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Flood zone revisions and economic loss: an example from Florida.

ABSTRACT

The Federal Emergency Management Agency's revisions to existing flood zones and designated floodways have the potential of being viewed as a regulatory taking. Recent changes In flow way designations In southwest Florida have raised this Issue. Appraisers may he asked to analyze the change in value. This article provides an example of a before and after approach to valuing an income property subject to a new flood map.

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The Federal Emergency Management Agency (FEMA) creates flood zone maps designed to inform residents and enable local and state governments to construct disaster contingency plans. These maps have real economic consequences, since property falling within designated flood zones is often required to carry flood insurance. In addition, property usage is commonly restricted when located in designated water flow ways. When existing flood maps are revised, the economic consequences may be severe for properties previously located outside the flood zones. If economic loss occurs from government regulations or restrictions on private property development or usage, courts may deem this a regulatory taking. This article details a before and after approach to valuing an income property that falls within a newly designated floodway.

Background

The issue of owner compensation for the government's confiscation of private property for public use is addressed in the Takings Clause of the Fifth Amendment of the United States Constitution. In contrast to the taking of physical property, a regulatory taking may occur when the government enacts laws that regulate or restrict the use of privately owned property. The U.S. Supreme Court first ruled on the issue of regulatory takings in Pennsylvania Coal Co. v. Mahon, decided in 1922. (1)

Generally, there are two approaches that have arisen through case law concerning the determination of a regulatory taking. The first is known as the Penn Central approach, referencing the legal challenge from which it arose. (2) This approach involves an ad hoc factual inquiry that considers various factors of significance to determine if a regulatory taking has occurred due to new government regulation. Factors such as the purpose of the regulation, the character of the regulation, the economic impact of the regulation, and interference in the owner's investment assumptions at the time of acquisition are considered.

The second approach is the Lucas (3) approach, which provides two additional requirements to an ad hoc factual inquiry. If a new regulation results in physical invasion of private property or if the result of the regulation is the loss of the entire economically beneficial or productive use of the property, then a regulatory taking has occurred. (4)

Coastal properties with large exposure to wetlands and flooding have been the subject of claims of regulatory takings. (5) A landmark case involved a property owner who purchased coastal property for residential development. Subsequent to the transfer of title, the state designated the property as wetlands and restricted development rights. In Palazzolo v. Rhode Island, (6) the property owner filed a claim, citing a total economic loss. An appraisal using subdivision development analysis determined that some development was still possible on a portion of the property that contained high grounds. Thus, the Rhode Island Supreme Court rejected that a taking per se had occurred. Without ruling on the amount of compensation required, on appeal the U.S. Supreme Court remanded the case back to the state to apply the Penn Central approach to determine if a regulatory taking had occurred.

In Florida, the Bert J. Harris Jr., Private Property Protection Act (Harris Act) was passed in 1995 as state law to provide compensation for property owners who suffer economic loss from a regulatory taking. (7) This law draws on the Penn Central approach by citing a taking as regulation that results in the inability to attain the reasonable, investment-backed expectation for the existing use of real property. The value of compensation due to new property regulation or restriction is determined by appraisal analysis of value before and after the government's action. (8)

The designation of both improved and vacant parcels within new or revised floodways constitutes a partial taking. The Harris Act requires compensation for private property owners who are economically harmed by such regulatory actions. Appraisers may be asked to account for the change in valuation that results from such designations. A case study follows to illustrate the impact of a new regulation on market value and the determination of the economic loss associated with such changes.

Case Study Example of Economic Loss from a Regulatory Taking

The case study presented here involves an economic loss associated with a Florida property. The economic loss derives from the revision of flood zones by FEMA, as enforced by county government. The case study is based on an actual appraisal and provides an illustration of the challenges and potential solutions encountered in these situations.

Property Description

The subject property is a 4.689-acre parcel improved with a 40,747-square-foot building located in Lee County, Florida. The property is zoned light industrial and houses a manufacturing operation. As of August 27, 2008, the FEMA flood map for the area indicated the property was located in Zone B. (9) As a result, the subject property was not located in a FEMA floodway and did not require flood insurance. However, on August 28, 2008, new FEMA flood maps were placed into effect in Lee County. These new maps indicated that the subject property was located in a Special Flood Hazard Area, Zone AE, and was therefore within a regulatory floodway. FEMA defines a regulatory floodway as, "the channel of a river or other watercourse and the adjacent land areas that must be reserved in order to discharge the base flood without cumulatively increasing the water surface elevation more than a designated height." (10)

The location of the property within a designated floodway results in severe limitations on the development or redevelopment of the property, according to the Lee County Land Development Code. The code requires that property owners obtain No-rise Certification prior to the approval of any permits. (11) A No-rise Certification requires a conclusive hydrodynamic study demonstrating that there will be no impact on flood waters. The Lee County Land Development Code provides the following on floodways:
   Located within areas of special flood hazard established in section
   6-408 are areas designated as floodways. Since the floodway is an
   extremely hazardous area due to the velocity of floodwater, which
   carries debris and potential projectiles and has erosion potential,
   the following provisions, in addition to those set forth in section
   6-472(1) through (3), will apply: a. Encroachments, including fill,
   new construction, substantial improvements and other developments,
   are prohibited unless certification by a registered professional
   engineer is provided with supporting technical data demonstrating
   that encroachments will not result in any increase in flood levels
   during occurrence of the base flood discharge. (12)


Officials with the Lee County Department of Community Development indicated that as a result of the property's location within the newly designated floodway, any future application for permitting would result in the subject property being fagged for review. County officials must balance the interest of individual property owners with those of other county residents, since unwarranted approval of projects within the floodway can jeopardize the ability of the county to secure federal flood insurance. Therefore, while some projects that involve only work done at grade may be readily approved, others will likely face scrutiny that will increase with the complexity of the project.

