At the end of the lease term the
developer recaptures the property. At this time he can renew leases, change the use of the property
or make such other appropriate disposition.

Among the timeshare forms, fee simple has the best resale value, especially when the remaining terms of
right to use or leasehold interest is relatively short. Although, one would expect fee simple intervals to be
priced higher then vacation leases or interval use; there may not be much difference. The form of ownership
affects both demand and unit price pricing.

The pricing of a timeshare interval is at best difficult. In addition, to the usual physical, locational, and supply
and demand factors, the consultant must consider the form of ownership and segment the weeks of the

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year into values that reflect buyer demand. With proper pricing the sales agent should be able to sell shares
in all seasons even if the “good-bad” package system is not used.

The exchange networks can enhance the off-week’s sale. A timeshare owner may swap his interval for one of
equal seasonal value at his choice of other units around. It is important for all parties to remember that an
owner will rarely be able to swap his off-season interval for an in-season period. This flexibility has been a
great help in selling throughout the year.

Timesharing also benefits the developer of resort area by increasing the resident population at the project.
An owner of a two-week interval will rarely leave it vacant, usually renting it or lending it to friends if he
does not use it himself. This increased population naturally has a favorable effect on the utilization, and
hence the profitability of the golf courses, restaurants, and other project amenities. This is particularly
important in new resorts where the carrying cost of the recreational amenities is very great.

4.6 HOTEL-MOTEL PROPERTY CONSULTING

The old real estate wisdom that the three most important elements in a real estate value and success,
“location, location and location”, holds very much in the hotel-motel property.

Like other retail service business, the evaluation of hotel operation must cover the business aspects, such as
management and franchise affiliation, and the physical attributes of real estate property necessary for a
successful accomplishment of investment objectives.

Hostelry Types, Ownership Forms and Management

Types of Hostelry may be classified form the viewpoints according to three factors; location market
orientation, and operation.

Location and Market Orientation in terms of area amenities and attraction of demand, location is one major
factor influencing a hostelry’s success. Accessibility and visibility are also vital in the analysis of any hostelry.

Airport hotels are generally located on airport property or within radius allowed by regulation. Their room
demand comes substantially from airline crew and related business and commercial activities around the
airport. Downtown or center-city hotels are generally located in the business, commercial and financial
districts of metropolitan areas, depending mainly on the travelling business persons for their room
occupancy. Resort properties are located in destination areas and appeal primarily to tourists and vacation
packaged seminars and conferences. Highway lodging facilities are located on provincial stop overs or major
local routes and depend heavily on t7he in-transit businessmen and vacationers for their room demand.
Areas such as economic zones and industrial parks also create demand for hotel-motels.

Location and facilities are often indications of hotel marketability. Hostelries with limited public facilities
such as meeting rooms and ballrooms accommodate mainly individuals or families. These may be
businesspersons or tourists who are either in transit or have arrived at their final destination.

The group type hostelry generally has more extensive meeting and banquet facilities and a larger number of
gust room units. The corporate oriented facility is found in cities or near office parks. It usually features small
meeting rooms and excellent food and beverage facilities. The hostelry oriented to conferences or
conventions can be in a resort area, a city or near6 major airport. It is characterized by large meeting and
banquet facilities. Group tours represent a substantial market segment for a few hotels, though this is
generally filler type business for more properties.

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Operation the three methods of hotel operation are: franchised properties, with license to operate under a
given name holiday Inn, Hilton, Ramada, Peninsula, Shangrila, Marriot and Sheraton. Owned but operated
under management contract or leased by a hotel chain, where the referral organization allows an
independently owned hotel to be associated in national network primarily for reservations benefits. Both
methods operation are used by some hotels. Independently owned and operated properties have no brand
name chain affiliation.

FORMS OF OWNERSHIP AND MANAGEMENT

Hotel may be owned in fee, or the land, building, and equipment may be leased. The operation of a hotel
may be managed by a third party professional property agent, but the owner still taking the principal
responsibility. Owners may lease their hotel properties to third party hotel operators, a form of operations
not usual in today’s market. Years ago, hotel companies were willing to accept the risks and obligations
associated with long term leases. This is not the case now due to the high debt service associated with newly
constructed hotels which are typically highly leveraged. The ideal capital mix is more equity and less fixed
debt in order to assure the viability of the equity investment. The most popular operations structure is for a
developer/investor to employ a management agent via a management contract. The contract may require
the operator to invest in the property. The management contract usually provides for the operator to
receive a base fee a percentage of gross sales plus an incentive fee based on budget profits before income
tax.

Feasibility Analysis of Proposed Hostelries

The feasibility of a hotel is finally decided by its cost profit viability and tax benefits. The initial steps of the
feasibility study are the analysis of the site and location and the analysis of market demand and competition
after which future projections of supply, demand and market penetration by the subject property are made.
These analyses will allow realistic projections of income, expenses and return on investment.

Location Analysis- the first major feasibility step. Hotel should be conveniently accessible and highly visible.
Ideal neighborhoods include nighttime activities and nearby residential or business commercial districts. The
neighborhoods should be free of urban decay and crime. Locations in growing areas or areas that
demonstrate strong and stable characteristics are preferable. Proximity to market generators may be
airports, office buildings, convention centers or in the case of resorts, natural amenities such as beaches and
marinas. The consultant should be most careful to analyze all of the factors that concern location access,
visibility, area activities, resident7ial or commercial backup, neighborhood characteristics, and growth
patterns as well as the overall economic growth and political social climate within the metropolitan area.

Demand Analysis is the second major step in the market feasibility analysis involving a review of the past,
present and future demand generators of transient occupants, generally classified into two categories,
individuals and groups. There are various subcategories in each of these demand segments. However,
properties in a particular area generally cater to similar markets. Identifying and quantifying specific
segments of demand is an interview process with hotel operators, chambers of commerce, major employers,
convention organizers and airport officials. The key to demand analysis is an estimate of existing demand
and potential future demand affected by new development such as a propose shopping mall, economic
zones, industrial parks, or amusement, entertainment or sports centers.

Supply Analysis involves a detailed review of the existing and proposed hostelries in the market area. These
should be compared with the proposed hostelry at lasting terms of location, price, facilities, chain affiliation,
management, and other proposed hostelries actually to be developed and when they will be opened to the
marketplace. This information gathering involves interviews with develop public building department,

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lending institutions and tourist agencies. The amount of proposed competition that actually materializes can
significantly affect the financial viability of any competitive hotel. Recall the overbuilding of hotels in Makati-
Manila areas for the World Bank Meeting and the numerous resulting hotel bankruptcies and foreclosures
that followed. The possibility of a recurrence of this experience should be anticipated.

Targeted market Segments the analyses of existing and future supply and demand will enable, the
consultant to arrive at a market entry potential for each of the proposed property’s target market segments
by analyzing the quality and strength of demand and the projected growth of each of these market
segments. The subject property’s location and physical facilities will determine t7he degree of its market
penetration in each category. For example, a proposed economy motel may represent only 10% of the
available rooms in a community with existing competitive hotels. However, because of its reduced room
rates it may be able to attract 20% or more of the available price sensitive markets such as salesmen on per
diem, government employees, student tourists and senior citizens. On the other hand, its reduced facilities
and services, or because of its location in relation to demand generators and competitive hotels, it may not
be able to capture a market share 10% of the available motels for conventions or expense account
businessmen.

The price sensitivity of each market segment must also be analyzed to avoid. For example, the error of
constructing a five star hotel in a secondary or tertiary city that does not have a strong corporate
headquarters base. Over improvements are exposed to economic obsolescence, a form of depreciation
difficult to estimate.

Market entry should also be analyzed in terms of how long it will take the proposed facility to reach a
stabilized operating position, the annual occupancy and the average rates that a hotel is expected to
achieve in a reasonable period. For example, a proposed hotel may be projected to obtain an average
occupancy of 75% over its project life. However, it requires two to four years of operation and marketing to
reach this level. Average rates are typically estimated in terms of market rated by comparing the subject
hotel with locally competitive hotels. These rates are then increased toward the year of stabilized occupancy
of the new hotel. Assumptions as to inflation projection should be very clearly considered because many
hotel projects cannot b proved feasible in terms of market value.

Financial Projections after the market entry and the facilities of the proposed hotel have been determined
by the consultant, projection of income and expenses can be made. Covering the stabilized year and prior
years so that the developer investor is made aware of the potential losses in the early y8ears of t7he hotel’s
operation. It may require years for a hotel to mature and reach a stable occupancy level.

A meeting is usually held with the developer to review the initial market study. The developer may decide to
go with the project by retaining an architect to prepare preliminary schematic plans based on the
consultant’s recommendations. The consultant is generally asked to comment on the preliminary plans and
project cost estimates.

Cost-benefit Analysis a projected cash flow is prepared based on the projected profitability with assumption
as to development financing and debt service cost from institutions such as banks, life insurance companies,
credit companies and pension funds fixed rate long term lenders are avoided. Creative financing packages
are put together in for the project and its growth.

A project is feasible only when a financial package is in place even for the short term regardless or market
feasibility. Other factors such as equity returns with and without tax benefits, appreciation of an area’s real
estate values, holding period, form of ownership, and risk of capital affect projects feasibility.

Investment Analysis of an Existing Hotel

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An investment analysis of an existing hotel requires a review of location, demand and supply, and projected
profitability almost observing a repeat of the basic studies when a project is proposed. The internal rate of
return on the investment other investment benefits measurements are calculated. Other benefits analysis
includes tax benefits and a favorable impact on the value of adjacent land and of proposed and existing
development.

Risks-benefits Analysis of a Particular Property analyzing the specific risks or benefits of a particular
property requires an understanding of the type of a property and the nature of its occupancy. This includes
knowing how secure that occupancy and what can happen to detract from or add it. A hotel is a retail
business, and its major source of profits comes from the sales of its room. Room rates that constantly
increase at or above inflation rates and on occupancy that can hold at a stabilized level except for times of
recession are indeed desirable characteristics.

Some specifics property risk-benefit subjects of analysis are:

1. Review of existing of debt or lease when a purchaser assumes or takes over a property subject to
existing financing, he may need to borrow a portion of the purchase price at interest are below
market rate. Existing debt and seller financing provide financing in the many hotel-motel purchase.

Hotel lease analysis will reveal lessor or lessee and of their potential risk benefit positions, what is
required of the tenant in rental payments, and how the landlord may benefit them the tenant’s
gross sales growth even if the tenant’s net profit does not. Other important lease provides address
such matters such as subordination, defaults, termination, renewals, restrictive use and the right of
the first refusal which can affect the market value and future profitability of the property.

2. Review of physical conditions and capital budgets the facility should be viewed both from a
deferred maintenance standpoint and from an upgrading expansion standpoint. It is often advisable
to use consulting engineers or in house engineers to evaluate the property’s physical conditions that
can; have a great impact on a hotel’s value, move a property from one class to another, increase
occupancy by adding facilities, increase rates by changing room characteristics.
3. Evaluation of management this evaluation includes with an analysis of the management contract
and a review of management’s work motivation and training procedures, on site management by
the management agent, and communication between the management agent the on premise
management, the owner and the other involved parties. Management contracts include informal
agreements and voluminous formal agreements specifying rights and obligations of both the owner
and the manager.
4. Property management property management service may be engaged institutional syndicate
investors by retaining a third party hotel consultant and management firm to liaison between
property management and ownership. The owner is provided with greater assurance of property
managing the hotel, financial reporting and monitoring of capital improvements. The property
manager’s primary responsibility is the preservation and enhancement of property value such as
refurbishing, marketing plans, adherence to budget, annual plans, and changes in a market’s
supply/demand ratios, room rate and pricing policies.
5. Analyzing the business income and real estate income it is difficult to distinguish between business
income and real estate income except in the case of a net-net lease, where the landlord is paid
primarily for the use of real estate and the tenant profit primarily from his business expertise. The
lessor also shares in the business profits through a share of gross sales. Where there is no lessor-
lessee relationship, the evaluation of business value versus real estate value becomes more difficult.
For example, the value of a casino business substantially exceeds the value its land and
improvement.

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 6. Tax consequences tax consequences involve allowable tax deductions because of the amount of
investment on improvements, furniture, fixtures and equipment. The ownership of hotel is bought
and sold primarily for their tax sheltering capacity rather than their ability to provide cash flow. The
tax regulation may permit greater allowable depreciation making the tax sheltering capacity of a
hotel even more than before. Hence, tax oriented equity investors and syndicators reduced their
projected cash on cash return requirement at least for the initial years of their ownership.

Analysis of the Future Income Stream

The valuation of the future income stream depends primarily on the increases in room rates and occupancy
that the consultant believes are obtainable. An internal rate of return can then be applied to this income
stream and the project cost. In the hospitality industry internal rates of return of 20% or more over a 15
years period now appear generally acceptable. Caution must be exercised in the projection process when
using a rate of inflation on room rates, when double digit increases in room rates are experienced period
with any reasonable degree of certainty. The hotel industry like most others is cyclical and typically it lags
behind the general economy during both its periods of recovery and its periods of decline.

Highest and best use alternative use analysis

Highest and best use analysis and alternative use analysis are concerned with the viability of a hotel for uses
other than its present use. For example, the present use might change from first class t economy, from first
class to luxury or even form use as a hotel to residential 8use, rental condominium or cooperative, time
share use, or use a condominium rental pool. Usually a hotel should be demolished or completely recycled
when the land value is greater than the value of the land and building as a going hotel. Perhaps the hotel
should be converted such uses as office space, user occupant space, or conference center space. The
purpose of the highest and best use analysis is to carefully consider possible uses in order to identify not
profitable use or uses for a hotel property.

How and when to sell or buy

A hotel should be sold if it has been determined with reasonable certainty that the present operating
conditions have attained maximum profitability and will fall without major refurbishing and the present
owner does not wish to become involved in a long term capital expense program of this nature. A hotel
should also be sold if the present owner is a hotel operator and believes that the hotel should be converted
to another use ad or if the present owner wants to move the active to the passive investment role. The tax
shelter capability of a hotel or the lack thereof is often an inducement to buy or sell a hotel.

Valuation of a franchise or chain

The evaluation of chain affiliation via franchise requires cost7 benefit analysis. The costs of franchise
membership vary. They involve not only the expense of physically complying with franchise standards but
also the ongoing royalty fees, which are generally a percentage of gross room rates plus marketing and
reservation fees. These costs typically range from 2% to 5% and more of gross room sales. The benefits
derived from chain affiliation are increased sales due to brand name identification, national sales and
reservation systems, and other chain services. These benefits are frequently difficult to measure because of
the uncertainty of the impact of a specific brand name on a particular market. Although many franchises
have national representation, the market strength of others is more r6egionalized. Discussing a franchise’s
strengths with an existing franchise in a similar but a competitive market area can often be most helpful.

Chain financial strength the financial strength of chains is usually easy to determine because many chains
are public corporations. However, an understanding of a particular chain’s share of the market and its

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national or regional strength is needed to determine its impact on a hotel’s value. The strength of the chains
is measured not only in their ability to produce and increase sales but also in their home office services and
specializations in such operating areas as front office, housekeeping, food and beverages, engineering,
architecture, design internal control, and purchasing. Also association with a particular chain may facilitate
obtaining financing for a hotel based ion the chain’s previous track record.

Ability to generate sales it must be understand that chains charge a great deal for the use of their name.
Therefore, such use has to be an asset that can bring enough additional business to create higher gross sales
and net profits after deducting all franchise expenses.

The reservation system of a chain has to be analyzed in terms of its sophistication, the number of
reservations it process, how these reservations are sold to prospective guests, and its performance for other
who currently own properties associated with the chain. A chain reservation system should be evaluated by
its ability to create sales over and above the sales that a comparable independent hotel could realize. Details
concerning the chain’s market strength on a year round basis and in particular market segments for
example, families, corporate executives, and price sensitive travelers should also be considered.

The best way to learn about a chain and its franchise system is to visit both its home office and individual
operations of third party owners. The comments of owners are especially valuable when the owner’s
product is located in market similar to that of the subject property and the facilities are physically
comparable. Important concerns are the number of reservations that the chains generate on a monthly
basis, seasonal variations, the ratio of chain-generated room night to total room nights, and the number of
room nights denied on the reservation systems because the property was at full capacity.

Obviously, if the other members of the reservation group are in the market area of the subject property, one
must make sure that they have overflow business available. However, overflow business is rarely the only
season to become associated with a particular brand name. A hotel should be able to attract its own market
share due to its location and facilities and not just capture existing markets from those using the same name
brand within the area. The franchise affiliation is sought for many reasons, including the security of brand
name identification, the reservation system, purchasing services, management systems and training and the
facilitation of project financing or investor acquisition and also as a method to obtain a relatively high
stabilized market value for the product.

If a chain produces group sales leads given to individual hotels concerning groups planning to meet in a
particular city, this indicates that the chain itself has sales people on the road and offices throughout the
country selling its product. However, it is up to the management of the individual property to make the most
effective use of these leads and convert them into sales. Corporate leads and sales are important, as are the
local and national advertising programs executed by the national chain. If these are directed for a product
similar to the property in question, they can be very helpful; in creating consumer awareness and
perceptions of quality.

