REAL ESTATE CONSULTING AND INVESTMENT ANALYSISANALYSIS
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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.
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Relationship of Valuation to Consulting
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.
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The consulting services may involve any of the following specific studies:
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Feasibility studies
Development planning
Disposition planning
Evaluation of proposed transactions
Acquisition planning
Cost-benefit studies
Cost studies
Investment analysis
Risk analysis
Forecasting
Portfolio design and review
Technical analysis
Highest and Best Use (HBU) studies
Location analysis
Site selection analysis
Market analysis
Marketing assistance
Zoning assistance
Impact analysis
Property management review
Neighborhood/community analysis
Opinion testimony
Conflict management
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?
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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:
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.
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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.
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.
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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
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.
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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. 36 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 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).
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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.
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.
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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 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.
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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 longterm 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 longterm 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 thirdparty 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.
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PROFESSIONAL FEE ARRANGEMENTS: Fixed Fee, Modified Fee, Performance Fees
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:
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Intricacy of the problem
Urgency of the engagement
Professional skills required
Savings affected
Time expended
Personnel employed
Results obtained
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.
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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 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.
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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 informationgathering 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.
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.
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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 clientconsultant 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.
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 decisionoften 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.
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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
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
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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
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.
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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?
A proposed construction or property that is to be altered or expanded may be well involve a longterm 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.
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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
Draw
Profile
DEFINE THE ENGAGEMENT
Identify Subject
Report
Property
Time/Date
Client Purpose
and Problem
II
Agree on Purpose
And Define Problem
FORMALIZE THE CONSULTING RELATIONSHIP
Preliminary Space
Fee/Expense
Sign Engagement Contract
Or Work/ Budget
Arrangement
III
Set Work Deadlines
Assign Task
IV
Compile data
EXECUTE THE PLAN OF ENGAGEMENT
Analyze Data and Develop Information
V
Report Format
PLAN THE ENGAGEMENT
Review In-house file
Set Critique Points
Formulate Conclusions
Recommendations
PREPARE THE REPORT WITH CONCLUSIONS AND RECOMMENDATIONS
CONSISTENT WITH:
Definition of Purpose
and Problem
Data Analyze and Info
Developed
VI
Check Accuracy of Computations
VII
Presentation Meeting
Report Format and
Critique Points
Engagement Obligation
REVIEW THE REPORT
Check Logic and Reasonableness of Conclusions and
Recommendations
PRESENT THE REPORT
Authenticate/Distribute Written Post-Report Dialogue
Report
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The Consultant as a Coordinator
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.
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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
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.
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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)
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
TOTAL/EXCESS
DEMAND
DEMAND
MARKET SHARE
PRICE/SALES
FORECAST
MARKET MIX
STUDY
X
LEGEND
Go
TECHNICAL
PRODUCT STUDY
PRODUCT
PROCESS
PRODUCT
VOLUME
MATERIALS
FINANCIAL
MANAGEMENT
PRODUCT COST
AND EXPENSES
INCOME
STATEMENT
BALANCE SHEET
BUSINESS
ORGANIZATION
MANPOWER &
SPECIALISTS
LEGAL & AUDIT
FUNDS FLOW
ADMINISTRATION
&HRD
SOCIOECONOMIC
SOCIAL BENEFIT
ECONOMIC
VALUE ADDED
ENVIRONMENT
PROTECTION
COMMUNITY
LABOR
X
x- Abandon
X
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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.
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.
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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.
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 socioeconomic aspect.
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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 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.
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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:
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.
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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 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.
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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 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.
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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
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.
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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.
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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 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.
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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 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.
2.
3.
4.
5.
Determine the investment objectives
Select that type of analysis that will show whether the investment objectives will be realized.
Undertake a marketability study for the estimation of gross income or sales.
Analyze development costs, including planning, legal and initial financing costs.
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,
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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.
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.
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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.
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.
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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 manmade 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 population density is too high, traffic congestion and the utility of multifamily 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.
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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;
sellers
monopoly,
oligopoly,
monopolistic competition
2.
3.
4.
5.
no Few
participants;
seller
or controls during a “sellers”
market, buyer controls during
a “buyers” market
Product knowledge and Buyers and sellers are highly Buyers and sellers are not
market exchange
knowledgeable; the exchange knowledgeable; the exchange
takes place with ease
is legalistic, complex and
expensive
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 others; no two are exactly alike
of different sellers
Mobility
Product can be transported to The location is fixed; a real
capitalize on more lucrative estate parcel cannot be moved
markets
to another more profitable
location; Real estate market is
local, not regional or national
Size and frequency of The item purchased is small Real estate is purchased
purchase
and 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
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6. Government’s role
7. Prices
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
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.
2.
3.
4.
Money is medium of exchange.
Money is a measure of value.
Money is a store of value.
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 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.
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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?
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THE BSP RESERVE SYSTEM
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.
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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.
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.
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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.
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.
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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.
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.
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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.
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.
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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:
