Here’s a simplified example of how improving your income statement will benefit you. Note that you only need a small increase in Net Operating Income (NOI) to benefit from a much larger gain in property value.
Let’s assume you have a 10,000sf office building which is leased to 5 different tenants at different rental rates. Next, let’s assume that the total of all rents (Income) is $400,000/year. Let’s also assume that, because these are modified gross leases, the current operating expenses are $100,000/year, leaving an annual NOI of $300,000/year.
But what if GPS were able to show you how to increase your income and decrease your expenses, such that your NOI was now $325,000/year, representing an increase of $25,000/year? What might that look like?
| |
Before GPS |
|
After GPS |
| Income |
$ 400,000 |
|
$ 410,000 (increase of $10,000) |
| Expenses |
$ 100,000 |
|
$ 85,000 (decrease of $15,000) |
| NOI |
$ 300,000 |
|
$ 325,000*** |
It looks good... but where you really see the value is when you apply a cap rate to this equation to roughly figure the value of the property. Just for fun, let’s assume an 8% cap rate. Now look at the value of the property!
| |
Before GPS |
|
After GPS |
| NOI |
$ 300,000 |
|
$ 325,000 |
| Property Value |
$3,750,000 |
|
$4,062.500*** |
By only improving the NOI by $25,000, we were able to increase the property value by more than $300,000!
Then you might ask…how did we do that? We use these strategies at GPS to help our clients every day. We know how to find hidden pockets of value, whether on the income side or on the expense side, so that we can bring that savings and increase in value directly to our clients.
What are some examples of how we improved the above NOI? First, we identified some vacant spaces in the building that were not being fully utilized. Since those spaces were substandard, we decided to lease those spaces to the existing tenants at storage rates, thus bringing in an additional $3,000/year in unexpected income. We also determined in an audit, that the tenants had not been billed properly for operating expenses in the past 3 years. This added an additional $4,000/year to the income. Then, due to successfully negotiating renewal leases for 2 of the tenants, we were able to obtain an additional $3,000/year, totaling $10,000 more income per year than before.
Regarding expenses, we were able to identify operating inefficiencies in the existing HVAC system, which saved immediately on the electric and gas bills and allowed the tenants to be far more comfortable in their work environment. We then worked with the utility provider to determine the proper billing plan that would take into account the time of use, total load, etc. Then, we renegotiated the janitorial contract, because we discovered that additional savings could be achieved. We also implemented the use of only eco-friendly cleaning supplies and paper products and improved upon the recycling program, thereby reducing refuse costs and saving some trees along the way. Due to those and other strategies, we were able to reduce the total operating expenses by $15,000/year, thereby increasing the value of the property by over $300,000! |
