RED 542 - Finance
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41 terms
Terms | Definitions |
|---|---|
 Cap Rate? | Year 1 NOI *Year 1 snap shot; what about future earnings? MARKET OUTCOME Cap Rates are derived from NOIs and Sale Prices in the market that the Cap Rate is for...***need to CHECK to see if Direct Capitalization can be used to evaluate the property *Seller: can load up on tenants on the last year to get a larger value on the Cap Rate Evaluation *The rate at which future flows of constant cash flows are discounted...at which they are capitalized into PV **ASSUMPTION: constant growth, constant cap rate =NOI (t+1) / Value (t) **Cap Rate is a Discount Rate with Growth embedded An infinite sum approximation |
| NPV? | Discounted cash flows of entire income coming in... [don't discount the first payment into investment, add this neg. # to the end of the formula] *is an indication of the "market value" of a given asset *can compare irregular cash flows, shows residual after requiring return/compensation for risk *weakness: not a return, scaling may be a problem, need to define a Discount Rate NOT A CLEAR INDICATION OF RETURN OF INVESTMENT |
| PV? | Present Value Assumes a CONSTANT cash flow |
| Mortgage Interest Rate? | Discount Rate against you *this is where the bank assesses your risk for their lent $ to you |
| GIM | Gross Income Multiplier =Value (t) / EGI (t+1) |
| IRR | Internal Rate of Return *is the discount rate at which NPV is 0, anticipated given return of of capital *does NOT include TIME VALUE & COMPENSATION OF INVESTMENT RISK, opportunity cost, Scale of Project *other weaknesses: multiple IRRs in a cash flow; ignores possibility of doing something else with your $ *Can compare irregular cash flows, industry standard A CLEAR INDICATION OF RETURN ON INVESTMENT |
| 2 #s that matter in Real Estate? | 1) How the market values a property? 2) How you value the same property? |
| R.E. differs from other goods? | Heterogeneous Durable Costly to Alter Immobile (exhibits Spatial Fixity) Long-lived Expensive |
| Approaches to Valuation? | (Replacement) Cost Approach Market (or Sales) Approach Income Capitalization -Income Multipliers -Direct Capitalization -Discounted Cash Flow |
| Market Value? | = PV (present value) or cash flows *Sales Price may deviate from this based on: -Risk -Financing -Liquidity -Market conditions "True" Market Value may never be observed |
| Cash Flows? | may be highly irregular may run over different time horizons may be uncertain |
| NOI | Net Operating Income -a measure of the cash flow from a property =Income - Operating Expenses Cap Ex are NOT included |
| Hurdle Rate | HR > IRR, the NPV is Positive HR < IRR, the NPV is Negative |
| EGI | =PGI - Vacancy + Reimbursables |
| PGI | = [income if building is full] - vacancy |
| Discount Rate | Present Value of Future Cash Flows & the Disc Rate = your established DR for the specific project/investment |
| Efficiency | = GLA (gross leasable area)/ GBA (gross building area) |
| Expense Stop | Limits expenses to Landlord (lease year stop) *Caps expenses to the Landlord, so expenses above the stop are paid by the tenant i.e. base year stop (& adjustments) |
| Leverage | as leverage increases: *debt service rises *risk of loss increases *risk premium rises *interest rate rises |
| Positive Leverage | =when project IRR exceeds the Internal Rate (interest rate) on the Debt OR Interest Rate on Loan is less than Unlevered IRR % Returns can be enhanced by "levering up" Risk may also rise As Leverage increases, *Debt Service rises *Risk of Loss increases *Risk Premia rises *Interest Rates rise |
| DCR | Ratio of cash available to service debt =NOI / Annual Debt Service *less than 1 is a negative cash flow |
| Cash-on-Cash | =Annual BTCF / Total Cash Invested *Simple interest calculated, does NOT factor in Compounding Interest |
| Single Period Measures | Cap Rate GIM Equity Yield |
| Equity Multiple | Ratio of All Distributions (from Operation and Sale) to Equity over the Equity Partners *Shows a simple measure of cash back *no time, still requires forecasts, ignores the value of waiting |