Evaluation of Managing Agent

Organization evaluation of a managing agent by the consultant should make sure that the agent has at least
a director of operations and home office directors that has management systems such as those required to
market, control and train as well as a meaningful operations manual. One should be certain that the agent
has sufficient strength to assemble the management team needed for a hotel and is capable of directing that
team.

It may not be necessary to have an expensive management agent for a simple 150-300 room motor hotel,
but a 1,000-2,000 room convention hotel would be expected to have a full-fledged management agent with

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a national brand name. The agent organization should be evaluated on the basis of owner needs. Some
agents offer full architectural and design services in addition to operational, accounting, and financial
specialists. Most agents charge for these specialized services in addition to their standard management fees.

The accounting systems of an agent should follow the standard hotel-motel accounting system acceptable
to the accounting practice in the industry, and should be give the owner periodic report with a comparison
between actual and budget and should assure the owner that the internal control system is properly
monitored. Although most agents decentralize the accounting function at the hotel level, some agents
continue to offer centralized accounting. In either event, the reporting systems should accurately reflect the
operation as well as maintain a high degree of control and supervision.

Engineering capability refers to a complete system, of preventive maintenance and capital project
evaluation and implementations. It includes the ability to put together an engineering section in an annual
plan that fully analyzes the physical condition of a property, indicates improvements categorized as either
desirable or necessary and provides a cost benefit analysis of those improvements that have the revenue or
cost impact. Once the owner decides to implement various projects, the engineering personnel should be
able to bid t7hem out monitor their implementation. Engineering costs, whether a capital or repair nature,
should relate to a flow of income, both present and future.

Marketing obviously is one of the key ingredients for hotels as for retail business. A detailed marketing plan
setting forth strategies and goals is essential to the orderly monitoring of the marketing program’s cost
effectiveness. Marketing strategy details should be clearly set forth and made part of the annual plan used
by the agent and the owner. Marketing supervision of the on premise personnel is needed for cost effective
marketing is the result of the combined efforts of the people at the hotel who sell the hotel and of the
management agent that supervise these people and gives them the necessary tools to make their program
succeed.

Systems, Procedures, Controls differ greatly among managing agents. However, management agents that
handle numerous brand name affiliations franchised properties and independents usually have designed
systems to include procedures and controls that are adaptable to meet properties and that allow the on
premise management teal to effectively run the individual property, while also allowing the agent’s home
office to monitor progress.

Evaluating investment in existing proposed hotel is a time consuming process. Reliance on operating
statements alone can be misleading because the hotel industry historically has been very volatile and
because each facility has its particular characteristics and market mix. Knowledge of the past operating
history, current and future market supply and demand conditions, physical facilities and their condition,
management, franchise and chain strengths and many other factors is necessary to the proper evaluation of
investment in hospitality industry.

4.7 Corporate and Financial Institutions Consulting

For years now the Philippine business community disregarded the inherent value of its real estate. Balance
sheets reflected values based on initial acquisition cost and capital investment- less depreciation. Such
balance sheet numbers failed to reflect the current value of land and buildings.

Corporate Philippines, regardless of the products and services it markets must seriously attend to the real
estate it acquires leases or sells. Any of these activities can affect corporate learning’s and financial standing
favorably or unfavorably. To enhance corporate standing, business executives should tap the experienced
and expert real estate consultant to assist them in decision making involving real estate such as on plant

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relocation, headquarter and branch sites, lease versus ownership and real estate appraisal for merger or
acquisition negotiations.

A major asset of many corporations is in real estate, thereby influencing greatly on their success or failure.
Corporations find it sometimes advisable to diversity their activities into real estate development. The expert
advice of a qualified real estate consultant can enhance the success of such operation.

The real estate consultant is usually retained by a corporate client to support an in house real estate
department that normally contains itself to a relatively narrow area of the company’s real estate activities. In
a sophisticated real estate economy, the consultant provides the client the benefits of a well-rounded
exposure to all facets of the real estate market. Where the corporate client has its own real estate
department, the consultant usually works closely with the head of real estate department or of the plants
and facilities department or the treasurer of the company. Sometimes the consultant deals directly to the
chief executive officer on matters involving major long term decision.

The range of corporate real estate decisions depends in great measure on the line of business with which the
company is concerned. This chapter is divided into section that should cover most the area of interest. These
are sections retaining, manufacturing, broadcasting and professional and service corporations. The last
category includes attorneys, accountants, advertising agencies, investment bankers, commercial and savings
institutions, and insurance companies. In addition, there is a section on the conglomerate a relative
newcomer on the corporate scene.

Retailing- this section is directed primarily to such retailing giants as SM, Robinson’s and Rustan’s. All of
these major retailing chains maintain numerous branches in various areas of the nation. The section is
limited to the department store client. It does not attempt to cover such chai as Mercury Drug, McDonalds,
Jollibee, 7/11, Abenson or the chains in particular such as the chain food stores or the chains in ladies wear
and shoes.

Limited client- consultants find it advisable to maintain the policy of limiting consultation activity to one
retainer client. Department stores are a line of business with trade secrets that are often shared with the
real estate consultant so as to properly implement particular engagements. However, a completing
department store may call on a consultant to handle a specific engagement. It is generally advisable for the
real estate consultant to undertake the engagement with proper disclosure particularly where the
consultant is on a retainer basis.

Department stores client usually maintain income real estate section./ they call the real estate consultant to
support in house capabilities. Problems constantly arise that fall well outside of the usual real estate
problems that the in house real estate deals with on a day to day basis. A department store for example,
opens a branch in a city in which it was not represented previously. The local real estate consultant is called
upon to advice on laws affecting real estate, such as real property taxes, the value added tax, capital gains
tax and transfer fees.

Site selection location is the primary key to a retainer’s success. Locational decision involves not only the
stores merchandising and real estate executives but also it real estate economic and marketing consultants.
A department store client embarking on branding would have its marketing and economic consultant target
those growth rates that either lack department store outlets or that offers a particular type of
merchandising a strong potential or a reasonable share of the consumer market. With the conclusions of the
financial and economic consultant, the client will usually ask the real estate consultant to study the
acquisition of the land within the targeted area. The normal requirements might be for a parcel of land large
enough to permit the development of a regional shopping mall with feet of gross leasable area, which would
be capable of supporting anchor tenants. The initial research for of an appropriate site necessary involves an

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exploration of pending and potential highway and road changes to ensure the ready availability of the
anticipated traffic patterns.

Presite selection counseling prior to the development of the site, the client7 may call on its real estate
consultant to invite shopping center developers for joint venture or land purchase, with the store retaining a
portion of the site for the construction and ownership of its facility. In the latter case, adequate assurances
are required that the developer will construct a center that is large enough to be truly regional in character,
with a grant to the department store of collateral easement for use of the parking lot, openings on the
enclosed mall and so forth. The negotiations and business matters involved in documenting a transaction of
this type are more complex than the usual real estate transactions. T7he consultant provides the necessary
advice relative to land acquisition costs, the availability and cost institutional financing for construction of
the improvements, the most advantageous joint venture agreement, tax consequences and the projected
earnings based on the projected gross leasable area and estimated rentals, operating expenses and real
estate taxes. Also the retain corporate client becomes involved in other situations such as acquisition or
disposition of warehouse and distribution facilities, public auctions or private negotiations for the purchased
of various of types of property and the financing and refinancing of property.

Both conventional and unconventional requests are common in real estate consulting for department store
clients. The consulting assignment might include finding an apartment or home for a transferred executive,
purchasing an existing store in a particular community for transfer to the client, and locating temporary
warehouse space with high ceilings to house floats for the client’s annual promotional parades.

In short, the consultant serves the retail client for support and advice in the areas where in house real estate
function needs assistance, such as lack of expertise in the real estate areas involved, or lack in the time and
personnel needed beyond the usual day to day service. Sometimes, the consultant shields the client from
the marketplace when necessary.

Manufacturing

The client involved in manufacture goods usually call on the real estate consultant for advice in connection
with the sale or purchase of a plant. This initial relationship with the manufacturing client usually results in
other assignments, many of which require the expert and trustworthy real estate professional. One of the
most painful decisions for a business is closing an old plant that employs big labor of a town’s population in
which it is located. This situation requires sensitive consideration both in legal and social aspects.

Sensitivity of plant closings the sensitive matter of plant closing almost prevents the client from seeking
advice from the community involved. Plant closing is a corporate decision that is kept under wraps until a
plan has been devised that will mitigate the loss of jobs within community. The obvious purpose is to avoid
adverse public reaction to the product and goodwill of the corporate client. The real estate consultant,
operating on a regional or nationwide basis, can offer the client appropriate plans to avoid the adverse
effects of a plant shutdown. One approach is to offer t7he property to a preselected list of users in the
community, and even to outside on a one to one basis without resorting to the usual advertising in daily
newspaper of a property offering. This approach provides job replacement to the community by new
occupants for the plant site at the same time that the corporate client announces closing to its operation.

The other approach is sale converter who will r6ecycle the ld plant and create an industrial development for
mix uses, thereby diversifying the local job market and establishing a stronger economic base for the
community. Personal contacts or blind ads locate these prospective buyers without surfacing an intended
plan closing.

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The consultant therefore offers the manufacturing client a complete program for plant closing and the
disposition of property, for implementation either by corporate personnel or by the consultant. In such
instances as described above, the client usually asks its consultant to handle the matter. The consultant’s
assignment would include a market analysis that results in a recommendation for market value appraisal
prices for the excess real estate and client. As a result, the consultant may be asked to negotiate and finalize
a transaction subject to approval by the client.

Office relocation decisions other services that result from an initial assignment from a manufacturing client
may include providing advice on relocation home office relocation of its corporate headquarters or auxiliary
facilities. Corporations have office space requirements in a magnitude that seek professional real estate
advice on a fee basis.

The big segment of the real estate industry makes seek knowledgeable and objective advice which is best
furnished by the professional consultant. Big engagement requires an orderly approach to integrate the wide
array of basic features to compare alternative comparable site or locations. Rental rates are only one of a
many factors that enter into space decisions. Each property is compared according to each of the selected
factors including floor areas, the position of stops on the elevator banks, the availability of public
transportation and the available parking for each area of leasable space. The following is an example of such
list.

1. The signing for building identification for example the Pan Am Building.
2. The extent work improvements or office finishing to be required by the landlord. In most instances,
the landlord gives the tenant an allowance to finish its space partitioning, carpeting and etc. the
greater the work letter in pesos, the less the client has to spend to finish its space in the fashion to
which it is accustomed.
3. The escalation clauses for computing increases in operating expenses and real estate taxes, the base
year to be used for the computation of escalation, the use of actual operating expense escalation as
opposed to a porter wage formula and the inclusion of an index for escalation or additional
escalation.
4. Possible repainting during the lease term.
5. The renewal options following an initial term and the basis for establishing rentals during option
periods.
6. The right of first refusal to purchase the building.
7. The takeover of existing space by the prospective new landlord u9ntil the expiration of the new
tenant’s current lease commitment.
8. The right of first refusal on contiguous or additional space in the building.
9. Security measures particularly after the usual business hours.
10. The adequacy of elevator service for passengers and maintenance.
11. Cleaning standards and garbage facilities.
12. Provision for and the cost of such items as air conditioning after normal office hours 8am to 5am on
weekdays and half day on Saturdays.
13. Subletting privileges with the tenant having the right to profit on subletting and sharing the profit
with the landlord.
14. In communities where the corporate client has never previously leased space it is customary for the
real estate consultant to provide the client with a report setting forth the range of rental rates for
various types of buildings in different parts of the municipality.

The r6eal estate consultant engaged to assist the client in office relocation decisions to 25 a variety of
services for the client such as the following:

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 1. An analysis of the clients growth projections during the next time 15 to 25 years in 5 years segment
so as to evaluate potential space needs.
2. A study personnel profiles for locational purposes so as to obtain commuting patterns for all
segments of the staff clerical personnel, professionals, knowledge people and middle and senior
management.
3. Where the home is to be owner occupied a review of the client’s present, lease commitments that
assesses occupancy costs as a rent equivalent, taking into consideration charges that are involved in
the ownership and management of real property allowances for stabilized maintenance, real estate
taxes, operating costs insurance, debt services, and etc.

With this information the consultant usually reports in writing to the executive officer, setting forth to his
conclusions and recommendations. These may include advising the client to remain at its present location,
to seek new space with adequate provision for future needs to acquire property for its own use either in an
existing building or in a building that is to be developed, to purchase building space on a condominium basis,
or to move back office space to less expensive areas of the municipality or to sub urban locations.

If the client selects one or more of these alternatives, the consultant may be called on to implement the
client’s decision. The assignment may require the use of the skill of other professional skills such as
architects, engineers or space planners and movers.

The consultant has to be available to the client’s attorney’s for review of all business matters incorporated in
the paper to consummate a transaction. Ongoing contact with the client is not completed until the client
moves in.

Broadcasting

The consulting functions for a broadcaster headquartered in large urban center can touch many facets of the
real estate industry, from residential to studio facilities. However, the main activity is usually in commercial
real estate office buildings and the broadcasting facilities such as studios, sound stages, rehearsals halls, and
storage facilities.

Typically, broadcasters in the large urban areas require large office space to house creative and management
personnel. Large broadcasters own head office buildings in their principal areas of operation but their
growth caused them to seek additional space. The consultant is called on to conduct space studies, to
analyze the cost of existing facilities, and to explore possibilities for additional space. In this connection the
client must inform the consultant which of the departments can be separated from its principal operation
without causing undue hardship to its other operations. For example, broadcasting companies may be
located within three blocks of each other along one thoroughfare in large northern eastern city. Day to day
interaction in a friendly competition is an advant7age to all the networks, placing the creative staff and the
senior people outside this small club area would impair their effectiveness. Conversely, and particularly in
this age of sophisticated electronic equipment, there is no need to place the accounting department except
perhaps for top executive personnel, in costly space. Such departments can be housed in one of the less
expensive parts of a central business district with rentals lower than the rentals charged for prime office
space.

Given an adequate understanding of the corporate operational problems, the consultant provides the client
with alternative areas for secondary space requirements all of which would be outside the central business
district CBD core. The consultants recommendations would include information on the availability of space
on competitive rental rates with escalation provisions for operating expenses and real estate taxes on the
extent of the landlords leasehold improvements to the space such as partitioning, lighting, and floor
coverings commonly referred to as “work letter” and on the possibilities of options for renew. The

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consultant would advise the client of his r6easons for preferring specific properties within each of t7he
geographic alternatives.

The client usually follows the consultants recommendations. He is then called to negotiate the acquisition of
space of arental rate or a purchase price below the owner’s asking rate or price. At the conclusion of
negotiations, the counselor has to work with the client’s attorney’s for t7he rental agreement. further, the
reviews and assists them with the business terms of the lease could be compli0cated legal document.

Office space problems generally take up a great dead time\. Yet problems with warehouse space fro the
storage of props and scenery or with the construction or leasing of sound stages are also quite important to
the real estate consultant who represents a major broadcaster.

The real estate consultant serves the client in difficult areas through home and branch offices and through
corresponding in areas where the consultant does not maintain offices.

As the broadcasting client’s space inventory continues to grow the consultant takes an additional task
particularly where there is no in house real estate department. These responsibilities may include preparing
lease summaries for the bookkeeping department and monitoring expiration dates for leased or renewal
options for the company treasure or the person in charge of facilities. The consultant may also be called on
to devise a tickler system for in house use by non-real estate personnel charged with the responsibility of
following up on such and other matters.

4.8 PROFESSIONAL AND SERVICE CORPORATIONS

The urban centers of the nation have become oriented to service industry employment rather than to
manufacturing. In past years the principal employment opportunities in many cities were found in
manufacturing. This manufacturing emphasis no longer exists. Jobs in the service and professional categories
(law, accounting, advertising, banking, insurance, and real estate) make up the largest segment of the job
market in these cities, a far cry from the conditions that prevailed in t7he 70’s and 80’s. The job losses in
manufacturing have generally been more than made up by the growth of the service industries. Those areas
where manufacturing employment has increased had necessary increases in the service categories as well.

Growth in Office Space Demand

The growing trend of white collar employment growth is a welcome one to the developers of residential and
commercial space, except for specific areas such as for the energy. There has been growth in t7he demand
for office space for professionals and senior and middle management persons employed in the service
industries. Furthermore, these employees must be housed in safe and decent housing with reasonable
proximity and convenient access to places to work.

Rent Increase Issue

The escalation of real estate t7axes and operating expenses has resulted annual increases in occupancy costs
in many of urban area. Costing of office buildings may use two methods for computing these charges direct
pass through and a formula tied to the wage rates of building services employees. Under the direct pass
through the tenant pays its proportionate share of the increased cost of operating a building over such costs
in the base year customarily in year in which the tenant takes possession in its space. Disputes arise as to the
charges or expense items to be included in the escalation computation under t7he direct pass through
method. Tenants were constantly taking issue with the landlord’s definition operating expenses. In the US
practice, landlords substituted the porter wage formula to avoid this hassle or because they perceived it to
be more profitable. This appeared to be a reasonable solution to be problem of avoiding controversies and

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initially the landlord and the tenant were prepared to accept the new plan particularly when the ratio was 1
to ½ that is as porter wages for the office building increased one penny per hour, rent was increased by ½
penny per square foot. Over several years, however, that initial relationship of 1 to ½ shifted steadily to
standard of 1:1. In addition, particularly during tight markets, landlords instituted increases over the base
rent geared to CPI increases in the cost of living, with a resultant escalation above that provided for
operations expenses and real estate taxes. In many new buildings in large urban center, the base for
escalation is predetermined by the owner at levels intended to fix the owners expense for operations and
real estate.