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.
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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.
2.
3.
4.
5.
Migration of households
Net household formation
Family income
Housing demolitions
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.
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:
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1.
2.
3.
4.
5.
New construction in the open market
The net change in inventory of finished units and under construction
The net change in housing vacancies
Demolitions and conversions to non-housing use.
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.
b.
c.
d.
The rate growth in the number of households.
Income and employment patterns
Liquid asset holdings income
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.
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.
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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.
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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 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 marketdriven 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.
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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 hour on-site service. These service features will
give an important competitive advantage with small and medium-size buyers. Other ecommerce 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.
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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.
2.
3.
4.
Identify and describe the buyers.
Understand their preferences for products.
Estimate the size and rate of growth of the market and,
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.
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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 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).
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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.
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.
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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.
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.
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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.
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.
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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:
Market Value
Cost to Construct New
Builder’s fee
Land value
Use 1
P250,000
-187,000
-30,000
Use 2
P200,000
-150,000
-24,000
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.
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The calculations used for HBU analysis are shown below:
NOI
Overall cap rate
Capitalized NOI
Conversion cost
Property value
w/house use only
P175,000
15%
P1,167,000
0
P1,176,000
w/house with office
P185,000
15.5%
P1,194,000
-350,000
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.
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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.
2.
3.
4.
Physical characteristics
Utility features
Zoning features
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.
2.
3.
4.
5.
6.
7.
8.
Employment level employment
Economic change
Economic boundaries
Population changes
Census data demography
Transportation
Public services
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.
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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.
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.
2.
3.
4.
Analysis of demand and supply situation
Cost study
Income and expense projection
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.
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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.
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.
2.
3.
4.
Related to income
Related to expenses
Related to investment characteristics
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.
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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.
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.
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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 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.
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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.
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.
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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.
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.
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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.
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.
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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 saleleaseback 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
Capital
Credit
Freedom of choice
The lessee can move out at the end of the lease: the landlord
has the vacancy problem
Leasing does not require long-term capital investment beyond
the tenant’s improvements
Major credit strength and being the first tenant in anew
property can result in a below market rent
A policy of short or intermediate lease terms can allow
movement from location to location and the consolidation of
operations
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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
Loss of advantages of These advantages can include equity buildup through mortgage
ownership
financing, depreciation and the tax benefits of owning real estate
Loss of expansion option Owned facilities can easily be expanded, particularly if excess land is
involved
Cost
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 shortterm 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.
65
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
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.
66
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.
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.
67
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 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.
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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.
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.
69
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.
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
70
2.
3.
4.
5.
6.
Consider the plan but not here
Consider the plan but not yet
Consider the plan now but somewhere else
Consider the plan here and now, but with revision
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.
2.
3.
4.
5.
6.
7.
8.
I don’t like your center
I don’t like your location
I can’t afford rent
The rent is cheaper at better locations
I should not have to pay percentage rents
I am doing you a favor by considering four facility
I will provide traffic that will help your center
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 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 t7he 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.
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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). 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.
72
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.
73
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 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.
TENANT
Alex
Department
Pilipino
Insurance
Schedule 1: Partial Schedule of Tenants
(SAMPLE FORM )
RENEWAL
LEASE TERM
R
SQUARE M
FROM
TO
R
3,655
03/10/00
07/31/04
R
759
07/15/00
07/14/04
OPTIONS
2-5 yrs.
74
Service Loan
Bubble Bath
Bed and bath
Fashions
Modern
Department
Carnation Ice
Cream
Weligreen
Furniture
Wood
specialists
All Restaurant
Vale Jewelry
Brenda
diamond
Onieda
Optical, Inc.
03/01/00
04/01/00
08/01/99
02/28/04
03/31/04
07/31/03
R
1,056
741
1,024 (portion
omitted)
3,234
03/10/99
03/09/03
R
4,428
03/09/99
03/09/03
R
17,305
03/01/66
02/28/95
R
53,320
07/21/64
01/31/86
4-5 yrs.
R
R
R
11,554
1,914
1,579
03/10/66
03/10/66
04/01/76
03/09/86
03/09/81
03/31/86
4-5 yrs.
2-5 yrs.
R
514
02/15/76
02/28/79
R
R
Total Retail
Total NonRetail
Total
1-5 yrs.
781,943
41,889
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
Common area
Fixed
P2,100
160
172
P3,984
182
172
P5,085
213
172
P6,053
240
Total
Net
P1,039
P1,393
P1,387
P2,951
P2,145
P3,325
P2,546
P3,919
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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;
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.
2.
3.
4.
5.
6.
7.
The nature of the district
The labor supply
Transportation facilities
The economics of bringing in raw material and distributing finished products
The political climate
The availability of utilities and energy and,
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.
76
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.
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.
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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.
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?
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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)
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.
79
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
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 specialpurpose 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.
80
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 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.
81
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 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.
82
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
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.
83
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.
84
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.
85
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.
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 welldesigned 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.
86
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.
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 18hole 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.
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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.
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.
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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.
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 offseason 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.