| Sensitivity Analysis | Change one variable at a time Then assess the impact of that single change |
| Scenario Analysis | Use Market Analysis / Rent Roll to build Forecast Any and All changes in variables Then assess the impact of the scenario |
| Pro Forma | a forecast of "expected" cash flows it is a tool! Where is there uncertainty? -rents -vacancy -expenses -interest rates -taxes -exit cap rates and sale price Two BROAD categories of RISK: -failure to perform risk -forecasting risk |
| Cap Ex | Normal Reserves For Major Expenditures (HVAC, roof, elevator, etc) Tenant Improvements (TI) with or without turnover *reimbursed TI goes in with other income! |
| Lease | Supply and Demand can be created with a Lease Creating a functional/financeable lease is nontrivial NOTE: a property's value based on the WHOLE RENT ROLL may differ from the value of the sum of its leases |
| Types of Leases | NNN Lease (Net Lease) = lessee pays rent, taxes, insurance, maintenance (but not mgmt fee) Gross Lease (full service) = lessee pays flat rent, landlord pays expenses Modified leases = hybrid, blend |
| Effective Rent | 1-forecast cash flows of different leases 2-choose discount rate 3-calculate lease's PV the level rent is called the "equivalent rent" |
| Mortgage Mechanics | Collateral & Cash Flow... *low risk of loss makes for LOW interest rates *low Loan-to-Value (LTV) ratio --> low risk *High Debt-Coverage Ratio (DCR) --> low risk when rates are LOW, we'd like to borrow more what happens as loan amount increases? LTV up, DCR down, RISK up --> higher Interest Rates |
| Static Analysis | S.A. collapses development, lease-up, operation, and disposition into a SINGLE STEP. in this the VALUE of the LAND is: *the PV of the completed asset less the costs of getting to that PV |
| Equity Yield | Year One Analysis/Snapshot Cash out of the deal compared to Equity you put in *Not an overall return, used with stable asset When better than an IRR? *When we are guessing the exit cap-rate *if the quality of the info we are using in the IRR is not reliable, we get a better picture using EY |
| IRR vs. NPV | *an IRR or NPV without the correct discount rates or hurdle rates are meaningless *SOMETIMES you have to think about Parking more money $ at a lower rate, and it works out better than just picking the higher return IRR is a rate of return, not the overall Return NPV is a harder # to compare, since IRR has bonds and other rates that are public information that you can compare it to... |
| Interest Reserve | NOTE: Costs in a Static Model take away dollars that you can use to bid on the property *it is a RESERVE, not a CARRY *if we expect it to happen, should we cost it out? *Interest Reserve should NOT be in the static because we don't expect it to happen |
| Shared Appreciation Mortgage | Obtain a lower interest rate when you share a percentage of the apprec. with the lender At SALE: owe the difference of the appreciation from when you purchased the property, PLUS the remaining principal balance of the mortgage ***TRADEOFFS: need to know about lower interest rate, analyze the NOI, this will effect your going-out price and estimate for the amount going to the bank. ALSO, if you plan on keeping it VERY long term, no bank will give you this deal (SAM). |
| Passive Tax Loss | Carries on through every year, up until SALE |
| ANSWERS on the TEST | First DEFINE what he is asking//the term Then assess based on the CONTEXT of the question and then MY OPINION, ANSWER |
| Lessons from MIDTERM | *Direct Cap Rate: realistic? Not if major changes coming down the line on the CF/ProForma *Both loans were realistic to the Lender, but 2nd loan was a little riskier with first 2 years in the NEG *Check when the Purchase Year is and see if neg cash flows created where more Equity will be required in the deal from EP or Developer |
| Equity | *a claim on Residual cash flows less riskier than debt Payment NOT defined (like Debt) |
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