Lease Negotiation

Complicated lease provisions are difficult for the lay person to properly evaluate leading large space users to
retain real estate consultants for in lease negotiations for which the consultant usually performs the
following works:

1. Helps in the formation of space committee responsible for making decisions and formulating policy
in connection with the transfer to new and expanded office. Centralization of authority is necessary
to effectively interact with a client in their regard.
2. Acts as the client’s representative in all matters pertaining to space needs and accepts full
responsibility for all inquiries from brokers or developers referred to him. This arrangement serves a
twofold purpose; to act a buffer between the real estate broker and the client and it prot7ects the
client against brokerage disputes, and to enable the client to focus on its business or profession
instead of diverting its attention to its space needs, particularly with unfamiliar problems and
pitfalls.
3. Develops alternatives to conventional leasing arrangement that solve space needs while satisfying
investment objectives such as purchase of a building, acquisition of a portion of a building on a
condominium basis, or joint venture development of a building.
4. Consultants with the client’s legal counsel on all t7he business terms of the lease.
5. Attends space committee meetings and provides reports and recommendations.
6. Assists the client is selecting an architect or space planner to design the proposed space and
utilization scheme before a final space selection is made.

Due Diligence Check in Acquisitions/Mergers

Acquisitions are undertaken for a variety of reasons such as increasing and ensuring earnings, protecting
earnings against dramatic changes affecting a company’s principal line of business, moving into a new
growth markets and acquiring operations that fir into the company’s mix of operations. Many public
companies diversified their operations by acquiring corporations that are completely unrelated to their
principal line of business.

Due diligence check is usually performed by the acquiring entity. As part of the due diligence study, the
acquiring usually require the service of a real estate consultant in addition to a group of auditors and legal
people, to satisfy the requirements of the Board of Directors and Securities and Exchange Commission if the
acquiring company is listed in public stock exchange and to evaluate the real estate assets that are to be
acquired as a part of the transaction.

The consultant is called on to inventory all real properties both held in fee simple and long term leasehold
estates in order to help establish policy with r6espect holdings. The assignment may include market value
appraisal and a program for disposition of excess properties.

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A major acquisition may involve a real estate consultant to perform a variety of studies and functions which
include the following:

1. To appraise parcels of real estate in different locations and establish prices for all real estate and to
prepare and handle a program for disposing.
2. To engage local real estate brokers on a full commission basis to sell the properties negotiations with
buyers subject to approval by the client.
3. To consult with the client’s legal counsel on all sales contracts and assist the counsel through closing.
4. To negotiate for the renewal of office leases.
5. To offer for sublet excess office space resulting from the merger or acquisition. To secure new office
space for use as a regional home office for company headquarters.
6. To conduct bidding to dispose excess assets in manufacturing plants.
7. To assist in the preparation of marketing brochures, newspaper advertising and public
announcement or launchings.

Conclusion
For years now the Philippine business commu9nity overlooked the inherent value of its real estate. Balance
sheets reflected values based on initial acquisition cost-less depreciation, failing to reflect the market value
of land and buildings. One prominent real estate consultant built a very successful career by making
investment goals and expansion of the corporate economy have made business more complex, chief
executive officers and financial officers have become aware of the profit potentials in these hidden assets.
As a result of this trend, the real estate consultant has become an important team member in the business
and financial communities.

The participation of companies in the expansion of the real estate industry has enlarged the role of the real
estate consultant. He has become more aware of the financial structure of companies and of their long term
objectives. Without that awareness he could not properly fulfill his role as adviser. Given the increasing
importance of the real estate to the corporate client, the role of the real estate consultant to business will be
expected to become even more important in the future.

4.9 Consulting for Government Agency

Growth of professional quality in the real estate consulting service benefits the government and the public
from maximum use of real property. All concerned are gaining increased rewards from improved decision
making.

REAL ESTATE CONSULTING advices in complicated market oriented issues seldom available within the
government are valuable to government agencies and government owned and controlled corporation. The
government recognizes the private sector for professional advice on sophisticated real estate problems
related to funding, alternative programs, and the implementation of solutions that are acceptable to both
public and private policies and objectives. Real estate consultants help government in solving real estate
related problems and objective expert determination of goals and objective analysis of program timing.

Professional real estate consultants must maintain continuing education and standards of practice within
their profession that will immediately make available their experience specialized service, research and
information. The capability to respond quickly will enable them to produce less expensive but efficient to
government. The government agencies and corporations that may be involved in real estate related
transaction avail of real estate consulting services include the following:

1. Public Estate Authority

2. Department of Public Works and Highways

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 3. Department of Agrarian Reform
4. Department of Environment and natural Resources
5. Housing and Urban Development Coordinating Council
6. Bangko Sentral ng Pilipinas
7. Philippine Deposit Insurance Corporation
8. National Housing Authority
9. Government Service Insurance System
10. Social Security System
11. Home Guaranty Corporation
12. Home Development Mutual Fund (PAG-IBIG)
13. National Power Corporation
14. Securities and Exchange Commission
15. Local Government Units

National Government LGUs and institutions will achieve acceptable solutions in property acquisition.,
conversion and disposition if advice is available from the professional consultant. A decision between
litigation and settling with a compromise purchase price, for example, may hinge on the potential cost of
setting a domino effect precedent that private business and local society may be better equipped than
government to foresee. Parochial advice is frequently invaluable to legal counsel preparing for
condemnation and damage trials. The professional real estate consultant may be a valuable expert witness
as he is usually effective in communication and able to reduce to express the client’s interest in
dispassionate and reasonable terms.

Acceptance of the consultant’s service for beneficial decision making is gaining ground.

1. Selection and acquisition of site for the training of police and armed forces troops and the
development of waterways, reservoirs, parks, highways and postal facilities.
2. The selection and disposition of surplus property to raise revenue and fro public assistance.
3. The trade of public for private lands where benefits are mutual.
4. The adaptation of national regulations to local needs.
5. The management of ancestral lands for long range value.
6. The management of public grazing lands and of commercial facilities in public parks.
7. The common property management problems of administrative, cultural, social and maintenance
facilities.
8. The crafting of regulations for real estate service practice and business.

Local real estate knowledge, although greatly needed is seldom used by national government agencies
perhaps of the tyranny of regulations and funding structures. However, few needs are as obvious as good
grass roots advice for the Housing and Urban Development Coordinating Council and its support agencies
HGC, NHMFC, SSS, HDMFC, GSIS, NHA and HLURB. Public Estate Authority, the Philippine Veterans
Administration and the Philippine Deposit Insurance Corporation on local market conditions, and on the
disposition of foreclosed properties. The military service, the Department Public Works and Highways, the
Philippine Postal Service and the Department of the Interior and Local Government are equally poorly
equipped to function successfully in acquiring, managing, and disposing of real estate without a strong
support of local knowledge into the decision processes.

1.2 Specific Property Development Programs

REAL ESTATE RELATED ACTIVITIES IN GOVERNMENT

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Real estate consultant are most frequently involved with the local government agencies in providing market
oriented advice on; community planning and zoning, community revitalization, urban renewal, land reform
program, road right of ways, property tax assessment system, zonal valuation and government property
management, acquisition and disposition.

Closing the gap between private market oriented consulting and government public goals requires a
common ground that is fundamental to the development of an efficient and effective private-public
partnership in an ever changing environment and real estate economic factors.

Urban Community Planning and Zoning the real estate consultant and land use planner private or public are
both concerned with future patterns of urban growth, quality of development, and consistent land use as
they influence private investment and public funding decisions. In this context, the real estate consultant is
able to assist LGUs in diversified real estate matters. The consultant may participate in developing planning
policy as a guide to decisions affecting future growth, supplement public planning and zoning
recommendations with market expertise and analyze the probable effectiveness of alternative funding
priorities for projects likely tp influence timing and commitment by private investors. The consultant can also
prepare market analysis and projections on risk management related to infrastructure costs, bonding,
regulatory enforcement and workable private-public partnership agreements.

LGU Comprehensive Land Use Plans most LGUs now require consistency between local planning and zoning,
with a view toward the establishment of equitable practices in plan implementation. Land use zoning is
typically regarded as enforceable when it is supposed by planning policy consistent with comprehensive
plans, like that for housing, industrial, commercial and land reform. A comprehensive plan should contain
general physical plans, each having a summary of relevant baseline data and analysis and a statement of
goals and objectives, key policies on land use, urban planning, transportation, recreation and the
environment, public facilities and public services. These plans provide a decision making guide affecting the
future of a community and may have political overtones. Comprehensive plans are normally adopted by a
local council assisted by a real estate board in principle and concept, allowing departmental project plans to
be prepared and updated so that proposed public agency projects can be set with priorities that are
coordinated and reviewed in light of specific public needs, financial capabilities, and the private incentives
needed to maximize project utility.

Construction of highways and utility extensions, and incentives to basic have proved successful in promoting
orderly cost-effective patterns of urban growth that are consistent with the concepts outlined by an adopted
local comprehensive plan. However, developing public capability to meet capital infrastructure and service
costs for community development within a given time frame requires planning that is sensitive to economic
conditions and to the flotation of bonded indebtedness which are not usually addressed by comprehensive
plans. Therefore, it is often the practice of LGUs involved in capital intensive development projects to update
project plans every several years. A 20 year local comprehensive plan may only require updating every 5 to
10 years depending on the existence of relevant 5 year project plans and on the pattern and intensity of
local urban growth.

Planning and zoning relationship is generally unclear, thus raising questions of right versus privilege and
scarifying predictable flexibility to change in both market conditions and public need. A local comprehensive
plan provides general guidelines for a master plan which includes criteria regarding natural constraints, land
use arrangements, population and housing which density maximums and the determination of public facility
and service responsibilities which is used as a guide to more specific decisions of land use zoning and
subdivision development. Zoning is established within a proposed neighborhood or district for specific
categories of land use activity at densities not exceeding those prescribed by the master plan and in a
fashion 8that is intended to foster local standards of land building use at minimum public cost.

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Land subdivision or platting is similar to zoning in design orientation, though it is most often accomplished
following the rezoning of land out of holding status, which is done prior or at the time of the approval of the
development plan. Plat planning concern is primarily to gain the maximum amenity value potential of each
proposed site and to property timing final plat approval in relation to market demand.

The elements of subdivision design that receive particular public attention include the final engineering
considerations for streets and utilities, school and park dedications, drainage, lot configuration, the grading,
re-greening, landscaping and other measure to establish local site development standards at least public
cost. Objective real estate advice is obviously imperative throughout the process of short and long term land
use planning.

Budget for capital improvements a government budget is the planned public agency programs expressed in
financial terms that describe either by object of expenditure or by function, how revenues are to be
allocated based on political decisions of optimum public benefit. Capital improvement funds are disbursed
among agencies whose combined program expenditures produce community facilities and services, the
effectiveness of which is measured in terms of general public welfare. The basic features of budgets for
capital improvement programs include middle range and end objective planning of priority programs,
centralized management review and a policy making or control framework aimed at effective management
and prudent use of funds within the budget period.

The difficu9ty in the structuring of a planning programming budgeting for public agencies is establishing
consensus on clearly defined problem, due to the complexity of analyzing major program policy options for
funding also due to the fact that the private sector is typically relied on to remain sensitive to the beneficial
output public programs under changing economic conditions. The application of economic analysis to public
sector decision making has focused on program budgeting that recognizes direct linkages between planning,
programming, and budgeting processes. This management systems technique is used at various levels of
complication in administrative decision making and is responsive at computer programs. It provides
analytical capability for the review of programs and objectives within a comprehensive policy making
framework as well as a politically acceptable mechanism for translating comprehensive and program plan
objectives and general policy statements into specific policy appropriate for effective public administration.
Orientation of program budgeting is not on taxation and debt but toward shaping policies expenditures.

The real estate consultant is in a strong position to strengthen public-private coordination toward the
improved effectiveness and efficiency of local public expenditures particularly where there is public
disclosure and information relevant to the economic soundness of public projects. Feedback from the
private sector to the public sector on changing economic conditions locks analysis of economic implications
directly affecting the efficiency of programs, policies, and funding. Such feedback during budget hearings
may be after the fact or may not be given within the context of fostering the long term economic stability of
the community. There are political advantages to funding public programs with short term visible benefits.
Thus, several fundamental problems concerning waste of public funds and lack communication may exist
between the private and public sectors of a community.

Impact analysis of policies goals are policy expression has remained a long standing administrative problem
due to the non-specific time frames typical of local plans uncertainties in project funding, and the insufficient
economic and financial expertise of local public administrators. The state’s police power has inherent
deficiencies in fostering the general public welfares so that zoning administration has evolved within the
framework of land use planning to allow increased flexibility in land use regulation, allowing land use policies
to be shaped by citizen input on quasi-judicial matters affecting future administrative action. In this solution
expert testimony at public hearings on local economic trends and investment potentials relating to the long
term economic stability of a community and to the protection of the interest of the various groups affected
by planning and zoning policies.

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The effectiveness of comprehensive plan is strongly influenced by the position n of the planning process in
the [decision making process. The relationship between LGU or agency comprehensive plans and economic
reality has many times been somewhat remote so that real estate consulting during comprehensive plan
formulation is burdened with economic assumptions. Conversely, local agency projects such as downtown
redevelopment or urban enterprise zones and neighborhood revitalization have realized notable success
when a market approach has been incorporated into the planning process during the plan formulation stage
not after the development of plan implementation [problems involving private commitments feasibility of
design alternatives and investment risks.

Consultants risk of tarnished credibility and economic speculation are minimized within a legal
administrative framework for comprehensive planning where LGU plan formulation is approached through
goal oriented policy making on a case by case basis. Though often controversial, this approach gives the
consultant the opportunity to address general economic conditions and specific market oriented planning
issues related to private planning and zoning proposals. With a relatively high level of public participation,
policy planning can produce predictable decisions that evolve as a comprehensive working plan. LGUs may
apply this concept in updating existing plan documents and in shaping policies to guide administrative
decisions that affect private investment, market competition and community economic growth and stability.

With the interrelationships among urban subsystems specifics projects with primary economic impact on a
targeted recipient segment can also be expected to have secondary economic impact because of proximity
of location and mutually reinforcing activity. A public-private partnership is capable of realizing greater cost
effectiveness in public expenditures through the selective use of subsidized private cost reductions. Such
partnerships will result in the improved design of new street improvements and lighting, seed money for
private financing, tax ceilings on upgraded improvements, and the r6evaluation of low-interest loan
accounts within special improvements.

In house assessment in terms of the interdepartmental and intergovernmental coordination of planning

policy and project modifications may be properly given within the context of the economic impact of local
public decisions and private-public partnership arrangements.

Master Plan Preparation and Review a master plan or the development of a major land area within a
community in relation to real estate consulting may be described as follows:

1. A master plan serves as a means of evaluating the relationship among proposed land uses at
prescribed densities, as well as the adequacy of support facilities and services to meet the needs of
projected population and housing.
2. A master plan is distinguished from a local comprehensive plan by its level of specific and
identification.
3. Master plan considerations relate to the physical parameters of development and amenity value
potentials, the character or proposed neighborhoods, opportunities for the self sufficiency of
employment centers, and conceptual land use arrangement.
4. A master plan considers population and housing density maximums, the location and capacity of
major streets and utilities, front end capital requirements and the time frame for development
phasing and land absorption in the marketing of either raw subdivision land or pattered sites with
streets and utilities but usually not in the marketing of turnkey sites with buildings already
developed.
5. A master plan also serves as an important ingredient for securing annexation with necessary zoning
at achievable land use densities subject to future revisions for obtaining public and quasi-public
commitments to serve an area with utilities and for coordinating planning so as to achieve properly
timed subdivision and marketing with adjacent properties.

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 6. For consulting purposes, a preliminary master plan is a tool for the analysis of land use potentials
where emphasis is given to various anticipated net future benefit to the landholder that are r6elated
to market timing, predicated on expected development and on future density standards.

Economies of scale are available to investor developers of large tracts of land with suburban subdivision
potent7ial. Such parcels may become liabilities if poorly handled or they may become key assets if employed
in market oriented approach. The economies include reduced unit costs of master planning, zoning, platting,
street and utility extensions and marketing and increased amenity value potential made available by the
design flexibility of longer land parcels. Consulting is valuable in the planning and timing of land parcel with
unique physical attributes.

The integration of community master plans into a desired neighborhood image requires knowledge of the
real estate market forces that create effective demand for successful development. However, anticipating
growth through the use of logic concerning the access, topography, and availability of utilities is not enough.
Many well considered long range community plans have failed because the lack of major land parcels at the
anticipated time spoiled an orderly development for maximum the general welfare. Other community
development goals break apart due to inflexibility in the face of changing market conditions. Since society’s
needs and desires are dictated by changing political economic, social conditions that emanate from local and
national affairs, the market is quickly altered and the best laid plans fail. Thus, a recipe for master plan
review may include the following:

1. Inside knowledge of the market

2. The plans of major landowners
3. Current market demands and volume of the market
4. Trends in affordable housing density and absorption rate
5. The tolerance of tax levels to support schools and parks and,
6. Practical solutions in development plans of needs for personal security

No net community benefit comes from controlling the use of a land parcel with zoning that is unacceptable
to the market even though a pocket of neighboring owners may relish an opportunity to temporarily usurp
the rights of other to develop or use their land. From a government planning viewpoint the selection of
suitable land uses must cover in addition to influences and goals for community welfare, the practical
matters of market need and effective demand related to timing. The avoidance of confrontations between
neighbor and developer requires understanding of both viewpoints plus practiced communication by an
acknowledgement real estate authority.

