HW Review

1. There are two differences between the income and expense statements as
prepared by accountants and the operating statements used by real estate
investment analysts.
a. The format is different. The accounting statement ends with Net
Income indicating accounting profit while the real estate operating
statement ends with Net Operating Income indicating net cash income.
b. The accounting statement is based upon revenues belonging to the
year and expenses for the year and does not focus on actual cash
payment, while the real statement operating statement is based upon
cash accounting and indicates the cash receipts and payments made
in the period.

2. One should consider potential gross rent (which depends upon the historical
collections, and average rental revenue of peer groups within the defined
market area), the vacancy rate, and other sources of income like parking fees,
vending machines, etc. Accordingly, the forecast of operating expenses like
management fees, salary expenses, insurance, supplies maintenance and
repairs, etc. should be forecasts that also depend upon applicable charges in
the locality, the life of the property, and the historical costs.

3. There are some specific issues as follows

a. Based on the comparables, the potential gross income should be
higher
b. The vacancy is not considered, while the gross rent should be net of
allowance for the vacancy
c. The management fee should be based on the revised forecast of the
rent
d. The utilities should be lower as the one reported is for 24 months and
should be adjusted for 12 months
e. The property taxes as per the latest assessment are much higher and
should be adjusted accordingly.
7. Some of the factors impacting a property’s ability to generate rent include
a. Market area
b. Linkages are favorable
c. Transfer costs are lower and more efficient
d. Desirable neighborhood factors
e. Functional efficiency
f. Physical Durability

HW Discussion

1. The claim appears reasonable given this is supported by internal or external

factors. The internal factors like improvement in the property design, and
renovation of the property and external factors like change in the demand,
change in the preference of the consumers, and positive externalities could
lead to higher rental rates.
3. Because the property has a different location (not congested in the central
city) has more preference and more demand and thus it could claim higher
rent and accordingly higher NOI. The 50% higher premium might not be
permanent and could gradually lower as more properties are developed in the
vicinity. The current NOI may be higher at a 50% rate, but the overall
valuation might not be 50% higher. Thus the property might not be 50% more
valuable than the other units.