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1、Final Exam Review,Thursday, May 4 1:00pm 3:00pm,Valuation Approaches,Cost Approach Income Approach V = I/R, I=stabilized NOI, R=cap rate Relationship between cap rate and discount rates. Incorporates real estate specific risk Market Approach Hedonics Overall: Weaker methods of valuations; know the a
2、pproaches, pros/cons of each, when you would use them.,Cash Flow Valuation,Operations: Gross potential income - Vacancy/bad debt = Effective gross income - Operating expenses = Net Operating Income - Debt Service - Capital Improvements = Before Tax Cash Flow,Net Operating Income - Interest - Depreci
3、ation (Residential=27.5 yrs/Commercial = 39) = Taxable Income Before Tax Cash Flow - Tax Bill = After-Tax Cash Flow,At Sale: Gross Sale Price - Sale expenses = Net Sales Price - Mortgage Balance = Before Tax Cash at Sale - Tax Bill at Sale = After Tax Cash Flow at Sale,Net Sales Price - Book Value (
4、Cost+Cap Improve) Accumulated Depreciation) = Capital Gain * Capital Gain Tax Rate = Tax Bill at Sale Overall: Know how to do cash flows. Period. Remember how to incorporate capital improvements into the cash flows as well.,Mortgage Mechanics,Write down basic TVM equations on your cheat sheet. To re
5、ceive partial credit, you must prove that you understand the basics i.e. use the correct equation and indicate that you know what to solve for. Loan Amortization: know how to find the remaining balance on a mortgage at any point. Loan Amortization: know how to divide the mortgage payment into princi
6、pal and interest Overall: Know how to manipulate the equations, solve for effective interest rates, IRRs, etc.,Cash Flow Pro formas,Where does value in deal come from? When? Timing matters for NPV. Are assumptions realistic? Expense growth? Increase at an increasing rate. Are you budgeting enough ca
7、pital reserves? Are you taking market conditions into account? Make less money when leases rollover in market downturns. Watch out for unrealistic sale price assumptions. What does it mean to have differences in going-in and terminal cap rates? Overall: Be able to think about whats going on.,Leases,
8、Designed to align incentives of landlord and tenant. Primary goal: get tenants to internalize externalities (foot traffic) Use strategic, tactical, and price control features. Strategic: picking tenants and establishing control to maximize return Tactical: locating tenants and incentives to maximize
9、 positive effects on each other Price: Maximize return to the mall owner without deterring tenants. Overall: Understand incentives and think about how to maximize return,Corporate Real Estate,Financial Criteria: Low cost of capital is important for decision to own Most companies should lease based o
10、n financial grounds Should do short-term rents if youre not sure youll be staying. Most firms/managers underestimate the value of flexibility resulting from short-term and overestimate the cost savings from long-term leases.,Corporate Real Estate,Non-financial or hard-to-value criteria: Need control
11、 over space Put a big investment in and think landlord will take advantage of you Corporate image. Overall: Be able to weigh costs/benefits of different potential ownership or leasing strategies,Wraparound Mortgages,Existing first mortgage has low interest rate Borrower wants to refinance or buyer w
12、ants to assume mortgage (but current market interest rates are significantly above existing first mortgages contract rate). Lender offers a below market loan and assumes first mortgage Borrower gets to refinance at a below-market rate Lender makes money of the spread between wrap and first Borrower
13、gets to frontload interest Complexity and subordination issues can be costly Overall: Know how to put these together and when you might want to use one.,Participating and Convertible Mortgages,Two types of participating mortgages: Income participation: lender receives a portion of upside income Equi
14、ty participation: lender receives some portion of upside of building value. Structure deal carefully to avoid giving borrower incentives to change building operations to lower lenders return Cost/benefit analysis Borrowers get low base interest rate, share operating or sale risk, but doesnt get all
15、of upside, loss of liquidity, loses some operational control Lenders get baseline income flow and some upside action with limited liability but have more risk.,Convertible mortgage: Low rate mortgage with an option for the lender to become an equity owner at some future date. Similar cost/benefit an
16、alysis to participation mortgages, but borrower retains more control pre-conversion, structure is more illiquid, complex, and expensive. Lender gets to join in a joint venture after the risky start-up period. Overall: These structures allow borrowers and lenders to trade off interest rates, the amount of risk, and the timing of cash flows and risk.,Deals Structured Around the Land,Ground leases lease use of land for some period; have right to improve it and collect net ren
