Growth Method Discussion

As may be seen from the assumption descriptions, revenues and expenses are treated in roughly the same fashion in the Assumption Set, and the following comments relate to both items. There are five Growth Methods available in planEASe: Annual, Continuous, One-Time, Ramp, Accrue by Year, and Accrue by Period, as shown in this Sample Growth Table, which shows how each of these Growth Methods would compute the growth in a $10,000 item growing at 10% annually, starting January 1, 2001 and lasting for four years. The following discussions of each of these Growth Methods show the assumptions that would be entered to cause these results and describe the details of the computations, as well as providing additional examples.

Annual Growth Annual Growth schedules the Revenue/Expense Amount to change every 12 months, like stair steps. The month in which the amount change occurs (the “riser” in the “step”) is determined by the month portion of the Revenue/Expense Start Date. Thus, if you use Annual Growth with a Start Date of 8.01, the increase in the amount will always occur in August. If you use 0.00 for the Start Date, growth occurs in the month used in the Date of Acquisition.

The Annual Growth line in the Sample Growth Table shows the results for this Growth Method using the (@ Growth Rate) choice, according to the assumptions shown here. The Start Date of 1 January 2001 causes the annual step to occur on January 1 of each year. The amount of each change is 10% of the previous year’s amount, so 2004, for instance, is the $12,100 for 2003 times 110%, or 13,310. Using the (@ Growth Rate) choice rather than (@ %>Inflation) means that the Growth Rate used is 10%, regardless of the value of the Inflation Rate in the Assumption Set.

The risers in the steps of Annual Growth are exactly 12 months apart, and all “treads” are 12 months long, starting from the Start Date. Thus, with an Acquisition Date of 4.01, if you enter $100,000 growing at 7% starting in 7.01, you will get $50,000 in 2001, $103,500 in 2002, et cetera. When the Start date is earlier than the Acquisition date, the first “tread” starts in the month of the Start date rather than in the month of the Acquisition date. Using this capability, you can make the number of months in the first “tread” any number you want, which is very useful in planning leases with annual COL increases. For example, if the Start date in the previous example were 1.01, you would get $75,000 in 2001, and $107,000 in 2002. In other words, by use of this technique, the first tread is shortened to 9 months, and the annual increase therefore occurs on

January first of each year. The Growth Rate for Annual Growth may be related to the general Inflation Rate (@ %>Inflation), or not (@ Growth Rate), or may simply be a fixed annual dollar amount (@ $/Year).

Continuous Growth Continuous Growth changes the Revenue/Expense Amount every month. For this reason, if you use this Growth Method, the amount shown in the first year of operations will contain growth, and therefore will be higher than you might expect. For instance, an amount of $100,000 growing at 5% with continuous growth shows as $102,470 in the first year due to the month-by-month growth. The Growth Rate for Continuous Growth may be related to the general Inflation Rate (@ %>Inflation), or not (@ Growth Rate).

The Continuous Growth line in the Sample Growth Table on page 114 shows the results for this Growth Method, according to the assumptions shown here. The Start Date of January 2001 causes the annual step to occur on January 1 of each year. The amount of each change is 10% of the previous year’s amount, so 2004, for in- stance, is the $12,691 for 2003 times 110%, or 13,960. Using Continuous (@ Growth Rate) (rather than @ %>Inflation) means that the Growth Rate used is 10%, regardless of the value of the Inflation Rate in the Assumption Set. The $10,488 amount in the first year of the Sample Growth Table requires a bit of explanation. Because revenues and expenses occur continuously during the year, the average time they occur is halfway through the year. Accordingly, planEASe inflates the first year amount with six months of inflation (the computation is $10,000 times 1.10).

The Rents Revenue and All Expense projections for the Sample Apartments both use Continuous Growth. Since the Sample Apartments are being acquired on 1 April 2001 there are nine months of operations in that year. Because revenues and expenses occur continuously during those nine months, the average time they occur is halfway through the time period, or four and a half months from the beginning of operations. Accordingly, planEASe increases the inflating expenses by 4.5 months of inflation in 2001. For example, the assumed value for the operating expense in this case is $100,000, growing at 8% per year. The value in the analysis for this item in 2001 is nine months of $100,000 (or $75,000) times 1.08, or $77,196. Similarly, the average expense in 2002 is paid on 1 July 2002, 15 months from the 1 April 2001 start of operations. Therefore the $110,098 expense shown in 2002 is computed as the original $100,000 times 1.08. The Rents Revenue projection is computed in the same way.

Ramp Growth Ramp Growth is typically used in projecting development startups. Here you tell planEASe the starting amount (in the Revenue/Expense Amount), the time length of the ramp (in the Revenue/Expense Period), and either the ending amount, for Ramp (Begin$ to End$) or the dollar increase per month, for Ramp (@ $/Month) (in the Revenue/Expense Growth Rate).

The Ramp Growth line in the Sample Growth Table on page 114 shows the results for this Growth Method, according to the assumptions shown here. This table shows two alternative Pages which both plan the same growth shown in the table. The Ramp Page uses Ramp (Begin$ to End$), and specifies that the $10,000 amount

should ramp up to $14,000 in four years. The Ramp2 Page accomplishes the same thing by specifying that the $10,000 amount should grow by $83.33 per month for the next four years.

