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CABARRUS COUNTY 2012 APPRAISAL MANUAL VARIABLE EXPENSES Included in this category are such expenditures as management fees, payroll and personnel, supplies and materials, utilities, grounds care, etc. These tend to vary, at least in part, with the percentage of occupancy. Much depends on the type of property, the climate and the landlord- tenant relationship as to expenses incurred. REPAIRS AND REPLACEMENTS These items vary from year to year and tend to be concentrated in some years. For valuation purposes it is necessary to spread the cost of certain major repairs and/or replacements over their useful life. Dividing the replacement cost for each category by the forecast useful life yields an annual payment to cover replacement. Some typical items would be air conditioners, heating systems and roof covers. SOURCE OF OPERATING EXPENSE DATA There are basically three sources for providing information on operating expenses of properties. Sources are past experience of the subject, market experience of similar properties and published studies and reports on local, regional and national fronts. NET OPERATING INCOME Net operating income (NOI) is the annual dollar amount that a property is capable of producing under typical conditions and is equal to the gross income less vacancy and collection losses and operating expenses. Example: Gross Income (20 apt. @ $1200 /year) $24,000 Less 5% Vacancy & Collection 1,200 $22,800 Less 35% Operating Expenses Net Operating Income (NOI) 7,980 $14,820 The net operating income usually takes into consideration the lease agreement presently in force to determine the dollar amount (income) to the investor and /or owner. The County also analyzes the leases of competitive properties to estimate contract rent, market rent, and other forms of income. Under General Statute 105 -317 (a) (2) which states in part that it shall be the duty of the persons making appraisals to determine the true value to consider in part: past income, probable future income and any other factors that may affect its value. Lease analysis is important and all characteristics of leases must be fully understood. DETERMINE INCOME PROJECTION PERIOD So far the emphasis has been on computing what the net annual income for a property would be. However, what must not be overlooked is that this net annual income is assumed to generate over a period of years during which the investor earns interest on his capital and also receives a proportionate return of his investment. In order to determine the duration of the income stream and /or the amount of time an investor has to recover his capital two things must be considered, the remaining economic life of the property and the typical holding or investment period depending on the valuation technique to be used. Cabarrus County — 2012 Revaluation INCOME PROPERTY VALUATION 8- 4 05/24/01 Attachment number 11 G -3 Page 407