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Analyzing "other" income.

"Other" income represents a secondary source of revenue typically generated as a service to real property's primary revenue source, space rental. A review of numerous appraisals reveals that substantial confusion surrounds appraisers' understanding of how to analyze and quantify this secondary income stream. Such confusion is understandable to the extent that no clear definition is included in appraisal literature to distinguish what constitutes other income. As a result, major inconsistencies prevail in methods used by appraisers to support estimates of other income.

The purpose of this article is to define what constitutes other income and improve consistency in appraisers' analysis of this income stream. The scope of this article is limited to the analysis of other income on apartments. The intent, however, is that the same degree of analysis be performed on all forms of other income, regardless of property type.


In a typical appraisal, other income is covered in the income approach and presented, for example, as follows:
Gross rental income $100,000
Less: Vacancy and
 collection loss $ 5,000
Plus: Other income $ 3,000
Effective gross income $ 98,000

In some appraisals, the stated amount of other income is not supported by any statements or data. In most reports, however, the topic is supported by brief statements such as the three following examples.

* Other income for this subject is received from forfeited security deposits, interest income, and miscellaneous (vending, laundry, etc.). The actual ancillary income for the subject was $110 per unit and is in line with the past history of the subject for years 1986 and 1987.

* Other income for the subject property has been estimated using Income/Expense Analysis: Conventional Apartments, Institute of Real Estate Management, 1986. This analysis supports other income for the subject at 2.9% of the gross potential income.

* Other income for the subject is derived from such sources as laundry income, deposit forfeitures, application fees, and late charges. Based upon typical experiences for comparable apartment properties, other income was projected on the basis of $9.50 per unit per month.

Table 1 presents a summary of what some appraisers consider to represent sources of other income, how that income compares with gross rent, and the methods used to derive other income. The table was developed by reviewing 28 randomly selected appraisals from the Southeast and Southwest and reveals 25 separate perceived sources of other income. Of the 25 separate sources, the five most frequently listed were:

1. Laundry

2. Vending machines

3. Late fees

4. Forfeited deposits

5. Application fees

The last row in Table 1 shows four particular methods the appraisers used to derive other income, coded as either 1, 2, 3, or 4. In some cases, two numbers appear because two methods were used. The particular methods and their corresponding codes are as follows:

1. Other income expressed as a percentage of gross rental income.

2. Other income expressed as dollars per unit, per month.

3. Other income identified as a lump sum based on historical or other data.

4. Other income identified as a line item with detailed discussion for each source of other income.

Method 2 (dollars per unit) was used 17 times; methods 1 and 3 were each used 8 times. Method 4, the most detailed, was used only 4 times. The tendency was to express other income as a rather simple number representing dollars per unit or as a percentage of income.

Three of the appraisals supported the use of the percentage method (method 1) with reference to the Institute of Real Estate Management (IREM) publication, Income/Expense Analysis: Conventional Apartments. (1) An interesting aspect of this particular analysis is that IREM's definition of other income excludes three of the five sources of other income identified by appraisers in Table 1.

When expressed as a percentage of rent or in dollars per unit, other income covered a wide range. As a percentage of gross rent, other income ranged from .05% to 7.84% with an average of 2.55%. When expressed as income per unit per month, the range was $.332 to $46.71 with an average of $10.69.

A review of Table 1 reveals that most appraisers conclude that other income is approximately 3% to 5% of gross rent and that they provide a brief, vague analysis of how other income is derived. Further, most appraisers are willing to accept a broad definition of what constitutes a source of other income. The net result is that other income is not uniformly or authoritatively presented in appraisal reports.


Other income's potential impact on value is significant. Consider the following apartment appraisal example, in which Appraisers A and B use the low and high percentages, respectively, from Table 1 (i.e., .05% and 7.84%).


A valid question is whether the value enhancement attributable to other income is reasonable and supportable. Appraiser A gave no explanation for the rather low (.05%) other income figure; thus, it is unclear whether all sources of other income were appropriately considered. In contrast, Appraiser B included numerous sources of other income. Appraiser B used methods 1 and 4 to derive other income; under method 1, Appraiser B estimated 4% of other income to come from

* Laundry income

* Deposits forfeited

* Damage reimbursement

* Application fees

* Termination fees

* Late fees

The remaining other income sources (3.84%) were forecast from washer and dryer leases, mini-storage, and garage rentals. A logical question is whether all of the sources identified by Appraiser B as other income are acceptable and justified. To help determine the acceptability of the sources, the next section emphasizes the need to define and justify what constitutes reasonable sources of other income.



