Technical Questions

Adjusted Net Operating Income

Net Operating income less CapEx, TI, LC, and replacement reserves. Also cash flow from operations.

debt service coverage ratio

Net operating income/ total debt service -measure of cash flow available to pay current debt obligation.

If you had to decide a project's merit on basis of one performance indicator what would you use? (cap rate)

"Generally it would be cap rate. But thats only a general rule because you can very well have different cap rates based on many variables." -You could have a lower cap rate if the tenant is good. -lower cap rate if there is a longer amortization period.

ROI assuming constant NOI

(Old cap rate - new cap rate)/new cap rate

Sage - Walk me through a hotel P&L

(UPSCALE INDPENDENT/Branded select service HWS) Year Rooms Occupied Room Nights Available Room Nights Days Open Occupancy ADR RevPAR REVENUE (100%) rooms f&b telecomm parking rentals & other income DEPARTMENTAL EXPENSES (44%/24%) Rooms f&b telecomm parking Rentals & Other Income TOTAL DEPARTMENTAL PROFIT UNDISTRIBUTED OPERATING EXPENSES (16.3%/30%) Admin & General IT Marketing franchise fees property operations & maintenance utilities GROSS OPERATING PROFIT (28%/47%) management & incentive fee 3% INCOME BEFORE FIXED EXPENSES (24%/44%) FIXED EXPENSES (13%) property taxes insurance equipment lease reserves (4%) NOI (11%/30% of revenue) $ % POR PAR Total Revenue % = 100 HWS

Levered Return

(Unlevered yield - (1 - Equity)*Debt Rate)/Equity

1.) Interviewer looks outside of the window, bring me through how you would value that office building over there

- I would look at the surrounding parcels and analyze the location and linkages around to estimate how much the land cost would be to have the area. -I would consider what the zoning codes may be and how good of access the building has to traffic. -I would consider the highest and best use for certain property types. - I would look for an opportunity to build up and onto the building for future projects.

Two properties are across the street from each other in Midtown Manhattan. The properties look exactly the same from the outside. Why might one be worth more than another

- Tenant credit & quality & occupancy - Views from other side of building - Internal upgrades to apartments/rooms - one has an underground parking lot, the other doesn't - different expenses depending on use/renovations - one may have a restaurant - zoning terms - one may have more air rights than another - age - History - maybe a dead body was found and that's a turn off or maybe it's become a haunted house tour - One building can have much more attractive transferrable debt - On-site amenities: cafe, gym, day care - one side of the street can get better sunlight

floating rate

- type of debt instrument that does not have a fixed rate of interest over the life of the instrument (mortgage) -also known as adjustable rate. -

Points

-fees paid directly to the lender when a loan agreement is finalized, usually in exchange for a reduced interest rate which can lower your monthly payments. These points are often negotiable, and the more you pay up front in points, the more you may be able to get a reduced interest rate. Overall, the longer you plan to own a home or pay off a mortgage, the more points will help you save on your interest over the course of the loan. This is why they are deducted out of the original loan amount in both cases of calculating an EBC or Lenders yield - you pay these fee's up-front to the lender and it effects your ultimate cost to borrow money.

Sage - Ramp Guidance ADR/OCC/RevPAR

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Sage - What is the due diligence process

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Walk me through Private Equity Waterfall?

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What is included in amortization table?

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Sage - What should be included in model? Walk me through Private Equity Waterfall? What is included in amortization table?

. .Due Diligence Deal Inputs CapEx Estimate Return Summary Key Investment Metrics PKF & STR Market Forecast Analysis Static Segmentation Static RevPAR Static CF Static Comparison OPHist_Pro Forma F&B Detail OPHist_Inputs Staffing Roster Staffing Build Up Pro Forma Stub Year Sage Dept Comps Seasonality Monthly Cash Flows Debt Construction & PIP Schedule Waterfall

Sage - Walk me through 3 financial statements

."The three financial statements are the income statement, balance sheet, and statement of cash flows. The income statement is a statement that illustrates the profitability of the company. It begins with the revenue line and after subtracting various expenses arrives at net income. The income statement covers a specified period like quarter or year. Unlike the income statement, the balance sheet does not account for the entire period and rather is a snapshot of the company at a specific point in time such as the end of the quarter or year. The balance sheet shows the company's resources (assets) and funding for those resources (liabilities and stockholder's equity). Assets must always equal the sum of liabilities and equity. Lastly, the statement of cash flows is a magnification of the cash account on the balance sheet and accounts for the entire period reconciling the beginning of period to end of period cash balance. It typically begins with net income and is then adjusted for various non-cash expenses and non-cash income to arrive at cash from operating. Cash from investing and financing are then added to cash flow from operations to arrive at net change in cash for the year."

DSCR compared to LTV

1. Determines if you can pay off the debt over a certain amount of time. 2. you would first need to look at your debt coverage ratio before giving out a loan. (Your NOI/ debt). 3. Debt coverage ratio will be a better measure before giving out a loan. That will tell you based on your net operating income and debt what you are likely going to be able to pay off. a. You want this number above one and probably between 1 and 1.5

i. The securitization process for CMBS's is important for both banks and investors.

1. It allows banks to issue more loans in total, and it gives investors easy access to commercial real estate while giving them more yield than traditional government bonds. 2. Typically only very wealthy investors invest in CMBS because there aren't many options for the average investors. 3. Though many real state mutual funds invest a portion of their

balance sheet

1. a financial statement that summarizes a company's assets, liabilities and shareholders equity at a specific point in time. 2. These balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by shareholders. 3. Balance sheet a. Assets= Liabilities + Shareholders' Equity.

You build a building at 5% cap rate and sell at 4% cap rate. what is your return assuming constant nOI?

1/0.05 = 20 1/0.04 = 25 5/20 = 1/4 = 25% return

How do you know if it is a good deal?

10% Return on Cost (Yr. 3 stabilized NI/Total All in equity investment or Projected Stabilized NOI / Total Project Cost) on most markets unless SF or somewhere with really high barriers to entry then 8% okay. This doesn't take debt into account - good cuz can always engineer debt to make return higher, however, if Covid-19 happens or some crisis, debt can suffocate you. You want to make sure deal is good without it.

Yield Maintenance

A prepayment premium that allows lenders to attain the same returns as if the borrower made all scheduled mortgage payments until maturity.