Without a No-rise Certification, work such as repairs or renovations to the subject property can only take place within the building footprint and may not exceed 50% of the property's value. In the event of destruction of the improvements by an act of God (such as a hurricane), the owner would not be allowed to replace the improvements.

The implementation of the new FEMA flood maps may denote a change in the value of the subject property that derives from the new restrictions faced by the property owners. As a result, the appraisal assignment was to estimate the retrospective market value of the subject property just prior to and immediately following the implementation of the new maps. A retrospective value opinion is defined by The Dictionary of Real Estate Appraisal, as "a value opinion effective as of a specified historical date." (13) Therefore, the retrospective market value of the fee simple interest in the subject property was estimated as of August 27, 2008, and August 28, 2008.

Sales Comparison Approach

The sales comparison approach relies on the principal of substitution, where a prudent purchaser would pay no more for a property than the cost of acquiring a comparable property of equal utility. The process involves the identification of recently sold comparable properties that are subsequently adjusted so that one may estimate the prices they would have commanded in the market if they were similar to the subject property in terms of all their important characteristics.

Local market conditions as of the retrospective value indication for the subject property were such that the search for comparable sales had to be expanded in terms of geography and time. This allowed the appraisers to identify six comparable sales of light industrial properties. None of the comparable sales required adjustments for property rights conveyed, financing terms, or conditions of sale. Adjustments of varying magnitudes to the comparable sales were required for market conditions, location, building size, land-to-building ratio, age/condition, and quality/appeal. Total adjustments to the comparable sales ranged from -15% to +20%. Table 1 presents the adjustments to the comparable sales.

Based on the adjusted prices indicated for the comparable sales presented in Table 1, the retrospective unit value of $65.00 per square foot and overall market value of $2,650,000 was indicated for the subject property. In this situation, the income capitalization approach and sales comparison approach were judged to be equally reliable given the quality of the market data available for analysis. Therefore, equal weight was given to each value indication, and the resulting retrospective value indication for the subject property as of August 27, 2008, (prior to the flood zone revision) was $2,600,000.

The weaknesses of the available market data required to calculate the retrospective value prior to the change in floodway status could be overcome by taking prudent steps, such as extending the time period considered and the geographical area. However, the lack of market data needed to conduct the income capitalization and sales comparison approaches placed the appraisers in a challenging situation. In short, there was no defensible approach for the estimation of the discount that a prudent purchaser would apply to the subject property over a comparable property not situated within a designated floodway. Therefore, the process outlined in this article is believed to provide a reasonable estimate of the value of the subject property after the change in floodway designation.

The retrospective value of the subject property as of August 28, 2008, was estimated using the following two-step process. The first step was the estimation of the value of the improvements using the projected remaining economic life of the improvements. This process involved the projection of income and expenses over the remaining economic life of the property, and subsequently discounting these values back to present value. The second step was the estimation of the remainder value of the subject land at the end of the economic life of the improvements and the subsequent discounting of this value back to present value.

Value of the Improvements

As previously noted, the remaining economic life of the subject improvements was estimated to be between 20 and 30 years. While the lack of precision in this estimate was such that the cost approach was omitted from the analysis prior to the taking, it can be used in this situation. Using 30 years, the high end of the estimated range of remaining economic life, results in the most conservative estimate of the economic damages resulting from the taking. Therefore, 30 years was determined to be the most appropriate estimate for remaining economic life of the subject improvements.

The first task in the determination of the value of the improvements is the estimation of a discount rate to be used in the discounted cash flow analysis. While a discount rate of 10% was appropriate for use in the discounted cash flow analysis of the property prior to the taking, it does not adequately compensate for the inherent risk an investor would take on when purchasing a property with restrictions on renovations or rebuilding in the event of total destruction of the improvements. The premium must also compensate the investor for increased forecasting risk associated with the extended period of analysis. Therefore, the current situation requires the buildup of an overall property yield rate. (14) The indicated equity discount rate is 29.87% or approximately 30%. This calculation is demonstrated in Table 2. It should be noted that the discount rate used in the estimation of the value of the subject property by discounted cash flow analysis in the income capitalization approach is approximately equal to the sum of the components of the equity discount rate calculated.

The next task required in the valuation of the improvements is the estimation of growth rates for income and expenses, vacancy and collection loss, leasing commissions, and reserves for replacement. Income is projected to remain flat for years 1 and 2, increase by 3% annually during years 3 through 15, remain flat in years 16 through 20, decline by 5% per year during years 21 through 25, and fall by 10% per year during years 26 through 30. Expenses are projected to increase from 3% to 5% annually. Taxes represent the exception to the increase in expenses as they are expected to flatten as the property value declines near the end of the economic life of the improvements. Vacancy and collection loss is estimated at 8% and leasing commissions are estimated at 6% of potential gross income in years 10 and 20. Reserves for replacement are estimated at 1.5% of effective gross income during years 1 through 25. After year 25, no reserves for replacement are deducted due to the advanced age of the subject improvements.