Predicting land absorption rate in new subdivisions is important for planning and zoning decisions and fro
decisions on municipal services health, police, fire, schools, and arterial highways. Unnecessary taxpayer
burdens result from over optimistic land absorption guesses and the provisions of inadequate land for
development creates excessive price levels and indirect damages by discouraging new business and industry.
Measuring rate of land absorption is a principal product of many private real estate consultants versed in the
economic effects of the under and oversupply of a particular land use activity and of market timing.

Impact Zoning Analysis the continuing apprehension of neighborhood property owners is that rezoning and
zoning variances will depreciate the value of their property directly or will precedents that lead to further
property use variances. Objective market investigation that compares property values under similar
circumstances will allay such fears if these investigations are well documented by an independent authority
acceptable to the community.

Applicants for a zone change or variance bear the burden of providing that unique or changing
circumstances have created economic burden that is likely to continue unless remedial local public action is

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taken. Feasibility studies of alternative future uses, precedents and market investigations that compare
similarly situated properties subject to different zoning regulations provide evidence to justify approval zone
change or variance application. Usually included to such approval is the specific design and use conditions
based on the [applicants intended future property use.

Outmoded and inflexible land use ordinances generally contributes to design obsolescence in private
development often including realization of the amenity value potential of sites subject to uniform lot size,
setback, density, and other use restrictions that influence both subdivision layout and building design. Once
established, site specific land use zoning seldom remains responsive to the urban growth pressures tend to
alter from existing zoning and the appropriate development of land committed to long term future use.

Market assessment of a propose development at a given location, made in view of urban growth trends and
projections provides a meaningful basis for estimating the degree of private investment risk related to land
use development based on the realistic zoning alternatives. In view of the potential for conflicts among
development projects and consequent land use activities over the economic life of a neighborhood, planning
and zoning plans must consider community wide rezoning of land from generally restrictive to selectively
more flexible planned development districts.

Although involuntary rezoning constitutes an involuntary exchange of development rights, overall

comparability of the values involved in such modification of enforceable restrictions may be necessary in
order to avoid a public taking. The real estate consultant may be asked to provide expert testimony toward
establishing reasonable administrative criteria for development plan review and approval, particularly where
such policy making is not limited to the continues of a political question.

Voluntary rezoning to permit more intensive land use in planned development districts is typically reviewed
in light of a larger area’s adopted master plan and may prove successful in protecting the market value of
existing improvements and their potential for upgrading such rezoning can:

1. Increased design flexibility in new development

2. Provide adequate buffering of otherwise incompatible land uses.
3. Reduce anticipated long term public expenditures for neighborhood redevelopment and public
safety and
4. Maintain the local tax base.

In planned land use zones design flexibility requires the owner-developer to secure local public approval for
proposed development plan. Planned commercial zones typically require a unified control document
supporting a development plan, where several contiguous sites within one development plan share common
elements such as off street parking, curb cuts, and signage yet retain individual ownership of separate sites
and improvements.

Urban renewal and community revitalization the redevelopment administrator is allowed considerable
discretion in identifying existing and probable future redevelopment need and in selecting development
project priorities. A local agency may designate a development area based on a wide variety of criteria
relating to economic and financial potentials among project alternatives, the availability of non-local funds,
and plan objectives aimed at reducing adverse urban conditions and blighting influences. Typically used and
sometimes graphically mapped for public hearings are neighborhood change indicators such as demographic
data, household income, retail sales, school enrollment trends, other service delivery statistics, [property tax
information, and a neighborhood conditions survey.

The local redevelopment agency needs objective advice supported by reliable market data from a recognized
authority in prescribing economic prerequisites and methods; to improve the viability of revitalization

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project proposal and the rehabilitation potentials of residential and nonresidential areas, to improve levels
and types of public assistance that are likely to be sufficient for attracting site-specific private investment
within a selected target area.

Having identified the redevelopment problems and objectives the basic task of the real estate consultant is
to advise the redevelopment administrator on how to balance publicly desired project characteristics with
the level and magnitude of economic revitalization that is projected as achievable in the market during
project implementation and planning period. Specifics are helpful and are likely to entail the selection of a
workable project alternative, the creation of a property timed market sensitive program and a gradual fine
tuning of the adopted strategy in a fashion that manages risk among the private and public interests that
enter into redevelopment project commitments.

Most discretionary public funds for local redevelopment come through national revenue allotments some
LGUs may invest a greater part of their discretionary funds into public capital improvements by directing
national loan subsidies to eligible private investors through a local nonprofit development corporation.
Other measures oriented to risk management in private-public redevelopment corporation partnership
include performance contacts, reinvestment of local low interest redevelopment loan funds, temporary
property improvement tax ceilings possible on a contractual basis, earmarked special improvement taxes,
and local redevelopment loan guarantees to mortgagors not holding an interest in potential equity on
property benefiting from public capital improvement expenditures.

Economic development must a joint concern and goal for government and private business. Public
entrepreneurship through the coalition of public and private entities is the new blueprint for economic
recovery.

Real Estate Property Assessment under the LG code local assessors is responsible for a uniform and
equitable valuation of real estate as the tax base by mass appraisal. Valuation formulas are typically directed
by the LGU with local ordinances on various percentages of value assessments for different classes of
property. Although the assessors are directed to apply many valuation factors and processes, the safe
practical method used for valuation is a fixed date of replacement cost analysis with depreciation charges to
building improvement related to age. Land values are assessed by acceptable mechanical processes.

The assessor’s goal is to minimize local complaint demonstrating equity in property classes and individual
properties. At the provincial level of assessment goal is equal value relationships among cities and
municipalities for equitable tax revenue flow.

Specialists in real property appraisal may be engaged each valuation period to analyze the fair assessed
value of properties that for various reasons do not fit mass appraisal procedure. Special situations frequently
include peculiar individual property, such as long term below market lease or a given right of use for a
specified time to a charitable organization. Economic cycles may result in temporarily depressed values for
factory space at one time, for general office space at another time, and for apartment at yet another time.

General knowledge of a community, an industry or local political peculiarities may have impact on
assessment adjustment and a well-documented appraisal. Real estate consultants are frequently relied on to
assist in presenting individual tax appeal cases as well as advising assessors. Consultants in the field of
property tax have knowledge of regulations concerning factors of valuation, general intent of effective
legislation, difference between the terminology of the real estate investment industry and that of legislators
the assessors zealous position with regard to overt special individual treatment of one property, the makeup
assessment appeal bodies and their impatient need to have valuation reasoning meet the layman’s
reasoning.

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Specific Government Consulting Needs

Real estate is of benefit government and taxpayer alike when it is used to improve the planning, acquisition,
disposition and use of real property by government.

Administrative and Operating Facilities

Government offices and government storage or maintenance facilities on well selected sites stimulate
private investment on neighboring property. The development of these facilities is in the community interest
of creating a bigger tax base and revitalizing a business district. Government must be well advised as to
when and where to rent space, in lieu of purchase, particularly when that space is within an area of excess
space supply and low property values.

Streets and highways to the professional real estate consultant decisions on the location and access rights of
new streets and highways have creative or destructive results on private property. Local planning agencies
are privy to announced plans of projects and resultant arterial and street requirements but the private
consultants provide added information concerning probable additional impending development that is
critical for the coordination of highway network planning. Acquisitions of rights of way also require expert
knowledge concerning their probable impact on the valuation and development of other property, how to
minimize eight of way costs by avoiding property severance and trading for use privileges zoning and access
rights and how to acquire existing access rights with a minimum of damage and expense to parties
concerned.

Schools student and faculty needs respond to changing standards of business, industry, and society result in
demands for continuing evaluation of the facilities of public and private schools. The r6eal estate consultant
is often needed to resolve questions surrounding the acquisition and disposition of property and
negotiations with neighboring landowners on such matters as expansion and zoning change, and the need to
adopt space to change often requires the team play of the architect, builder, academician, and real estate
consultant.

Schools are often beneficiaries of real estate donation. Donation may be encouraged and enhanced if the
done makes professional consultant available to the donor to provide real estate, advice on the related legal
and tax accounting matters and assistance in programing the use of real estate donation. Such decisions
relate to questions regarding the most profitable or beneficial use and the firming or manner of marketing,
particularly with land that are in use transition or that are in a maturing stage.

Site selection advice is valuable when needing knowledge of the success potentials of community wide
development plans. The lack of such advice may lead school administrations to go in the direction of
previous growth, frequently failing to consider impending economic and social change. Advice is also needed
on the disposition of excess and obsolete property, market timing and use restrictions.

Parks also have a strong social and value impact on adjoining property, but that impact is not [always
beneficial. Location studies and analyses of need and probable resulting effects are of considerable
importance to society, government and business. Flood plain zones are useful for the creation of
recreational and open space, a conversion of community liabilities to potential assets. Private owners of
flood plain lands in many instances attempt to force a dangerous use or a litigious development precedent
that might well be circumvented with local government cooperation by trading developable excess public
land to private owners for marginal flood plain land that is converted to parkland.

Public Utilities professional market oriented advice is cost efficient for public utilities in their long range
planning of main service facilities, advice on the fair price, timing and methods of acquiring and disposing of

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excess property. Public utilities in expensive areas or blighted areas may require careful studies as this
development may involve the exercise of the power domain and relocation of illegal occupants.

4.10 Consulting for IS Development

Why the consultant should understand the planning principles of IS development?

When a client engages the consultant to be a member of a team to coordinate the development of a new IS
he can and must accept the job.

Organizations engage non-IS consultants play major roles in systems development not just to provide input
but as a member of a development team. The IS professionals on the team will need his insight into the
business activities being run and on ways to improve business through the use of new or improved ISs. To be
a productive team member he needs to understand the different phases of planning for system
development.

The consultant must understand what systems analysts and project managers try to do from the very
beginning to the end of the process. In short, any system that involves the client is the consultant’s business
to make sure that the IS developed or purchased satisfy the client’s business need. The new practice to let
non-IS managers actually understands the principles of systems development.

Why develop an IS?

Some organizations develop their information systems by combining many different smaller functional
systems, while others create their ISs from the ground up. The process of developing ISs within a planned
framework creates the best systems and best helps avoid combining a collection of incompatible ISs.

Three factors can trigger the development of a new IS; an opportunity, a problem, or a directive. In the IS
context; an opportunity means a potential increase in revenue reduction of costs or gain in competitive
advantage that can be achieved using an IS. A problem is any undesired situation that can be resolved by
using an IS. For instance, an organization may realize that certain processes are too slow, cost too much, or
produce product or services of inferior quality and that a new IS could solve the problem. Seeking an
opportunity is proactive, while solving a problem is reactive. A directive is an order to take a certain action,
such as to comply with a law or regulation. For example, a BIR regulation may require that data be recorded
and maintained in a certain manner that can only be implemented with an IS.

IS DEVELOPMENT: THE FRAMEWORK SYSTEMS DEVELOPMENT LIFE CYCLE

Big ISs that address structured problems, such as accounting and production systems are conceived,
planned, developed and maintained within the framework systems development cycle (SDLC) consisting of
several distict methodical phases. Different practitioners may refer to the different phases and sub phases
by different names, group two or three different phases into one phase or break a phase into two or three
phases but in general they observed the same steps. While the SDLC is a useful methodology for systems
development, organizations are sometimes forced to take shortcuts due to time pressure funding
constraints or other factors.

The SDLC approach is called a life cycle because it starts with a need, followed by an assessment of the
functions that a system must to fulfill that need, and ends when the cost of the system outweighs its
benefits at which point the life of a new system begins. The planning phase is followed by four major phases;
implementation, analysis, and support. Figure 1 depicts the cycle and the conditions that may trigger the
return to a previous phase.

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System Analysis

Note that the analysis phase is similar to the traditional consulting tool, the PFS. The systems analysis phase
is a five step process designed to answer such questions as:

1. Investigation: How does the existing system work? What business opportunity do we want the
system to seize or what problems do we want to solve or what directive must we fulfill?
2. Technical Feasi0bility Study: Is there technology to create the system we want?
3. Economic Feasibility Study: what resources do we need to implement the system? Will the systems
benefits outweigh its cost?
4. Operational Feasibility Study: Will the system be used appropriately by its intended users? Will the
system be used to its full capacity?
5. Requirements Definition: What features do we want the system to have? What interfaces will the
system have with other systems?
Investigation the first step determines whether there is a real need for a system and whether the system as
conceived as feasible. The investigative team may also be engaged from a consulting firm to undertake the
following:

a. Interview the staff, spend time with employees at their work stations to learn first-hand about the
way they currently carry out their duties, and interview the workers about problems with the
current systems, gives users or workers the opportunity to express their ideas about the way they
would like a new IS to function to improve their work.
b. Prepare a written report summarizing the information gathered, with own opinions on the need for
a new system or disagree with the requesting managers that a new system is justified.
c. Recommend a more comprehensive investigation if the preliminary report concludes that the
business situation warrant investment in a new IS. The executive in charge selects members for a
larger analysis team (to include members of the original team) to determine whether the proposed
system is feasible technically, economically, and operationally.

The Technical Feasibility Study a new IS is technically feasible if its components exist or can be developed
with available technologies in hardware, software, and telecommunications. The investigators are their own
knowledge and information from trade journals and from hardware and software vendors to determine
whether the proposed system can be built. The team must also consider the organization’s existing
commitments to hardware, software and telecommunications equipment.

The Economic Feasibility Study like any project, an economic feasibility study is conducted to see if over the
life of the system, the benefits outweigh the costs. To this end, the analyst prepare a cost/benefit analysis,
which can be a spreadsheet showing all the costs incurred by the system and all the benefits that are
expected from its operation. These benefits are extremely important in business and must be considered
even if they are not quantifiable. The systems proponent and systems analyst must consider all the benefits
and present them in a convincing matter. Yet, calculating ROI is extremely difficult and many executives now
understand that even the most experienced IS professionals cannot always quantify the benefits of the ISs.
Perhaps the question that decision makers should ask is not only “what is the ROI of this proposed IS?” but
also “can we continue to be competitive without this proposed IS?”

The Operational Feasibility Study the purpose of this study is to determine whether the new system will be
used as intended, specifically answering the following question:

1. Will the system fit into the culture of this organization?

2. Will all the intended users use the system to its full capacity?

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 3. Will the system interfere with company policies or laws and regulations?

Organizational culture refers to the general behavior of the corporate environment on issues such as the
nature of relationships between supervisors and subordinates casual or formal the existence or lack of dress
code; the use of or ban on flex time, which allows employees to start and stop work within a range of hours
as long as they work the required total; and acceptance or rejection of telecommuting, which allows
employees to work at home.

Requirements Definitions when the analyst determines that the proposed system is feasible the project
team is installed. Management or the consultant nominates a project leader who puts together a project
team that will develop the system until it is ready for delivery. The team includes system analysts,
programmers and often representatives from the prospective group of users.

Among the first information the analysts must know is the system requirements, the functions that the
system is expected to fulfill and the features or means through which it will perform its tasks or goals.
Requirements definition is often also called fact finding which is done several ways:

1. Interviews- the analysts meet with prospective users and ask questions. The users are given
opportunity to discus problems with the existing system and ways they would like these problems
solved.
2. Questionnaires- employees involved in the business processes for which the system is to be
developed fill out questionnaires. The analysts glean the information they need from the answer.
3. Examination of documents- the employees give the analysts forms and other documents containing
input data and output information involved in their work.
4. On-the-job observation- the analysts spend time with employees while they carry out their normal
work. The analysts follow the business process first-hand.

The facts gathered are then organized into a document of information detailing the system requirements.
The analysts present the list to the users and their managers to confirm that they are the features they need.

Note that the requirements report does not yet include any details of the hardware and software that will be
used, such as no mention at this point of the specific computer models to be used or of the programming
languages in which the software will be written.

For instance, the requirements report ay say that the accounting department needs a new client/server IS
that is capable of accepting bar coded information entered by shipping personnel at shipping docks,
automatically generating invoices, allowing authorized users to generate financial reports from their PCs.

Planning For IS Development

Why plan? According to observed business experience in IS development, business spent billions of pesos on
information technology, and that IT spending constitutes a big percentage of capital equipment spending.
Also, it is estimated that a big percentage of all IS development projects are abandoned before completion.
Much of this waste of resources is due to lack of proper planning.

What is planning? Business planning starts with a general idea and an explicit statement of where an
organization wishes to be at some time in the future, from a year to five years horizon in terms of:

a. How management foresee the role and use of its IT in the future.
b. Activities that will help achieve the goals.
c. A program for measuring r6eal-world progress against the plan.

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 d. The means to implement changes in the plan.
e. Planning is not a full control of an organizations business or dictates what will happen, but a tool to
help shape the future and anticipate and prepare for whatever may occur.