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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 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.
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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.
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.
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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, lending institutions and tourist agencies.
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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.
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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
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.
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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.
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.
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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 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.
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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 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.
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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 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.
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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 exploration of pending
and potential highway and road changes to ensure the ready availability of the anticipated traffic
patterns.
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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.
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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.
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.
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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:
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
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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 consultant would advise the client of his r6easons for
preferring specific properties within each of t7he geographic alternatives.
The client usually follows the consultants recommendtaions. He is t7hen called to negotiate the
acquisition of space of arental rate or a purchase price below the owner’s asking rate or psice. At
the conclusion of negotiationjs, the counselor has to work with the client’s atoorney’s for t7he rental
agreement. Urther, 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 rpoblems 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 whjo 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.
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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 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.
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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.
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.
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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.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
Public Estate Authority
Department of Public Works and Highways
Department of Agrarian Reform
Department of Environment and natural Resources
Housing and Urban Development Coordinating Council
Bangko Sentral ng Pilipinas
Philippine Deposit Insurance Corporation
National Housing Authority
Government Service Insurance System
Social Security System
Home Guaranty Corporation
Home Development Mutual Fund (PAG-IBIG)
National Power Corporation
Securities and Exchange Commission
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.
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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
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.
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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.
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.
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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.
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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.
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.
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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.
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.
2.
3.
4.
5.
6.
Inside knowledge of the market
The plans of major landowners
Current market demands and volume of the market
Trends in affordable housing density and absorption rate
The tolerance of tax levels to support schools and parks and,
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.
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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 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.
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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 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.
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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.
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.
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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 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.
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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.
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?
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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?
3. Will the system interfere with company policies or laws and regulations?
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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:
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a.
b.
c.
d.
e.
How management foresee the role and use of its IT in the future.
Activities that will help achieve the goals.
A program for measuring r6eal-world progress against the plan.
The means to implement changes in the plan.
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.
6.
7.
8.
Setting objectives
Deciding on changes to objectives
Designating the resources to obtain the objective
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.
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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 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.
2.
3.
4.
5.
Recognize that IS is an indispensable resource
Understand that IT is a complex resource
Record IT as owned by the entire organization
Record ISs as a source for gaining strategic goals
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.
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2. Without such recognition management may not agree fund the acquisition of ISs.
3. 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.
4. 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.
5. 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 position in a highly competitive market than
acquisition of computers that seemingly only make some employees work easier.
6. 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.
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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.
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.
122
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,
1,000.00
 Economic and physical factors, say
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.
Floor area of the building
Estimated useful life of the building
Actual age (also effective age)
Accrued depreciation rate (20/50)
Fair market value of the land
-
P20,000.00
500 sqm.
50 years
20 years
40%
P2,000,000.00
-
P10,000,000.00
-
4,000,000.00
6,000,000.00
2,000,000.00
P8,000,000.00
Computation of Fair Market Value (Land and Building)
Reproduction Cost-New of the building
FA 500sqm × P20,000.00
Less:
Accrued Depreciation (40% of P10M)
Depreciated Value of the building
Add: appraised Value of the land
Market Value (Land and Building)
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
123
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)
= 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
124
2c. Cost Approach – Unit-in place method
It compresses the quantity survey method.
Example: Reproduction cost-new of a two-storey building
Particulars
Mobilization
Excavation
Foundation (30cm)
Columns (40cm)
Beams (20cm)
Truss/Roofing (200sqm)
Ceiling (400sqm)
Concrete slab (400sqm)
CHB walls (600sqm)
Door/Jambs (10sets)
Ceramic tiles (400sqm)
Windows (600sqft)
Gate (84sqft)
Electrical
Painting
Plumbing
Misc. and contingencies Lump
sum
Total
Add: Contractor’s profit 1/3 of
total cost
Reproduction cost-new
Divided by Floor area of say
Reproduction Cost /sqm.
Unit Cost
Lump sum
Lump sum
P8,000.00
10,000.00
10,000.00
2,500.00
500.00
1,000.00
1,000.00
1,500.00
500.00
700.00
800.00
Lupm sum
Lump sum
Lump sum
Amount
P15,000.00
20,000.00
210,000.00
400,000.00
200,000.00
500,000.00
200,000.00
400,000.00
600,000.00
15,000.00
20,000.00
420,000.00
67,000.00
250,000.00
200,000.00
150,000.00
50,000.00
3,517,000.00
1,172,000.00
P4,689,000.00
400sqm.
11,722.50
12,000.00
6,000.00
Rounded to
Add: developer’s Mark-up of
50%
Selling price per square meter
2d. Cost Approach – Quantity Survey Method
Materials
1. Concrete works
2. Masonry works
3. Steel reinforcements
4. Electrical works
5. Plumbing works
6. Doors and windows
7. Painting works
8. Tile works
9. Ceiling works
10. Wood partitions
11. Roofing works
Estimated total cost of materials
P18,000.00
-
P1,200,000.00
700,000.00
344,000.00
180,000.00
100,000.00
200,000.00
100,000.00
100,000.00
150,000.00
80,000.00
300,000.00
3,454,000.00
125
Labor cost (30% of materials cost)
-
1,060,200.00
Others
1.
2.
3.
4.
5.
-
172,700.00
50,000.00
345,400.00
345,400.00
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
Contingencies @5% of material cost
Permits and license
Supervision at 10% of material cost
Contractor’s profit at 10% of material cost
Taxes
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)
Direct Capitalization Method
General Formula: Value = NOI / Capitalization Rate
1. Gross Income Multiplier
1a. Gross Income Multiplier (GIM) Method
Formula: SP of Computer / 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
126
2. Residual Technique (straight line method)
Uses split rates for land and building residual methods. Split rates are separates rates for
alnd 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.
2.
3.
4.
Income to land (6% of P10M)
Income to building (6% of P20M)
Recapture of the building (2% × P20M)
Total NOI
-
P600,000.00
1,200,000.00
400,000.00
P2,200,000.00
-
P2,200,000.00
-
600,000.00
1,600,000.00
8%
20,000,000.00
-
10,000,000.00
P30,000,000.00
2b. Building Residual Method