Status of the RE Market

2018-2019 o Still a lot of uncertainty where the commercial real estate market is going as we enter the late stages of the real estate cycle, still waiting for a cyclical downturn o Policy uncertainty has been cleared up for the most part, such as the direction of interest rates and the effect of the tax bill on commercial real estate - there have already been two interest rate hikes in 2018 and more are likely to come at a more aggressive pace o Interest rate hikes and inflation add upward pressure on cap rates, as we may see some cap rate expansion depending on the market and its growth expectations § For example, large markets with strong institutional investor funds and global influx of capital may be able to offset upward pressure on cap rates, where secondary markets that have to rely more on debt capital may not § Currently in an adjustment phase where there is a gap between buyer and seller price expectation and trading activity is relatively flat o Property fundamentals such as rent levels and occupancy are still favorable and signal room to grow o Tax bill positive for CRE investors - deductions for pass-through entities benefit investment vehicles, capex deduction changes make value-add strategies appealing, changes to carried interest encourage private capital into RE Present Listen to podcasts Break into CRE Adventures in CRE https://twitter.com/ey_realestate?lang=en https://www.ey.com/en_us/real-estate-hospitality-construction https://www.ey.com/en_us/real-estate-hospitality-construction/how-covid-19-has-impacted-real-estate-value-considerations https://www.ey.com/en_us/webcasts/2020/04/how-covid-19-is-impacting-accounting-tax-and-disclosure-considerations-for-reits https://www.ey.com/en_gl/real-estate-hospitality-construction/covid-19-why-this-means-farewell-to-a-golden-age-of-real-estate https://www.ey.com/en_us/real-estate-hospitality-construction/how-covid-19-has-impacted-real-estate-value-considerations https://rsmus.com/what-we-do/industries/real-estate/industry-outlook-real-estate.html

A. Over how many years do you depreciate multifamily assets?

27.5 years

A. Over how many years do you depreciate commercial real estate assets, excluding multifamily?

39 years

IF

=IF (logical_test, [value_if_true], [value_if_false]). logical_test - A value or logical expression that can be evaluated as TRUE or FALSE. value_if_true - [optional] The value to return when logical_test evaluates to TRUE. value_if_false - [optional] The value to return when logical_test evaluates to FALSE.

major drawbacks of using IRR to evaluate investment

=IRR doesn't explain whether the return is coming from operations or reversion. (your year zero cash flow is usually operating or reversion inflows/returns on property, expressed as negative) -YOu don't know where the returns are coming from. -almost always the IRR is higher if you sell it earlier in the year. If you want to optimize IRR, you sell after year one.

Interest Coverage Ratio

=NOI/Interest expenses

NOI Margin

=Net operating income/effective gross income

Land Residual Method

A calculation that takes the highest and best use of a particular piece of property and subtracts out the total cost of development to arrive at the residual value: the land value. The first part is to estimate the final or future value of the proposed property. The second part is to estimate the development costs of the project. Land value is residual because the value is created by what a develoepr can build on it, less the cost to build.

Coupon Rate

A coupon rate is the yield paid by a fixed income security. A fixed income security's coupon rate is simply just the annual coupon payments paid by the issuer relative to the bond's face or par value. The coupon rate is the yield the bond paid on its issue date. This yield, however, will change as the value of the bond changes, thus giving the bond's yield to maturity.

Capital Structure

A description of the totality of capital invested in a project, including pure debt, hybrid debt,and equity.The stack is described as containing the most risk at the top,traveling down the stack to the position with the least risk. Higher positions in the stack expect higher returns for their capital because of the higher risk.Lenders and equity stakeholders are highly sensitive to their position in the stack.

What's a discount rate and what factors affect the discount rate?

A discount rate in DCF = rate of return taking into account TVM required annualized rate of return to make the investment worthwhile example if acquiring an office building and you need 12% required annualized return over 5 year hold period then discount rate is 12% IRR is the discount rate that makes NPV = 0 (future revenue - future costs) risk (higher risk needs higher rate of return) expected economy wide inflation risk premiums: property specific, etc. is it new or old? is it office, industrial, hotel? is it core urban market or suburban/rural? are there strong credit tenants like google or strong business guests... like google every year? high vacancy? secondary or tertiary market --> riskier like 7% for low risk deals and 20% for high risk but he is saying for office

Equity multiple

A ratio dividing the total net profit plus the maximum amount of equity invested by the maximum amount of equity invested. For investors looking for a long-term return much larger than the initial investment, an offering's equity multiple might be the best metric to study.

Floating vs Fixed Debt?

A floating interest rate, also known as a variable or adjustable rate, refers to any type of debt instrument, such as a loan, bond, mortgage, or credit, that does not have a fixed rate of interest over the life of the instrument Floating interest rates typically change based on a reference rate (a benchmark of any financial factor, such as the Consumer Price Index). One of the most common reference rates to use as the basis for applying floating interest rates is the London Inter-bank Offered Rate, or LIBOR (the rates at which large banks lend to each other).

Springing Recourse

A form of loan guarantee only enforceable by a lender when certain default or credit events occur (e.g. if a borrower violates operating covenants, does not meet net worth requirements, files for voluntary bankruptcy, etc.). In springing recourse or springing liability, when such adverse events occur, the borrower's guarantor (i.e. principal) becomes partially or fully liable for the loan obligation regardless of whether the loan is non-recourse or not.

Full Service Hotel

A hotel that has a dedicated F&B component and offers a full range of amenities and services such as concierge service, bars and restaurants, pool and spa, etc. Full service hotels have high fixed costs and appeal to the more affluent casual and business travelers who are able to afford the higher than average room rate. intercontinental w hotels crowne plaza

Limited Service Hotel

A hotel that provides only the basic amenities and services with some hotels offering facilities such as a swimming pool and/or business center. Limited service hotels (such as Fairfield Inn or Homewood Suites) operate on smaller budgets enabling them to pass on the cost savings to travelers via lower room rates. No or restricted F&B; la quinta Select Service Select-service hotels, as the name suggests, offer the fundamentals of limited-service properties together with a selection of the services and amenities characteristic of full-service properties. Generally, this means certain restaurant and banquet facilities but on a less elaborate scale than one would find at full-service hotels. aloft

Triple Net Lease

A lease agreement on a property where the tenant or lessee agrees to pay all real estate taxes, building insurance, and maintenance (the three "Nets") on the property in addition to any normal fees that are expected under the agreement (rent, utilities, etc.). This is the most popular type of net lease for commercial freestanding buildings and retail space.

Rent Roll

A list of tenants in an income producing real estate asset and the property owners' reflection of all the rental income derived from the tenants at a specific time (usually at the end of the month). The rent roll often includes other information related to the tenants, such as a description of the space being rented, lease start/expiry dates and any security deposits held.

Distribution Waterfall

A method by which the capital gained by the fund is allocated between the limited partners (LPs) and the general partner (GP). Can be pictured as a set of buckets or phases. Each bucket contains its own allocation method. When the bucket is full, the capital flows into the next bucket. The first buckets are usually entirely allocated to the LPs, while buckets further away from the source are more advantageous to the GP. This structure is designed to encourage the general partner to maximize the return of the fund.

Ratio Utility Billing system (RUBS)

A method of calculating a resident's utility bill based on specific factors such as occupancy rate or apartment square footage and then billing the tenant for their share of utility use. It is often used when the installation of sub meters is not financially feasible (due to the large up front capital investment) or economically feasible (due to a poorly designed utility configuration). The practice is becoming increasingly common as landlords seek ways to increase revenue and limit their cost inflation risk.

Development Yield

A metric used in real estate development, Development Yield is calculated as the project's net operating income (or sometimes cash flow from operations) at stabilization divided by the total project cost. Development Yield is also referred to as a project's Yield-on-Cost. Stabilized NOI/Total Project Cost

Loan to Cost

A ratio used in commercial real estate construction to compare the amount of the loan used to finance a project to the cost to build the project. If the project cost $1 million to complete and the borrower was asking for $800,000, the loan-to-cost (LTC) ratio would be 80%. The costs included in the $1 million cost figure would be land, construction materials, construction labor, professional fees, permits and so on.