IS as an integral part of an organization’s overall business plan. The following discussion is both business
planning as it relates to ISs, and the process of planning ISs themselves.

Business Planning

Successful plan of business managers must be clear about:

1. The organization’s current market share position

2. The organization’s objective market share
3. How they can help where their organization wants it to be.

These clear ideas from the background for business planning, consisting of the following elements:

1. Defining an organization’s goals and objectives.

2. Determining the resources needed to attain these objectives.
3. Creating the policies that will govern [the acquisition, use and distribution of those resources.
4. Providing for any changes in objectives that may be needed along the way.

In summary, business planning consists of:

5. Setting objectives
6. Deciding on changes to objectives
7. Designating the resources to obtain the objective
8. Establishing policies that govern the

Planning by critical success factors defines the factors that are critical for success as the basis for a plan.
Critical success factors (CSF) are concerns and issues managers identify as critically important to the success
of their business units.

In the reason of ISs, planners interview executives to see how it can promote their goals and asked to
pinpoint the most critical factors to their success such as delivery time of goods and services, time to
prepare certain reports, availability of information combined from several disparate sources, and online
availability of information. The underlying concept is that the success of the organization is the sum of the
success of individual business units. For example, a new or improved IS may help one business unit become
more successful by shortening product delivery time. A new or improved IS may help other business unit
become more successful by reducing the time needed to produce reports. If each unit improves its
performance, then the organization will improve.

Information Systems Planning

Until perhaps the late 1980s, organization planned without considering either the role of IS professionals
could take in the planning process or the planning that is necessary to create a productive IS department.
Most companies called there is units data processing departments and data processing professionals were
considered technicians who concentrated on automating processes rather than professional and consultants
who could help the organization achieve its goals. Top management didn’t realize then for several years that
the ISs themselves had to be planned, lest expenditures balloon uncontrollably. In the past, ISs were either
not planned at all or planned bottom-up. Eventually, organizations recognized that the large amounts of

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time and money they spent on ISs required IS planning for their development and for the resources needed
to develop and maintain the systems. The modern approach to systems development is no longer based on
reacting to emerging business needs as it was earlier. Nowadays, ISs are often the core of business processes
and sometimes the generator of new revenue. Thus, IS managers are involved with short range and long
range IS planning.

For example, because of their traditional focus, credit card companies were accustomed to focusing on
“processing data” and serving their existing customers well in that regard. Processing data was the main
purpose of their ISs. Now, these same companies collect and use their data for many more reasons than just
serving their customers credit needs. The data are used in sophisticated data warehouses, data mining and
artificial intelligence techniques to gain more customers, create alliances with other organizations and
augment their market share by offering more services. When the focus is only to automate business process,
not much planning is required however, when Iss are to be used for strategic purposes, planning is essential.
Not only do IS managers have to plan their activities, but now many organizations integrate there is planning
into their overall organizations strategic planning. Top management acknowledges that IT plays a role in
generating business, not just in improving it in small increments. For example, consider Pep Boys the
American auto service chain. The operations in such an organization may seem simple enough not to
warrant the integration of ISs into its business planning. However, management does consider ISs in its plans
which has resulted in the development of a data warehouse close to 2 TB (terabytes) one of the country’s
largest data warehouse. This warehouse is a major part of the company’s long range business plan. Among
other activities, top management can use the data warehouse to find out which services are most also use
the data warehouse to continue to minimize customer returns due to car problems that were not fixed well
the first time.

Prerequisites for Information Systems Planning

As prerequisites for successful IS planning, top management must:

1. Recognize that IS is an indispensable resource

2. Understand that IT is a complex resource
3. Record IT as owned by the entire organization
4. Record ISs as a source for gaining strategic goals
5. View ISs as a tool to control power

1. Top management must recognize that IS is an indispensable resource in all business activities. IS has
impact on the organization as great as that of new manufacturing machinery that may significantly
change the way an organization conducts its business. Without such recognition management may
not agree fund the acquisition of ISs.
2. Top management must understand that IS is a complex resource and its development and use must
be planned. ISs are more than just computers; they are hardware, software, telecommunications,
people, procedures, and data. These components must be planned to avoid waste. From a
hodgepodge of hardware and software that do not integrate well to serve the organization,
management can always rely on internal experts and external consultants to explain issues such as
hardware obsolescence, software incompatibility and business concerns.
3. Top management must see IS as a resource owned by the entire organization, not just the IS unit. Its
development and use should be planned like human resources, manufacturing machinery and
finances.
4. Top management must regard the ISs as a source for gaining strategic goals rather than merely
solving problems or supporting existing business processes. For example, top management is more
likely to approve the acquisition of ISs that help augment the company’s market share or sustain its

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 position in a highly competitive market than acquisition of computers that seemingly only make
some employees work easier.
5. Top management must view ISs as a source to control and distribute power. Management should be
aware of how power is granted or denied and integrate that understanding into planning ISs and
help minimize political struggles while ensuring that employees are given appropriate access to IS
resources.

Factors that Influence Real Estate Values

1. Physical and environment- the range of possible liabilities imposed on property owners for
environment factors like typhoons, earthquakes, floods, tsunami, and proximity to fault lines, ill-
planned development and non-coordinated uses of properties can be overwhelming.
2. Economic- real estate is spark plug of economic activities. Once it moves, everything else moves.
Low interest rates coupled with high rate of employment and purchasing power encourage
developers to develop and produce more housing.
3. Government and legal- police power like zoning, height limitation, and taxation affect the value and
demand on properties.
4. Social- area preference influences values of properties. Demand coupled with purchasing power is
an attraction to real estate developers. Condominium projects have received a measure of
acceptance in urban areas.

Elements or Determinants of Values:

1. Demand- is present when someone wants the property and has the financial ability (purchasing
power) to purchase it.
2. Utility- the property can serve a useful purpose.
3. Scarcity- present when the supply of property is less than the demand.
4. Transferability- title to the property can be moved readily from one person or entity to another.
Property registered under the Torrens system is better than an unregistered land.

Physical Characteristics of the Land

1. Immobility- exact in location; geographical location always remain the same

2. Indestructibility- land is durable; not a wasting asset
3. Non-homogeneity- no two parcels of real estate are exactly alike

Economic Characteristics of the Land

1. Scarcity- supply is limited; the owner of property in a highly desirable area will have an almost
monopolistic advantage
2. Modification- also called improvements, states that changes in a parcel of land affect its value
3. Fixity- investments in real estate is long term also called permanence of investment
4. Area preference- also called situs, refers to people’s preference for certain areas

Different Kinds of Values

1. Market value (assessor)- value of the assessor for the property based on classification and as shown
in the tax declaration; being used in computing local taxes like realty tax, special education fund tax
and idle land tax.
2. Assessed value (assessor)- taxable value; basis of realty tax.
3. BIR zonal value- assigned values for the lots and condominium units.

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 4. Market value (appraiser)- exchange value or objective value; most likely value in case of sale.
5. Loan value (appraised value of property x loan to value ratio)- base on capacity to pay
6. Capitalized value- the value arrived in income approach= Net operating income/cap rate
7. Book value- the value of the property as appearing in the books of accounts (asset account)
8. Estate tax value- value of the estate at the time of death
9. Value in use- value to the owner of the property, subjective value
10. Value in exchange- market value, objective value
11. Cash value- property should be appraised in cash value or its equivalent; it is market value
12. Economic value- an estimate based on the market place, in which primary consideration has been
given to scarcity(supply), utility (demand), and futurity (future benefits).
13. Just compensation value or condemnation value- an estimate arrived at for property taken
according to laws governing the taking.
14. Cost value- an estimate derived form costs actually paid to bring properties into being.
15. Plottage value- increase in value when two or more parcels are combined into one property.
16. Rental value- refers to the price fixed for the right to use a certain property for a specific period of
time.
17. Investment value- the worth of investment property to a specific investor.
18. Going concern value- the value in an existing established business property compared with the value
of selling the real estate and other assets of a concern whose business is not yet established. The
term takes into account the goodwill and earning capacity of a business.
19. Insurable value- the highest reasonable value that can be placed on property for insurance purpose.
20. Liquidation value- value which is below market value
21. Salvage value- the amount that may be recovered minus cost of disposal when the asset will be
retired of disposed at a future time.
22. Scrap value- value of materials recovered from a depreciated property.

APPROACHES TO VALUE- COMPUTATION

1. Market Data or Sales Comparison Approach

Value = Value of Comparable + or – Adjustments = Land Value

Value of Comparable Property, say - P5,000.00

Add or minus:
Adjustments due:
• Terms of sale, time element,
• Economic and physical factors, say - 1,000.00
Estimated land value per square meter - P6,000.00

2. Cost Approach to Value- per square meter method

Value = Cost to replace – Depreciation + Land Value

Assumption:
Estimated RCN of the building per sqm. - P20,000.00
Floor area of the building - 500 sqm.
Estimated useful life of the building - 50 years
Actual age (also effective age) - 20 years
Accrued depreciation rate (20/50) - 40%
Fair market value of the land - P2,000,000.00

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Computation of Fair Market Value (Land and Building)

Reproduction Cost-New of the building

FA 500sqm × P20,000.00 - P10,000,000.00
Less:
Accrued Depreciation (40% of P10M) - 4,000,000.00
Depreciated Value of the building - 6,000,000.00
Add: appraised Value of the land - 2,000,000.00
Market Value (Land and Building) - P8,000,000.00

2a. Cost Approach- per square method- (more realistic approach)

Example: Benchmark is, say, living room area at P15,000.00 per square meter
1. Garage is 50% of living room
2. Living room at P15,000/sqm.; dining area at 90% of living room
3. Maids room at 70% of living room
4. Masters bedroom at 70% of living room
5. All other bedrooms at 120% of living room
6. Toilet and bath at 90% of living room
7. Roof deck (concrete slab) at 30% of living room

2b. Cost Approach- Building Value Computation

Assumption:
1. RCN of the building
2. Original acquisition cost
3. Estimated useful life per book
4. Actual age/historical age
5. Effective age
6. Estimated remaining useful life
7. Estimated remaining useful life
- P10,000,000.00 (appraisal)
- P2,500.000.00 (accounting)
- 50 years (accounting)
- 30 years (accounting)
- 20 years (appraisal)
- 30 years (appraisal)
- 20 years (accounting)

Compute:
1. Accrued depreciation rate per accounting
2. Accrued depreciation per accounting
3. Accrued depreciation per appraisal
4. Net book value
5. Appraised value
6. Unearned increment

Solution:
1. Accrued depreciation rate (accounting)
= 30 yrs. / 50 yrs. = 60%

2. Accrued depreciation (accounting)

= 60% × P2.5M = P1.5M

3. Accrued depreciation (appraisal)

= 20 yrs. / (20yrs + 30 yrs) = 40%

4. Net book value (accounting)

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 = P2.5M × 40% = P1M

5. Appraised value
= P10M × 60% = P6M

6. Unearned increment
= P6M – P1M = P5M

Accrued depreciation rate: (appraisal)

Effective Age (20 years)

Effective age (20yrs) + remaining useful life (30yrs.)

Therefore: Accrued depreciation rate = 20/50 = 40%

Unearned increment:
Increase in the value of the property without too much effort on the part of the owner.

Appraised Value – Net Book Value = Unearned Increment

2c. Cost Approach – Unit-in place method

It compresses the quantity survey method.

Example: Reproduction cost-new of a two-storey building

Particulars Unit Cost Amount

Mobilization Lump sum P15,000.00
Excavation Lump sum 20,000.00
Foundation (30cm) P8,000.00 210,000.00
Columns (40cm) 10,000.00 400,000.00
Beams (20cm) 10,000.00 200,000.00
Truss/Roofing (200sqm) 2,500.00 500,000.00
Ceiling (400sqm) 500.00 200,000.00
Concrete slab (400sqm) 1,000.00 400,000.00
CHB walls (600sqm) 1,000.00 600,000.00
Door/Jambs (10sets) 1,500.00 15,000.00
Ceramic tiles (400sqm) 500.00 20,000.00
Windows (600sqft) 700.00 420,000.00
Gate (84sqft) 800.00 67,000.00
Electrical Lupm sum 250,000.00
Painting Lump sum 200,000.00
Plumbing Lump sum 150,000.00
Misc. and contingencies Lump 50,000.00
sum
Total 3,517,000.00
Add: Contractor’s profit 1/3 of 1,172,000.00
total cost
Reproduction cost-new P4,689,000.00
Divided by Floor area of say 400sqm.
Reproduction Cost /sqm. 11,722.50

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 Rounded to 12,000.00
Add: developer’s Mark-up of 50% 6,000.00
Selling price per square meter P18,000.00

2d. Cost Approach – Quantity Survey Method

Materials
1. Concrete works - P1,200,000.00
2. Masonry works - 700,000.00
3. Steel reinforcements - 344,000.00
4. Electrical works - 180,000.00
5. Plumbing works - 100,000.00
6. Doors and windows - 200,000.00
7. Painting works - 100,000.00
8. Tile works - 100,000.00
9. Ceiling works - 150,000.00
10. Wood partitions - 80,000.00
11. Roofing works - 300,000.00
Estimated total cost of materials - 3,454,000.00

Labor cost (30% of materials cost) - 1,060,200.00

Others
1. Contingencies @5% of material cost - 172,700.00
2. Permits and license - 50,000.00
3. Supervision at 10% of material cost - 345,400.00
4. Contractor’s profit at 10% of material cost - 345,400.00
5. Taxes - 103,620.00
1,017,120.00

Reproduction Cost New - P5,531,320.00

Divided by: Building gross floor area - 300 sqm.

Estimated cost per sqm. - P18,437.00

3. Income Approach to Value

Two Kinds of Income Approach

1. Direct capitalization method

a. Gross Income Multiplier Method
b. Gross Monthly Rent Multiplier
c. Residual Methods
i. Straight line
• Land, building and property residual
ii. Annuity
• Land, building and property residual

2. Yield capitalization method (discounted cash flow)

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Direct Capitalization Method

General Formula: Value = NOI / Capitalization Rate

1. Gross Income Multiplier

1a. Gross Income Multiplier (GIM) Method

Formula: SP of Comparable / Effective Gross Income of Comparable = GIM

Value of subject Property = GIM × EGI of subject property

Applicability: Commercial properties

1b. Gross Rent Multiplier (GRM) Method

Formula: SP of Comparable / Effective Gross Mo. Rental of Comparable = GRM

Value of Subject Property = GRM × EGMR of subject property

Applicability: Residential apartments

2. Residual Technique (straight line method)

Uses split rates for land and building residual methods. Split rates are separates rates for land and
building (interest and recapture rates).

2a. Land Residual Method (straight line)

 Building value is known, recapture rate is 2% per year (building has 50yr useful life)
 Formula:
NOI of subject property - P2,200,000.00 (given)
Less: Income to building
o OAR × Bldg. Value - 1,600,000.00
(8% × P20M)

 Income attributable to land - 600,000.00

 Divided by: Interest rate - 6% (given)
 Land Value - 10,000,000.00
 Plus:
 Building Value - 20,000,000.00
 Land and Building Value - P30,000,000.00

Distribution of P2,200,000.00 income:

1. Income to land (6% of P10M) - P600,000.00

2. Income to building (6% of P20M) - 1,200,000.00
3. Recapture of the building (2% × P20M) - 400,000.00
4. Total NOI - P2,200,000.00

2b. Building Residual Method

 Land value is known, recapture rate is given

 Formula:
NOI of subject property - P2,200,000.00

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 Less: Income to land
o Say 6% × Land value of P10M - 600,000.00
 Income attributable to building - 1,600,000.00
 Divided by: Overall rate - 8%
 Building value - 20,000,000.00
 Plus:
 Land value - 10,000,000.00
 Land and Building Value - P30,000,000.00

2c. Property Residual Technique

 The general formula for income approach

o Value = NOI / Rate
o P27,500,000.00 = P2,200,000.00 / 8%

3. Residual Technique (annuity method)

3a. Land Residual Method

 NOI of subject property - P2,200,000.00

 Less: Income to building
o Bldg. Value / PWF (50yrs @8%) - 1,633,987.00
(P20M / 12.24)
 Income attributable to land - 566,013.00
 Divided by: Interest rate - 6%
 Land Value - 9,344,550.00
 Plus:
 Building value - 20,000,000.00
 Land and Building Value - P29,433,550.00

To get the Present Worth Factor of 50 years @ 8%, use S-1/Si

 (1+.08)50 – 1/ (1+.08)50 × i = 46.9016 – 1 / 46.9016 × i

= 45.9016/3.75= 12.24 (normally, this is given in the exam)

3b. Building Residual Method

 NOI of subject property - P2,200,000.00

 Less: Income to land
o Interest rate × Land value
Say 6% × P10M - 600,000.00
 Income attributable to building - 1,600,000.00
 Multiply by: PWF (50yrs @8%) - 12.24
 Building Value - 19,584,000.00
 Plus:
 Land Value - 10,000,000.00
 Land and Building Value - P29,584,000.00

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3c. property residual method (future building value is given @ P60M)

 NOI of subject property - P2,200,000.00

 Multiply by: PWF (50yrs @8%) - 12.24
 Present Worth of NOI - 26,928,000.00
Add: Reversion value of the land
 (Future Value × Reversion Factor (50yrs @6% - 3,258,000.00
Say P60M × 0.0543)
 Land and Building value - P30,186,000.00

Reversion Factor = 1/S (50yrs at say 6% discount rate/year)

= 1 / (1.06)50 = 1 / 18.42 = 0.0543 (rounded)

Yield Capitalization Method (Discounted Cash Flow)

 Applicability:
If series of income is different every year
 Formula:
Calculate value/year = Yearly income × Present Worth Factor
Then, add all the value indicated per year = Property value

Discounted Cash flow

(Income stream is variable)

 Compute the present value of

A 5 year income stream
Discounted at 12% IPA

Income: Yearly Cash PWF PWF Present Value

Flow
First year P500k 1/1.12 (0.892857) P446,428.50
Second Year 600k 0.892857/1.12 (0.797193) 478,315.80
Third year 700k 0.797193/1.12 (0.711779) 498,245.30
Fourth year 800k 0.711779/1.12 (0.635516) 508,412.80
Fifth year 900k 0.635516/1.12 (0.567425) 510,682.50
Total P3.5M P2,442,084.90

Here, the Present Value of P3,500,000.00 to be realized in 5 years if discounted by 12% per year is
P2,442,084.90. The difference is called discount or interest of the lender.