Remainder Value

The remainder value of the subject land at the end of the economic life of the improvements can be estimated based on the sales of comparable vacant floodway parcels. Recent transactions involving floodway parcels indicate a trend of such parcels being purchased for use as conservation land. (15) Again, the appraisers were forced to expand their search geographically for comparable sales in order to obtain enough sales to conduct the analysis. Of the six comparable sales that were identified, one took place in December following the date of the retrospective value indication. While it would be preferable to use only those sales that had take place prior to the date of the retrospective value indication, this sale was deemed to provide an additional, reliable value indication for the subject property as a vacant floodway parcel. The difference in timing of the sale relative to the date of the remainder value is nominal. The sale prices for the six sales ranged from $12,227 per acre to $36,315 per acre.

In order to estimate a per unit price for the subject property, these sales were considered on an aggregate basis. The total sale price of the six parcels was $16,236,200 and the total area was 580.5 acres. The resulting average price per acre was $27,969. Based on this data, the unit value for the subject property as if vacant was estimated to be $25,000. Hence the total retrospective land value as of August 28, 2008 was estimated to be $120,000, calculated as follows:

4.689 acres x $25,000/acre = $117,225 or $120,000 (rounded)

In order to convert the $120,000 land value into a reversionary cash flow, a 3% annual growth rate was applied resulting in an estimated remainder value of $291,272 at the end of year 30. The retrospective market value of the subject property as of August 28, 2008 is estimated to be $760,000. Table 3 presents these calculations.

Income Capitalization Approach

In order to obtain a value indication via the income capitalization approach, the market value for the subject property was estimated using direct capitalization and discounted cash flow analysis. These two methods are based on the underlying assumption that market participants will base their value estimates on the present value of anticipated future benefit.

Direct Capitalization

The estimation of the market value of the subject property using direct capitalization required the development of an operating statement. The first step in this process, the analysis of rental data from comparable properties, resulted in a range of base rental rates from $5.25 to $7.82 per square foot, and a range of common area maintenance (CAM) charges from $1.75 to $2.35 per square foot. Based on the subject's relative position in the market, a base rent of $6.00 and CAM of $2.00 per square foot were indicated. Similarly, analysis of market conditions indicated a vacancy rate of 8% was appropriate for the subject property.

Historical data from the subject property as well as data from comparable sales were used to estimate the annual operating expenses for the subject property. Given the relative age and condition of the subject property, operating expenses were estimated at 28.7% of effective gross income. Using data from comparable sales and a national investor survey, the overall capitalization rate of the subject property was indicated at 8.50%. Therefore the value of the subject property prior to the changes in the flood map indicated by direct capitalization of net operating income was indicated at $2,520,000. These calculations are presented in Table 4.

Discounted Cash Flow Analysis

Estimation of the market value of the subject property using discounted cash flow analysis required the projection of future revenues, operating expenses, annual net operating income, and reversionary sale price. In addition, a typical holding period assumption for the property and appropriate discount rate was determined. With these tasks completed, the projected pretax cash flows were converted to an estimate of market value for the subject property by applying the appropriate discount rate. Analysis of the current market conditions and anticipated future conditions indicate that the assumptions presented in Table 5 are well supported.

Application of the assumptions presented resulted in estimated year 1 net operating income of $213,784 and a reversionary value for the subject property at the end of year 10 of $3,050,961. The estimated market value of the subject property was $2,555,000. The complete calculations for the discounted cash flow method are presented in Table 6.

In light of the market conditions and the quality of the data available for use in the analysis, the value indications from the direct capitalization and discounted cash flow analysis provide reliable indications of the market value of the subject property. Since the value indications in this case are considered to be approximately equal in terms of reliability, the retrospective value indication of the fee simple interest in the subject property by the income capitalization approach as of August 27, 2008, were indicated as $2,540,000.

Cost Approach

The main improvements to the subject property were 23 years old as of the retrospective dates of appraisal. The cost approach can provide very reliable value estimates for properties that are relatively new and do not suffer from significant depreciation. However, the cost approach was deemed to have a low level of reliability arising from the difficulty associated with accurately estimating the level of accrued depreciation for the subject improvements. The useful economic life of the main improvements to the subject property is approximately 40 years. Based on the accrued depreciation of the subject property improvements, the remaining economic life for the subject improvements was estimated to be between 20 and 30 years. This lack of precision in the estimation of remaining economic life has a significant impact on the reliability of the value estimate from the cost approach. Therefore, the cost approach was omitted from the analysis.

External Obsolescence and Compensation

The change in the floodway classification of the subject property may be interpreted as external obsolescence. According to The Dictionary of Real Estate Appraisal, external obsolescence is "an element of depreciation; a diminution of value caused by negative externalities and generally incurable on the part of the owner, landlord, or tenant." (16)

In the case of the subject property, the depreciation in market value is incurable and is the result of a negative influence external to the site--the implementation by the county of new regulations in response to the change by FEMA in floodway classification. Therefore, it is correct to view this decline in value as the realization of external obsolescence. In the case study appraisal, the decline in value is estimated to be $2,600,000 -- $760,000 = $1,840,000. This reduction in value constitutes an economic loss arising from new regulation, and thus historical and legal precedents imply compensation by government is warranted.

