Question

when calculate property value for real estate, should we consider the negative expense stop or ignore it and consider it as a zero?

Answer 1

The task of analyzing a real estate investment may be divided into three components:

1. Cash flow The amount of cash annually received by the investor, including revenues generated and financing proceeds realized, minus all cash expenses incurred, with the exception of income taxes;

2. Tax effect The amount by which the investment affects the taxes payable in the current year by the investor;

3. Future benefits The amount by which the capital position of the investor is affected by the sale or refinancing of the property or entity owning the property on an after-tax basis. It takes into account prior mortgage amortization and the change in value of the asset.

This note examines each of these elements of return and their use in establishing an overall rate of return and valuation of the property as well as the effects the passage of time may have on all of the above.

Expense-stop pass-throughs — Some pass-through arrangements require the tenants to pay a just portion of the recoverable expenses. The landlord pays up to a certain amount, called an “expense stop,” and the rest is passed through to the tenants. The “stop” can be a dollar amount defined in the lease, or it can be a “base-year stop,” where the landlord pays whatever amount comes due in the first year of the lease and the tenants pay any increase in subsequent years.

CONCLUSION -

While calculating the valuation of property one should consider the incremental approach. It means any savings in exps should also considered in calculating the valuation of property as it leads to reduction in exps which means there is generation of income.

It is not preferable to consider the saving in exps as zero exp because it doesn't show the correct picture while evaluating the two or more projects.