Option

A real estate purchase option is a contract on a specific piece of real estate that allows the buyer the exclusive right to purchase/lease the property.

Interest Reserve

A reserve account held by the lender of a construction loan and used by the borrower to cover loan interest shortfalls during construction and lease-up. The interest reserve is funded via the initial proceeds from the construction loan, and is calculated based either on expected future draws or by means of a simple average estimate of the outstanding loan balance throughout the loan period.

Equity Multiple

A return metric which shows how much an investor's capital has grown over time. The equity multiple (EMx) is calculated by dividing the sum of all capital inflows (capital distributions) by the sum of all capital outflows (capital contributions). While the equity multiple does not account for the time value of money, it does describe the total cash returned to the investor and is thus often utilized alongside the internal rate of return in real estate investment analysis.

Expense stop

A tool used by landlords to limit their exposure to operating costs, and as such helps to maintain predictable operating expenses over the term of a lease.

Gross lease

A type of commercial lease where the landlord pays for the building's property taxes, insurance and maintenance.

Bullet Loan

A type of loan where the principal is paid back at the maturation date. This is used for high-yield, mezzanine pieces.

Acre

A unit of land that equals 43,560 square feet, or 4,047 square meters

Leasing Commission

An amount paid to a real estate broker in exchange for bringing a tenant and landlord together to form a lease agreement. Usually paid in the form of a percentage of the yearly rent.

Triple Net lease

Allows you to pass risk on to the tenant! -You always want to do NNN lease. -Expense reimbursements are based on actual reimbursement. You may estimate rent to be $20 and estimate throughout the year to accrue $8 more in expenses. - I will charge you $28 today, but at the end I will reevaluate it and adjust it so I don't take on risk. -You pay exactly the expense reimbursement.

Concessions

Also referred to as an "Inducement", any preferential financial treatment offered by one party to another in a real estate transaction. In the case of a lease agreement, a concession most often takes the form of free rent for a period of time or an agreement by the landlord to waive certain charges such as parking charges or pet fees. These concessions are meant to induce the tenant to sign the lease. Concessions are most often used during initial lease-up (i.e. when a building first delivers) or during tenant-friendly periods in the market cycle to maintain rent rates.

Non-stabilized property

An actual level of occupancy that is less than the stabilized level. Property specific. Never cap an unstabilized cash flow.

Tenant Work letter

An agreement that is entered into concurrently with the execution of a lease and sets forth the terms upon which the initial tenant improvements are to be built. Form of rent concession. Another common rent concession is free rent, one or two months of free rent to allow for buildout of the space and tenant move-in.

replacement reserve

An amount of money set aside because building components or equipment will wear out in a relatively short time and need to be replaced. Can be a mere accounting entry as a phantom expense item reducing net operating income each month, or it can be money actually deposited into an account and earmarked for replacements.

NPV

Net present value (NPV) is a method of determining the current value of all future cash flows generated by a project after accounting for the initial capital investment

Cap Ex

An expense used to upgrade a property which is expected to result in a long-term (longer than 1 year) improvement. Typical capital expenditures (CapEx) include roof repairs, HVAC replacement and other expenses generally related to the structural improvement of the building. For tax purposes, Capital Expenditures are capitalized and depreciated over a period of years with the length of the depreciable life varying depending on the capital item.

Hotel Flag

An informal term used to denote an operating brand within the hotel industry. Marriott, Hilton, and Best Western are examples of "Flags" used by owners of hotel properties.

Proforma

An operating statement that acts as a cash flow projection. PGI -> EGR -> NOI -> CFAF.

loan constant

Annual Debt Service/Loan Principal Amount. The loan's constant, when multiplied by the loan maturity, gives the payment needed to fully repay the debt over the specified amortization period.

CASH ON CASH

Annual Pre-Tax cash flow/total cash invested

Don't freak out

Answer calmly

Rank asset classes lowest to highest on cap rate (updated August 2019)

As of 2nd half of 2019 according to CBRE · Apartment (increasing desire to rent, more stable demand base) 5.11% · Warehouse (increasing reliance on e-commerce) 6.13% · Office (falling out of favor because of the heavy CapEx requirements and TIs) 6.65% · Hotels (First assets to fall during a recession, great cash-flowing assets but a higher cap rate is needed for this to be true) 7.99% · Retail (Very out of favor, deals need very strong cash flow profile for investors to take the risk) 4.78% on high street 7.47 regualr

Unlevered returns

Assumes no debt; NOI / equity investment

Real Estate Modeling Best Practices

Blue Font = Required INput black font = calculation or output Green font = link to output from another worksheet red font = change made to black/green font cell orange font = optional input always use paste values or paste formulas

What Rent Cuts Mean for CRE

Because less demand cuz loss of jobs; over supply rent cuts Office/Retail/Industrial Leases 3-10 years - tenant bankrupticies and stuff but not seen rent cuts cuz leases are so long only 10-20% of these leases expire every year Multifamily on the other hand 6-18 months many expire every year the bigger/pricier the city the harder they have been hit Boston, NY, SF, San Jose >8% rent cuts Likely will keep falling in secondary/tertiary for properties acquired w value add strategy in 2019 --> big effects rent growth compounds so when it goes negative... if investor uw deal with expected 1k per unit but then rents in that market are cut by 10% in first year even with 3% annual increases it would take 5 full years to get to 1k value in first place problem hitting expected returns - projected sale value to hit target EM, IRR Example: Property acquired in January 2020 with the plan to renovate, stabilize deal, sell property at end of 5 years; property in hot market that seen big rent inc and investor projected 4% increases for first two years then 3% for years 3-5 That deal would make 13% IRR 1.7x EM, >8.8% Cash on Cash if 6.7% decrease in first year of ownership even with 4% rent increase next year, IRR = 0.3%, EM = 1.01x, cash on cash --> 5.8% even slighter decreases still will have big impact; even no growth has big impact important to overall return metrics short term interest only loans also big impact it will take longer just to get back to where you were if value ends up being less than original acquisition will have to pay for loan out of own pocket if rents continue to slide - be conservative on market rent growth assumptions, maybe incorporate negative rent growth don't use i/o periods to justify overpayment; make sure it still pencils without i/o periods lock in long term debt with prepayment flexibility if possible gives property time to recover, add. flexibility of when you want to sell property

Cash on Cash Return

Before tax cash flow (BTCF = CFO - Debt Service) divided by the total equity contribution to date, expressed on an annual basis as a percentage. While the Cash-on-Cash Return (CoC) does not account for taxes and does not take into account the time value of money, it is a useful screening tool used by investors when evaluating potential investments. (CFO - Debt Service)/Total Equity Contribution Leveraged BTCF/ Total Equity Contribution

Cash on Cash

Cash after debt service/only equity in deal

Return on Investment

CFAF/Equity.

Return on Asset

CFO/value, a variation of the value equation.

why do institutional investors invest in commercial real estate as part of a mixed-use portfolio

CRE offers many different sectors that make it easy to diversity investments. They tend to be more stable investments.