This table shows the how you might use Ramp Growth in the assumptions for a Lease-Up situation where the revenues are to grow from the $10,000 annual level as of January 2001 to the $55,000 annual level nine months (.75 years) later, or October 2001. Thus the projected annual revenue level will increase $5,000 per month during this nine month period. When the $55,000 level is reached, revenues are to increase at the Slower rate of $3,000/month for the next 6 months (.50 years), or until April 2002. At that time, annual revenues will be at the $73,000 annual level ($55,000 plus 6 months of $3,000 increases). The Inflate page then calls for that $73,000 annual revenue to increase continuously at the inflation rate for 10 years thereafter.

You may, of course, plan each of the pages as independent pages with discrete Revenue Start Dates and amounts rather than using the Continuation Page capability. The advantage to using continuation is that varying one of the Revenue Periods or dollar amounts in a page automatically adjusts the start date or starting amount for the following pages.

As you may remember, planEASe does not compute any assumption page for which the Annual Revenue or Annual Expense amount is zero (unless it is a Continuation Page). Therefore, if you wanted to ramp up Lease- Up from zero rather than $10,000 as shown, you should enter a very small amount (for instance, 0.0000001) as the Annual Revenue or Annual Expense amount. Entering an otherwise small amount such as 1.00 or 0.01 leads to wrong results because, since it is less than 100, it will be interpreted as a percentage of the Price of Property and be converted into a correspondingly large number.

One-Time Growth One-Time Growth is used when you want to simply place a particular amount of revenue or expense into a particular month in your projection. Here you tell planEASe the amount of money (in the Revenue /Expense Amount), the date received/expended (in the Revenue/Expense Start Date), and the growth rate (in the Revenue/Expense Growth Rate). Since the amount is placed into the month named, the Revenue/Expense Period assumption is irrele- vant, and is ignored by planEASe in this case. Although you typically will not use a Growth Rate with this Method, One-Time Growth may be related to the general Inflation Rate (@ %>Inflation), or not (@ Growth Rate). In the windfall example here we have used one-time growth to place $10,000 of revenue in March of 2001.

Accrue by Year Growth Accrue Growth is used in situations where you would otherwise want to use Annual Growth, but the “steps” are not 12 months apart. This is primarily useful for leases with COL Clauses applied at other than annual determination times. Accrue Growth allows you to specify the time length of each “step” rather than defaulting to a step length of one year. In order to do this, you use the Continuation Page capability, and set up a separate page for each step, specifying the length of the step and the growth rate. The Growth Rate for Accrue by Year Growth may be related to the general Inflation Rate (@ %>Inflation), or not (@ Growth Rate), or may simply be a fixed annual dollar amount (@ $/Year).

The Accrue by Year Growth line in the Sample Growth Table on page 114 shows the results for this Growth Method, according to the assumptions shown here. The Start Date of 1 January 2001 causes the annual step to occur on January 1 of each year. The amount of each change is 10% of the previous year’s amount, but Accrue by Year Growth “saves” these changes until the end of the Revenue Period (3 years here). Thus, the planned revenue is a flat $10,000 until 2004, when three years of compounded growth is applied to change the revenue level to $13,310 (computed as 10,000 times 1.10). Using Accrue by Year (@ Growth Rate) means that the Growth Rate used is 10%, regardless of the value of the Inflation Rate in the Assumption Set. There is a very good example of the use of Accrue by Year Growth in the 4xx Insurance lease in the Redondo Professional Building analysis (offices.ru.) sample shipped with planEASe.

Accrue by Period Growth Accrue by Period Growth is like Accrue by Year Growth, except that the amounts in the Growth Rate field relate to the Revenue/Expense Period rather than being an annual amount. Accrue by Period (@ $/Period) allows you to specify that the Revenue / Expense Amount in the following Continuation Page will be a specified $ amount greater than the current page, no matter how long the Revenue/Expense Period. Accrue by Period (@ %/Period) allows you to specify that the Revenue / Expense Amount in the following Continuation Page will be a specified % greater than the current page, no matter how long the Reve- nue/Expense Period. Accrue by Period (@ %>Inflation) allows you to specify that the Revenue / Expense Amount in the following Continuation Page will be a specified % greater than the current page, no matter how long the Revenue/Expense Period. Linking the growth to the Inflation Rate (an annual rate) may at first appear strange, but this method allows you to, for instance, vary the Inflation Rate in Sensitivity Analysis to investigate the effect of 5 year bumps of 4% thru 8%.

Growth in General You can think of revenue or expense forecast for your property as being like a wall of differently shaped blocks. Both the revenue and expense assumption pages enable you to, in general, place a “block” of any amount of money into your revenue or expense projection at any time for any duration. The figure to the right shows a revenue/expense building “block” (the shaded area) that you specify when you enter the assumptions for a revenue or expense assumption page. Your Start Date and Period specify the left and right edges of the block. The Annual Revenue or Expense amount specifies the height of the block at the left-hand side, and the Growth Rate and Method

specify the shape and slope of the top of the block. The block shown here uses Annual Growth. A Continuous Growth block has a smooth sloping top. Projecting a revenue or expense forecast for a property consists of stacking as many of these blocks as you want both side by side in time and on top of each other to build your total forecast for the property or revenue/expense item.