MOD III
VALUATION OF OFFICE BUILDINGS
VALUATION OF OFFICE BUILDINGS
MOD III
OFFICE BUILDINGS Office buildings are developed and purchased as investment opportunities. The objective of developers and purchasers alike is to realize a profit on their investment. The greater the earning power, the greater the profit and, therefore, the higher the value of the investment . The production of income is a major reason for an income-producing property's existence. The expectation of monetary gain is the major consideration in the valuation of income-producing properties, like office buildings. The anticipation of future benefits, either amenities or pesos, is the very basis of the value of any kind of property.
OFFICE BUILDINGS
MOD III
Office buildings are categorized in three groups: Class A, B and C.
Buildings are given a Class A designation the design and finish are of the highest quality, they attract quality tenants and are professionally managed. have superior locations and command rents at the top of the market. Examples - The Enterprise, The RCBC Plaza, Ayala Tower One
OFFICE BUILDINGS
MOD III
Class B buildings have rental rates considerably lower than Class A buildings. While they are well maintained and have a good quality design and finish located in less expensive office parks or suburban areas. Class B buildings are often older Class A buildings Examples – The Pacific Star,
OFFICE BUILDINGS
MOD III
Class C buildings tend to be more utilitarian than aesthetic. are often more than 20 years old, but still have steady occupancy. Many are located in mixed use buildings, often on the upper floors above retail or service businesses, or in industrial parks. Class C space rents for less than Class B space, typically in the lower 20 percent of a given market.
MOD III
OFFICE BUILDINGS  It is important to note, however, that while these buildings need to meet more than one requirement to be categorized within a building class, there is no specific formula and there may be a judgment call required in a final analysis.
VALUATION OF OFFICE BUILDINGS
MOD III
Office buildings are valued to a great degree as a function of their income - ultimately the tenancies and leases. A fully tenanted building boasting long-term leases and national tenants will be valued considerably higher in the market place than an empty one. Office Building appraisals use a combination of three methodologies to value a building: the cost approach, the sales approach, and the income approach.
VALUATION OF OFFICE BUILDINGS
MOD III
Cost Approach Under the cost approach, appraisers calculate how much it would cost to rebuild the structure from scratch, including the purchase of the underlying land. Appraisers typically assign more weight to this approach for buildings less than five years old or if they are highly specialized, such as medical offices. The building value is estimated using the depreciated replacement / reproduction cost method by determining its reproduction or replacement cost less depreciation. The land value is estimated using the market data approach.
VALUATION OF OFFICE BUILDINGS
MOD III
Sales Comparison or Market Data Approach  The second method is the sales comparison or market data approach.  Appraisers conduct extensive research, looking at similar buildings in the market and comparing square footage, location and a host of other factors before calculating an estimated sales price that could be achieved for the subject property if it was listed for sale.
VALUATION OF OFFICE BUILDINGS Income Capitalization Approach
MOD III
Perhaps the most useful method for office investors conducting due diligence
Value is based on the net income a building owner makes on the spaces that are leased.
Monthly rent payments are added to calculate the buildings gross income.
Allowance for vacancies and bad debts are deducted from the gross income to get the Effective Gross Income (EGI)
Net operating income (NOI) is then determined by subtracting the expenses from the effective gross income.
The value of the office building including the land is estimated by capitalization, based on the formula V = Income / Rate
VALUATION OF OFFICE BUILDINGS
MOD III
Income Capitalization Approach
Capitalization Rate
or “cap rate”, is a ratio of net income and capital cost.
It is calculated by taking the NOI for the building and dividing by the purchase price.
For example, a building purchased for P1 million that generates P100,000 in net operating income has a cap rate of 10 percent. P100,000 / P1 million = 10% cap rate
VALUATION OF OFFICE BUILDINGS
MOD III
Income Capitalization Approach
Capitalization Rate
When valuing properties it is useful to think of the cap rate the same way you would look at a rate of return for any other investment.
The higher the cap rate, the higher the rate of return on the investment, but also the higher the perceived risk.
Cap rates vary depending on the location, size and history of the property and will be lower for Class A buildings than it will be for more risky Class C ones.
MOD III
VALUATION OF OFFICE BUILDINGS EXAMPLE
EXAMPLE: VALUATION OF OFFICE BUILDINGS MOD III
SUBJECT OFFICE BUILDING Newly built Within Fort Global City, office bldg area Complete with amenities
SUBJECT OFFICE BUILDINGS MOD III
Use of Cost Approach is reasonable since building is relatively new.

VALUATION BY COST APPROACH
BUILDING VALUE
Building Reproduction Cost including building machinery & equipment
B1
931.74
sq.m. @ P
16,000
per sq.m.
P
14,907,840.00
B2
1,020.02
sq.m. @ P
16,000
per sq.m.
P
16,320,320.00
B3
1,020.02
sq.m. @ P
16,000
per sq.m.
P
16,320,320.00
B4
1,020.02
sq.m. @ P
16,000
per sq.m.