Conclusion

Regulatory takings occur when government regulations or restrictions alter market values of existing properties, resulting in economic loss. In Florida, the Harris Act of 1995 was passed specifically to compensate private property owners who are negatively impacted by such restrictions. A floodway designation restricts future property usage and limits maintenance of existing improvements. The Penn Central approach to determine if a regulatory taking has occurred includes the inability to attain the reasonable, investment-backed expectation for existing property. In the case study presented here, an economic loss is estimated from the appraisal analysis before and after the new floodway designation. Appraisers, property owners, and regulatory officials should consider regulatory takings and the economic consequences associated with revising existing flood zone maps for coastal regions.

It should be noted that use of police powers, such as the one described in this case, serve an important purpose to limit the negative impacts of a property owner's actions on the owners of surrounding properties. Public officials charged with implementing such regulations face a difficult task in attempting to balance the interests of property owners on all sides of these issues. However, in cases in which this balance is not achieved, compensation is required for economic losses arising from regulatory takings.

Web Connections

Internet resources suggested by the Y. T and Louise Lee Lum Library

Exploring Constitutional Conflicts: Takings of Private Property (University of Missouri-Kansas City) http://www.law.umkc.edu/faculty/projects/flrials/conlaw/takings.htm

Federal Emergency Management Agency (FEMA) http://www.fema.gov/

FEMA Map Service Center http://mscfema.gov/webapp/wcs/stores/servlet/FemaWelcomeView?storeld= 10001&catalogld=10001&langId=-1

GIS University of Chicago (elevation data) http://gis.uchicago.edu/data.htm

History of the Takings Clause (Washington University at St. Louis) http://law. wustl.edu/landuselaw/Articles/Brief_Hx_Taking.htm

Lee County Government, Florida, FEMA Flood Zones for Lee County http://www3.leegov.com/dcd/fema.htm#Look up Flood Zones

National Flood Insurance Program http://www.flodsmart.gov/floodsmart/

National Flood Risk Management Program http://www.nfrmp.us/

U.S. Army Corp of Engineers, Flood Risk Management http://www.usace.army.mil/CECW/PlanningCOP/Pages/flood.aspx

(1.) Pennsylvania Coal Co. v. Mahon, 260 U.S. 393 (1922).

(2.) Penn Central Transportation Co. v. City of New York, 438 U.S. 104, 124 (1978).

(3.) Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1014 (1992).

(4.) For a detailed analysis of these approaches to regulatory takings, see Richard O. Duvall and David S. Black, "New Developments in Regulatory Takings: The Supreme Court Takes an Interest in the Fee Simple Estate," The Appraisal Journal (July 2002): 241-253.

(5.) Donald C. Guy and James E. Holloway, "Should Landowners Receive Just Compensation for Coastal Wetlands Regulation?" The Appraisal Journal (April 2003): 164-171.

(6.) Palazzolo v. Rhode Island, 533 U.S. 606 (2001).

(7.) Florida Statutes [section] 70.001, Private Property Rights Protection (1995).

(8.) Charles C. Carter and Marcus T. Allen, "The Appraiser's Role under Property Rights Compensation Statutes," The Appraisal Journal (Summer 2007): 246-252.

(9.) FEMA defines Zone B as an "area of moderate flood hazard, usually the area between the limits of the 100-year and 500-year floods. B Zones are also used to designate base floodplains of lesser hazards."

(10.) FEMA Floodway NFIP Policy Index, http://www.fema.gov/plan/prevent/floodplain/nfipkeywords/floodway.shtm.

(11.) FEMA Floodway NFIP Policy Index, http://www.fema.gov/plan/prevent/floodplain/nfipkeywords/no_rise.shtm.

(12.) Land Development Code, County of Lee, Florida, Section 6-472(4), available at http://library.municode.com/index.aspx?clientld=12625&stateld=9 &stateName=Florida.

(13.) Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Chicago: Appraisal Institute, 2010), 171.

(14.) Morningstar Incorporated, Ibbotson Valuation Yearbook, http://www.ibbotson.com.

(15.) In the current market, transactions involving parcels designated as floodways have featured private entities selling the properties to Lee County for use as conservation land. In this situation, sale of the parcel as conservation land may likely be the highest and best use of the property since it represents a legally permissible, physically possible, financially feasible, and maximally productive use. While it is entirely possible that a use other than conservation land may represent the highest and best use at the actual end of the life of the improvements, current market activity and the trend toward government purchase of land for such purposes provide the basis for the assumption used in the determination of the value of the subject property.