Commercial leases (office, retail, and industrial)

Can be gross or net. Typically long term. Usually include base rent and operating expense and real estate tax escalations, such as a CPI clause that escalates with inflation.

office building measurements

Can vary by market, but typically these leases are based on rentable area. Rentable area is the usable area (area a tenant can put carpet on) plus common areas of the building. Also, gross building area, typically the actual physical measurement, above grade, of the building, could be used.

Know the relationship between Cap Rate & NOI & Market Value

Cap Rate = NOI/ Market Value

What is the Equity Multiple

Cash distributions/cash contributions the total cash distributions received from an investment, divided by the total equity invested. Essentially, it's how much money an investor could make on their initial investment. An equity multiple less than 1.0x means you are getting back less cash than you invested. An equity multiple greater than 1.0x means you are getting back more cash than you invested. For instance, an equity multiple of 2.50x means that for every $1 invested into a CRE project, an investor could be expected to get back $2.50.

Cash on cash return

Cash flow after financing/market value. It is a ratio (usually converted to a percentage) that is derived by dividing cash flow (before tax) by the amount of equity initially invested. An indication of how much income the property is throwing off. also known variously as the equity dividend rate, equity cap rate, and cash-throw-off rate.

Cash Flow after Financing

Cash flow from operations less debt service and ground lease payments

Potential Gross income

Cash that could be generated if the property were 100% leased. Function of contractual lease terms and market rents.

Office market

Classified by CBD (mid to high rise) and suburban (low to mid rise). Job growth is the major economic driver, with new construction the major supply side factor. These buildings are capital intensive, often requiring lots of work to re-tenant, including broker commissions. Leasing costs might be 5% of the aggregate lease rent and half that for renewal leases.

Base-year lease

Combination of triple net and gross lease. Under a base year lease, the "base year" is typically the calendar year that a particular tenant first occupies the premises (that's the general rule, anyway). The tenant under the lease only reimburses its share of the property expenses to the extent that they exceed the amount of those same expenses for the base year. The norm for office leases.

Capital Stack/Capital Structure

Common equity preferred equity mezz debt senior debt

What are the three ways to value a building - Comparable, Cost, Income Cap

Cost Approach New build value = construction costs + market land value Existing Property Value = Construction Costs (Today) - Physical deterioration, structural/functional obsolescence, external obsolescence + Market Land Value Physical deterioration = factors in economic life of building and time elapsed functional/structural - increased costs to operate older building like energy costs external obsolescence - accounts for extreme traffic, pollution, crime changes that affect operating revenue Usually only for new structure Sales Comparison Approach comparable sale data from properties that recently sold that are similar in age, location, product type, and quality adjustments: differences in sale date, geographic location, building age, sf, proximity to landmarks, 9/11, recession adjust upward for superior location, better amenities, newer build better approach when a lot of transaction activity of same product type, age, property but if not a lot then less useful in the last 12 months Income Approach 3 main methods -Gross Rent Multiplier (GRM) GRM = Sale Price/Gross rent annual basis gives you number to apply to gross rents of property not helpful cuz properties have different expense ratios -direct capitalization NOI/V = cap rate market appropriate cap rate found by comparable sale data and find cap rate on those sales and apply to this property (may adjust if property is better/worse) Discounted Cash Flow (DCF) forecasting net cash flows for a predetermined hold period making sale (exit) assumptions at end of period including rev, expenses, capital expesnses, and projected sale proceeds applying discount rate fo find npv of net cash flows discountr ate = rf rate (treasury rate) + risk premium

How would you approach valuing a retail shopping center?

Cost Approach: If there are no comparables, The cost to rebuild the structure from scratch, taking into account the current value of the associated land as well as construction material and other costs that would be associated with the replacement of the existing structure. Sales Comp Approach: method relies heavily upon recent sales data for comparable properties. By seeking recently sold buildings with similar properties from the same market area, a buyer hopes to ascertain a fair market value for the property in question Income Approach DCF forecasting net cash flows for a predetermined hold period, making sale (exit) assumptions at end of period, including rev, expenses, capital expesnses, and projected sale proceeds, applying discount rate fo find npv of net cash flows Direct Capitalization market appropriate cap rate found by comparable sale data and find cap rate on those sales and apply to this property (may adjust if property is better/worse) Make adjustments based on quality of tenants and tenant leases - higher value for higher quality tenants/leases Rent zones—varying rental rates based on tenant size and placement—also require consideration; so do rent escalations and extended lease options. Vacancy Cash flow reflects: location, age, etc.

OFFSET

Create a reference offset from given starting point. =OFFSET (reference, rows, cols, [height], [width]). reference - The starting point, supplied as a cell reference or range. rows - The number of rows to offset below the starting reference. cols - The number of columns to offset to the right of the starting reference. height - [optional] The height in rows of the returned reference. width - [optional] The width in columns of the returned reference. OFFSET returns a reference to a range that is offset from a starting point in a worksheet. The starting point can be one cell or a range of cells, and the offset is supplied as rows or columns "offset" from the starting point. The height and width arguments are optional and determine the size of the reference that is created.

3 C's of Underwritting

Credit, capacity, and collateral

DSCR above 1 and below?

DSCR above one means you can pay debt obligation DSCR below one means you can't pay debt obligation

DSCR over and under 1

DSCR> 1 means it can pay debt obligations DSCR < 1 Can't pay debt obigations

What are the Key Debt Metrics

DY, DSCR, LTV, ROC

Debt Covenants

Debt covenants are essentially rules written into the loan documents which govern the behaviour of a borrower once the debt is issued. There are 2 general types of covenants which either permit (affirmative covenant) or restrict (negative covenant) the borrower's ability to perform certain actions. Should the borrower break a covenant, the lender typically has the legal right to call back the loan (i.e. demand repayment). e.g. must achieve a certain threshold in certain financial ratios, perform regular maintenance, provide audited financial statements e.g. you can't sell without telling us, borrow more debt, partake in M&A

Name factors worth examining when evaluating an office/multifamily/retail property.

Demand drivers such as employment, growth industries, age composition of population, whether there are large universities nearby, and amenities. Future and current supply should also be examined. Consider the physical condition of the property. Examine seller history. Understand comparable properties. Also look at macroeconomic conditions. There are many more acceptable answers here - do not limit yourself to this response. Hotels --> Seasonality, Airbnb Infiltration, Market & Comp Set Occupcancy, ADR, RevPAR, COVID Reopening status, demand generators, resilience in downturns, Compression Nights or whether it is a convention market, buyer composition, prike/key, airport traffic, politics in the area, minimum wage

Where would you invest $100m?

Depends on your risk profile (value added or opportunistic). Work with what you know (specialist in office buildings or hotel). If you are seeking stable long term returns with little uncertainty and a near guaranteed cash flow then multifamily or trophy caliber office buildings in major urban markets would be the best investment. If you're seeking high returns then ground up development or opportunistic investments are the way to go. Also, what's your expertise? If your specialty is hotels, then you might want to invest there

Economic vacancy

Difference between PGI and true rent collections because of rent concessions, down time between leases, etc.

DCF

Discounted Cash Flow- future cash flows discounted to the present (Cash Flow n)/(1 + discount rate)^n ...

3 ways to value a building?

Discounted cash flow, cap rate analysis, use comparable properties.

Retail market

Economic determinants of rent are generally a function of sales levels. Mall owners usually make their money from small shop, non-anchor tenants (hub and spoke model). A good measure of strength is sale per SF of small shop space.

