SHORTFALL METHOD

The shortfall method uses the equivalent yield concept as a common base or datum for the comparison and valuation of investment properties.

STARTING ASSUMPTIONS

• the investment property is fully let. That is, there are no vacancies or there is a zero vacancy rate.
• all rents are market rents.

EXAMPLE OF THE SHORTFALL METHOD   COMMERCIAL PROPERTY

GROSS ANNUAL INCOME:

Total market rents ("imputed")	$3 500 000
Profit on resale of electricity:	$ 65 000
Naming rights:	$ 40 000
GROSS ANNUAL INCOME:	$3 605 000
Less outgoings:	$(1 098 500)
	--------------
NET ANNUAL INCOME:	$2 506 500
Capitalize the net annual income at the initial yield capitalization rate of return: 7% per annum:	2506500 * 100/7 = $35807145
	say $35 800 000

To determine market value of the subject property the value of the short fall is deducted from the above amount:

• present value of vacancies
• present value of the loss of rent between passing (current) and imputed (market) rents that is, the profit rentals.

Vacancies @ 10% of gross rent = $360 500 pa

Present value of vacancies @ 7%pa
(360 500 * PV.PMT) = $(5150000)

LESSEES' INTERESTS

Present value of profit rentals (lessees' interests) from tenancy schedule: = $(735 664)

MARKET VALUE

$35 807145   $5150 000   $735 664 = $ 29 921 481
say $29 900 000

See reversionary capitalisation rate