Commercial Valuation Report: Property, Market, and Financial Analysis

This commercial valuation report presents a comprehensive analysis of a hypothetical property, incorporating both financial and market perspectives. The report begins with a detailed table of contents, followed by projected before-tax and after-tax cash flows from operations, along with a discounted cash flow analysis to assess the property's investment potential. Sensitivity analysis is conducted to evaluate the impact of changes in key variables, such as operating income and sales price, on the equity value. The report also includes a scope and purpose section, examining the methodology used for market value reports (MVRs), and provides a valuation executive summary. Furthermore, it delves into property details, including location, title, statutory assessments, and town planning. The report analyzes tenancy details, income, and valuation approaches, addressing marketability and risk assessment. Ethical implications of property investment are discussed, alongside the strengths and weaknesses of the discounted cash flow methodology. The report concludes with references and an appendix containing supporting tables and data, including operating expenses and income projections.

Commercial Valuation Report

TABLE OF CONTENTS
Question1.........................................................................................................................................5
Projected Before-Tax Cash Flow from Operations.....................................................................6
Projected After-Tax Cash Flow from Operations........................................................................6
Discounted Cash Flow.................................................................................................................7
Sensitivity Analysis.....................................................................................................................8
Question 2......................................................................................................................................10
Scope and Purpose of MVR......................................................................................................10
Valuation Executive Summary..................................................................................................10
Introduction to the property.......................................................................................................10
Property and Locality................................................................................................................11
Title Details...............................................................................................................................11
Statutory Assessment.................................................................................................................11
Town Planning...........................................................................................................................12
Improvements............................................................................................................................12
Environmental Issues.................................................................................................................12
Tenancy Details.........................................................................................................................13
Income Analysis........................................................................................................................13
Valuation Rationale or Approach..............................................................................................13
Goods and Services Tax............................................................................................................13
Sales and Rental Evidence.........................................................................................................14
Marketability..............................................................................................................................14
Risk Assessment........................................................................................................................14
Innovative Solutions to Property Issues of Varying Complexity..............................................14
Ethical Implications of Property Investment Decision Making................................................15

The Strengths and Weaknesses of the Discounted Cash Flow Methodology...........................15
References......................................................................................................................................17
Appendix........................................................................................................................................19

LIST OF TABLES
Table 1: Operating cash flow before tax..........................................................................................6
Table 2: Table representing cash flow from operations after tax....................................................6
Table 3: Discounted value of cash flow before tax.........................................................................7
Table 4: Discounted Cash Flow After Tax......................................................................................7
Table 5: Assumption relating to property........................................................................................8
Table 6: Assumed values relating to sale of property......................................................................8
Table 7: Table representing change in equity value due to change in operating income................9
Table 8: Table representing change in equity value due to change in sales price...........................9
Table 9: Operating Expenses relating to property.........................................................................19
Table 10: Table representing operating income of five years.......................................................20

QUESTION1
Market valuation of a hypothetical property has been provided below in detail along with the
calculation relating to income from rent if the property has been rented and calculations relating
to sale of property.
Details of the property:
An assumption has been made the same will be rented for a period of five years; the other details
relating to property have been specified below:
` Anticipated holding period: 5
Potential Gross Rent inputs: Units Monthly Rent
Type 1: Two-Bedroom 50 $800
Type 2: One-Bedroom 100 $700
Type 3: Studio Units 50 $500
Increase in rate of rent per year:
0
1 2 3 4 5
Increase in rents: 2.5% 4.0% 4.0% 3.0% 3.0% 3.0%
Assumption relating to rate of vacancy rates
1 2 3 4 5
Estimated vacancy rates: 6.0% 5.0% 4.0% 4.0% 4.0%
Annual gross rent estimate: $1620000
Potential gross rent : $1660500
(Estimate for first year)
Other Income : 4%
Note: All the above figures are taken on hypothetical basis.

Calculations relating to estimated rental income after reducing vacancy allowance along with
other income has been specified below:
Projected Before-Tax Cash Flow from Operations
Table 1: Operating cash flow before tax
Year 1 2 3 4 5
Potential Gross Rent 16,60,500 17,26,900 17,96,000 18,49,900 19,05,400
Vacancy Allowance 99,600 86,300 71,800 74,000 76,200
15,60,900 16,40,600 17,24,200 17,75,900 18,29,200
Other Income 62,400 65,600 69,000 71,000 73,200
Effective Gross
Income
16,23,300 17,06,200 17,93,200 18,46,900 19,02,400
Operating Expenses
Management Fee 64,900 68,200 71,700 73,900 76,100
Salary Expense 1,95,700 2,01,600 2,07,600 2,13,800 2,20,200
Utilities 1,03,000 1,06,100 1,09,300 1,12,600 1,16,000
Insurance 30,900 31,800 32,800 33,800 34,800
Supplies 21,600 22,200 22,900 23,600 24,300
Advertising 25,800 26,600 27,400 28,200 29,000
Maintenance
&repairs
1,85,400 1,91,000 1,96,700 2,02,600 2,08,700
Property Taxes 2,00,000 2,00,000 2,00,000 2,00,000 2,40,000
Total Expenses 8,27,300 8,47,500 8,68,400 8,88,500 9,49,100
Net Operating Income 7,96,000 8,58,700 9,24,800 9,58,400 9,53,300
Debt Service 6,85,000 6,85,000 6,85,000 6,85,000 6,85,000
Before-Tax Cash Flow 1,11,000 1,73,700 2,39,800 2,73,400 2,68,300
An increasing trend in rental income can be accessed from above table; the reason behind the
same is increase in rental income every year.
Projected After-Tax Cash Flow from Operations
Table 2: Table representing cash flow from operations after tax
Year 1 2 3 4 5
Potential Gross Rent 16,60,500 17,26,900 17,96,000 18,49,900 19,05,400
Vacancy Allowance 99,600 86,300 71,800 74,000 76,200
15,60,900 16,40,600 17,24,200 17,75,900 18,29,200