How to use your calculator to arrive at PWF: even ordinary calculator)

1. Press one (1)

2. Press division sign two times (2)
3. Press 1.12
4. Press equal sign and 0.892857 will appear
5. Press again equal sign (=) and 0.797193
6. Just continue pressing and get the desired PWF

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Discounting
 Discounting or Discounted Cash Flow Analysis (DCF) is the process f converting future payments into
its present value.

Compounding
 The rate per compounding period is called Effective Interest Rate or Effective Yield Rate.

Annuities
 Refers to series of regular payments, such as regular monthly rental payments under the term of
lease or regular monthly amortization of loan.

Amortization Factor (diminishing balance)

 Compute Mo. Amortization of 21% IPA at 60 months to pay:
 Formula:

MAF = S × I divided by S – 1 or Si/S-1

Where:
 S = (1=i)n
 I = interest per period (here it is one month interest)
(21% / 12 months = 1.75% or 0.0175
 N = number of paying period = 60 months
 Solution:
S × I divided by S – 1
= (1.0175)60 × 0.0175 / (1.0175)60 – 1
= 2.8318 × .0175 divided by 2.8318 – 1
= 0.049556784/1.8318
= 0.0270536 or 0.02705

 Question:
Compute monthly amortization of 1,000,000 loan payable in 60 months at 21% IPA?
 Answer:
MA= P1,000,000 × 0.027054 = P27,050.00
 Question:
How much is the total interest paid in 60 months?
 Answer:
Total interest in 60 months
P27,050.00 × 60 months = P1,623,000.00 – P1,000,000.00 = P623,000.00

Present Worth Factor or Discount Factor

 Use this factor to get the present value of an income stream at a discount
 Applicable if income stream is in equal amounts.
 Compute the present worth factor (PWF) of 60 months income stream in equal amounts discounted
at 21% interest per annum:

 Formula: (exact opposite of MAF)

PWF= S – 1 divided S × I or S-1/Si
 Solution:
S-1/Si or 1.8318 / 0.049556748 (see amortization factor)
63.9636

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  Question:
Compute the PRESENT VALUE of P27,050.00 (equal monthly income stream) payable in 60 months
discounted at 21% IPA?
 Answer:
Present Value = P27,050.00 × 36.9636 = P999,865.00
Rounded to: P1,000,000.00

Commonly Used Formulas in Income Approach

1. Future Value Factor

 Simply S or (1+i)n
 Where:
1 is one whole number or 100%
I is interest period
Future value = present value × FVF

2. Reversion Factor
 Exact opposite of Future Value Factor or 1/S
 Present Value= Reversion Factor × Future Value

3. Amortization Factor
 Formula: S×I divided by S-1
 Say: Mo. Amortization = MAF × Loan Value
 Here, the periodic monthly amortization is equal in amounts (interest + principal)

4. Discount Factor
 Formula: S-1 divided by S×i
 Say: Present Value= Discount Factor × Periodic Income Stream
 Here, the periodic income stream should be in equal amounts

How and where to get Overall rate?

1. Band of investment method

1. Investor can avail 75% of capital requirement at 15% interest rate

2. Investor can put 25% equity and satisfied with 10% return
3. Compute the overall rate

Participation Interest Composite Rate

Mortgage loan 75% x 15% 11.25%
Investors equity 25% x 10% 2.5%
Overall rate (capitalization rate) 13.75%

2. From Market Comparable

Selling price of comparable building - P5,000,000.00

Annual net income of the comparable - 400,000.00
Overall rate =n P400k/P5M - 8%

 What is the interest rate if recapture rate is 2%?

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 Interest rate= overall rate – Recapture rate
= 8% - 2% = 6%

 What is the value of the subject property if its NOI is P2M?

Value = P2M / 8% = P25M

Operating Statement

In income approach, income is net operating income (NOI). There are expenses in accounting that are not
included in computing NOI for appraisal purposes. There are four types:

1. Financing costs- property is appraised without considering available or probable financing except
under the mortgage equity capitalization method. The focus of a market value estimation is the
property’s productivity- its NOI.
2. Income tax payments- it is not included because it is more related to the owner than to the
property.
3. Depreciation charges on buildings or other improvements- an annual depreciation charge is an
accounting method or recovering the cost of an investment over a period of time.
4. Capital improvements- payment of items like new refrigerators, ranges, windows are not treated as
operating expenses but are taken from the replacement reserve monies.

Operating Statement

Annual gross potential income say P5,000,000

Less: allowance for vacancy say 10% 500,000
Gross effective income 4,500,000.00
Less: operating expenses before recapture
1. Variable expenses
2. Fixed expenses
3. Reserves fro replacement 1,000,000.00
Net operating income P3,500,000.00

Question:
Based on the above figures, what is the estimated value of the land and building if overall rate is 10%?

Land and Building Value = NOI/10% or P3.5M/ 10% = P35M

Operating Statement Ratios

1. Operating expense ratio = Operating Exp./Effective Gross Income
2. Net income ratio = NOI/Effective Gross Income
3. Break-even ratio = Operating Expenses + Debt Service
Potential Gross Income

How to compute recapture rate:

1. Recapture rate (building is brand new)

Estimated useful life of building – 50 years
Method of computing – straight line
What is the yearly depreciation rate (accounting) or recapture rate (appraisal)

Solution: 100% / 50years = 2%

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 2. Recapture rate (building is old)
Estimated useful life of building – 25 years
Method of computing – straight line
What is the yearly depreciation rate (accounting) or recapture rate (appraisal)

Solution: 100% / 25years = 4%

3. Recapture rate (leasehold)

100% / remaining useful life of lease
Say: 100% / 20years = 5% per year

Selecting the Interest Rate

By: The Market Extraction Method

In this method the appraiser finds the interest rate of a comparable property by subtracting the portion of
the property’s NOI attributable to building recapture from total NOI, then dividing the remainder by the
selling price of the property.

Assumption:
1. The comparable property was sold at P200M (land and building)
2. Land value of comparable property is P50M
3. Building has remaining economic life of 40 years (comparable)
4. NOI of comparable is P30M

Find/Solution:

1. Building value = P200M – P50M = P150M (comparable)

2. Recapture rate = 100% / 40years = 2.5%
3. Recapture value /year = P150M × 2.5% = P3,750,000.00
4. Income to land and bldg. = P30,000,000 – P3,750,000 = P26,250,000.00
5. Interest rate from market = P26,250,000/P200M = 13.125%

Problem Solving

Gross Income Multiplier (GIM)

 Given:
Selling price of comparable building - P6M
Annual gross effective income of comparable building - P1M

 Questions and Answers:

GIM of comparable = P6M / P1M = 6

What is the estimated land and building value of the subject property using the above GIM if the
annual Effective Gross Income of the subject property is P2M?

Value of subject property

= EGI of subject property × 6 = P12M

It is by substitution:

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P6M / P1M = 6 (comparable)
P12M / P2M = 6 (subject property)

Gross Rent Multiplier (unfurnished rental)

Given:
 Subject property’s monthly market rent
(Economic rent) not contract rent say - P300,000.00
 Selling price of comparable building used as basis - P100M
 Gross rent per month of comparable building - P5000,000.00

Question and Answer:

1. What is the estimated land and building value of the subject property using the above assumptions?

GRM of comparable = P100M / 500K = 200

Therefore:
Value of subject property = 200 × P300K = P60M

MATHEMATICS OF INVESTMENT FORMULAS

1. (1+i)n = S Accumulation factor or future value factor compound interest

2. (1+i)-n = 1 Reversion factor (compound interest)

S

3. (1+i)n – 1 = S – 1 Amount of an annuity of P1per period accumulation

I I

4. i = i Amount of an annuity of P1 per period present value

(1+i)n-1 S-1

5. 1 – (1+i)-n = S-1 Discount factor or present value of an annuity of 1 per period

I S×i

6. i =S×I Amortization factor

1 – (1+i) S – 1
-n

1. FV = PV x S

2. PV = FV x 1
S

3. FV = PMT x S-1
I

4. PMT = FV x i
S–1

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 5. PV = PMT x S – 1
Where:
SxI
S = (1+i)n
6. PMT = PV x S x i N = Number of paying period
S–1 I = interest per period
FV = Future Value
PV = Present Value
PMT = Periodic payment

Math of Investment Problem Solving:

1. What is the future value (FV) of P100K single deposits for 20 years earning 10% interest
compounded annually?

Answer:
Formula: Future Value = PV x S
= P100K x (1.10)20
= P100K x 6.73 = P673,000.00

S = (1+.10)20 = 6.73

2. You desired to have P100K six years from now. What amount should be deposited now (PV) to
provide for it? Interest rate is at 10% per annum.

Answer:
Formula: Present Value = FV x 1/S
= P100K x 0.564473 = P56,477.30

1/S = 1/(1.10)6 = 1/1.771561 = 0.564473

3. If 3 annual deposit of P20,000 each are placed in an account, how much money has accumulated
(FV) after the last deposit at 10% interest per annum?

Answer:
Formula: Future Value = PMT x S – 1 / I
= P20K x 3.31 = P66,200.00

S – 1/I = (1.10)3 – 1/0.10 = (1.331 – 1)/0.10 = 3.31

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4. How much money am I going to deposit annually (PMT) on equal months in order to have P100K at
the time of 5th annual deposit? Interest is at 10% per year.

Answer:
Formula: PMT = FV x (I / S – 1)
= P100K x 0.16379748 = P16,379.75

i/S – 1 = 0.10 / (1.10)5 – 1 = 0.10/1.61051 – 1 = .16379748

5. What is the present value (PV) of P5,000.00 (PMT) payable per month at an annual interest of 18%
for 5 years?

Answer:
Formula: Present Value = PMT x S – 1 / Si
= P5,000 x 39.38 = P196,900.00

S - 1/ Si = (1.015)60 - 1 / (1.015)60 x 0.015

= 2.443219 – 1 / 2.443219 x 0.015
= 1.443219/0.036648 = 39.38

6. How much is the annual amortization (PMT) in 5 equal payments at 10% interest per annum in order
to repay P100,000 loan?

Answer:
Formula: PMT = Present Value x Si/S – 1
= P100K x 0.26379748 = P26,379.74

Si / S – 1 = (1.10)5 x 0.10 / (1.10)5 – 1

= 1.61051 x 0.10 / 0.610 = .26379748

METHODS OF SITE VALUATION

1. Market Data or Sales Comparison Approach

Case 1: comparable is actual sale (market data approach)
1. The subject property is superior in terms of location - 10%
2. The comparable is superior in terms of shape - 10%
3. The comparable is inferior in terms of elevation - 10%
4. The comparable property was sold 2 years ago
(time element – at 5% general increase per year) - 10%

Actual selling price /sqm. Of nearest comparable say - P5,000

Adjustments: (with sequence of adjustments)
1. Time element (5% x 2yrs x P5,000) - 500

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 Adjusted value at the time of valuation - 5,500
2. Location factor + 10%
3. Physical factor
 Shape - 10%
 Elevation + 10%

Net adjustment + 10% 550.00

Fair Market Value of the lot per square meter - P6,050.00

Case 2: Comparable is currently for sale

Asking price per square meter (less 10% if paid in cash) - P5,000.00
Less:
 Terms of sale (value in terms of cash) - 500.00

Assumed cash value of the property - 4,500.00

Less: 10% net adjustments (other adjustments assumed) - 500.00

FMV of the lot per square meter - P4,000.00

Case 3: To the seller and buyer: Do you know that properties for sale owned by corporations located in
Quezon City, Taguig City, Pasig City, Caloocan City, and Las Pinas City are generally subject to the following
taxes:

1. Creditable withholding tax - 6%

2. Documentary stamp tax - 1.5%
3. Value-added tax - 12%
4. Business tax (always based on selling price - 2% (more or less)
Additional cost to the buyer 21.5%

Case 4: If seller is simply an individual. In this case the seller may include in his selling price:

1. Allowance for market resistance say - 10%

2. Allowance for capital gains tax - 6%
3. Allowance for documentary stamp tax - 1.5%
4. Brokers commission say - 5.0%

2. Extraction or abstraction Method

1. No vacant lot is available as comparable.

2. How to compute for land residual value if comparable is, say, house and lot.
3. Compute comparable land value.

Asking price of house and lot - P5,000,000

Less: Allowance for discount (say 10%) - 500,000
Estimated cash value of house and lot - 4,500,000
Less:
Estimated depreciated value of house (by cost approach)

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 (FA200 x P15,000 x 70%) - 2,100,000
Estimated cash price of land (residual) - 2,400,000
Estimated cash price of land per square meter
(P2,400,000 / LA 500 sqm.) - P4,800.00

3. Allocation Method
1. Selling price of house and lot (economic housing) – P1,000,000
2. Lot area is 100 sqm. Which is 40% of selling price
3. Therefore, selling price of lot per sqm. Is
PIM x 40% = P400K / 100sqm = P4,000.00

4. Ground rent capitalization method (Direct – Straight Line)

Assumption:
1. Long term lease of land, say 25 years with option to renew after 25 years
2. Monthly rental per square meter – P150.00
3. Lot area is 2,000 square meters
4. Interest rate on land (capitalization rate) – 8%

Compute:
Land value by income approach (direct capitalization)

Solution:
Yearly income - P150 x 2,000sqm. X 12 months - P3,600,000
Divided by: - Capitalization rate - 8%
Indicative land value - P45,000,000
Land value per sqm. (P45M / 2,000sqm.) - P22,500.00

5. Land Residual Method by Income Approach (Direct – Straight Line)

Assumption:
1. Net operating income of land and building - P2,600,000
2. Building value (depreciated value) - 20,000,000
3. Remaining economic life of the building - 25 years
4. Interest rate on market - 6%
5. Lot area - 1,000sqm.

