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16,291 sq.ft. x $.30 x 12 58,648
Net Operating Income $161,305
Mitten/Reynolds then used the capitalization rate
information for the lease comparables to estimate a
capitalization rate of 8.5 percent for the property.
Mitten/Reynolds arrived at a value of $1,900,000 (rounded) under
the income capitalization approach for the retail/office
component of the Redwood City Fox.
Mitten/Reynolds next adjusted this figure for the impact of
the Jacobs lease. Jacobs leased the Second floor office, the
Third floor office, and the West retail space, including the
mezzanine, at a rate of $3,000 per month, completely net.
Referring to the Jacobs lease as the “Master Lease”,
Mitten/Reynolds modified thus modified their net operating income
estimate as follows:
Income
Master Lease: 11,205 sq.ft. x $0.27 net $ 3,000
Mezzanine: 2,475 sq.ft. x $1.00 gross2,475
1st Floor: 2,611 sq.ft. x $1.35 gross3,525
Total per month $ 9,000
x 12 months
Total per Annum $108,000
Vacancy/Collection Loss (10%)
(Applied to non-Master only) 7,200
Annual Collections $100,800
Expenses (non-Master only)
5,086 sq.ft. x $.30 x 12 18,310
Modified Net Operating Income $ 82,490
Mitten/Reynolds then determined that because 69 percent of
the commercial space was rented under a long-term below-market
lease and that the risk of not receiving that net income was
slight, a lower capitalization rate was warranted to reflect the
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