Land value is known, recapture rate is given
Formula:
NOI of subject property
Less: Income to land
o Say 6% × Land value of P10M
Income attributable to building
Divided by: Overall rate
Building value
Plus:
Land value
Land and Building Value
2c. Property Residual Technique

The general formula for income approach
o Value = NOI / Rate
o P27,500,000.00 = P2,200,000.00 / 8%
127
3. Residual Technique (annuity method)
3a. Land Residual Method








NOI of subject property
Less: Income to building
o Bldg. Value / PWF (50yrs @8%)
(P20M / 12.24)
Income attributable to land
Divided by: Interest rate
Land Value
Plus:
Building value
Land and Building Value
-
P2,200,000.00
-
1,633,987.00
-
566,013.00
6%
9,344,550.00
-
20,000,000.00
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
Less: Income to land
o Interest rate × Land value
Say 6% × P10M
Income attributable to building
Multiply by: PWF (50yrs @8%)
Building Value
Plus:
Land Value
Land and Building Value
-
P2,200,000.00
-
600,000.00
1,600,000.00
12.24
19,584,000.00
-
10,000,000.00
P29,584,000.00
3c. property residual method (future building value is given @ P60M)





NOI of subject property
Multiply by: PWF (50yrs @8%)
Present Worth of NOI
Add: Reversion value of the land
(Future Value × Reversion Factor (50yrs @6%
Say P60M × 0.0543)
Land and Building value
-
P2,200,000.00
12.24
26,928,000.00
-
3,258,000.00
-
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)
128


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:
First year
Second Year
Third year
Fourth year
Fifth year
Total
Yearly Cash Flow
P500k
600k
700k
800k
900k
P3.5M
PWF
1/1.12
0.892857/1.12
0.797193/1.12
0.711779/1.12
0.635516/1.12
PWF
(0.892857)
(0.797193)
(0.711779)
(0.635516)
(0.567425)
Present Value
P446,428.50
478,315.80
498,245.30
508,412.80
510,682.50
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.
2.
3.
4.
5.
6.
Press one (1)
Press division sign two times (2)
Press 1.12
Press equal sign and 0.892857 will appear
Press again equal sign (=) and 0.797193
Just continue pressing and get the desired PWF
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.
129
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
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
130
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
Mortgage loan
Investors equity
Overall rate
Participation
75%
x
25%
x
(capitalization rate)
Interest
15%
10%
Composite Rate
11.25%
2.5%
13.75%
2. From Market Comparable
Selling price of comparable building
Annual net income of the comparable
Overall rate =n P400k/P5M
-