Compute:
Land value by income approach (land residual method)

Solution:
Recapture rate (100% / 25 years) - 4%
Add: Interest rate - 6%
Overall rate or capitalization rate - 10%

Net operating income - P2,600,000

Less: Income to building (P20M x 10%) - 2,000,000
Residual income for the land - 600,000
Divided by: Interest rate - 6%
Estimated land value - P10,000,000
Estimated land value per sqm. (P10M / 1,000sqm) - P10,000.00

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 6. Subdivision Development Method – Computation of Raw land value

Note: Subdivision development Approach (Discounting is not applied)

Selling price (10has x 10K x 70% x P5,000) - P350,000,000

Less:
1. Development cost (P1,000 x 100,000sqm) - (100,000,000)
2. Marketing and promotion say 10% - (35,000,000)
3. Other expense/contingencies say 10% - (35,000,000)
4. Developer’s profit say 25% - (87,500,000)
Rawland value - 92,500,000.00

Rawland value/sqm (P92,500,000/100,000sqm) - P925.00

Rawland value/lott (200sqm x 925/sqm) - 185,000.00
Rawland ratio to selling price (925/5,000) - 18.5%

6a. Subdivision Development Method – Computation of Raw land Value by DCF

Using above example:

1. Assuming the above lots are to be sold in 3 years
2. Average area of lots = 200sqm.
3. Open space requirement is 30% or 70% net saleable area
4. Total number of saleable lots (10has x 10K x 70%) / 200 sqm. = 350 lots
5. Average seling price per lot (P350M/350 lots) = 1,000,000

Sales schedules:
1. 1st year sale – 200 lots x 185K (rawland value/lot) = P37,000,000
2. 2nd year sale – 100 lots
(P37M x 50% x 110% (10% increase) = 20,350,000
3. 3rd year sale – 50 lots
Or P20.35M x 50% x 110% = 11,192,500

Total = P68,542,500

In every simplified computation, what is the discounted value of 3 year proceeds to be used in computing
the present value of rawland if interest rate is 10%? Yield capitalization method

Reversion factor/ Present Value = RF x value

1st year = 1/1.10 = 0.9091 x P37M = P33,636,700
2nd year = 0.9091/1.10 = 0.8265 x P20.35M = 16,819,275
3rd year = 0.8265/1.10 = 0.7514 x P11.1925M = 8,410,044.50
Indicative value of rawland = P58,866,019.50

Indicative value per square meter of rawland

(P58,866,019.50/100,000sqm.) = P588

Rawland ratio to selling price (588/5,000) = 11.76%

6. Stripping Method or the 4-3-2-1 rule (depth tables)

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 Subject property: 20 heactare lot with different owners fronting highway (rawland)
Basis: FMV of smaller rawland lots along highway = P500

Computation:
1. First quarter (fronting the road
50,000sqm x 500 x 100% (4/4) = P25,000,000
2. Second quarter (adjacent to first quarter)
50,000sqm x 500 x 75% (3/4) = 18,750,000
3. Third quarter (adjacent to 2nd quarter)
50,000sqm x 500 x 50% (2/4) = 12,500,000
4. 4th quarter (end portion)
50,000sqm x 500 25% (1/4) = 6,250,000
Total land value = P62,500,000

Indicative value/sqm. (P62.5M / 200,000sqm) = P312.50

LEASE VALUATION

Leased fee estate: present worth of leasehold + reversion value

Leasehold estate: market value (property) – leased fee value

Valuation formula: market value (leasehold valuation)

= leased fee value + leasehold estate value

Problem solving:

Compute:
a. PWF of series of payments in 5 years at 12% interest.
b. Reversion factor of 5 years at 15% interest
c. Present value of P50,000 payable in equal amounts yearly for 5 years at 12% interest
d. Reversion value if at the end of 5th year the property is estimated at P600,000 (FV)
e. Lease fee interest of lessor-owner based on the above assumption

Solution:

a. PWF = S-1/Si = (1.12)5 – 1 (1.12)5 x .12

= 1.762 – 1 / 1.762 x .12
= 0.762 / 0.211 = 3.61

Note: Use this PWF if the series of income or payment (PMT) are equal in amounts.

b. Reversion factor = 1/Si = 1/(1.15)5

= 1 / 2.011 = 0.497

c. Present value of P50,000 x 5 years

= P50,000 (PMT) x 3.61 (PWF) = p180,500

d. Reversion value of P600,000 (estimated value after 5 years)

= P600,000 (FV) x 0.496 (RF) = P298,200

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 e. Lease fee interest (owner-lessor) at the time of valuation
= P180,500 + P298,200 = P478,700

Present Value of Yearly Cash Flows at 12% Interest Rate (discounted Cash Flow)

Time Cash Flow x PVF = Value

1 P50,000 0.8928 P44,640
2 P50,000 0.7971 39,855
3 P50,000 0.7117 35,585
4 P50,000 0.6355 31,775
5 P50,000 0.5674 28,370
3.6045 P180,225

Leasehold (Lessee’s Interest)

Time Based on 14% interest Contract Rent Difference

Market/Economic Rent
1 P55,000 50,000 P5,000
2 57,000 50,000 7,000
3 60,000 50,000 10,000
4 64,000 50,000 14,000
5 69,000 50,000 19,000
P55,000

Time Difference PWF Present Value

1 P5,000 0.877 P4,385
2 7,000 0.769 5,383
3 10,000 0.675 6,750
4 14,000 0.592 8,288
5 19,000 0.519 9,861
P34,667

Formula for PWF: (1) 1/1.14 = 0.877 (2) 0.877 / 1.14 and so on.

Sandwich Lease Interest (Interest of the lessee in the sublease)

Assumption:
Sublease rent per year - P57,000 (fixed for 5years)
Contract rent per year - 50,000 (fixed for 5 years)
Int7erest rate - 13% per year (discount rate)

Compute:
1. Present Worth factor of 5 years at 13% interest (S – 1 / Si)
2. Present value of 5 years sandwich lease interest

Solution:

1. Present Value Factor or PWF

= (1.13)5 – 1 / (1.13)5 x 0.13
= 1.842 – 1 / 1.842 x 0.13

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 = 0.842 / 0.2395 = 3.52
2. Present Value
= P7,000 x 3.52 = P24,640

Subleasehold - interest of the sub-lessee. There is positive sub-leasehold if market rent is higher than
sublease rent.

STEPS IN THE APPRAISAL PROCESS

1. State the problem includes the following:

a. Property identification
iii. Plot the title of the property to determine the shape and orientation to north, east,
west and south (cardinal directions)
iv. Due diligence should be done if property to be appraised will be used as mortgage
or to be bought by a prospective purchaser.
v. The appraiser may use the tax map of the assessor’s office.
vi. The appraiser may also use the subdivision plan if property is within a subdivision.
vii. It can also be verified with the adjoining lot owners (if applicable)
viii. Take note of the orientation of the lot (lot plan vs. actual inspection)
ix. Though there are assumptions and limiting conditions, like-
1. The owner or representative identified the property it is a good practice to
match the lot plan and the actual location of the property.

b. Identification of the property rights to be appraised, example:

i. Fee simple – absolute ownership; synonymous to bundle of rights
ii. Leased fee interest – interest of owner-lessor
iii. Leasehold interest
iv. Interest in easement or right-of-way
v. Title in partnership by corporation or jointly with other individual

c. Definition of the value to be estimated

i. The client must understand the kind of value being appraised, example:
• The typical market value (exchange value)
• Market rent or economic rent
• Special value, plottage value and many more

d. Purpose and intended use of the appraisal

Client and appraiser must agree on the purpose and intended use, example:
• Selling or buying the property
• Just compensation
• Market rent, etc.

e. Effective date of the value estimate

Because real estate values are constantly changing an estimate of value is considered valid only
for the date specified. Normally, the time of inspection is the effective date of value estimate.

f. Assumption and limiting conditions of the appraiser

The purpose is to protect the appraiser and to inform and protect also the client and other users
of the appraisal report.

2. List the data needed, the sources and the method to be used.

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 Once the appraiser knows which approach(es) to be used, the information needed can be itemized,
example:

• Valuation of vacant lot

Market data comparable lots through the following sources:
o Residents in the area, fellow brokers and appraisers
o Properties with for sale sign
o Advertised properties (newspaper, internet)
o Acquired assets of financial institutions
o BIR, RD, Assessor’s Office

• Valuation of residential house and lot

o Same as above for the lot component

• Valuation of income producing property

Determination of:
o Potential gross income and allowance for vacancy based on actual experience
o Interest rate and recapture rate to be used
Capitalization method to be used
o Direct capitalization
o Residual method (building, land, property)
o Annuity method
• The appraiser may also determine the value of the land and building by cost approach to
determine if the property is in its highest and best use

3. Determine the HIGHEST and BEST USE of the property

Because of the changes in the current use and zoning, residential areas are being transformed into
commercial development. Therefore, a property actually used for residential purpose has potential
for commercial development and lot should be valued as commercial even if in the tax declaration is
still residential.

4. Estimate the land value using the three approaches if applicable.

5. Application of Three Approaches
6. Reconcile the estimated values.
7. Report the final value estimate

ASSUMPTION AND LIMITING CONDITIONS

1. The appraiser is not responsible-

a. For matters of legal in nature that may affect the value of the property being appraised;
b. That the appraiser assumes that the title is good and marketable and therefore, will not render
any opinion about the title;
c. That the property is appraised on the basis of it under responsible ownership;
d. That any encumbrance to the property is disregarded;

2. The lot plan and plat plan of the property is shown as an attachment to the report to guide the user
of the report to visualize the more or less shape of the lot, its legal boundaries as shown in the title,
as well as improvement or site development.

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 3. The appraiser may measure the property but not to the extent of being a surveyor- no relocation
was done in the property;
4. The appraiser will not give testimony or appear in court if the appraised property is in question
unless it is within the scope of the assignment;
5. The appraiser obtained the information (say value of comparable), estimates and opinions that were
expressed in the appraisal report from sources that he or she considers to be reliable and believes
them to be true and correct. The appraiser does not assume responsibility for the accuracy of such
items that were furnished by the informants.

APPRAISER’S APPLICATION

I HEREBY CERTIFY THAT:

1. I have personally inspected the subject property, taken into consideration the following:
a. Its physical character, location and kind of neighborhood;
b. Marketability of the property
c. Taken into consideration factors which may affect its value
d. Highest and best-use of the property

2. The value arrived is only my personal, unbiased and professional analysis, opinion and conclusion,
which are subject to assumptions and limiting conditions specified in this report;
3. I have no present nor contemplated future interest at the subject property;
4. My compensation is not based on a pre-determined value;
5. This report is in conformity with the Philippine Valuation Standards and Code of Conducts for the
real estate appraisers.

Name and Signature of the appraiser

License and PTR No.

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 THE APPRAISAL PROCESS

DEFINITION OF THE PROBLEM

Identification of Property Rights Date of Value Use of Definition of Other Limiting
Real Estate Valued Estimate Appraisal Value Conditions

PRELIMINARY ANALYSIS AND DATA SELECTION AND COLLECTION

GENERAL SPECIFIC (SUBJECT AND COMPS)

Social Site and Improvements

Economic Sales
Government Cost
Environment Income/Expenses

HIGHEST AND BEST USE ANALYSIS

Land as though vacant

Property as improved

LAND VALUE ESTIMATE

APPLICATION OF THE THREE APPROACHES

Cost Approach Sales Comparison Income Capitalization

RECONCILIATION OF VALUE INDICATIONS AND FINAL VALUE ESTIMATE

REPORT OF DEFINEDN VALUE

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 RECONCILIATION and the APPRAISAL REPORT

The next step in the appraisal process is the reconciliation of the values indicated by each of the three
approaches to value.

• In the market data or sales comparison approach, the utilities of the comparable properties
were compared with the appraised property and sales prices were adjusted to derived an
estimate of value;
o Formula: Value of comparable + or – Adjustment = MV of subject property

• In cost approach, the cost of reproducing or replacing the structure net of depreciation is
added to the land value
o Formula: RCN – Depreciation + Land Value = Market Value

• In income approach, value was based on income the property should be capable of earning.
o Formula: NOI/Capitalization Rate = Building and Land Value

The value reached by these different techniques will almost never be the same, yet the appraiser must make
a final determination of the single best supportable estimate of value. The process by which the appraiser
does this is reconciliation. In the value reconciliation process, the validity of the methods and result of each
approach are weighted objectively to arrive at the single best and most supportable conclusion of value. This
process is called correlation of value.

Note: In actual practice, if an appraiser reaches the same value indication for all three approaches, the
credibility of the appraisal report could be seriously questioned.

There are hindrances in the reconciliation process due to appraiser’s belief, that:
• In income approach is not applicable to single family residences or residential properties,
that cost approach is the better alternative;
• Cost approach should not be used for vacant lot- should be sales comparison approach.

Four Factors to Consider in Reconciliation:

1. Definition of value sought

2. Amount and reliability of the data collected in each approach
3. Inherent strengths and weaknesses of each approach
4. Relevance of each approach to the subject property and market behavior

If the three or two approaches would be considered, weighting is better than averaging to determine the
final value estimate.

Three Types of Appraisal Report

1. Self-contained report- it is a thorough presentation of the data, analyses, and reasoning that led to
the appraiser’s estimate of value.
2. Summary report- although not as complete as a self-contained report, the summary report must
contain sufficient information to lead the client to the appraiser’s conclusion.
3. Restricted use report- made for a specific client and for a stated limited purpose, the restricted use
report contains virtually none of the information the appraiser used to arrive at the value
conclusion.

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Styles of Written Appraisal Report

1. Form style report- it makes use of a standardized form or format to provide in a few pages a
synopsis of data supporting the conclusion of value. There could be different forms for every type of
property like residential, commercial, and industrial properties. Usually it is being used by financial
institutions like banks. It is just like filling the banks.
2. Narrative style report- the purpose of this report is to give the client not only the facts about the
property but also the reasoning that the appraiser used to develop the estimate of value. It is
classified as a self-contained report.

Usual contents of an appraisal report

• Subject property for appraisal

o Kind of property, location
• Purpose of appraisal
• Property right to be appraised
• Requesting party
• Date of valuation and date of report
• Description of the property
o Legal description of the lot
 Size of the lot, registered owner per title and per tax declaration, lot and
block #, legal boundaries, zoning, actual use per tax declaration
o Physical description (per ocular inspection)
 Elevation compared to street level, terrain, kind of soil, actual use per
inspection, current occupants, description and improvements
o Description of improvements (if there is any)
• Location and neighborhood description
o Use of the adjoining lots, street frontage, predominant uses of the properties in the
area accessibility, street description, notable developments in the area
• Utilities and community facilities
o Water, power, public transportation, road conditions, market, church, commercial
area
• Highest and best use analysis
• Valuation
o Definition of value to be appraised
o Assumptions and limiting conditions
o Opinion on marketability of the property
 Positive factors
 Negative factors
o Sales comparable
o Taxation aspect
 Market value of property per tax declaration
 BIR zonal value
o Computation of values by: (what is only applicable)
 Sales comparison approach
 Cost approach
 Income approach
o Reconciliation of approaches to value
o Final estimate of value
• Attachments:
o Photocopies of TCT, tax declaration

133
o Lot plan, plat plan, location/vicinity map, site development plan, Google map
o Pictures of property
o Qualification of the appraiser

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 SAMPLE FORM: APPRAISAL TEMPLATE
INSPECTION REPORT (Checklist)

CHECKLIST REQUIREMENTS:
• Photocopies of: 1) title/s 2) tax dec. 3) lot plan 4) location plan
• Authority to inspect
• Contact person: Tel. Mobile:

LAND- Physical
• Area - sqm.
• Shape - 1) rectangle 2) square 3) irregular
• Terrain - 1) flat 2) rolling terrain 3) slopping 4) others
• Elevation- 1) higher than the road 2) lower than road 3) at grade with street level
• Street frontage meters fronting street
meters fronting street
• Average depth meters
• Adjacent lot (current uses)
o Left side

o Right side

o Back

o Front

• Improvement

• Current occupant

LAND- Legal/Site Identification

• Area per title sqm. TCT #:
• RD
• Reg. owner Date registered
• Lot# Block# Survey#
• Serial# Page# Book#
• Annotations

• Land classification per tax dec. Actual use per TD

• Actual use per inspection

• legal boundaries (see lot plan)

• zoning 1) residential 2) commercial 3) industrial 4) agricultural 5)

LAND- Government Values/sqm.

• BIR zonal values:

135
 • Assessor’s value:

LOCATION and NEIGHBORHOOD

• Address:

• Actual use per inspection:

• Neighborhood: 1) residential 2) commercial 3) mixed-use

• Predominant use of neighborhood
• Notable development in the area
• Distances/Accessibility: (X) walking distance (XX) less than a km (XXX) accessible
o Nearest public road Public transportation
o Church Market Coml. Center Hospital
• Schools
• Hospitals
• Church
• Mall
• Commercial area
• Police precinct Fire station Brgy. Hall
• Others

IF WITHIN A SUBDIVISION
• Name of subdivision: Developer
• Kind of subdivision: 1) high end (affluent families) 2) average 3) low-cost
• Subdivision features:
o 1) Gated entrance 2) perimeter fence 3) 24 hour security 4) major road m.
5)secondary road m. 6) basketball court 7) swimming pool 8) parks and playground
9)chapel 10) drainage (underground or open) 11) concrete road/ curbs and gutters
12)sidewalks (concrete or earth) 13) promenade 14) clubhouse 15) multi-purpose hall
16)administration office 17) tennis court 18) 19) water system 20)power
21) tel 22) cable
• Adjoining subdivisions:

MARKETABILITY
• Positive factors
• Negative factors

MARKET DATA (Sales Comparable)

• Price range within the subdivision
• Price range in the adjoining subdivisions
• Contact numbers Contact Person Location

Valuation (appraised value): Area xP :P

IMPROVEMENTS
• Residential house

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 • Commercial building
• Warehouse
• Factory building
• Office building
• Others

For residential house

• Kind of house: 1) single detached 2) single attached 3) townhouse 4) bungalow 5) 2-storey
6)3-storey 7) 2-sty with attic 8) semi-concrete 9)
• Kind of materials used: 1) expensive 2) average 3) low cost 4)
• Foundation: 1) reinforced concrete 2)
• Walls
o Exterior: 1) CHB 2) wood 3) glass 4) painted 5) adobe 6) anay finish
o Interior: 1) CHB 2) plywood 3) glass 4) painted 5) adobe 6)
• Windows: 1) glass on steel casement 2) analok 3) glass jalousie 4)
• Doors: 1) wooden panel 2) plywood 3) glass 4)
• Ceiling: 1) plywood 2) gypsum board 3) hardiflex 4) concrete 5) wooden frame 6) steel frame 7)
• Roofing: 1) GI sheet 2) long span colored 3) concrete slab 4)
• Stairs: 1) wood 2) concrete 3) vinyl tiles 4) ceramic tiles 5) stell grills
• Year constructed: Year renovated:
• General condition: 1) excellent 2) good 3) fair 4) needs renovation 5) little value
• Maintenance: 1) excellent 2) good 3) fair 4) needs renovation 5) little value
• Estimated depreciation: %
• Ground floor: Floor Area Condition
o Gate: 1) steel 2) wood 3) none 4) washout pebbles 5)
o Fence: 1) CHB 2) barbed wire 3) interlinking wire 4)
o Garage: 1) covered 2) plain cement 3) tiles 4) others FA sqm
o Ground cover: 1) earth 2) with grass 3) others
o Living room: 1) cement 2) vinyl tiles 3)ceramic tiles 4) marble 5) granolithic 6) wood parquet
7) T & G (wood) 8) crazy cut 9)
o Dining room: 1) cement 2) vinyl tiles 3)ceramic tiles 4) marble 5) granolithic 6) wood parquet
7) T & G (wood) 8) crazy cut 9)
o Kitchen: 1) cement 2) vinyl tiles 3)ceramic tiles 4) marble 5) granolithic 6) wood parquet 7) T
& G (wood) 8) crazy cut 9) cabinet
o Informal kitchen: 1) plain cement 2) tiles 3) marble 4)
o Terrace: 1) cement 2) tiles 3) marble 4) washout pebbles 5)
o Lanai: 1) cement 2) tiles 3) marble 4) washout pebbles 5)
o Bedrooms: 1) cement 2) vinyl tiles 3)ceramic tiles 4) marble 5) granolithic 6) wood parquet 7)
T & G (wood) 8) crazy cut 9) walk-in closet Master BR 2nd BR 3rd
o Maids room:
o Toilet and bath: 1) glazed tiles 2) unglazed 3) marble 4)
o Stock room: Laundry
o Others:
• Second floor: Floor area Condition
o Bedrooms: 1) cement 2) vinyl tiles 3)ceramic tiles 4) marble 5) granolithic 6) wood parquet 7)
T & G (wood) 8) crazy cut 9) Master BR 2nd BR 3rd 4th
Family room Walk-in closet
o Toilet and bath: 1) glazed tiles 2) unglazed 3) marble 4)
o Balcony: Terrace
o Others:
• Mezzanine floor: Floor area Condition

