Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Static versus Active Analysis

Our analysis so far shows the results of one year of income and expenses. The problem is that using a one-year snapshot might be a good rough and quick determination of value and the project's prospects, yet it does not fully and completely reflect an evaluation of the potential investment, especially if the project is in a state of flux.

Why does an analysis based upon one year of income and expense results probably fall short of clearly setting forth a complete understanding of the project?

If the goal is to determine the stabilized value of the subject property and, if the project is in a lease-up mode, it would be misleading to use only actual figures for leases in place. Assumptions have to be made as to the rate of absorption and the market rate to be achieved. A construction project is an even more extreme example. Assuming no preleasing, when the construction is complete it will have no income, so does it therefore have no value? Of course this is inaccurate. You will need to make assumptions as to achievable market rent, the lease-up time frame, the cost to accomplish the fill-up, and the capitalization rate once you achieve stabilized occupancy.

Let us assume that the project is an existing real estate project with 85 percent of the potential rentable space leased and occupied, yet a major tenant's lease or several tenant's leases expire in the next two years. Does the hypothetical analysis constructed so far account for these types of assumptions? ...