P
16,320,320.00
B5
1,020.02
sq.m. @ P
16,000
per sq.m.
P
16,320,320.00
GF
817.98
sq.m. @ P
36,000
per sq.m.
P
29,447,280.00
2F
866.94
sq.m. @ P
36,000
per sq.m.
P
31,209,840.00
3F
790.65
sq.m. @ P
36,000
per sq.m.
P
28,463,400.00
4F
790.65
sq.m. @ P
36,000
per sq.m.
P
28,463,400.00
5F
790.65
sq.m. @ P
36,000
per sq.m.
P
28,463,400.00
6F
782.14
sq.m. @ P
36,000
per sq.m.
P
28,157,040.00
MOD III
Income Approach – Direct Capitalization MOD III VALUATION BY INCOME APPROACH
GROSS REVENUE FROM RENTALS (GR)
Gross Leasable
Monthly Rental
Monthly
Annual
Level
Area (sq.m.)
Rate (P/sq.m.)
Rental (P)
Rental (P)
GF
653.81
750
490,358
5,884,290
2F
688.76
550
378,818
4,545,816
3F
663.36
550
364,848
4,378,176
4F
737.22
550
405,471
4,865,652
5F
737.22
550
405,471
4,865,652
6F
728.71
550
400,791
4,809,486
7F
428.95
550
235,923
2,831,070
8F
428.94
550
235,917
2,831,004
9F
428.94
550
235,917
2,831,004
10F
428.94
550
235,917
2,831,004
Income Approach – Discounted Cash Flow
PV1 + PV2 + PV3 + PV4 + PV5 + EV = MV
0
2
1 pwf x I 1
MOD III
4
3
5
I1
pwf x I 2
I2
pwf x I 3
I3 pwf x I 4
I4
I5
pwf x 51 pwf x EMV
Exit Market Value (end of period)
Income Approach – Discounted Cash Flow
VALUATION BY INCOME APPROACH
GROSS REVENUE FROM RENTALS (GR) - YEAR 1 & 2 Gross Leasable
Monthly Rental
Monthly
Annual
Level
Area (sq.m.)
Rate (P/sq.m.)
Rental (P)
Rental (P)
GF
653.81
750.00
490,358
5,884,290
2F
688.76
550.00
378,818
4,545,816
3F
663.36
550.00
364,848
4,378,176
4F
737.22
550.00
405,471
4,865,652
5F
737.22
550.00
405,471
4,865,652
6F
728.71
550.00
400,791
4,809,486
7F
428.95
550.00
235,923
2,831,070
8F
428.94
550.00
235,917
2,831,004
9F
428.94
550.00
235,917
2,831,004
MOD III
Income Approach – Discounted Cash Flow
MOD III
GROSS REVENUE FROM RENTALS (GR) - YEAR 3 & 4 Gross Leasable
Monthly Rental
Monthly
Annual
Level
Area (sq.m.)
Rate (P/sq.m.)
Rental (P)
Rental (P)
GF
653.81
800.00
523,048
6,276,576
2F
688.76
600.00
413,256
4,959,072
3F
663.36
600.00
398,016
4,776,192
4F
737.22
600.00
442,332
5,307,984
5F
737.22
600.00
442,332
5,307,984
6F
728.71
600.00
437,226
5,246,712
7F
428.95
600.00
257,370
3,088,440
8F
428.94
600.00
257,364
3,088,368
9F
428.94
600.00
257,364
3,088,368
10F
428.94
600.00
257,364
3,088,368
11F
428.94
600.00
257,364
3,088,368
Income Approach – Discounted Cash Flow
MOD III
GROSS REVENUE FROM RENTALS (GR) - YEAR 5 Gross Leasable
Monthly Rental
Monthly
Annual
Level
Area (sq.m.)
Rate (P/sq.m.)
Rental (P)
Rental (P)
GF
653.81
850.00
555,739
6,668,862
2F
688.76
650.00
447,694
5,372,328
3F
663.36
650.00
431,184
5,174,208
4F
737.22
650.00
479,193
5,750,316
5F
737.22
650.00
479,193
5,750,316
6F
728.71
650.00
473,662
5,683,938
7F
428.95
650.00
278,818
3,345,810
8F
428.94
650.00
278,811
3,345,732
9F
428.94
650.00
278,811
3,345,732
10F
428.94
650.00
278,811
3,345,732
11F
428.94
650.00
278,811
3,345,732
Income Approach – Discounted Cash Flow
MOD III
DISCOUNTED CASH FLOW ANALYSIS YEAR
NOI
PW Factor
NPV
1
35,073,000
0.9259
32,474,091
2
35,073,000
0.8573
30,068,083
3
37,877,000
0.7938
30,066,763
4
37,877,000
0.7350
27,839,595
5
40,682,000
0.6806
27,688,169 148,136,700
FMV (today) Land
90,000,000
Building
355,000,000
Total
445,000,000
0.6806
302,867,000 451,003,700