What is the interest rate if recapture rate is 2%?
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
P5,000,000.00
400,000.00
8%
131
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
Less: allowance for vacancy say 10%
Gross effective income
Less: operating expenses before recapture
1. Variable expenses
2. Fixed expenses
3. Reserves fro replacement
Net operating income
P5,000,000
500,000
4,500,000.00
1,000,000.00
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%
132
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.
2.
3.
4.
5.
Building value
Recapture rate
Recapture value /year
Income to land and bldg.
Interest rate from market
= P200M – P50M = P150M (comparable)
= 100% / 40years = 2.5%
= P150M × 2.5% = P3,750,000.00
= P30,000,000 – P3,750,000 = P26,250,000.00
= P26,250,000/P200M = 13.125%
Problem Solving
Gross Income Multiplier (GIM)
 Given:
Selling price of comparable building
Annual gross effective income of comparable building

-
P6M
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
133
It is by substitution:
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
Gross rent per month of comparable building
P5000,000.00
-
P100M
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
S
Reversion factor (compound interest)
3. (1+i)n – 1 = S – 1
I
I
Amount of an annuity of P1per period accumulation
4.
Amount of an annuity of P1 per period present value
i = i
(1+i)n-1 S-1
5. 1 – (1+i)-n = S-1
I
S×i
Discount factor or present value of an annuity of 1 per period
6.
Amortization factor
i
=S×I
-n
1 – (1+i) S – 1
134
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
5. PV = PMT x S – 1
SxI
Where:
S
N
I
FV
PV
PMT
6. PMT = PV x S x i
S–1
= (1+i)n
= Number of paying period
= interest per period
= Future Value
= Present Value
= 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
1/S
=
=
FV x 1/S
P100K x 0.564473 = P56,477.30
=
1/(1.10)6 = 1/1.771561 = 0.564473
135
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
=
=
S – 1/I =
PMT x S – 1 / I
P20K x 3.31 = P66,200.00
(1.10)3 – 1/0.10 = (1.331 – 1)/0.10 = 3.31
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
=
=
i/S – 1 =
FV x (I / S – 1)
P100K x 0.16379748 = P16,379.75
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
=
=
S - / Si =
=
=
PMT x S – 1 / Si
P5,000 x 39.38 = P196,900.00
(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
=
=
Si / S – 1 =
=
Present Value x Si/S – 1
P100K x 0.26379748 = P26,379.74
(1.10)5 x 0.10 / (1.10)5 – 1
1.61051 x 0.10 / 0.610 = .26379748
136
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
2. The comparable is superior in terms of shape
3. The comparable is inferior in terms of elevation
4. The comparable property was sold 2 years ago
(time element – at 5% general increase per year)
-
10%
10%
10%
-
10%
-
P5,000
-
500
5,500
-
550.00
P6,050.00
Asking price per square meter (less 10% if paid in cash)
Less:
 Terms of sale (value in terms of cash)
-
P5,000.00
-
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
Actual selling price /sqm. Of nearest comparable say
Adjustments: (with sequence of adjustments)
1. Time element (5% x 2yrs x P5,000)
Adjusted value at the time of valuation
2. Location factor
+ 10%
3. Physical factor
- 10%
 Shape
+ 10%
 Elevation
Net adjustment
+ 10%
Fair Market Value of the lot per square meter
Case 2: Comparable is currently for sale
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.
2.
3.
4.
Creditable withholding tax
Documentary stamp tax
Value-added tax
Business tax (always based on selling price
Additional cost to the buyer
-
6%
1.5%
12%
2% (more or less)
21.5%
137
Case 4: If seller is simply an individual. In this case the seller may include in his selling price:
1.
2.
3.
4.
Allowance for market resistance say
Allowance for capital gains tax
Allowance for documentary stamp tax
Brokers commission
say
-
10%
6%
1.5%
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
Less: Allowance for discount (say 10%)
Estimated cash value of house and lot
Less:
Estimated depreciated value of house (by cost approach)
(FA200 x P15,000 x 70%)
Estimated cash price of land (residual)
Estimated cash price of land per square meter
(P2,400,000 / LA 500 sqm.)
-
P5,000,000
500,000
4,500,000
2,100,000
2,400,000
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
Divided by:
Capitalization rate
Indicative land value
Land value per sqm. (P45M / 2,000sqm.)
-
P3,600,000
8%
P45,000,000
P22,500.00
138
5. Land Residual Method by Income Approach (Direct – Straight Line)
Assumption:
1. Net operating income of land and building
2. Building value (depreciated value)
3. Remaining economic life of the building
4. Interest rate on market
5. Lot area
-
P2,600,000
20,000,000
25 years
6%
1,000sqm.
Compute:
Land value by income approach (land residual method)
Solution:
Recapture rate (100% / 25 years)
Add: Interest rate
Overall rate or capitalization rate
-
4%
6%
10%
Net operating income
Less: Income to building (P20M x 10%)
Residual income for the land
Divided by: Interest rate
Estimated land value
Estimated land value per sqm. (P10M / 1,000sqm)
-
P2,600,000
2,000,000
600,000
6%
P10,000,000
P10,000.00
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)
Less:
1. Development cost (P1,000 x 100,000sqm)
2. Marketing and promotion say 10%
3. Other expense/contingencies say 10%
4. Developer’s profit say 25%
Rawland value
-
P350,000,000
-
(100,000,000)
(35,000,000)
(35,000,000)
(87,500,000)
92,500,000.00
Rawland value/sqm (P92,500,000/100,000sqm)
Rawland value/lott (200sqm x 925/sqm)
Rawland ratio to selling price (925/5,000)
-
P925.00
185,000.00
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
139
Sales schedules:
1. 1st year sale – 200 lots x 185K (rawland value/lot)
2. 2nd year sale – 100 lots
(P37M x 50% x 110% (10% increase)
3. 3rd year sale – 50 lots
Or P20.35M x 50% x 110%
Total
=
P37,000,000
=
20,350,000
=
11,192,500
=
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
1st year
=
1/1.10
2nd year
=
0.9091/1.10
rd
3 year
=
0.8265/1.10
Indicative value of rawland
=
=
=
=
RF x value
0.9091 x P37M
0.8265 x P20.35M
0.7514 x P11.1925M
=
=
=
=
P33,636,700
16,819,275
8,410,044.50
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)
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)
2. Second quarter (adjacent to first quarter)
50,000sqm x 500 x 75% (3/4)
3. Third quarter (adjacent to 2nd quarter)
50,000sqm x 500 x 50% (2/4)
4. 4th quarter (end portion)
50,000sqm x 500 25% (1/4)
Total land value
Indicative value/sqm. (P62.5M / 200,000sqm)
=
P25,000,000
=
18,750,000
=
12,500,000
=
=
6,250,000
P62,500,000
=
P312.50
LEASE VALUATION
Leased fee estate:
present worth of leasehold + reversion value
Leasehold estate:
market value (property) – leased fee value
140
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
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
1
2
3
4
5
Cash Flow x
P50,000
P50,000
P50,000
P50,000
P50,000
PVF =
0.8928
0.7971
0.7117
0.6355
0.5674
3.6045
Value
P44,640
39,855
35,585
31,775
28,370
P180,225
Based on 14% interest
Market/Economic Rent
P55,000
57,000
60,000
64,000
69,000
Contract Rent
Difference
50,000
50,000
50,000
50,000
50,000
P5,000
7,000
10,000
14,000
19,000
P55,000
Leasehold (Lessee’s Interest)
Time
1
2
3
4
5
141
Time
1
2
3
4
5
Difference
P5,000
7,000
10,000
14,000
19,000
Formula for PWF: (1) 1/1.14 = 0.877
PWF
0.877
0.769
0.675
0.592
0.519
Present Value
P4,385
5,383
6,750
8,288
9,861
P34,667
(2) 0.877 / 1.14 and so on.
Sandwich Lease Interest (Interest of the lessee in the sublease)
Assumption:
Sublease rent per year
Contract rent per year
Int7erest rate
-
P57,000 (fixed for 5years)
50,000 (fixed for 5 years)
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
= 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, like1. The owner or representative identified the property it is a good practice
to match the lot plan and the actual location of the property.
142
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.
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
143