Other Income 62,400 65,600 69,000 71,000 73,200
Effective Gross Income 16,23,300 17,06,200 17,93,200 18,46,900 19,02,400
- Operating Expenses 8,27,300 8,47,500 8,68,400 8,88,500 9,49,100
Net Operating Income 7,96,000 8,58,700 9,24,800 9,58,400 9,53,300
- Debt Service 6,85,000 6,85,000 6,85,000 6,85,000 6,85,000
Before-Tax Cash Flow 1,11,000 1,73,700 2,39,800 2,73,400 2,68,300
- Income Taxes 1,700 20,900 45,400 60,500 68,300
After-Tax Cash Flow 1,09,300 1,52,800 1,94,400 2,12,900 2,00,000
Discounted Cash Flow
Discounted cash flow valuation is done to ascertain the attractiveness of an investment
opportunity that whether it is feasible or not. The methodology evaluates the future free cash
flow and discounts the same for ascertaining present value for assessing the potential of an
investment. In present case the same has been done to assess present value of property.
Table 3: Discounted value of cash flow before tax
Year 0 1 2 3 4 5
BT
CF:
1,11,000 1,73,700 2,39,800 2,73,400 2,68,300
BT
ER:
0 0 0 0 1,10,73,500
To
tal:
-45,94,500 1,11,000 1,73,700 2,39,800 2,73,400 1,13,41,800
IRR = 22.36%
Table 4: Discounted Cash Flow After Tax
Year 0 1 2 3 4 5
AT
CF:
1,09,300 1,52,800 1,94,400 2,12,900 2,00,000
AT
ER:
0 0 0 0 96,17,000
To
tal:
-45,94,500 1,09,300 1,52,800 1,94,400 2,12,900 98,17,000
IRR = 18.68%

Sensitivity Analysis
Sensitivity Analysis is done though assessing the variables in the manner which they impact the
valuation of financial model; through altering the variable such as income or selling price (Bodie,
2013). In present case, impact on valuation has been assessed through two variables i.e. selling
price and operating income. The
Following assumption has been made regarding the property whose valuation analysis has been
done:
Table 5: Assumption relating to property
Anticipated holding
period:
5
Purchase price: 1,14,44,500
Transaction costs: 1,50,000
Initial Investment Basis: 1,15,94,500
Mortgage: 70,00,000
Initial Equity: 45,94,500
Table 6: Assumed values relating to sale of property
Selling Price: 1,78,00,000
- Selling Costs: 8,90,000
Net Proceeds: 1,69,10,000
- Mortgage Balance: 58,36,500
Before-tax Reversion: 1,10,73,500
- Taxes due on sale: 14,56,500
After-Tax Reversion: 96,17,000
Discounting rate: 10%
Present value of Equity: $6612698
Variation in Net Operating Income

Table 7: Table representing change in equity value due to change in operating income
% change in
Equity
Value
With -10%
Variation
Equity
Value
Expected
With +10%
Variation
Input %
Variation
10% 19.45% 5326538 6612698 7898858
Variation in Sales price
Table 8: Table representing change in equity value due to change in sales price
% change in
Equity
Value
With -10%
Variation
Equity
Value
Expected
With +10%
Variation
Input %
Variation
10% 15.88% 5562720 6612698 7662676
Calculation for change in NOI:
After-Tax Cash Flow 1,65,000 2,12,97
0
2,59,080 2,79,94
0
2,66,730
After-tax Equity Reversion 0 0 0 0 1,13,08,000
Total Cash Flow 1,65,000 2,12,97
0
2,59,080 2,79,94
0
1,15,74,730
Change in Equity Value: 7898858-6612698 =1286160
Calculation for change in Sales Price:
1,09,300 1,52,80
0
1,94,40
0
2,12,90
0
2,00,000
After-tax Equity Reversion 0 0 0 0 1,13,08,00
0
Total Cash Flow 1,09,300 1,52,80
0
1,94,40
0
2,12,90
0
1,15,08,00
0
Change in Equity Value: 7662676-6612698 =1049978

