Effective gross income
| Effective gross income |
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Effective gross income (EGI) is the amount calculated from the difference between potential gross income and the losses in income, justified by the market and the condition of the property being valued, e.g. exemptions from payments, vacancy, rent arrears. In other words, it is gross annual income less vacancy periods and bad debts (L. Tatu, et al., 2011, pp. 6).
Specification of effective gross income
Gross income, or pre-tax income, is income that includes advances on income tax, contributions of any kind and other deductions (N. Kheir, B. A. Portnov. 2016, pp.518-527). The influence of the state on the income of other entities through the imposition of taxes results in the separation of net and gross income. It should also be remembered that income does not mean the same as income (N. Kheir, B. A. Portnov. 2016, pp.518-527). It is a basic quantity and economic category, which is a positive effect of production factors applied in the course of management(N. Kheir, B. A. Portnov. 2016, pp.518-527):
- labour
- financial
- material capital
- land
The creation of income is real thanks to human entrepreneurship and an appropriate fusion of production factors. It is also an economic surplus of the farming population, constituting the basis for satisfying personal and collective needs, current objectives, i.e. consumption objectives and development objectives, i.e. investment objectives. Income takes the form of money, although its content is not money but services and goods that can be purchased by entities of the economic organism that have purchasing funds (N. Kheir, B. A. Portnov. 2016, pp.518-527).
Quality of the income
This is an assessment of the realism of the confirmed income by the enterprise and its analogies with the economic reality of the economic unit of the enterprise (L. Bellman, P. Öhman. 2016, pp.225-248). It is a multilateral evaluation, which is carried out from the financial and accounting point of view, containing quantitative and qualitative elements. The qualitative components are not measured. Quantitative elements are measured and calculated as follows (L. Bellman, P. Öhman. 2016, pp.225-248):
Although there is absolutely no evident amount of income that the realistic adjusted income, as calculated in the valuation recital for each class of items, more accurately reflects the results of the enterprise's operating activities than its documented net income (L. Bellman, P. Öhman. 2016, pp.225-248).
Application of effective gross income
Effective gross income is a parameter used for property valuation. The procedure for determining the value of real estate in the income approach with the simple capitalization technique is as follows (G. Richardson, R. Lanis, 2007, pp. 689–704):
- assumptions and output data for valuation
- forecast of revenue and costs
- determining the effective income from real estate
- determination of costs
- calculation of operating income (effective income less costs)
- determination of the capitalisation rate for net effective income
- determination of the value of real estate
Effective gross income in the investment method
Income from real estate comprises receipts from rentals that are possible to a typical, average-effective one, owner or other user (H. Augustyniak, et al., 2018, pp.234-247). The sources of information on the amount of income from real estate are in lease agreement and other types of agreements the contracts relating to the property being valued, as well as the relevant agreements generically comparable market data (H. Augustyniak, et al., 2018, pp.234-247). Where the property being valued is encumbered with rights obligations (e.g. lease or tenancy agreements), or material, relevant for the assessment of the magnitude of the impact or for the assessment of the risk of obtaining them (in particular it may concern the duration of contracts, rules for settling expenditures made by tenants), the consequences of the encumbrance of such rights should be included in the valuation (Pagourtzi E., et al., 2003 pp.383-401).
Determination of the market value requires an analysis of the burdens to be assessed the property is subject to rights and other obligations resulting from the administrative contracts and decisions concluded, and knowledge of the rules and regulations, and the conditions under which such contracts are concluded in a given market (R.S. Simmons, 2003, pp.105–120).
The analysis of agreements and administrative decisions lead to knowledge in particular: the level of rent rates and the manner of their determination, the principles of indexation of rent, amount and type of incurred expenses related to the maintenance of real estate by the owner and the tenants (M.P. Devereux, et al., pp.1210). The determination of the market value requires an examination of whether the whole property (or parts thereof, including plant, equipment) is the subject of the following lease agreement. The existence of a lease should be in the operas properly described (M.P. Devereux, et al., pp.1210).
References
- Augustyniak H., Laszek J., Olszewski K. Waszczuk J., (2018), Property valuation for mortgage purposes in Poland, "Property Management 36"
- Bellman L., Öhman P., (2016), Authorised property appraisers’ perceptions of commercial property valuation, "Journal of Property Investment & Finance 34:3"
- Devereux M.P., Lockwood B., Redoano M., (2008), Do Countries Competeover Corporate Tax Rates?, "Journal of Public Economics 92"
- Kheir N., Portnov B. A., (2016), Economic, demographic and environmental factors affecting urban land prices in the Arab sector in Israel, "Land Use Policy 50"
- Pagourtzi E., Assimakopoulos V., Hatzichristos T., French N., (2003) Real estate appraisal: a review of valuation methods, "Journal of Property Investment & Finance 21:4"
- Richardson G., Lanis R., (2007), Determinants of the Variability in Corporate Effective Tax Rates and Tax Reform: Evidence from Australia, "Journal of Accounting and Public Policy 26"
- Simmons R.S., (2003), An Empirical Study of the Impact of Corporate Taxation on the Global Allocation of Foreign Direct Investment: A Broad Tax Attractiveness Index Approach, "Journal of International Accounting, Auditing &Taxation 12"
- Tatu, L., Dragotă V., Lecturer N., (2011), An Observation of the Effective Tax Rate for Corporate Income in Romania, "Economic computation and economic cybernetics studies and research"
Author: Dawid Misiura
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