Our Response:

Thank you for your interest in Investment Analyst. To answer your question directly, Investment Analyst does not import Argus files. But, if I were in the position of reviewing offerings presented by others, I would not want to input their data directly. Rather, I would prefer to perform an independent analysis, using "clean" data, to verify their calculations. Because of the approach used by Argus, it is very easy to "bury" a number that will distort the overall calculation of value. I explain this below.

Argus is a well-respected product that has been around for many years (not quite as long as Investment Analyst) and is relied upon by many in the real estate industry. This is also true of Investment Analyst. But Investment Analyst and Argus approach the analysis of income producing real estate from different perspectives. Argus uses a "bottom up" micro approach. Lease terms must be entered for each space and critical assumptions that affect the calculation of value are often hidden in the detail. This is also true for expenses. Once all detail is entered, the "magic" number is calculated by discounting the detail - a number that may, or may not, represent Market Value. This approach to data entry is, perhaps, good for property managers, but it is prone to user error or intentional manipulation. Furthermore, errors that have crept into the data entry are difficult to uncover, especially by a third party. I would not want to start my evaluation of a property using potentially flawed data. This is not a reflection upon the Argus product, but on the "bottom up" method that is employed.

Investment Analyst uses a "top down" macro approach to income analysis. It is not always necessary or desirable to enter the minute details of leases. Usually, a prospective purchaser is better served by the macro view. For example, take a typical office building. Most tenants are under 3 to 5 year leases, the range of rental rates varies, different pass-throughs have been negotiated on a per tenant basis, and the leases expire at different times. Regardless of the present lease terms for individual spaces, all leases will tend towards market terms in a relatively short period of time. A prospective purchaser of the property does have an interest in this lease detail, but only after evaluating the long term potential of the property under market assumptions, from the macro view. We always recommend that our clients first perform a "stabilized" analysis using market terms. The stabilized analysis becomes your benchmark. Then, as necessary, an analysis of the leases in place can be compared to this benchmark. This gives you greater confidence in your final evaluation of the value of the property. Please see our discussion of Occam's Razor to learn why our approach is usually a better way to perform an income analysis.

Investment Analyst offers the capability to perform a stabilized analysis and a lease analysis simultaneously. It can be as simple as estimating gross income ($20 per s.f. per year times 100,000 s.f.), estimating a frictional vacancy rate, and estimating an expense ratio. One can then evaluate the income stream instantly, under different conditions. For example, one can change the mortgage terms, alter the growth rate assumptions, or change the required rate of return. As these conditions are changed, Investment Analyst provides instant feedback on the cash on cash yield, the debt coverage ratio, the overall cap rate, the terminal value, and many other key indicators that are critical to a thorough understanding of the property.

Using the macro view with "clean" data, one can quickly determine whether an investment meets your criteria. If it does, Investment Analyst provides the capability of "drilling down" to the lease detail by allowing you to enter detailed contract lease terms for all tenants or only selected tenants, as necessary. For example, most tenant spaces may be at "market" under relatively short term leases, but one anchor tenant may be under a long term lease that is above or below market. Detailed lease information can be entered for just this tenant and the effect upon value can be evaluated.

In summary, Investment Analyst offers both the flexibility to quickly evaluate offerings and the sophistication to evaluate complex lease terms of individual tenants, when necessary. I would recommend that you employ Investment Analyst in your evaluation of offerings, even if you already owned Argus. Analyst is much easier to use and its learning curve is short. I believe that it is essential to start with "clean" data, rather than relying upon data that was entered by the broker or other interested party. Importing data may seem like it will save time, but it will actually make your job more difficult and your conclusion of value more problematical.

Finally, Investment Analyst provides analysis tools that are not available in other income analysis products. Key indicators are at your fingertips. Assumptions are easily changed and the changes are instantly reflected in the value calculation. Both a stabilized analysis and a lease analysis can be performed simultaneously. Investment Analyst has a built-in Review tool that reviews the reasonableness of your inputs. The reports produced by Investment Analyst are presentation quality, they are easy to understand, and they are easy to explain

I am confident that Investment Analyst will meet your needs and I look forward to hearing from you. Thank you for the opportunity to explain our product. Please feel free to call or email with further questions.



Financial Masterplan, Inc.


Bob Halko
President
412-606-9000
fmi@incomeanalysis.com