Multi-family

Economic drivers of apartment buildings include demographic trends, home ownership and household formation rates, and local employment growth. Leases are typically short-term (one to two years), and adjust quickly to market conditions. Larger apartment buildings are only minimally affected by any single vacancy. Multi-family properties are generally considered to be one of the more defensive investment types within commercial real estate, though they are still subject to competitive pressures from newer construction.

Net Operating Income

Effective Gross Revenue less operating expenses (non-capitalized expenses) such as common area maintenance, insurance, and real estate taxes

If you had to decide a project's merit on basis of one performance indicator what would you use? (Equity)

Equity multiple =when looking at equity side when you want quick money. total asset value/ total net equity. -measures leverage - you want a low equity multiple that would indicate that you aren't relying on debt completely to finance asset. (lower financial leverage, which is better)

Sage - What should be included in an Investment Memo

Executive Summary (Summary of Request) Deal Background & Timing (Sponsor Overview; Debt; Project Management/Renovation; PCR & ESA Phase 1; Franchise & YR 1 Update) Asset & Location Overview Business & Renovation Plan Market Analysis - tourism, growth and development, office market, retail market, employment & population Financial Analysis (Pro Forma; Capitalization; Basis; Returns; Sensitivities) Alternate Scenarios (Donwside; Upside) Investment Considerations Next Steps & Priorities Exhibits (Loning, Deal level returns, investor summary, PCR immediate and deferred repairs, property description, renovation budget & construction schedule, proforma, parking, airbnb analysis) Read through Days Inn, HWS Boulder, HGI San Francisco

Retail valuation

For regional malls, typically valued on a DCF or direct cap rate basis. NOI for capitalization is based on first year in-place NOI after replacement reserves with minimal allowance for lease up of unleased space. Cap rates for this type are usually amongst the lowest of any real property type. Comparisons to comparable sales are difficult because the percentage of anchor and major tenants varies.

FF&E

Furniture, Fixtures, and Equipment (FF&E). In real estate financial analysis, FF&E is most often found as a line item in development budgets and operating statements. It can generally be defined as any easily moveable object not permanently affixed to the building. Examples of FF&E are as follows: Chairs Beds Couches Curtains Desks Sconces Tables FF&E A.CRE

Capital expenditures

Goes below NOI. Funds that a business uses to purchase major physical goods or services to expand the company's abilities to generate profits. These purchases can include hardware (such as printers or computers), vehicles to transport goods, or the purchase or construction of a new building. A business expense incurred to create future benefit.

Risk of different Asset Classes?

Hotel: 7-9 cap; daily leases and high fixed costs Retail: 5-7 cap; varies based on consumer spending/confidence Industrial: 5-6 cap; long term leases but very specific purposes Office: 4-5 cap; long term leases but high vacancy Multifamily: 3-5 cap; low vacancy, high rents, everyone needs a place to live (somewhat recession-proof), some concern with overdevelopment

How responsive are the following sectors to economic downturns: hotels, multifamily, office, retail?

Hotels are the most responsive of the four. A hotel operator must re-lease a room every day. Thus, a decline in demand is reflected immediately in hotel occupancy rents. This contrasts office, where leases can span several years and are not subject to short-term fluctuations. For this reason, office is the least responsive. Multifamily and retail are more intermediate in their responsiveness. One could argue that multifamily is less responsive since the demand for apartments persists through all parts of the economic cycle. Additionally, retail is very subject to consumer confidence, which falls quickly during an economic downturn.

If you had to decide a project's merit on basis of one performance indicator what would you use? (debt)

IRR measures profitability of potential investments. IRR is a discount rate that makes the NPV of all cash flows rom a particular period equal to zero.

1. Explain why prefer IRR vs. EM to evaluate an opportunity

IRR - Internal Rate of Return rate of return earned on each dollar invested, for each period of time it is invested in. discount rate NPV =0 Advantage 1) accounts for Time Value of Money - dollar today is worth more than dollar in the future due to ability to earn interest Advantage 2) Allows comparison of 1 investment to another as long as they have the same hold period Disadvantage 1) Cannot compare against different holding periods, doesn't measure absolute return on investments EM - Equity Multiple The equity multiple measures how much cash an investor will get back from a deal. Measures absolute returns The reason why these two indicators are often reported together is because they complement each other. The IRR takes into account the time value of money while the equity multiple does not. On the other hand, the equity multiple describes the total cash an investment will return while the IRR does not. https://fnrpusa.com/measuring-private-equity-real-estate-returns-irr-vs-equity-multiple/ always use both cuz serve different purposes

What is an IRR?

IRR is the internal rate of return. It is the discount rate used in a DCF that makes the net present value of all cash flows equal to zero. Generally, the higher a project's internal rate of return, the more desirable it is to undertake the project.

What are the Investment Return Metrics

IRR, NPV, EM

Treasury bill impacts

If fed sells T-bills then there is less money supply in economy because people are giving their money to the fed and they are holding it. -when the fed buys them, they're putting more money into circulation and that causes inflation. -to combat inflation the fed rises the interest rate to increase the incentive to buy and put money in banks. 5-9% in 1990's, 3-6 2000's

Physical vacancy

In a multi-family market, this is the actual number of unleased units divided by the total number of units.

Multi-family lease

In most markets, typically 6 months to one year. Utilities may or may not be included, but that will be reflected in rent. Rents and expenses are incurred on a per SF basis.

Mezzanine Debt

In real estate, mezzanine debt or mezz, is a subordinate loan on real property secured by an interest in the entity that owns the real property rather than on the real property itself. In the event of default, because the entity rather than the real estate acts as collateral, the mezzanine lender is able to foreclose on the entity via a UCC foreclosure - a faster and less expensive process than a foreclosure on the real estate would be. In the capital stack, mezzanine debt falls between mortgage debt and equity. It carries a higher interest rate than more senior debt due to its riskier place in the capital stack.

Single Net lease

In this lease, the tenant pays base rent plus a pro-rata share of the building's property tax (meaning a portion of the total bill based on the proportion of total building space leased by the tenant); the landlord covers all other building expenses. The tenant also pays utilities and janitorial services.

Industrial

Industrial properties include manufacturing facilities, warehouses, distribution centers, and research & development space. Manufacturing and R&D properties tend to be build-to-suit buildings that can be difficult to "re-tenant" without extensive modifications, while warehouses and distribution centers can be more generic buildings. Industrial properties are also influenced less by local job growth than by larger economic drivers such as global trade growth (imports and exports) and corporate inventory levels. As with office buildings and retail centers, industrial property leases tend to have long terms, so that over time lease rates can fall behind "market." Perhaps most importantly, industrial properties tend to be occupied by a single tenant, adding another level of risk to the property.

Maximum loan analysis

Involves two calculations: a mininum DSCR and maximum LTV, choose the lower of the two numbers.

gross lease

It is NNN rent+ estimate of expense reimbursement (property taxes, insurance, and electrical costs) - sum and charge them one number for the whole year. -You don't adjust at the end with gross. -If expense comes in more, you lose money. =If expense comes in as less, you gain money.