The inexact methods that appraisers use to estimate other income are partially a result of the way this topic is treated in appraisal literature. In one appraisal text, other income is not even defined, though it is included in an apartment appraisal

[TABULAR DATA OMITTED] [TABULAR DATA OMITTED] illustration. (2) The ninth edition of the Appraisal of Real Estate limits discussion of other income to the following short paragraph:

Other income covers all income generated by the operation of the real property that is not derived from space rental. It includes income from services supplied to the tenants such as switchboard service, antenna connections, and garage space; income from coin-operated equipment and parking fees is also included. Because service-derived income pay or may not be attributed to the real property, an appraiser might find it inappropriate to include this income in the property's gross potential income. The appraiser may treat "other" income as business income or real property income, depending on how the market perceives it. (3)

The Appraisal of Real Estate, ninth edition, leaves several unresolved questions. For instance, the definition says that other income includes all income except space rental, and goes on to use garage space as an example of other income. An appraiser who adheres to this definition could easily conclude that other income would certainly include forfeited deposits, late fees, interest income, and bad check fees.

In his book, The Appraisal of Apartment Buildings, Daniel J. O'Connell, one of the leading authorities on apartment appraisals, states that "The only income from miscellaneous sources which is generally included in appraisals is that from parking, extra storage, and laundry room usage." (4) Other income is defined by IREM as all income collected from such sources as maid service, gas and electricity sold to tenants, commissions from telephones, laundry and vending machines, signs on the building, and air-conditioning charges. (5) This definition does not include many of the items listed in Table 1 and deviates from the definition included in The Appraisal of Real Estate, ninth edition. Specifically excluded from IREM's definition are such items as interest or dividend income, forfeited deposits, late fees, bad check fees, short lease premiums, pet deposits, and debt fees. In other words, other income as defined by one of the leading authorities on apartment appraisals and by IREM is not comparable to the definitions of other income employed in the appraisals reviewed in Table 1.

The IREM definition limits other income to sources that are operation oriented, that is, vending machine, laundry, telephone commissions, and so forth. Items such as garage and parking income are recognized as part of gross rent. The IREM's reporting form is arranged in the following manner: (6)


Conflicting interest between borrowers and lenders further explains some of the perceived inconsistency in what constitutes other income. Borrowers are motivated to include all possible sources of other income to maximize all cash flows to achieve higher value, while lenders are interested in prudently minimizing risk and exercise diligence in analyzing the various sources of perceived other income. For instance, in an apartment complex built around a lake, rowboats are used to generate income, which the owners of the complex argued constituted other income. The lender disagreed, stating that this income was not reliable, and refused to give this source consideration. Appraiser's responses to opposing borrowers and lenders may explain some of the inconsistencies in the way other income is reported.

As a general rule, lenders are willing to accept sources of other income that are reasonable and supportable for a particular market. Documentation is the key determinant of the legitimacy of sources of other income. Thus, if an owner or developer cannot document a source of other income, most lenders will not consider the source. An excellent example of prudent lender restrictions on sources of other income is from Federal Home Loan Mortgage Corporation (Freddie Mac), one of the nation's largest buyers of conventional mortgages. Freddie Mac guidelines typically restrict other income to laundry, garage, and storage income. Some miscellaneous sources of other income will be considered and allowed to be included in the income stream only if such sources can be documented with past operating statements. Specifically excluded from other income are

1. Forfeiture security deposits

2. Insufficient funds (NSF) checks

3. Pet fees

4. Application fees

5. Refundable security deposits

In this case, an appraiser simply needs to determine whether the income stream from allowable other sources is reasonable and reliable.


Appraisers need proper procedures for analyzing other income, and the first step is to agree on a complete definition of other income. The previously cited definition from The Appraisal of Real Estate, ninth edition, serves as an excellent starting point. Basically, the definition divides all income into two types: rental income and other income. Rental income includes scheduled rent plus space rent from all other sources such as individual garages and storage units. Other income is based on service and includes such things as vending machine income; laundry services; carwashes; leased equipment such as washers, dryers, and furniture; telephone service; club and pool fees; and so on. If laundry rooms are rented to an operator, the income represents rental income. In most cases, however, laundry rooms are either operated by management or operated by an outside firm that splits income (typically 50%-50%) with management. In either of these cases, the income should be classified as other income.

In the analysis of other income sources, an appraiser should analyze and thoroughly consider the applicable sources. Prior to determining what constitutes other income, certain items should be specifically excluded from the category, including deposit forfeits, interest on deposits, late fees, bad check fees, and refundable security deposits. The income from these sources is, to a large extent, a function of the quality of management. An aggressive manager may practically elimate these income sources. To the extent that such income is generated, it should be appropriately considered as an adjustment to collection losses and used to offset such losses.

Sources of Other Income

With respect to the various specific sources of other income, consider the following suggestions. The major source of other incomer is laundry income, which is influenced by whether the individual apartment units have washer/dryer connections. To properly analyze this source of other income, a complete description of exactly what laundry or vending machine facilities are available must be presented. Further, the number of washer anddryer units within the respective units needs to be identified and considered with regard to its impact on laundry/vending machine revenue. Clearly, a project with individual unit washer and dryer hookups would generate less laundry revenue than a complex that only offers a central laundry facility without individual unit connections.

