In Prodev the Yields are entered before the Rents so that any yields you may wish to use are already available by the time that you enter your rental values. Prodev contains 20 yields along with 120 rental values. Any rental can be applied to any yield.
Each yield (easily recognised as it has the most decimal places) has factors that apply to it and the rental income to which it refers (the seven lines of information under each yield). These are Funds (Purchasers) Costs, Income received prior to the sale date, Income shortfalls and Ground Rents.
Yield/Capitalisation rate
These are the capitalisation rates items used to derive the end of value for the rental income of the completed development. There are a total of 20 yields available.
For a simple development requiring only one yield rate then enter this as Yield-A as all the rents are pre-set by default to pick up on Yield-A.
Alternatively you may have a scheme consisting of offices and shops and you wish to use a different rate for each element. In this case, enter Yield-A and Yield-B (at their respective separate rates) then, when entering the various office and retail rents you can decide which rents you wish to capitalise at Yield-A and those you wish to capitalise at Yield-B. Prodev will segregate the appropriate rental flows and capitalise them at their respective yields. For a 3-phase office development use three yields (it doesn't matter if you use the same rate for all three). This will enable you to divide your total capital value into three separate parcels which may be desirable for timing purposes or to apply individual inducement, rent free and other items.
More information on how to apply a yield to a rent is contained in the description for ‘Rental Area and Rates’.
Each yield can be expressed either as a Percentage Capitalisation rate or a Years Purchase (Gross Rent Multiplier) figure. Normally a percentage rate is assumed but if a YP/GRM is required then use the letter 'y' (British Version) or 'g' (International Version) in place of Enter, e.g. typing 9y or 9g treats the yield as 9 times the rental income (rather than 100/9).
Individual Capital Values can be exempted from Investment Sale Fees by highlighting the Yield Rate item of the category to be excluded and using the ‘No-Fee’ button. Note that this does not apply to the Funds /Purchasers costs (described below) as these are already individually applied to each yield.
Funds/Purchasers costs
The cost of acquisition incurred by the Investment Purchaser, borne by the vendor (usually so as to preserve the net investment return). There is a separate Funds Cost applicable to each yield.
The Funds Costs apply the investment purchaser’s own costs (Stamp Duty/Transfer tax, Legal and Agency fees). The purchaser will normally deduct such transaction costs from the gross purchase price in order that the total figure paid equates to the investment yield anticipated. A typical rate in the UK is 5.75% (if 4% Stamp Duty is included).
Note: Funds Costs are represented as a percentage of the Net Capital Value. For example £1,000,000 Gross Value inclusive of 3% Funds Costs gives: 1,000,000 ÷ 1.03 = 970,874 Net Value and Costs of £29,126. This often causes confusion as in many cases the 3% would be applied to the £1m Gross Value giving an incorrect figure of £30,000.
Income from rents - Advance Income
The Advance Income setting within Prodev is to account for interim income received by the developer before the development is sold. There is generally a time lag (albeit short) between the time that a tenant takes occupation of the building and the time at which the investment is sold. In this interim period, any rental income will accrue to the developer.
The timescale in which the Advance Income is deemed receivable is set in the Time/Finance Section as the time period between the ‘Commence Rental’ period and the ‘Investment Sale’ date. In other words the commence rental date will define the point at which the income starts and it will then be received up to and including the month before the investment sale date. It is important to note that the actual value of rent received is defined by the length of time that it is receivable.
The Detailed Timing section offers greater flexibility in dealing with timescales of this kind because there are separate timescales for each yield. The investment value start date is the point at which the rental commences and the end date defines the investment sale date.
If the Commence Rental and Investment Sale dates are the same then no income will accrue to the project because the transaction is simultaneous
Unlike the other entries in the Data List, the Advance Income value is treated as either ‘On’ or ‘Off’. The default setting is ‘On’. The only values you can enter here are zero (for ‘Off’) or one (for ‘On’). For instance if you type ‘0’ then press Enter then Advance Income will be switched off. if you type ‘1’ followed by Enter then Advance Income will be switched on. Note: In Prodev version 4022 Advance Income in the Data List displays as 0/1 rather than Off/On. Treat 0 as 'Off' and 1 as 'On'.
There is a separate advance income setting for each individual yield. This is useful in situations where only part of the development is subject to this sort of income in that you can separate the qualifying and non-qualifying rents under different yields and apply advance income accordingly.
