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Carneghi next subtracted landlord expenses from the annual
gross potential income. Because the market rents were estimated
on a triple net basis (whereby the tenant is responsible for all
expenses including taxes, insurance, maintenance, utilities, and
janitorial), the only expenses Carneghi determined to be incurred
by the landlord were management and structural reserves. He
projected these expenses at 3 percent and 1 percent of effective
gross income, respectively.
After subtracting the estimated expenses, Carneghi arrived
at an estimate of net operating income for the property. To this
figure he applied a capitalization rate of 7.5 percent. Carneghi
chose this capitalization rate based on his comparable office
building sales, which encompassed a range of capitalization rates
of 6.5 percent to 10.5 percent. Carneghi concluded that, after
consideration of the quality of the property, its lack of
parking, the fact that the retail/office space is small and is
part of a larger building, a capitalization rate of 8.0 percent
was appropriate. However, in light of the below-market Jacobs
lease, which created a low-risk situation for the building owner,
a lower capitalization rate of 7.5 percent was warranted.
Carneghi arrived at a value of $1,130,000 (rounded) for the
retail/office space under the income capitalization approach,
calculated as follows:
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