Normal Amortization

It is also called the "constant payment method" because the borrower's total installment payment remains the same throughout the loan period. The installment comprises two elements: principal repayment and interest payment. Because the installment payment doesn't change, however, the amounts applied to the principal and the interest change, so more of the payment goes toward interest in the beginning of the loan.

Cash on Cash

Literally cash in vs cash out; pre-tax NOI/total Equity investment (LTV x $Total Value)*Interest Rate = $Debt Service NOI-debt service=New NOI New NOI/Equity Investment=Cash on Cash

Order of how Bank, LP, and MP get paid

MP puts money in first and gets paid last, biggest return. LP puts money in after MP and gets paid after bank. Bank/Debt partner: puts in money last (usually the most money), gets paid first. Gets lowest return because less risk.

Cap Rate

Measures risk on investment; NOI/$total value

NOI

Net Operating Income; cap rate x $total value total income generated from a property and subtracting the operating expenses. In hotels this can be from parking, F&B, telephone, etc. Total Revenue - Departmental Expenses - Undistributed Operating Expenses (A&G, IT, marketing, franchise fees, POM, Utilities) = Gross Operating Profit - Management fees - fixed expenses (property taxes, insurance, reserve) = NOI

Key Money

Money provided by a hotel operator or hotel "flag" to a hotel owner in order to secure a hotel management or franchise agreement at a hotel property. In highly competitive hotel markets, where operators are looking to get a foothold or expand their brand, operators may use key money as one negotiating tool and will compensate the hotel owner as part of the agreement. Key money is especially relevant in hotel development projects where risks are particularly high and lenders may be much more conservative for this risky asset class.

Debt service coverage ratio

NOI or CFO/ debt service

debt yield

NOI or CFO/ loan amount

cap rate

NOI year 1/ property value

Debt Service Coverage Ratio

NOI/Debt Service First year noi? A financial metric used in real estate to measure a property's ability to cover its debt obligations. The Debt Service Coverage Ratio (DSCR or DSC) is calculated by dividing the net operating income by the debt service payment and is often expressed as a multiple (i.e. a DSCR of 1.20x). The DSCR is used by banks to determine the maximum loan amount offered to a borrower and to assess the probability that a borrower might default on the loan.

Capitalization rate

NOI/value. Theoretically incorporates all of the characteristics of a real estate investment. If income is above market, the investment will have less growth potential and the cap rate will be higher. If income is below market, the investment may have more growth potential and the cap rate will be lower. Result of all of the characteristics of that investment.

Net present value

NPV of all future cash flows: saying present value. =this would be the price you pay today to earn an 8% return with those expected future cash flows. -THe value you would pay today to get an expected return in the future given the current cash flows.

Top development markets:

NYC, Miami, West LA, DC, Charlotte, raleigh, denver, austin, slc (beautiful market mountains held back by mormon church but releasing), seattle, portland, sf, atlanta --> caveats: atlanta & chicago is choked with developers so nevermine, SF and Boulder and Boston are high barrier to entry, SF and Boston are union

Name 3 regulations that REITS face

Need to have shares fully transferrable. -have minimum of 100 shareholders after its firsts year as a REIT. - have no more than 50% of its shares held by 5 or fewer individuals during the last half of the taxable year. - derive at least 95% of its gross income from such real estate sources and dividends or interest from any source. -Have no more than 50% of shares held by 5 or fewer individuals during the last half of the taxable year.

Net vs Gross Lease

Net rents are when the tenants pay the base psf rent and some part of operating expenses, as well. Gross rent means the tenant pays the base psf rent and the landlord pays for all of the operating expenses. The three components of NNN leases are real estate taxes, insurance, and maintenance meaning that the tenant pays the base rent plus those three additional components.

My Preferred Return is 8% IRR and my Cash on Cash return is 10% in Yr 1, but no promoted interest is being calculated. is something wrong

No. Promoted interest won't be earned in first year of ownership with 10% cash on cash even with preferred return of just 8% becasue most waterfall structures are irr based meaning promote and hurdle rates based on irr not cash on cash. IRR much different than cash on cash, in order for IRR to be positive, need return of capital before. this means that even with impressive 10% COC in first year that 8% hurdle wouldn't even be close to being met. Example: LP initial investment = -100k YR 1 net cash flow = 10k yr 1 COC = 10% IRR at end of YR 1 = -90% would need to hit 108k in yr 1 to hit 8% hurdle which is unlikely without sale of property

OS&E

Operating Supplies and Equipment OS&E refers to an enormous range of items that a hotel will need to operate. OS&E does not include items like stoves or washing machines or any major items that require installation. Examples of OS&E are as follows: Dishware Cutlery Trashcans Trays Cleaning supplies Staff uniforms Office supplies Irons and ironing boards Luggage carts Vacuums

Opportunistic, Core Plus, Core, Value Add RE Investment Strategies

O - High risk, high return; volatile cash flow, require greater expertise, often employ more leverage, most often either ground-up developments or the redevelopment of properties to a higher and better use Core+ Slightly riskier Core; e.g. high street retail building with a tenant that takes 10% - 15% of the space vacating in 2 years and the space needs to be upgraded and re-leased, otherwise Core office tower located a bit outside of the prime office submarket with a lease or two that is a bit below market. A levered IRR for this risk profile could be between ~8% to ~13%. Core low risk and commensurately low, stable returns; Core longer hold periods, lower levels of leverage, and higher quality assets. Core investments are generally stabilized properties, with high occupancy rates and predictable cash flows. Investors of core real estate investments value stable, reliable and consistent cash flows over price appreciation. Value Add medium-risk and medium returns, typically involves acquiring under-performing assets with upside potential and adding value through one or more repositioning strategies. These strategies may include property renovation, tenant realignment, operational improvements and re-tenanting strategies among others with the goal of boosting net operating income, and thus increasing the value of the property.

NOI for hospitality

Occupancy, keys (# of rooms), average daily rate (ADR), revenue per available room (revpar) other revenue -> Total revenues - total departmental expenses -> total operated departmental income - total undistributed expenses -> gross operating profit - MGMT fee, RE taxes, insurance, replacement reservce -> NOI.

sandwich position

Occurs when their is a sublease, the subtenant pays the tenant who uses that amount to pay the landlord and pockets the difference, which is this.

Office

Office buildings range from large multi-tenant structures in city business districts to single-tenant buildings (like a hospital's medical office building). Rents and valuations are influenced by employment growth, a region's economic focus (finance and high-tech centers need more office space), and productivity rates. Individualized tenant improvements are usually not very involved, but credit quality of tenants is key; re-leases of office space typically require some lead time to consummate. Office properties often have longer-term leases that can lag current market lease rates, so that "step-ups" (or step-downs) of rental rates are not infrequent when leases expire. Because these buildings are often leased to businesses (not just individuals), the tenants often demand special features in the leases, including rights of first refusal to rent contiguous space, signage rights, or even building purchase options.

Hospitality valuation

Often made using direct capitalization of NOI. NOI is usually forward 12 months. A comparison to recent sales on a price per key basis is also helpful. DCF analysis could be helpful, especially where there is a ground lease with rent changes in future years, or if one is measuring the effect of repositioning.

walk me through a proforma

Potential gross income- vacancy allowance + other income to arrive at your gross income. Then subtract your operating expenses from effective gross income to get NOI. Once you have NOI, subtract capital improvement expenditures to arrive at property before tax cash flows.

