Fort Walton Beach Council agenda — 02-27-2007 workshop agenda — reading text

offset by the increased utility of the parcels. 7. 1. 7. 6 Access Roadwav The calculated parcel value is decremented by an estimate of the cost to construct a roadway from Lewis Turner Blvd to the parcel. The cost of construction assumes a 20 foot wide roadway with a cost breakdown as follows7: C;radWng $ 15. 60 Paving $ 66.40 CurbjC;utter $ 27. 00 Starn Drains $ 49. 05 158. 05 Aprox Feet 700 Base Cost $ 110, 635 Current Mult $ 1.10 Current Cost $ 121, 699 Rounded $ 122,000 Figure 4 Parcel #3 access road construction costs. 7. 1. 8 Sales Comparison Approach Conclusion Based on the above analysis, we have reconciled to a market value of: Parcel # 1 $ 4,504,000 Parcel #2 $ 6,401, 000 Parcel # 3 $ 3, 955, 000 as of December 20, 2006, and subject to the Limiting Conditions and Assumptions of this appraisal. 7 Marshall & Swift, Section 12 Page 5 31 of~~ fl,-. J;~. 5tpP,~C;;frfjL~~ g 1;!; 9~ rce  Northwest Florida Fair Grounds - Land 7.2 Income Approach The Income Approach to value is based on present value of the subject property. This type of analysis considers the property ITom an investor' s point of view, the basic premise being that the value of the property ( invested capital) is the basis for amount and quality of the income stream. The direct capitalization formula that applies to this type of valuation is8: Income ( 10 Value ( V L) = Rate ( Ra) Restated: Income ( h) =Value ( VL) x Rate ( Ra) 7. 2. 1 Direct Capitalization Analysis The steps involved in capitalizing the subject' s value are as follows: Develop the subject' s market value based on a sales comparison analysis ( VL) Develop the appropriate capitalization rate ( Ra). Multiply the estimated value by the capitalization rate for an estimate of income through the income approach. 7. 2. 2 Capitalization Rate 7. 2. 2. 1 Band of Investment This technique utilizes lender and real estate investor investment criteria to develop, or synthesize a capitalization rate. There are four key inputs necessary for this method: The loan-to- value ratio ( M) The mortgage interest rate ( i) The loan term ( n) The equity cap rate or equity dividend rate ( RE) 8 Appraisal of Real Estate, Page 514 32 r~ ~.. IJ;I1~ 5tpP ,~~,~,~i~ uf!.z;,;: t~- rce  Northwest Florida Fair Grounds - Land The mortgage variables are used to build the mortgage constant ( RM), which is the total amount of the payments made in one year, expressed as a percentage ofthe original loan amount. Payments x 12/ Original Loan Amount = Mortgage Constant ( RM) The equity cap rate is the annual return to the investor, expressed as a percent of the original amount invested. The annual return to the investor is also known as the equity dividend rate; it is the profit remaining after debt service and all other expenses. After Debt Service Profit / Equity Investment = Equity Cap Rate ( RE) Note that the equity cap rate is not the same ( usually, that is) as the equity yield rate. The equity yield rate reflects the total return to the investor over the life of the investment. Factors such as appreciation and mortgage pay down affect and usually increase this return to a point higher than the equity dividend rate. In markets where substantial appreciation is expected, investors will often accept a low or even negative equity dividend rate, anticipating a compensating payoff when the property is eventually sold. In markets where little is appreciation expected, much more weight is given to the annual equity dividend. Formula: RMxM rate M) RE x (l- rate Cap Rate (~) 7. 2. 2. 2 Debt CoveraQe Ratio Analysis This technique develops a capitalization rate based on typical mortgage terms. There are four variables necessary for this method: 1. The loan- to- value ratio ( M) 2. The mortgage interest rate ( i) 3. The loan term (n) 4. The debt coverage ratio ( DCR) Items 1 through 3 are discussed above under the Band of Investment section. In this method it is also used to develop the mortgage constant ( RM). The debt coverage ratio is the factor by which income exceeds debt on an annual basis. Fonnula: Debt Coverage Ratio x Loan to Value Ratio x Mortgage Constant = ~ or DCRxMxRM=~ 33 J/ I'- a~ f- J;~. 52Lpp ;~,!-: zr! f.~ g z;;,, rce  Northwest Florida Fair Grounds - Land We have researched mortgage rates and terms typical of the subject market segment for the regional area. The table below details the Band of Investment and Debt Coverage Ratio Analyses calculations. Mortgage Interest Rate was determined from conversations with area commercial lenders. The predominate rate is typically equal to or 1 percentage points above the prime rate with Yz to 1 percent origination fee for a variable rate mortgage, or a 20 year rate 5 year balloon. There appears to be very few fixed rate 30 year commercial mortgages issued due to the low interest rate currently being charged. It is the appraisers' opinion that a 6. 0% fixed rate 20 year mortgage with no fees would simulate the current variable rate for computation purposes. It is the consensus of opinion that debt coverage of 1. 2 would be typical and an equity dividend of 8% typical for a somewhat safe real property investment without improvements that tend to depreciate with the passage oftime. Capitalization Rate Calculations P:iI' a~.~~ j~~~;':;' r . 11ill1zi:)~ il)iU~; Mortgage Interest Rate 6.00% Loan Term 20 Years Loan To Value Ratio 80% Debt Coverage Ratio 1. 20 E uit Dividend Rate 8.00% Mort a e Constant Loan Ratio Contributions 0. 085972 x 80. 0% 6. 88% E ui Dividend Rate 8.00% x 1. 60% a: 48%';' : Debt Covera e Ratio x Loan to Value Ratio x Mort a e Constant 1. 2 x 80. 0% x 0. 08597 0. 08253 Ca italization Rate = 8.25% ' Figure 5 Capitalization Rate Calculations 34 J~ ~1' ..i'-.. J':-~~ f~; f-- 5tpPt;~f1.,~,~- 2uf!ttTCe  Northwest Florida Fair Grounds - Land 7. 2. 3 Capitalization Rate Conclusion The calculations as demonstrated in Figure 5 Capitalization Rate Calculations represent two views of investment capitalization. The Band of Investment Analysis represents an investor' s perspective while the Debt Coverage Ratio Analysis represents a view from the perspective of a potential lender. For the purposes of developing a reasonable market rent the Band of Investment methodology would provide a more realistic simulation of the markets actions. 7.3 Income Approach to Rental Rate Based on the Direct Capitalization FomlUla detailed on page 32 the following calculations represent the most probable annual rental income for the subject parcels. Parcel Rate x Value = Annual Income Income Rounded 1 8.48% x $ 4, 504, 000 = $ 381, 939 $ 381, 900 2 8.48% x $ 6,401, 000 = $ 542, 805 $ 542, 800 3 8.48% x $ 3, 955, 000 = $ 335, 384 $ 335, 400 8 Final Reconciliation The process of reconciliation involves the analysis of each approach to value. The quality of data applied, the