William Cole is an owner of Stephan, Cole & Associates, a state-certified general real estate appraiser, and an Associate member of the Appraisal institute. Cole is a Fort Myers native; he graduated from Western Carolina University in 1991. He has been a full-time real estate appraiser since 1993. He handles all types of assignments for the firm, and specializes in complex income analysis. Contact: billcolc@stephan-cole.com

Bruce Stephan, MAI, is an owner of Stephan, Cole & Associates. Stephan holds the MAI designation of the Appraisal Institute. A native of South Florida, he has been a full time real estate appraiser since his graduation from Florida State University in 1974. Stephan has been appraising in Fort Myers since 1975. He handles all types of assignments for the firm, and has a wide variety of appraisal experience. Contact: bas@stephan-cole.com

Nathan Chouinard is an associate appraiser with Stephan, Cole & Associates, a state-certified general real estate appraiser and an Associate member of the Appraisal Institute. Chouinard is a graduate of Florida Gulf Coast University and has been a full-time real estate appraiser since 2005. He handles all types of assignments for the firm. Contact: nrc@stephan-cole.com

J. Howard Finch, PhD, holds the Alico Chair in Financial Management and Planning in the Lutgert College of Business at Florida Gulf Coast University in Fort Myers, Florida. He teaches in the areas of financial management and money and capital markets, and his research focuses on real estate finance, asset valuation, and financial education. He earned his PhD in finance from the University of Alabama. Contact: jhfinch@fgcu.edu

H. Shelton Weeks, PhD, is the Lucas Professor of Real Estate and director of the Lucas institute for Real Estate Development and Finance at Florida Gulf Coast University. Weeks received his BS, MA, and PhD in finance from the University of Alabama. He was a member of the inaugural faculty at Florida Gulf Coast University. He is the managing editor of the Journal of Housing Research, and serves on the editorial board of the Journal of Economics and Finance Education and academic review panel for The Appraisal Journal. He teaches in the areas of corporate finance, investments, and real estate. His research examines pedagogical issues, corporate governance, and real estate. Contact: sweeks@fgcu.edu
Table 1 Adjustments to Comparable Sales

                                        Sales

Adjustments                     1         2         3

Price/sf                      $66.66    $88.41    $63.92
Market conditions               -14%       -8%       -7%

Adjusted transaction price    $57.33    $81.34    $59.45

Location                         30%       10%        0%
Building size                     0%      -10%      -15%
Land-to-building ratio          -10%       10%        0%
Age/condition                   -10%      -20%        0%
Quality/appeal                   10%       -5%        5%

Adjusted price                $68.80    $69.14    $53.50

                                        Sales

Adjustments                     4         5         6

Price/sf                      $69.74    $60.80    $57.14
Market conditions                -6%       -2%       -2%

Adjusted transaction price    $65.55    $59.59    $56.00

Location                         10%       20%       10%
Building size                   -10%      -10%        0%
Land-to-building ratio           20%       10%       10%
Age/condition                     0%        0%      -10%
Quality/appeal                  -20%        0%        0%

Adjusted price                $65.55    $71.50    $61.60

Table 2 Overall Property Yield Rate Buildup

             IRP = ([RI.sub.i] x ERP) - ERP
             [K.sub.s] = [r.sub.f] + ERP + [SP.sub.S] + IRP

where:

[K.sub.5]    = the cost of equity for company s
             (overall property yield rate)

[r.sub.f]    = the expected return on the riskless asset

ERP          = the expected equity risk premium, or the amount by
             which investors expect the future return on equities to
             exceed that on the riskless asset

[SP.sub.S]   = the expected beta-adjusted size premium for company s
             based on the firm's equity market capitalization

IRP          = the expected industry risk premium for industry i, or
             the amount by which investors expect the future return
             of the industry to exceed that of the market as a whole.

[RI.sub.i]   = the risk index for the industry

             IRP = (3.24 x 6.5%)--6.5% = 14.56%
             [K.sub.s] = 3.0% + 6.5% + 5.81% + 14.56%
             = 29.87% or 30.0% (rounded)

See Ibbotson SBBI Yearbook for annual premiums (Ibbotson Valuation
Yearbook, http://www.ibbotson.com). Morningstar publishes risk
indexes on an annual basis.

See also http://corporate.morningstar.com/ib/documents/
MarketingOneSheets/DataPublication/Q407_IPCoListReport.pdf.

Table 3 Retrospective Market Value as of August 28, 2008

Year                              1           2           3

Potential gross income         $244,482    $244,482    $251,816
Additional rent                 $81,494     $83,939     $86,457
Total PGI                      $325,976    $328,421    $338,273
Vacancy and collection loss     $26,078     $26,274     $27,062
Effective gross income         $299,898    $302,147    $311,212
Less operating expenses
  Real estate taxes             $40,521     $41,737     $42,989
  Insurance                     $15,756     $16,229     $16,716
  Maintenance                   $15,000     $15,750     $16,538
  Management                     $7,500      $7,554      $7,780
  Utilities                      $2,037      $2,098      $2,161
  Miscellaneous                    $800        $824        $849
  Leasing commissions
  Tenant improvement
  Reserves/replacement           $4,500      $4,532      $4,668
Total expenses                  $86,114     $88,723     $91,700
Expense ratio (% of income)          $0          $0          $0
Net operating income           $213,784    $213,424    $219,512
Reversionary value (9% cap)
Less cost of sale (4%)
Net sale proceeds
Discounted PV @ 30%            $164,449    $126,286     $99,914
Estimated value                $762,784
Rounded                        $760,000

