Step 3.3: Effective Income

Effective Income
 This dialog (shown below) is activated from the Income tab by clicking the "Step 3: Effective Income" button. 

Effective Income is the income that is used in the analysis. It may be the same as market income and not require a separate specific projection, or it may be an income stream that is defined by specific lease terms. In that case, it may similar to, above or below market income. Market income reflects the "going rate", effective income is the income the unit is expected to produce which may or may not be the same as market income. 

This process is very similar to projecting market income in detail mode.

Important Points
  1. When the market income stream (Steps 3.1 and 3.2) is created, the effective income is automatically projected under identical terms. There are now two identical income streams, with the effective income stream reading the market income stream. The valuation analysis is based on the effective income. 

    Until the effective income stream is specifically defined with new terms, any changes made to the market income stream will be automatically made to the effective income stream.

  2. When a new effective income is defined (as opposed to market income), the effective income stream will no longer read from the market income stream, for the period of time covered by the effective income stream. Most projections of effective income include a mix of lease and market income terms.  

    For example, If the effective income projection covers a three-year time frame, the balance of the income stream will remain at market. Any changes made to the market income stream will automatically be made to the portion of the effective income stream that is not subject to specific lease terms. However, if effective income projection covers the full projection period, the new income stream will not be tied to the market income stream.
Activate The Projection Tool
To activate the projection tool, click a cell under a date in the Effective Income - Detail table. When a cell is clicked, the detail for that month displayed in the projection tool. The income projection tool allows you to edit the income/vacancy for any month, or series of months, up to length of the projection period. 

The following image shows the top-left section of the Effective Income - Detail table. The full table includes income and vacancy for each month of the projection period. Unless you are using a large monitor, you may not see all of the table. Use the scroll bars at the bottom and right side of the screen to view more of the table. You can also set the view (top-right section of income sheet) to 90% or 85% to increase the viewable area. 

The Income Projection Tool

Income: Enter the income applicable for this income stream. This income will be applied according to the income measure established under Step 3.1: Unit Information. For example, if you selected the "Per SF"  income measure, the income will be applied by the square footage of the unit. Likewise, if you entered "Monthly" or "Annual", the income income will be multiplied by 12 months or applied as a lump sum for the year.

Vacancy/Collection Loss: Simply click on the spinner to set the vacancy/collection loss rate.

Change Income:  Income can be entered as a flat rate, with no changes, or it may increase annually by a percentage or dollar amount. The change increment is set for every 12 months, but by clicking on the spinner you can change the frequency. 

Project Income and Vacancy Forward
To project the new income/vacancy terms forward in time, drag the projection bar to the right for the desired number of months, then click "Apply". Note the projection bar shows the relative position of the cash flow. 

To apply different income and vacancy terms for a future date, click a cell under the future year to reactivate the projection tool.

  1. If the lease is already in place as of the appraisal date, click the first month (top left) of table. Enter the current lease terms in the projection tool. Some leases will require entering different terms at different periods (see example 3 below). 

  2. If a vacant unit was expected to lease-up in six months, click on the first month and project $0 income and 0% vacancy for six months. Next, click on the seventh month and project the expected terms, or they are unknown, leave the balance of the cash flow at market.

  3. A lease is expected to run at a flat rate for 3 years, then increase 10% and run flat for another 3 years. This can be done as a one or two step projection. To do it as a one step projection: Set the income amount, then using the spinner under the "Change Income By" box, set the increase to 10%. Next, set the frequency of change to 36 months using the spinner on the right side. The final step is drag the slider to the right for 72 months and click "Apply".  

    What Happens: The income is applied at a flat rate for 36 months. On the 37th month it is increased by 10%, then applied at this rate for the balance of the lease. Note that if the term had exceeded 72 months, another 10% increase would have been applied on the 73 month.

    To project the lease in two steps, one would apply the initial income for 3 years with no increases. Next, click on the 37th month and project the new rate flat for three years.