If washers and dryers and furniture are rented to each apartment, the income received should be listed as personal property income so that its source is clear to all interested parties. If this is done, a lender or buyer will know that the value estimates are based on income for personal property; some lenders may not wish to finance personal proeprty for the same length of time (i.e., amortization) as real property. If applicable, an appraiser should also make sure that reserves for replacements reflect that personal property items must be replaced periodically.

As stated previously, in many apartments the laundry facilities are operated by third-party services. Typical arrangements permit a landlord to keep 50% of the income generated by the laundry room; the third-party operator is responsible for the maintenance and repair of the machines. Again, laundry income will be affected by the number of units having and using individual washers and dryers. A thorough inspection and interview with management will provide the necessary information to document and support this income stream. Of particular importance is to establish from management the average monthly receipts collected from the third-party laundry operator.

Vending machine income is typically nominal and includes income from the operation of soda machines and so forth. It should be considered other income.

Garage rent should be counted as rental income and appear in gross rent. If a parking fee is charged and is easily distinguishable from garage rent, consider it a service and include the income as other income.

Coin-operated car cleaning service income; typically, howerver, the costs to operate these facilities offset any revenue generated.

Application fees cover the cost of processing a prospective applicant's credit check. If the cost of processing an application is deducted as an expense, then including application fees as other income is appropriate. If the costs associated with processing the application are netted against the associated fees, however, only the net difference should be classified as other income. For example,if a $25 application fee is collected, and management documents the cost of processing an application as $10, then the net is $15 and can be treated as other income. Other income generated from application fees is typically insignificant, and moreover, in most cases is considered a pure cost offset.

Termination fees are remitted when tenants vacate prior to lease expiration. Unless these fees can be documented and supported, the income from these fees should be used to offset the costs associated with re-renting the unit. As with application fees, if the costs associated with re-renting the unit are deducted as an expense, then termination fees should be treated as of er income; otherwise termination fees should analyzed as an offset to the associated costs.

Short-lease premiums represent rental income and should be classified as rent.

Corporate profit income is similar to a short-lease premium and should appear as rent. This income streamis highly volatile. The specific income attributed to corporate income should be isolated so that all users of a report are appropriately informed.

Telephone income is a service and should be classified as other income. Typically this income is nominal.

Club/pool rental income should be considered rent. If tenants pay a monthly fee to use the facilities, a service is being provided and the income should be classified as other.


Pet fees are paid for use of rental space and should be considered rental income. Because pets can damage furniture and carpets, fees collected may be offset by higher reserves, carpet cleaning expenses, and so forth.

Redecorating fees are similar to pet fees and should be treated as rental income. Only in strong rental markets are these fees attainable. Thus, documentation is needed to support this other income stream.



Table 2 illustrates a recommended procedure for analyzing other income that recognizers two basic sources (i.e., rental and other) of income and the specific components that should be included in each. The procedure incorporates the previously discussed four methods of reporting other income.

Each individual component of other income identified in Table 2 must have support for the associated income projected from that source. Specifically, the support for laundry income would identify the number of individual units containing washer and dryer units, the arrangements, if any, with third-party operators, and a brief history of income received from the central laundry facilities.

If every apartment appraisal followed the proposed or a similar procedure, estimates of other income would be more supportable and reliable. A consistent and logical procedure will permit improved analysis of this important income stream.

(1) Ins. of Real Estate Management, Income/Expense Analysis: Conventional Apartments (Chicago: Inst. of Real Estate Management, annual publication).

(2) Maurice A. Unger, Elements of Real Estate Appraisal (New York: John Wiley & Sons, Inc., 1982), 134-37.

(3) American Inst. of Real Estate Appraisers, The Appraisal of Real Estate, 9th ed. (Chicago: American Inst. of Real Estate Appraisers, 1987), 444.

(4) Daniel J. O'Connell, The Appraisal of Aparment Buildings (New York: John Wiley & Sons, Inc., 1989), 32.

(5) Income/Expense Analysis Conventional Apartments, 1987 Edition (Chicago: Inst. of Real Estate Management, 1987), 216.

(6) Ibid., 1989 ed., 120.

William Ted Anglyn, MAI, is the Southeast regional appraiser with New York Life Insurance Company in Atlanta. He received his BS in finance from Auburn University. Mr. Anglyn is a previous contributor to The Appraisal Journal.

Charles P. Edmonds III, PhD, is a professor of real estate and finance at Auburn University. He received his PhD from the University of Arkansas. The author of several textbooks, his work has appeared in numerous finance and real estate publications, including The Appraisal Journal.

John H. Hand, PhD, is a professor of finance at Auburn University. He received his PhD from Massachusetts Institute of Technology and has published numerous articles on finance, real estate, and economics.

The authors wish to acknowledge Edward G. Knight, MAI, SRA, for his contributions.
COPYRIGHT 1992 The Appraisal Institute
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Author:Anglyn, William Ted; Edmonds, Charles P., III; Hand, John H.
Publication:Appraisal Journal
Date:Apr 1, 1992
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