Year                              4           5           6

Potential gross income         $259,371    $267,152    $275,167
Additional rent                 $89,051     $91,722     $94,474
Total PGI                      $348,422    $358,874    $369,641
Vacancy and collection loss     $27,874     $28,710     $29,571
Effective gross income         $320,548    $330,164    $340,069
Less operating expenses
  Real estate taxes             $44,278     $45,607     $46,975
  Insurance                     $17,217     $17,734     $18,266
  Maintenance                   $17,364     $18,233     $19,144
  Management                     $8,014      $8,254      $8,502
  Utilities                      $2,226      $2,293      $2,361
  Miscellaneous                    $874        $900        $927
  Leasing commissions
  Tenant improvement
  Reserves/replacement           $4,808      $4,952      $5,101
Total expenses                  $94,782     $97,972    $101,276
Expense ratio (% of income)          $0          $0          $0
Net operating income           $225,766    $232,192    $238,793
Reversionary value (9% cap)
Less cost of sale (4%)
Net sale proceeds
Discounted PV @ 30%             $79,047     $62,536     $49,472
Estimated value
Rounded

Year                              7           8           9

Potential gross income         $283,422    $291,924    $300,682
Additional rent                 $97,308    $100,227    $103,234
Total PGI                      $380,730    $392,152    $403,916
Vacancy and collection loss     $30,458     $31,372     $32,313
Effective gross income         $350,271    $360,780    $371,603
Less operating expenses
  Real estate taxes             $48,384     $49,836     $51,331
  Insurance                     $18,813     $19,378     $19,959
  Maintenance                   $20,101     $21,107     $22,162
  Management                     $8,757      $9,019      $9,290
  Utilities                      $2,432      $2,505      $2,580
  Miscellaneous                    $955        $984      $1,013
  Leasing commissions
  Tenant improvement
  Reserves/replacement           $5,254      $5,412      $5,574
Total expenses                 $104,697    $108,240    $111,910
Expense ratio (% of income)          $0          $0          $0
Net operating income           $245,574    $252,539    $259,693
Reversionary value (9% cap)
Less cost of sale (4%)
Net sale proceeds
Discounted PV @ 30%             $39,136     $30,959     $24,489
Estimated value
Rounded

Year                             10          11          12

Potential gross income         $309,702    $318,994    $328,563
Additional rent                $106,331    $109,521    $112,807
Total PGI                      $416,034    $428,515    $441,370
Vacancy and collection loss     $33,283     $34,281     $35,310
Effective gross income         $382,751    $394,234    $406,061
Less operating expenses
  Real estate taxes             $52,871     $54,457     $56,091
  Insurance                     $20,558     $21,175     $21,810
  Maintenance                   $23,270     $24,433     $25,655
  Management                     $9,569      $9,856     $10,152
  Utilities                      $2,658      $2,738      $2,820
  Miscellaneous                  $1,044      $1,075      $1,107
  Leasing commissions           $18,582
  Tenant improvement
  Reserves/replacement           $5,741      $5,914      $6,091
Total expenses                 $134,292    $119,647    $123,725
Expense ratio (% of income)          $0          $0          $0
Net operating income           $248,459    $274,586    $282,335
Reversionary value (9% cap)
Less cost of sale (4%)
Net sale proceeds
Discounted PV @ 30%             $18,023     $15,322     $12,118
Estimated value
Rounded

Year                             13          14          15

Potential gross income         $338,420    $348,573    $359,030
Additional rent                $116,191    $119,677    $123,267
Total PGI                      $454,611    $468,250    $482,297
Vacancy and collection loss     $36,369     $37,460     $38,584
Effective gross income         $418,242    $430,790    $443,713
Less operating expenses
  Real estate taxes             $57,773     $59,506     $61,292
  Insurance                     $22,464     $23,138     $23,832
  Maintenance                   $26,938     $28,285     $29,699
  Management                    $10,456     $10,770     $11,093
  Utilities                      $2,904      $2,991      $3,081
  Miscellaneous                  $1,141      $1,175      $1,210
  Leasing commissions
  Tenant improvement
  Reserves/replacement           $6,274      $6,462      $6,656
Total expenses                 $127,950    $132,327    $136,863
Expense ratio (% of income)          $0          $0          $0
Net operating income           $290,292    $298,462    $306,851
Reversionary value (9% cap)
Less cost of sale (4%)
Net sale proceeds
Discounted PV @ 30%              $9,585      $7,580      $5,995
Estimated value
Rounded

Year                             16          17          18

Potential gross income         $359,030    $359,030    $359,030
Additional rent                $123,267    $123,267    $123,267
Total PGI                      $482,297    $482,297    $482,297
Vacancy and collection loss     $38,584     $38,584     $38,584
Effective gross income         $443,713    $443,713    $443,713
Less operating expenses
  Real estate taxes             $61,292     $61,292     $61,292
  Insurance                     $24,547     $25,284     $26,042
  Maintenance                   $31,184     $32,743     $34,380
  Management                    $11,093     $11,093     $11,093
  Utilities                      $3,174      $3,269      $3,367
  Miscellaneous                  $1,246      $1,284      $1,322
  Leasing commissions
  Tenant improvement
  Reserves/replacement           $6,656      $6,656      $6,656
Total expenses                 $139,191    $141,620    $144,152
Expense ratio (% of income)          $0          $0          $0
Net operating income           $304,522    $302,094    $299,561
Reversionary value (9% cap)
Less cost of sale (4%)
Net sale proceeds
Discounted PV @ 30%              $4,576      $3,492      $2,664
Estimated value
Rounded

