“But You Promised…”
I promised a real-world example. So be it. About a dozen years ago or so, I called and spoke to one of the designers of the Urban Land Institute’s Dollars and Cents study. I don’t have access to the reports I did at that time (it was under someone else’s employ), but in 2002, I had a difficult shopping center to appraise. So I called and spoke to a project manager for their industry standard study. The names have been omitted to protect the innocent. Here is the actual text from my appraisal report (minus the name of the interviewee)
The numbers in the columns of Dollars and Cents intentionally do not add up. For instance, Total Rent is comprised of Minimum Rental Income and Overage Rental Income, yet adding these two sub items together does not equal what is shown as Total Rent. This can be said of virtually all the items in their Operating Results tables.
According to Urban Land Institute (ULI) , they do not add up because “each line item is calculated based on the total of its own category.” This has significant impact on the results. To best understand the difference, we’ve presented a numerical example below.
Table 4-2 of their 2002 edition (page 87) has a “Property taxes and insurance” amount of $1.71 per square foot. Yet underneath it is a “Property taxes” amount of $1.91 per square foot and an “Insurance” amount of $0.10. Clearly, adding the two sub items does not even come close to the “Property taxes and insurance” item above; in fact, the sum is $0.30 per square foot greater than the total! The reason for this is that, say, 25 centers replied to ULI’s survey with a line item for “Property taxes and insurance”, yet only 15 of them had a separate line item for property taxes and another for insurance. Taking the average from 15 survey responses and adding them up would not likely equal the 25 responses for the the two components that were not delineated separately. This explains why very few of the Dollars and Cents totals add up to the sum of their individual components (i.e. they are not based/calculated on the same number and is based on different sample sizes).
Having said the above, which numbers do we choose? According to ULI, that depends on the line item we are using as a basis of comparison. To use the example above, if we wanted to compare the subject’s Property and insurance line item [note the singular], we would need to choose the same category from Dollars and Cents, not add up the individual components and use that for comparison. That leads us the natural question, which of the two is accurate? ULI answered that question with “it depends”.
Although technically correct, this answer leaves us with having to choose which of their numbers truly reflects the results of a particular category and since each item and its total are based on different sample sizes, there is simply no way to know.
Dollars and Cents of Shopping Centers is the accepted authority for deriving industry based numbers, so disregarding it would not be proper. Given the faults discussed, it is our opinion that using the largest income and expense categories would produce the best comparison. The largest categories would have the greatest number of survey samples (being the most reliable), differences in the reporting of their smaller line items would average out, and a typical market participant would give particular credence to these categories over the smaller line items that may or not be reported in a center’s operating statements. The largest categories would be Total Operating Receipts, Total Operating Expenses and Net Operating Balance; only these three categories will be compared to the subject.
So there you have it. Try calling them or other designers of the industry standard studies and ask them about any confusion they have. You paid for the study… you’ve got the right to know.
John Simpson, MAI