NOI for commercial real estate (office, retail, industrial)

PGI (Base rental revenue, absorption and turnover vacancy, base rent abatements, CPI revenue, operating expense reimbursement, other income) -> Total PGR. Less general vacancy and credit loss -> EGR. EGR less total operating expenses (RE taxes, insurance, utilities, payroll, MGMT fee, repairs, security, etc) -> NOI. Less capital expenditure deductions (TI, LC, capital replacement reserves) -> Cash flow from operations.

NOI for multi-family

PGI less Vacancy (physical vacancy, rent loss, rent concessions, model units) plus other income -> EGI. EGI less operating expenses (payroll, marketing, maintenance, landscaping, utilities, insurance, RE taxes, Mgmt fee, replacement reserves) -> NOI.

Equity Waterfall FAQ

Partnership structure -Cash Flow Split - GP - LP non operating capital partner, the funds Preferred return & Promoted Interest - Preferred retrn = 8% IRR - 8% to 11% IRR = 20% promote -11%-15% IRR = 30% -15% IRR = 40% Then is to align incentives operating partner (gp) to maximize returns for everyone involved to meet exceed return expectations

Sublease

Possible right of the tenant's to lease to another tenant at a market rate.

Effective Gross Income

Potential Gross Income plus reimbursement income less vacancy and credit loss

I understnad the basic premise behind waterfall structures, but how does the cash flow split actually work in practice?

Promoted interest = percentage of cash flows distributed to gp that would otherwise be owed to lp over certain return hurdle; e.g. 10% equity investment gp 20% promoted interest over 8% irr total cash flows distributed to gp over 8% irr take 10% + 20% of what would have been lp's 90% of cash flows over that 8% irr = 28% cf to gp and remaining 72% = lp in operating documents, language is more granular. direct distribution of promoted interest to gp managing entitty cash flow percentage remaining split based on equity interests Example 10%/90% initial 20% of all cf above preferred return distributed to gp + gp pro rata share of remaining 80% cf since gp invested 10% 20%+(10% *80%) --> still 28% cash flow going to gp math is same but final result is same but here are the logistics this is how legal language is phrased https://brissettecre.wordpress.com/interview-questions/

What is a triple net lease?

Rather than landlord, a lease agreement on a property whereby the tenant or lessee promises to pay all the expenses of the property including real estate taxes, building insurance, and maintenance. These payments are in addition to the fees for rent and utilities

Why would someone refinance

Refinancing a commercial mortgage means paying off an existing loan, and then replacing it with a new one. 1. Securing A Lower Interest Rate a borrower will receive a lower interest rate on the loan they're currently are paying, thereby paying less money in the long run. Refinancing for this purpose allows property owners to save money each month by lowering their monthly payment. 2. Shortening The Length of A Mortgage Term If you have a 30-year mortgage you may want to shorten the term of the mortgage to 15 years if you're worried about a long commitment. While the monthly rate will rise slightly, borrowers can reduce the time it takes to pay back the loan. Since this shortened mortgage term would have a lower interest rate than the 30-year mortgage. For example, according to financial real estate experts, for that 30-year fixed-rate mortgage on a $100,000 home, refinancing from 9% to $5.5% cuts the term in half to 15 years. This would cause only a slight change in the monthly payment from $804.62 to $817.08. 3. Converting To a Fixed-Rate Mortgage change the type of mortgage they have. A property owner or homeowner may desire to convert from an adjustable-rate mortgage to a fixed-rate mortgage, or vice versa. Adjustable rate mortgages may have a low monthly payment; but rates can fluctuate and increase. More often than not, a large majority of borrowers choose to refinance before the rates skyrocket. Payments and interest rates can increase at any moment, which tends to worry property owners and homeowners. With fixed mortgage rates, a set rate exists for the duration of the loan. Choosing this type of mortgage at a time when interest rates are low can be a smart decision. If you're struggling with hefty payments, you may want to choose an adjustable mortgage rate so that it is lower at the beginning of your payments. 4. Utilizing Equity potential to pull a large sum of money out - a process known as equity. Some borrowers may need to use equity to develop in a booming real estate market. But, the money does not come at without cost. Borrowers will need to make payments on a monthly basis to pay back the equity line. Be cautious because only experienced borrowers should consider using equity to manage finances.

Load Factor

Rentable area / usable area = load factor Example: If a building has 50,000 sf of rentable area and 40,000 sf of usable area, the building has a load factor of 1.25 (50,000/40,000)

Operating Expenditures

Results from the ongoing costs a company pays to run its basic business, the bulk of a company's regular costs. Those expenditures required for the day-to-day functioning of the business, like wages, utilities, maintenance, and repairs

ROI

Return on Investment (ROI) is a performance measure, used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments. ROI measures the amount of return on an investment, relative to the investment's cost. To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment. The result is expressed as a percentage or a ratio.

RevPar & Total RevPAR

Revenue Per Available Room RevPar = Total Actual Revenue in Given Period ÷ Available Rooms Or RevPar = ADR x Occupancy Rate TRevPAR Where RevPAR divides total revenue from room sales by available rooms in a given period, Total Revenue Per Available Room (TRevPAR or Total RevPAR) is a metric that includes total revenue from all hotel departments in addition to room revenue. Other departments are typically and formally categorized as F&B, Other Operated Departments, and Miscellaneous Income.

Difference between mezzanine debt and senior debt

See qUAN'S NOTES

What would you invest in right now?

Single family rental homes increased interest from institutional capital between 2011 and 2017, institutional investors spent 36B dollars to acquire 200k homes across us 2007-2017 the us renter population exploded with less than 1 million owner occupied homes created vs. 6.5mm renter occupied homes added blackstone, cerberus, colony capital made subsidieries aimed at acquiring single family housing product and jp morgan just announced something in March partnership with homes 4 rent earlier this year ULI report family renter household = with children living at home 1/3 of entire us rental pool kids need more space than trad. multifamily housing avg new unit size decreased from 1023 to 923 in 2019 us census beaureu expects 8% growth in 30-50 age group, more millenials having children will need more space, moving out of large expensive cities to more suburban areas for more space NYC, BOSTON, SAN JOSE are top 3 most expensive rental markets in country, rental rates have decreased though decreased demand with more remote work opps --> suburbia but doesn't mean they can buy dream home right away now unemployment rate high single family homes = office space new data from zillow 66% would move with permanent remote work 31% want dedicated office space in home 29% need more rooms single family home investors need to be focused on lt value growth not maximizing cash on cash cuz right now most markets don't have single home rents that will produce noteworty cash on cash strong rental increases and value appreciation over long time so need long term compound annual rent growth in 4.4% since 2014 in san diego according to zillow invest in publicly traded reits invitation homes & homes4rent this space is likely to grow Grocery Stores Self Storage Affordable Housing Short term executive offices Industrial - Amazon distribution centers and warehouses offices - amazon offices

Real Estate is Tangible

Something you can see, touch, and understand operations of. Excel models and analyzing investment opps is much more exciting when you can see the investment and experience the market it is in. Physical nature of property makes it more easily understandable since it impacts everyones lives on an everyday basis.