Year                             19          20          21

Potential gross income         $359,030    $359,030    $341,079
Additional rent                $123,267    $123,267    $117,104
Total PGI                      $482,297    $482,297    $458,182
Vacancy and collection loss     $38,584     $38,584     $36,655
Effective gross income         $443,713    $443,713    $421,528
Less operating expenses
  Real estate taxes             $61,292     $61,292     $58,227
  Insurance                     $26,824     $27,628     $28,457

  Maintenance                   $36,099     $37,904     $39,799
  Management                    $11,093     $11,093     $10,538
  Utilities                      $3,468      $3,572      $3,679
  Miscellaneous                  $1,362      $1,403      $1,445
  Leasing commissions                       $21,542
  Tenant improvement
  Reserves/replacement           $6,656      $6,656      $6,323
Total expenses                 $146,793    $171,089    $148,469
Expense ratio (% of income)          $0          $0          $0
Net operating income           $296,920    $272,624    $273,059
Reversionary value (9% cap)
Less cost of sale (4%)
Net sale proceeds
Discounted PV @ 30%              $2,031      $1,434      $1,105
Estimated value
Rounded

Year                             22          23          24

Potential gross income         $324,025    $307,823    $292,432
Additional rent                $111,248    $105,686    $100,402
Total PGI                      $435,273    $413,509    $392,834
Vacancy and collection loss     $34,822     $33,081     $31,427
Effective gross income         $400,451    $380,429    $361,407
Less operating expenses
  Real estate taxes             $55,316     $52,550     $49,922
  Insurance                     $29,311     $30,190     $31,096
  Maintenance                   $41,789     $43,879     $46,073
  Management                    $10,011      $9,511      $9,035
  Utilities                      $3,789      $3,903      $4,020
  Miscellaneous                  $1,488      $1,533      $1,579
  Leasing commissions
  Tenant improvement
  Reserves/replacement           $6,007      $5,706      $5,421
Total expenses                 $147,712    $147,272    $147,146
Expense ratio (% of income)          $0          $0          $0
Net operating income           $252,740    $233,157    $214,261
Reversionary value (9% cap)
Less cost of sale (4%)
Net sale proceeds
Discounted PV @ 30%                $787        $558        $395
Estimated value
Rounded

Year                             25          26          27

Potential gross income         $277,811    $250,030    $225,027
Additional rent                 $95,382     $85,843     $77,259
Total PGI                      $373,192    $335,873    $302,286
Vacancy and collection loss     $29,855     $26,870     $24,183
Effective gross income         $343,337    $309,003    $278,103
Less operating expenses
  Real estate taxes             $47,426     $42,684     $38,415
  Insurance                     $32,029     $32,990     $33,979
  Maintenance                   $48,376     $50,795     $53,335
  Management                     $8,583      $7,725      $6,953
  Utilities                      $4,141      $4,265      $4,393
  Miscellaneous                  $1,626      $1,675      $1,725
  Leasing commissions
  Tenant improvement
  Reserves/replacement           $5,150          $0          $0
Total expenses                 $147,332    $140,134    $138,800
Expense ratio (% of income)          $0          $0          $0
Net operating income           $196,005    $168,869    $139,302
Reversionary value (9% cap)
Less cost of sale (4%)
Net sale proceeds
Discounted PV @ 30%                $278        $184        $117
Estimated value
Rounded

Year                             28          29          30

Potential gross income         $202,524    $182,272    $164,044
Additional rent                 $69,533     $62,580     $56,322
Total PGI                      $272,057    $244,851    $220,737
Vacancy and collection loss     $21,765     $19,588     $17,629
Effective gross income         $250,293    $225,263        $203
Less operating expenses
  Real estate taxes             $34,574     $31,116     $28,005
  Insurance                     $34,999     $36,049     $37,130
  Maintenance                   $56,002     $58,802     $61,742
  Management                     $6,257      $5,632      $5,068
  Utilities                      $4,525      $4,661      $4,800
  Miscellaneous                  $1,777      $1,830      $1,885
  Leasing commissions
  Tenant improvement
  Reserves/replacement               $0          $0          $0
Total expenses                 $138,133    $138,089    $138,631
Expense ratio (% of income)          $1          $1          $1
Net operating income           $112,159     $87,174     $64,106
Reversionary value (9% cap)                            $291,272
Less cost of sale (4%)                                 $355,378
Net sale proceeds
Discounted PV @ 30%                 $72         $43        $136
Estimated value
Rounded

Table 4 Value Prior to Changes in Flood Map

                        SF    Per SF        Annual

Potential gross
  income             40,747     $6.00      $244,482
CAM                  40,747     $2.00        81,494
Total potential
  gross income       40,747     $8.00      $325,976
Vacancy and
  collection loss
  (8%)                                      $26,078
Effective gross
  income                                   $299,898
Expenses (28.7%)     40,747     $2.11       $85,976
Net operating
  income                        $5.25      $213,922
Capitalized at
  8.50%                                  $2,516,726
Rounded                                  $2,520,000