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 • Third floor: Floor area Condition
• Fourth floor: Floor area Condition

For other buildings

 Name of building:
 Kind of materials used:
 Date constructed: Date Renovated:
 Maintenance: 1) excellent 2) fair 3) poor
 General Condition: 1) excellent 2) fair 3) poor
 Present occupants:
 Main frame:
 Walls:
 Flooring:
 Windows:
 Ceiling:
 Roofing:
 Doors:
 No. of floors: above the ground below the ground
 Parking: 1) ground 2) above ground cars: Basement 1 cars
 Elevators capacity 1) stand by generator 2) overhead tank 3) pressure tank
 Offices Reception area S. Pool Gym Library
 Roofdeck Penthouse lounge CR male female
 Multi-purpose room garbage chute garbage bin fire escape
 Other features
 Floor area:

Valuation
Building Value: Reproduction Cost New P
Less: Depreciation
Depreciated Value
Add: Land Value
Market/Appraisal Value (Philippine Currency) P

Appraised by:
Date inspected:
Valuation date:

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 GIDELINES IN APPRAISAL REPORT WRITING

KINDS OF BUILDINGS COMPOUND PARTS OF THE BUILDING/FIXTURES

1. Residential condominium - carport
2. Commercial condominium - walls (exterior/interior)
3. Hotel/motel - flooring
4. Residential apartment - windows
5. Commercial apartment - foundation
6. Hospital - main frame
7. Theater/auditorium - columns and beams
8. Restaurant - roof
9. Church - toilet and bath
10. Funeral parlor - ceiling
11. Gasoline station - terrace
12. School - balcony
13. Car park building - pavement
14. Shopping center - roof deck
15. Industrial/factory building - maids room/driver’s quarter
16. Commercial complex - gate/fence
17. Warehouse - ground cover
18. Market/cockpit - stairs
19. Gymnasium - cabinets
20. Open shed - walk-in closet
21. Hangar - living
22. Boarding house/lodging house - dining
23. Recreational building - kitchen/dirty kitchen
24. Cold storage - laundry area
25. Residential house - playroom
a. Single detached - music room
b. Single attached - bedrooms
c. One/two-storey townhouse - garden/swimming pool
d. Duplex - guestroom/den

Floor Finishes
- Marble slabs - granolithic
- Marble tiles - vigan tiles
- Plain cement - granite tiles
- Crazy cut - linglazed tiles
- Marbles - ordinary wood tiles
- Vinyl tiles - wood parquet
- Washout pebbles - t&g (wood)

Walling
- Concrete or hollow block, wall paper, glazed tiles
- Adobe, tiles, painted, wood, plywood, synthetic rubble

Ceiling
- Plywood, cement board, gypsum board, luminous, acoustic
- Insulation

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APPRAISAL REPORT

SUBJECT PROPERTY
Three-storey commercial building

Located along

(state address of subject property)

As requested by:

(party requesting appraisal)

Appraised by:

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 APPRAISAL REPORT

GENERAL
 Kind of property for appraisal - commercial lot with three-storey building
 Address -
 Purpose - fair market value appraisal
 Rights to be appraised - fee simple interest
 Party requesting appraisal -
 Valuation date - February 24,2011
 Date of report - March 9,2011
 Appraiser - Cesson Appraisal Corporation

VALUATION TERMINOLOGIES
1. Market value- is the estimated amount for which a property should exchange on the date of
valuation between a willing buyer and a willing seller in an arm’s length transaction after proper
marketing wherein the parties each acted knowledgeably, prudently and without compulsion.

It is the highest price in terms of money which the property will be bought if exposed for sale in an
open market, allowing a reasonable time to find a buyer who buys with knowledge of all uses to
which it can be adapted and for which it is capable of being used. It is sometimes called objective
value.

2. Special value- value that may arise if an asset has attributes that makes it more attractive to a
particular buyer or to a limited category of buyers than to the general body of buyers in a market.
Special value is normally higher than market value. It is value to a special purchaser. An owner of
land may pay a premium price for adjacent property.
3. Fee simple- absolute ownership subject only to limitations imposed by the State such as taxation,
police power, eminent domain and escheat.
4. Highest and best use- the most probable use of a property which is physically possible, appropriately
justified, legally permissible and financially feasible and which result in the highest value of the
property being valued.
5. Assumptions and Limiting conditions- assumptions are suppositions taken to be true like values of
comparable properties given by fellow brokers, appraisers and other informants of values used in
the valuation. Limiting conditions are conditions in the valuation that maybe imposed by the client
or the valuer. Example, this valuation does not cover actual surveying or relocation of the property
and whatever area appears in the title is presumed correct.

LOT INFORMATION: (Per Title)

 TCT number -
 Registered owner per above title -
 Lot area - 66.70 square meters
 Lot - Lot 11-C
 Survey # -
 Registry of Deeds - Quezon City
 Serial # -
 Page number -
 Book number -
 Date registered per title - December 9,1999
 Lot shape - rectangular

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  Street frontage - 4.45 meters
 Average depth - 15.00 meters

 Existing liens and encumbrances -

• Section 4 Rule 74 of the Rules of Court (re two-year contestability period from any other
party deprived of the inheritance of the estate of the deceased ) is presumed
cancelled due to lapsed of time. The two-year contestability period ends of June 23,1997.

LOT INFORMATION

Per Tax Declaration

o Lot area - 66.70 sqm
o Owner per tax declaration submitted -
o Classification per tax declaration - residential
o Actual use per tax declaration - commercial
o Tax declaration number -
o Property index number -
o Market value - P133,400.00
o Assessed value - P53,360 (basis of realty and SEF tax)
o Assessment - split assessment

Per ocular inspection:

o Elevation - slightly higher than Boni Serrano
o Shape - rectangular
o Terrain - flat
o Uses of adjoining lots - commercial, residential

Building Information: (Per Tax Declaration)

o Floor Area Actual Use
 Ground floor - 43.93 sqm. - commercial
 Second floor - 55.10 sqm. - commercial
 Third floor - 55.10 sqm. - residential
 Roof deck - 55.10 sqm.
 Parking area(covered) - 11.18 sqm.
o Owner per tax declaration submitted -
o Classification per tax declaration - residential-commercial (split assessment)
o Actual use per tax declaration - commercial (being rented)
o Tax declaration number
o Property index number
o Market value
 Commercial portion - P660,910
 Residential - P552, 110
o Assessed value
 Commercial portion - P264,360
 Residential - P138,030

IMPROVEMENTS
The lot is improved by a three storey commercial building currently being rented and being used as office.
The building is built with reinforced concrete materials with concrete slab roofing. It is attached to another
building (with common wall) – the .

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Building features are as follows:

o Ground floor
 Firewall on both sides
 Concrete flooring with ceramic tile finish
 Glass front door and walling
 Exposed concrete ceiling
 Comfort room pantry and storage space
 Concrete stairs with steel railing
 One car garage
o Second floor
 Concrete slab roofing
 One office room
 With toilet and bath
 Kitchen
o Third floor
 With two bedrooms on parquet flooring
 One toilet and bath
o Roof deck
 With ceramic tile flooring with protective wall about one meter in height

LOCATION AND NEIGHBORHOOD

The subject property is located along the commercial area of Boni Serrano (formerly Santolan Road),
Barangay Bagong Lipunan, Crame, Quezon City Metro Manila. Uses properties in the area are mixed-use of
residential and commercial developments.

Notable developments in the area are the following:

o Adjacent to
o Greenhills Garden Square Condominium by Empire East (an another tenant in the area)
o Avida Residential condominium project of Ayala Land (another anchor tenant)
o Camp Crame
o Public Safety Mutual Benefit Fund Building
o One to two kilometers away from-
 Cubao shopping center
 Camp Aguinaldo and its gold course
 Greenhills Shopping Center
 Cubao and Santolan MRT jstation
 Horseshoe Village and Satori Garden Villas

UTILITIES AND COMMUNITY FACILITIES

o Water system - Manila water
o Public transportation - tricycle, jeepneys, shuttles, taxis buses MRT
o Power - available
o Telephone - available
o Cable - available
o Road lots - concrete
o Drainage system - underground
o Schools - accessible
o Market - accessible
o Religious institution - accessible
o Government offices - accessible

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 o Hospitals - accessible
o Police precinct - accessible
o Fire station - accessible
o Banks - accessible
o Commercial centers - accessible (Cubao, Greenhills, Ortigas, Trinoma-SM
area)

APPLICABLE TAXES AND FEES IN CASE OF SALE

o Updating of realty tax for current year 2010

o BIR taxes
 Creditable withholding tax of 6% (ordinary asset); used in business
 Documentary stamp tax of 1.5%
 Value added tax of 12% (used in business)
o Other fees and taxes
 Transfer tax (payable to the Treasurer’s office)
 Registration fee (Register of Deeds)
 Assessor’s Office- for new tax declaration

HIGHEST AND BEST USE

In our opinion, the current improvement is in conformity with the present value in the area- thus, highest
and best legal use of the lot.

MARKET PROSPECT

The property is marketable because of its location, utility and current improvement.

VALUATION

In valuing the land, we used Market Data Approach or Sales Comparison Approach. This approach uses the
principle of substitution. It means that the value of a property being appraised is dictated by the cost of
getting another equally desirable property with the same uses or utility. The property with the very least
adjustment is the best comparable.

We value the land as if vacant and based on its highest and best legal use.

In valuing the improvements, we used Cost Approach to Value. The reproduction cost-new of the
improvement is computed based on the current cost of labor and materials and other incidental expenses. It
also uses the principle of substitution. The depreciation rate of the subject property is estimated as
observed, multiplied it to reproduction cost-new. The depreciation is then deducted from reproduction cost-
new to arrive at estimated building value. Land value is then added to arrive at the fair market value of land
and improvement.

MARKET DATA- selling prices of comparable properties

1. A 400 sqm. Lot long Boni Serrano near 18th Avenue, with old house, is being offered for sale at
P12milion (P30,000/sqm). Source: Buy and Sell;
2. At 6th Avenue, Barangay Socorro, Cubao, a 300 sqm. Lot is being advertised at P8 million
(P26,666/sqm) Source: Buy and Sell;

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 3. ACTUAL USE: last year we sold a 1,000 sqm lot owned by BPI located along Banahaw Street, near
MRT Cubao Station at P15,000/sqm.
4. ACTUAL USE: two years ago we sold a property (with 5 storey old concrete building) of BPI with an
area of %00sqm along Aurora Blvd. between Hi-top supermarket and NCBA Project 4) at P26M.
Effective value of lot per square meter is about P25,000/sqm.
5. ACTUAL USE: Our student in real estate sold 3 contiguous lots at the corner of Manga and Aurora
Blvd. (near LRT Belmonte Station) at P25,000/sqm about a year ago. Buyer is Shoemart.
6. A commercial lot along 15th Avenue with an area of 425 sqm. Is being offered at P24,000/sqm.
Source: Buy and Sell
7. At the back street of Boni Serrano (Benitez Street), a vacant commercial and corner lot with for sale
sign is being offered for sale at P20,000/sqm.
8. A 450 square meter lot along 13th Avenue, near Ali Mall is being advertised at P30,000/sqm. Source:
Buy and Sell
9. BIR zonal values per square meter of lot along Boni Serrano, Crame, Quezon City:
 Residential - P12,500
 Commercial - P18,750
 Note: This year there is an ongoing revision of zonal values in Quezon City. This appraiser is
member of BIR technical committee on zonal valuation representing private appraisers. The
subject property may fetch no less than P25,000 per square meter as the new zonal value.

APPRAISER’S OPINION ON VALUE

Our estimate is based on the following factors:

 Prices of comparable
 Location of the property
 Shape, elevation of the lot and street frontage
 The size of the property and its affordability

Based on the foregoing, we estimated the value of land, computed as if vacant at THIRTY FIVE Thousand
(P35,000) per square meter and the whole property at:

FMV: SIX MILLION FOUR HUNDRED FORTY FOUR PESOS (P6,444,000.00)

Philippine Currency, as of

FAIR MARKET VALUE COMPUTATION:

1. By Income Approach to Value:

Effective gross income per year

 P70,000 x 12 months - P840,000
Less: Operating expenses
 Taxes, maintenance, etc. say 25% - 210,000.00
Net Operating Income (NOI) - 630,000.00

Market Value= P630,000/30% - P6,300,000.00

2. By Cost Approach

Land value:
 66.70sqm x P35,000/10% - P2,334,500.00

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 Improvements:
 Floor area
Ground floor - 43.93sqm x 25K x 80% - 878,600
Second floor - 55.10sqm x 25K x 80% - 1,102,000
Third floor - 55.10sqm x 25K x 80% - 1,102,000
Roof deck - 55.10sqm x 20K x 30% - 330,600
Parking area - 11.18sqm x 20K x 80% - 178,880.00

Depreciated value of building - 3,592,080.00

Fair market value (Land and Improvements) = P5,926,580.00

3. Using Condominium Approach

 Estimated net area subject to independent ownership
120sqm (for 3 floors) x P50K (depreciated value) - P6,000,000.00
Roof deck - 1,000,000
One parking slot - 250,000.00
Estimated value of building and land (as condominium) - P7,250,000.00

Final Estimate of Value by Weighted Average:

By Income Approach
By Market Data/Cost Approach
By Market Data/Condominium Approach:
: P6,300,000 x 50% = P3, 150,000.00
: 5,926,580 x 25% = 1, 481,645.00
7,250,000 x 25% = 1,812,500.00
P6,444,145.00
Rounded to P6,444,000.00

Appraised by:

Cesar E. Santos
Licensed Real Estate Appraiser No.
PTR No. until

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 CERTIFICATION OF VALUE

I HEREBY CERTIFY THAT, I have inspected and investigated a three-storey commercial property
located along Boni Serrano, Barangay Bagong Lipunan, Crame, Cubao Quezon City.

The lot is identified as Lot and covered by TCT No. registered at the Registry of Deeds
of Quezon City. The lot per title presented to us is registered in the name of:

(state the name of the registered owner)

The purpose of this appraisal is to express an opinion on the market value of the above property.
Fair market value is defined in the succeeding pages of this report.

In our opinion, after analyzing all available data, subject to limiting conditions stated herein, we
estimated the value of the subject property at Six Million Four Hundred Forty-four Pesos, Philippine
Currency, as of .

FMV: P6,444,000.00

I FURTHER CERTIFY THAT, we have neither present nor prospective interest in the above property
either directly or indirectly and that our appraisal fee is not contingent upon the final estimate of value.

Given this 9th day of March, 2011 at Marikina City, Metro Manila, Philippines.

Cesar E. Santos
President

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 DUE DILIGENCE

DEFINITION

o A proper and careful research and analysis in preparation for a transaction

o An investigative process

IMPORTANCE

o Accelerates negotiation process

o Promotes fast and clean transactions
o Security
o Avoid risks
o Discovers undisclosed problems
o Uncovers hidden assets and opportunities
o Foresees future problems
o Gives room party’s trust and confidence

STEPS IN CONDUCTING DUE DILIGENCE

1. Determine the kind and purpose of transaction

a. Property acquisition
b. Rent or lease
c. Right-of-way
2. Site inspection
a. Property location
b. Property condition
c. Street and neighborhood scene
d. Notable developments in the area
e. Accessibility
3. Secure necessary documents
a. Tax maps and tax declaration- Assessor’s Office
b. Cadastral maps- Bureau of Land Management
c. Subdivision plans- Land registration Authority
d. Title- Register of Deeds
e. Tax assessment- Treasurer’s Office
f. Other legal documents- Register of Deeds
4. Verify ownership
a. Request for IDs
b. Check if the owner is still alive
5. Legal information (zoning, land use, restrictions, etc.)
6. Site financial (appraisal, taxes, etc.)
7. Site physical information (survey and soil tests)
8. Verify easements and ROWs
9. Repair quotes

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