By default, in the UK version of Prodev advance income is received quarterly in advance. The International version treats advance income as being received monthly. These settings can be changed using the Advance-Income-Settings menu. Note: This menu is accessed from the Detailed Timing Section screen and not the Data List.
The available options are ‘Quarterly in Advance’ or ‘Monthly’. The latter is more illustrative but the former reflects the way the income will normally be received (at least in the UK).
Unpaid Rent / Tenant Inducements
The unpaid rent accounts for the cost of tenants inducements or incentives required. Typically, a tenant will ask for a 6 or 12 month rent free period from the date of occupation to contribute towards the costs of fitting out.
It is important to differentiate between incentives of this kind and void (sale delay) periods. In an ideal market, a tenant would take occupation of a building upon completion of construction and will commence paying rent immediately. However, either/or, or both of the following may happen:
| • | The building lies empty for a period of time therefore no income is receivable. |
| • | A tenant will demand a rent free period. |
In the first instance the premises are lying empty and therefore an appropriate void (sale delay) period will have to be applied in the Time/Finance section. In the second instance, the developer has a choice of either waiting for the rent-free periods to expire or circumvent this by paying the cash equivalent of the unpaid rent to either the tenant or the investment purchaser.
The Unpaid Rent item is entered either as a number of months or as an amount. Values of 120 or less are treated as number of months. Any figure greater than 120 is treated as an amount. Where treated as number of months, Prodev will calculate a cost equivalent to the gross income for the selected yield for the period of months entered. For example, if the rental income capitalised at Yield-A is £120,000 per annum and Unpaid Rent-A is 6 months then the cost of the Unpaid Rent is £60,000 (120000 x 6 / 12). When treated as an amount, the figure is fixed and will not relate to the number of months.
There are two methods of applying the Unpaid Rent. By default, this figure will be deducted from the sales proceeds. The investment purchaser will be aware that the tenant is in occupation, does not owe rent for 6 months and will therefore deduct this figure directly from the net sales proceeds. The other scenario is that the unpaid rent figure will be paid directly to the tenant on condition that they commence their own rental payments six months sooner. If you wish the treat the unpaid rent in this way (paid to tenant) then go to the Settings menu on the Data List and tick the item labelled ‘Deduct Unpaid Rent as Cost’.
Note 1: Prodev allows you to deal with sale delays either via the timescales (using void periods) or by factoring in incentives in this way. It is important to decide exactly how these matters should be treated so as to avoid any double-counting. Prodev will not prevent both methods being used (as they may need to be in adverse market conditions).
Note 2: Unpaid Rent is the opposite of Advance Income as the former deals with rental received after the investment sale date and the latter deals with rental received prior to the investment sale date. Prodev will prevent you using these together unless ‘Deduct Unpaid Rent as Cost’ is active.
Ground rent/Vacancy
In the British version this is titled Ground Rent, in the International version it is titled as Vacancy. However it calculates in the same way, in that it allows for a deduction from the gross rent receivable for the yield to which it relates prior to capitalisation. It can be re-titled if required.
For instance a gross rental of £100,000pa subject to a 5% ground rent means that £5,000pa will be paid over as ground rent and the remaining £95,000 will be capitalised.
Ground rent/Vacancy is expressed either as a Percentage of Rent Receivable or an amount. Values greater than 100 will be treated as an amount, values of 100 or less will be treated as a percentage. To enter an amount of 100 or less use the letter 'a' in place of Enter, for example 56a will treat the entry as £56.
Deductions 2/3/4
The Deductions are seldom required in the United Kingdom but are useful in countries where premises are let on annual licences (so a vacancy factor is needed) and where more provision is needed for the upkeep of the building (so a Maintenance factor is needed).
Deductions work in the same way as for Ground Rent/Vacancy except that they apply to the net figure after any Ground Rent/Vacancy deductions. Subsequent Deductions work in a stepped fashion on each previous net figure. For example if the Gross Rent is £1,000,000 and the Ground Rent/Vacancy is set to 10% and all the Deductions entries are set to 10% then the order of deduction and amounts deducted are as follows:
The deductions headings can be re-titled if required. Values greater than 100 will be treated as an amount, values of 100 or less will be treated as a percentage. To enter an amount of 100 or less use the letter 'a' in place of Enter, for example 56a will treat the entry as £56.