Table 5 Estimation for Discounted Cash Flow

Item                           Market-Based Estimate

Discount rate                           10%

Reversionary (terminal)
capitalization rate                      9%

Cost of sale                             4%

Growth rate for income          Flat for year 1, 3%
                                annually thereafter

Growth rate for expenses               3%-5%

Vacancy and collection loss              8%

Table 6 Calculations for Discounted Cash Flow

Year                            1             2             3

Potential gross income      $244,482      $244,482      $251,816
Additional rent              $81,494       $83,939       $86,457
Total PGI                   $325,976      $328,421      $338,273
Vacancy and collection
  loss                       $26,078       $26,274       $27,062
Effective gross income      $299,898      $302,147      $311,212
Less operating
    expenses
  Real estate taxes          $40,521       $41,737       $42,989
  Insurance                  $15,756       $16,229       $16,716
  Maintenance                $15,000       $15,750       $16,538
  Management                  $7,500        $7,554        $7,780
  Utilities                   $2,037        $2,098        $2,161
  Miscellaneous                 $800          $824          $849
  Leasing commissions
  Tenant improvement
  Reserves/
    replacement               $4,500        $4,532        $4,668
Total expenses               $86,114       $88,723       $91,700
Expense ratio
(% of income)                 28.71%        29.36%        29.47%
Net operating income        $213,784      $213,424      $219,512
Reversionary value
(9% cap)
Less cost of sale (4%)
Net sale proceeds
Present value at 10%        $194,349      $176,383      $164,922
Estimated Value           $2,554,968
Rounded                   $2,555,000

Year                            4             5             6

Potential gross income      $259,371      $267,152      $275,167
Additional rent              $89,183       $91,722       $94,474
Total PGI                   $348,554      $358,874      $369,641
Vacancy and collection
  loss                       $27,884       $28,710       $29,571
Effective gross income      $320,670      $330,164      $340,069
Less operating
    expenses
  Real estate taxes          $44,278       $45,607       $46,975
  Insurance                  $17,217       $17,734       $18,266
  Maintenance                $17,364       $18,233       $19,144
  Management                  $8,017        $8,254        $8,502
  Utilities                   $2,226        $2,293        $2,361
  Miscellaneous                 $874          $900          $927
  Leasing commissions
  Tenant improvement
  Reserves/
    replacement               $4,810        $4,954        $5,101
Total expenses               $94,787       $97,972      $101,276
Expense ratio
(% of income)                 29.56%        29.67%        29.78%
Net operating income        $225,883      $232,192      $238,793
Reversionary value
(9% cap)
Less cost of sale (4%)
Net sale proceeds
Present value at 10%        $154,201      $144,173      $134,792
Estimated Value
Rounded

Year                            7             8             9

Potential gross income      $283,422      $291,924      $300,682
Additional rent              $97,308      $100,227      $103,234
Total PGI                   $380,730      $392,152      $403,916
Vacancy and collection
  loss                       $30,458       $31,372       $32,313
Effective gross income      $350,271      $360,780      $371,603
Less operating
    expenses
  Real estate taxes          $48,384       $49,836       $51,331
  Insurance                  $18,813       $19,378       $19,959
  Maintenance                $20,101       $21,107       $22,162
  Management                  $8,757        $9,019        $9,290
  Utilities                   $2,432        $2,505        $2,580
  Miscellaneous                 $955          $984        $1,013
  Leasing commissions
  Tenant improvement
  Reserves/
    replacement               $5,254        $5,412        $5,574
Total expenses              $104,697      $108,240      $111,910
Expense ratio
(% of income)                 29.89%        30.00%        30.12%
Net operating income        $245,574      $252,539      $259,693
Reversionary value
(9% cap)
Less cost of sale (4%)
Net sale proceeds
Present value at 10%        $126,018      $117,811      $110,135
Estimated Value
Rounded

Year                           10            11

Potential gross income      $309,702      $318,994
Additional rent             $106,331      $109,521
Total PGI                   $416,034      $428,515
Vacancy and collection
  loss                       $33,283       $34,281
Effective gross income      $382,751      $394,234
Less operating
    expenses
  Real estate taxes          $52,871       $54,457
  Insurance                  $20,558       $21,175
  Maintenance                $23,270       $24,433
  Management                  $9,569        $9,856
  Utilities                   $2,658        $2,738
  Miscellaneous               $1,044        $1,075
  Leasing commissions
  Tenant improvement
  Reserves/
    replacement               $5,741        $5,914
Total expenses              $115,710      $119,647
Expense ratio
(% of income)                 30.23%        30.35%
Net operating income        $267,041      $274,586
Reversionary value
(9% cap)                                $3,050,961
Less cost of sale (4%)                    $122,038
Net sale proceeds                       $2,928,922
Present value at 10%        $102,956    $1,129,226
Estimated Value
Rounded
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Article Details
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Title Annotation:Private Property Protection Act
Author:Cole, William; Stephan, Bruce; Chouinard, Nathan; Finch, J. Howard; Weeks, H. Shelton
Publication:Appraisal Journal
Article Type:Abstract
Geographic Code:1USA
Date:Jan 1, 2011
Words:7257
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