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.
5.
6.
7.
Estimate the land value using the three approaches if applicable.
Application of Three Approaches
Reconcile the estimated values.
Report the final value estimate
ASSUMPTION AND LIMITING CONDITIONS
1. The appraiser is not responsiblea. 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.
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.
144
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.
145
THE APPRAISAL PROCESS
DEFINITION OF THE PROBLEM
Identification of
Real Estate
Property Rights
Valued
Date of Value
Estimate
Use of
Appraisal
Definition of
Value
Other Limiting
Conditions
PRELIMINARY ANALYSIS AND DATA SELECTION AND COLLECTION
GENERAL
SPECIFIC (SUBJECT AND COMPS)
Social
Economic
Government
Environment
Site and Improvements
Sales
Cost
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
146
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.
2.
3.
4.
Definition of value sought
Amount and reliability of the data collected in each approach
Inherent strengths and weaknesses of each approach
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.
147
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.
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
148
o
o
o

Sales comparable
Taxation aspect
 Market value of property per tax declaration
 BIR zonal value
Computation of values by: (what is only applicable)
 Sales comparison approach
 Cost approach
 Income approach
Reconciliation of approaches to value
Final estimate of value
o
o
Attachments:
o Photocopies of TCT, tax declaration
o Lot plan, plat plan, location/vicinity map, site development plan, Google map
o Pictures of property
o Qualification of the appraiser
149
SAMPLE FORM: APPRAISAL TEMPLATE
INSPECTION REPORT (Checklist)
CHECKLIST REQUIREMENTS:
 Photocopies of: 1) title/s
 Authority to inspect
 Contact person:
2) tax dec.
3) lot plan
Tel.
4) location plan
Mobile:
LAND- Physical
sqm.
 Area 1) rectangle
2) square
3) irregular
 Shape 1) flat 2) rolling terrain
3) slopping
4) others
 Terrain 1) higher than the road 2) lower than road 3) at grade with street level
 Elevationmeters
fronting street
 Street frontage
meters
fronting street
meters
 Average depth
 Adjacent lot (current uses)
o Left side
o
Right side
o
Back
o
Front

Improvement

Current occupant
LAND- Legal/Site Identification
sqm.
 Area per title
 RD
 Reg. owner
Block#
 Lot#
Page#
 Serial#
 Annotations
TCT #:
Date registered
Survey#
Book#


Land classification per tax dec.
Actual use per inspection

legal boundaries (see lot plan)

zoning 1) residential 2) commercial 3) industrial 4) agricultural 5)
Actual use per TD
LAND- Government Values/sqm.
 BIR zonal values:
150

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
Developer
 Name of subdivision:
 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 Person
 Contact numbers
Valuation (appraised value): Area
xP
Location
:P
IMPROVEMENTS
 Residential house
 Commercial building
151




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 renovated:
 Year constructed:
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:
Condition
 Ground floor: Floor Area
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:
Condition
 Second floor: Floor area
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
th
4
Family room
Walk-in closet
o Toilet and bath: 1) glazed tiles 2) unglazed 3) marble 4)
o Balcony:
Terrace
o Others:
152



Mezzanine floor: Floor area
Third floor: Floor area
Fourth floor: Floor area
Condition
Condition
Condition
For other buildings
 Name of building:
 Kind of materials used:
Date Renovated:
 Date constructed:
 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:
below the ground
 No. of floors: above the ground
2) above ground
cars: Basement 1
cars
 Parking: 1) ground
capacity 1) stand by generator 2) overhead tank 3) pressure tank
 Elevators
Reception area
S. Pool
Gym
Library
 Offices
Penthouse
lounge
CR male
female
 Roofdeck
garbage chute
garbage bin
fire escape
 Multi-purpose room
 Other features
 Floor area:
Valuation
Building Value: Reproduction Cost New
Less: Depreciation
Depreciated Value
Add: Land Value
Market/Appraisal Value (Philippine Currency)
P
P
Appraised by:
Date inspected:
Valuation date:
153
GIDELINES IN APPRAISAL REPORT WRITING
KINDS OF BUILDINGS
BUILDING/FIXTURES
1. Residential condominium
2. Commercial condominium
3. Hotel/motel
4. Residential apartment
5. Commercial apartment
6. Hospital
7. Theater/auditorium
8. Restaurant
9. Church
10. Funeral parlor
11. Gasoline station
12. School
13. Car park building
14. Shopping center
15. Industrial/factory building
16. Commercial complex
17. Warehouse
18. Market/cockpit
19. Gymnasium
20. Open shed
21. Hangar
22. Boarding house/lodging house
23. Recreational building
24. Cold storage
25. Residential house
a. Single detached
b. Single attached
c. One/two-storey townhouse
d. Duplex
Floor Finishes
- Marble slabs
- Marble tiles
- Plain cement
- Crazy cut
- Marbles
- Vinyl tiles
- Washout pebbles
COMPOUND PARTS OF THE
-
-
carport
walls (exterior/interior)
flooring
windows
foundation
main frame
columns and beams
roof
toilet and bath
ceiling
terrace
balcony
pavement
roof deck
maids room/driver’s quarter
gate/fence
ground cover
stairs
cabinets
walk-in closet
living
dining
kitchen/dirty kitchen
laundry area
playroom
music room
bedrooms
garden/swimming pool
guestroom/den
granolithic
vigan tiles
granite tiles
linglazed tiles
ordinary wood tiles
wood parquet
t&g (wood)
Walling
-
Concrete or hollow block, wall paper, glazed tiles
Adobe, tiles, painted, wood, plywood, synthetic rubble
-
Plywood, cement board, gypsum board, luminous, acoustic
Insulation
Ceiling
154
APPRAISAL REPORT
SUBJECT PROPERTY
Three-storey commercial building
Located along
(state address of subject property)
As requested by:
(party requesting appraisal)
Appraised by:
155
APPRAISAL REPORT
GENERAL
 Kind of property for appraisal
 Address
 Purpose
 Rights to be appraised
 Party requesting appraisal
 Valuation date
 Date of report
 Appraiser
-
commercial lot with three-storey building
fair market value appraisal
fee simple interest
February 24,2011
March 9,2011
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
Lot
Survey #
Registry of Deeds
-
66.70 square meters
Lot 11-C
Quezon City
156