From above calculation it can be assessed that change in net operating income affect the value of
equity more significantly in comparison to change in selling price. Thus, more emphasis should
be given on this variant in order to be sure about the decision of investing in the property.
QUESTION 2
Scope and Purpose of MVR
According to John Doe (2016), the MVRs of any company or specific property explain
how a relevant methodology was implemented to a group of properties. These report present
pertinent market data available related to the legislated date of valuation and demonstrate how
some of the key variables are obtained for that property. Any factors linked with the relevant
methodology (i.e., cost rates and economic indicators) that are applied by an evaluator of MVRs
are specially incorporated in this Report. The owners of Property may access this report that is
related to their property.
Valuation Executive Summary
The insurance company- Youi is planning to put up its new HQ and a call centre on the
Sunshine Coastlocated in Queensland. The new facilities at Sippy Downs worth $80 million will
replace the leased premises of the company which is located 10 kilometers away in the vicinity
ofBirtinya. Sippy Downs is abode to many Universities of the Sunshine Coast (Jonathan
Chancellor, 2015). Reasonable financial incentives were proposed to Youi for locating theirHQ
in Sippy Downs. This was by far the largest non-government investment in the history of
Sunshine Coast. Youi was established in 2008 by a parent company- Rand Merchant Holdings
Group located in South Africa.
Introduction to the property
The Building plans for New Global Headquarters of Youi at Sippy Dows have been
approved (Daily Herald, 2016). An application for the development of the same was given green
signal on September 23 by Sunshine Coast Council. Youi proclaimed its plan for building the
extended facility at Sippy Downs in March 2015, as reported in a daily newspaper. The
Construction for the same was intended to begin in the current year in the month of August with
the traditional ceremony of sod-turning at the site on 22nd August. However there was some
delay in the same due to which reporters have contacted the company for providing an update on
the building plans in progress.

Property and Locality
The property site approved is located within the Sippy Downs Town Centre. Sippy down
is a hub to many designated knowledge universities. The property at Sippy Downs 31-Drive is a
residential development site with high-density coverage and an eight-storey height limit. It is
flooded with various amenities like bus facilities together with societal, educational and leisure
facilities (Times, 2017). The approved plan includes
 An office building,
 An outlet for food and drink,
 A multi-level carparking area,
 A reception area.
 Countryside open space area.
Title Details
The Municipal Property Assessment Corporation (MPAC) approached large and special
purpose property owners as well as their representatives and municipalities through a series of
consultation sessions in 2015. In the starting of 2016, a special session was conducted on
Replacement Cost based on industry feedback. The part of the Sunshine Coast which was fairly
dormant for many years was negotiated with the deals.
Statutory Assessment
With respect of statutory assessment, the focus is on altering the conduct of real estate
market participants to become more aware of day-today sustainable living. Sustainability in real
estate business has been developed consideringgrowth of economic environment protection and
social wealth consideration to maximizing benefits and minimizing negative impact accounting
to the owners, developers, and occupiers. There is a wave of development that is continuing to
gain thrust in the growing area of Sippy Downs. Recently, two huge development sites have
changed hands in the area of west Mooloolaba in deals of more than $11million. The properties
at 31 and 83 Sippy Downs comprise of available areas of 4.65ha and 2.02ha which were sold for
$5.6million and $5.5million respectively.

Town Planning
Though the Sunshine Coast was an appropriate site for Youi, they were surely being
presented some extremely good factors by different local authorities of Sippy Downs to set up
their property in their backyard (Gatton Lockyer and Brisbane Valley, 2017). After facing so
many issues with the present HQ and attractive offers from the council of Sippy Downs, Youi
saw all of a sudden few projects including the development of four-stage residential unit, the
group’s new HQ and a retail complex. So the entire town centre at Sippy Downs to the opposite
of the university started to emerge. The town is expected to become a fully developed area in
next 5-7 years.
Improvements
It was a real revolution to get their headquarters on the Sunshine Coast, and getting the
site to expand the amenities they have here.Sippy Downs has really been inactive for many
years. As per the executive of the company, Mr Stevens, the new HQ of Youi would get Sippy
Downs to move forward and launch the site as a ‘great place for investment’. The Council of the
area has been planning for growth since 10 years but nothing really happened as a result. Youi,
which largest private sector employer of the Sunshine Coast, declared their plans for new facility
of approximately $80 million last year in March. The move to Sippy Downs was undertaken as a
solution to the problem of car parking at its the Birtinya site, where a spread out of car park from
Youi's ended up on housing streets. As held up by the Council of Sunshine Coast that the site
will prove to be a great place to base such a large company (Paul Blair, 2016).
Environmental Issues
The annual report attributes the fall in earnings to large and frequent events of natural
calamities which have increased claims. This was referred to the severe storms of January and
June that hit parts of south-east Australia. Thus, the area of Sippy Downs may also see such
crashes in market due to inevitable natural factors. The Storms of West East Australia are
expected to take a part of the company’s growth; but the company is well prepared for to
mitigate these natural calamities. The company has special teams in force to manage such risk.
These types of risks are said to be a part of company’s natural business.