Serial #
Page number
Book number
Date registered per title
Lot shape
Street frontage
Average depth

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.
-
December 9,1999
rectangular
4.45 meters
15.00 meters
LOT INFORMATION
Per Tax Declaration
o Lot area
o Owner per tax declaration submitted
o Classification per tax declaration
o Actual use per tax declaration
o Tax declaration number
o Property index number
o Market value
o Assessed value
o Assessment
-
66.70 sqm
Per ocular inspection:
o Elevation
o Shape
o Terrain
o Uses of adjoining lots
-
slightly higher than Boni Serrano
rectangular
flat
commercial, residential
Building Information: (Per Tax Declaration)
o Floor Area
 Ground floor
 Second floor
 Third floor
 Roof deck
 Parking area(covered)
o Owner per tax declaration submitted
o Classification per tax declaration
assessment)
o Actual use per tax declaration
o Tax declaration number
o Property index number
residential
commercial
P133,400.00
P53,360 (basis of realty and SEF tax)
split assessment
Actual Use
43.93 sqm.
55.10 sqm.
55.10 sqm.
55.10 sqm.
11.18 sqm.
-
commercial
commercial
residential
residential-commercial
(split
commercial (being rented)
157
o
o
Market value
 Commercial portion
 Residential
Assessed value
 Commercial portion
 Residential
-
P660,910
P552, 110
-
P264,360
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
.
Building features are as follows:
o
o
o
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
Second floor
 Concrete slab roofing
 One office room
 With toilet and bath
 Kitchen
Third floor
 With two bedrooms on parquet flooring
 One toilet and bath
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 mixeduse 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
158
UTILITIES AND COMMUNITY FACILITIES
o Water system
o Public transportation
o Power
o Telephone
o Cable
o Road lots
o Drainage system
o Schools
o Market
o Religious institution
o Government offices
o Hospitals
o Police precinct
o Fire station
o Banks
o Commercial centers
Trinoma-SM area)
-
Manila water
tricycle, jeepneys, shuttles, taxis buses MRT
available
available
available
concrete
underground
accessible
accessible
accessible
accessible
accessible
accessible
accessible
accessible
accessible (Cubao, Greenhills, Ortigas,
APPLICABLE TAXES AND FEES IN CASE OF SALE
o
o
o
Updating of realty tax for current year 2010
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)
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.
159
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;
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:
P12,500
 Residential
P18,750
 Commercial
 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:
160
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
Less: Operating expenses
 Taxes, maintenance, etc. say 25%
Net Operating Income (NOI)
-
P840,000
-
210,000.00
630,000.00
-
P6,300,000.00
Land value:
 66.70sqm x P35,000/10%
-
P2,334,500.00
Improvements:
 Floor area
Ground floor
Second floor
Third floor
Roof deck
Parking area
-
878,600
1,102,000
1,102,000
330,600
178,880.00
Depreciated value of building
-
3,592,080.00
Fair market value (Land and Improvements)
=
P5,926,580.00
Market Value= P630,000/30%
2. By Cost Approach
-
43.93sqm x 25K x 80%
55.10sqm x 25K x 80%
55.10sqm x 25K x 80%
55.10sqm x 20K x 30%
11.18sqm x 20K x 80%
3. Using Condominium Approach
 Estimated net area subject to independent ownership
120sqm (for 3 floors) x P50K (depreciated value)Roof deck
One parking slot
Estimated value of building and land (as condominium) Final Estimate of Value by Weighted Average:
By Income Approach
:
By Market Data/Cost Approach
:
By Market Data/Condominium Approach:
P6,000,000.00
1,000,000
250,000.00
P7,250,000.00
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
161
Appraised by:
Cesar E. Santos
Licensed Real Estate Appraiser No.
PTR No.
until
162
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.
TERESITA B. BONGALES
163
DUE DILIGENCE
DEFINITION
o
o
A proper and careful research and analysis in preparation for a transaction
An investigative process
IMPORTANCE
o
o
o
o
o
o
o
o
Accelerates negotiation process
Promotes fast and clean transactions
Security
Avoid risks
Discovers undisclosed problems
Uncovers hidden assets and opportunities
Foresees future problems
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
164