Office lease

Tend to be more towards the gross side of the commercial leasing spectrum. Typically full service gross, or base year leases where landlord pays all expenses up to the expense amounts in a base year (year lease was signed). Typical lease lengths for Central Business District (CBD) buildings will typically be 10+ years.

Retail leases

Tend to be more towards the net side of the leasing spectrum. Usually consists of a minimum base rent, which is a function of the rent to sales ratio, and percentage rent, wherein the tenant pays more in rent if sales are above a breakpoint.

Valuation Approaches

That's why appraisers use comparable sales, replacement value, and the income approach as part of a three-pronged method in estimating value. They make the appraisal representative of the market conditions and the typical requirements of investors and lenders active in the market. The third method, the income approach, is usually given the most weight. That method is also known as the "band of investment" method of estimating the present value of future cash flows. It addresses the return required on both equity and debt, and leads to what can be called a derived capitalization rate.

ADR

The Average Daily Rate, or average revenue generated per paid occupied room per day, calculated by dividing room revenue by the number of rooms sold. Room Revenue/Number of Rooms Sold

Cap Rate

The Cap Rate, or Capitalization Rate, is the percentage derived from a stabilized asset's annual NOI divided by its purchase price. Stabilized asset's annual NOI/purchase price Investors often look to cap rates that have been set in the market to begin getting a ball park idea of what they might pay for an asset they are looking to invest in. For example, an investor is looking at a Class A office asset in X market. Class A office buildings in X market have been trading between a 5% - 6% cap rate over the past 6 months, so an investor may look to his or her first year of projected NOI and divide that by a cap rate of somewhere between 5% - 6% to get an idea of the price he or she might need to pay.

IPMT

The Excel IPMT function calculates the interest payment, during a specific period of a loan or investment that is paid in constant periodic payments, with a constant interest rate. The syntax of the function is: IPMT( rate, per, nper, pv, [fv], [type] ) Where the arguments are as follows: rate - The interest rate, per period. per - The period for which the interest payment is to be calculated (must be an integer between 1 and nper). nper - The number of periods over which the loan or investment is to be paid. pv - The present value of the loan / investment.

PPMT

The Excel PPMT function calculates the payment on the principal, during a specific period of a loan or investment that is paid in constant periodic payments, with a constant interest rate. The syntax of the function is: PPMT( rate, per, nper, pv, [fv], [type] ) Where the arguments are as follows: rate - The interest rate, per period. per - The period for which the payment on the principal is to be calculated (must be an integer between 1 and nper). nper - The number of periods over which the loan or investment is to be paid. pv - The present value of the loan / investment.

What is the difference between an equity multiple and an IRR?

The IRR measures the percentage rate earn on each dollar invested for each period it is invested. The equity multiple measures how much cash an investor will get back from a deal.

Tenant Improvement

The customized alterations a building owner makes to rental space as part of a lease agreement, in order to configure the space for the needs of that particular tenant.

Development Spread

The difference, denoted in basis points, between the market cap rate and the yield-on-cost . The Development Spread measures the "development pop", or value-added by taking on the construction and lease-up risk. The greater the development spread, the more likely a development project will be deemed financially feasible.

IRR (Internal Rate of Return)

The discount rate at which the net present value of an investment is equal to zero. The internal rate of return is a time value of money metric, representing the true annual rate of earnings on an investment. In real estate practice, IRR is used together with other return metrics such as equity multiple, cash-on-cash return, and average rate of return to compare real estate investments and make investment decisions.

Net Effective Rent

The gross amount of rent payable by a tenant less any costs incurred by the landlord in order to lease the space to the tenant. Such costs typically include leasing commissions, tenant improvements and/or rent-free periods. Rent payable - leasing costs

1.) You have two identical office buildings right next to each other; they were built at the same time, are the same size, and have the same specs. One is valued significantly higher than the other. What are some explanations for this?

The highest and best use could be different for the property. (may be profitable for some businesses and not for others). one tenant could be of higher credit quality and because of that stye could get better loan ratings, which would lower the cap rate and riskiness (amazon versus a family business that is new). The lease discount would be based on what they can borrow. -cap rates change based on lease terms (weighted average of 5 year lease versus 10 year lease would have different value, 10 year less risky). -5 year would be have higher cap rate and be more risky than 10 year lease (less time to amortize out loan) -could be zoning requirements. (what type of business can be there in those locations, highest and best use). - what are there building codes, can you possibility build on or build up?

Hospitality

The hotel sector covers establishments providing accommodations, meals, and other services for travelers and tourists. The hotels may be independent (boutique) or flagged—the latter means it's part of a major hotel chain, such as a Marriott or Sheraton. Real Capital Analytics splits them into six separate categories: - Limited-service: Does not have room service, on-site restaurant, or concierge. - Full-service: Includes room service and has on-site restaurant. - Boutique: Located in an urban or resort location, has full-service amenities, is not part of a national chain, and has fewer rooms. - Casino: Has a gaming component, such as video poker or slot machines. - Extended-stay: Limited-service with fully equipped kitchens in guest rooms and larger rooms for long stays. - Resort: Full-service, large amount of land, in a typical resort location (such as Hawaii or Orlando), and has an attached golf course, water park, or amusement facility.

Straight Amortization

The interest amount varies according to the outstanding loan balance. This means that the installment payments also change, and higher installment payments occur at the beginning of the loan. Gradually the amount of each installment payment reduces because the interest applies to a lower outstanding balance.

prime rate

The lowest rate of interest at which money may be borrowed commercially. It is the underlying index for most credit cards, home equity loans and lines of credit, auto loans, and personal loans.

Sponsor

The partner that "sponsors" a real estate investment, this individual or company is responsible for finding, acquiring and managing the investment. The sponsor generally brings market and property type expertise and plays the primary management role, whilst third party investors (limited partners) typically take on a more passive investment role. The Sponsor is also referred to as the General Partner (GP).

Amortization

The process of paying back the principal of a loan in equal monthly installments. This type of loan is used in first mortgage or bank loans.

Abatement

The provision that in the event the property is damaged, the landlord will allow the tenant to suspend paying rent until the property is repaired and the tenant can resume operations.

Discount Rate

The rate at which future cash flows are discounted and then added together to create a present value in a discounted cash flow (DCF) model. In real estate valuation models, the discount rate can be interpreted as the Cap Rate plus expected NOI growth, representing the income and growth components of total required rate of return respectively.

Discount Rate

The rate used in a discounted cash flow analysis to compute present values. Typically, the investor's required rate of return is used, or in the case of an institutional investor, the weighted average cost of capital (opportunity cost).

Debt Yield

The ratio of Net Operating Income (NOI) to the mortgage loan amount, expressed as a percentage. The debt yield is useful to lenders as it represents the lender's return on cost were it to take ownership of the property. Among other metrics, lenders use debt yield to determine an appropriate loan amount. NOI/Loan Amount

Retail

The retail sector includes everything from smaller neighborhood shopping centers (encompassing, for example, a small grocery, pharmacy and a few restaurants or clothing stores) to large "super-regional" malls that have entertainment activities and can draw shoppers from a great distance. In the remainder of the spectrum are community shopping centers, fashion or specialty malls, outlet malls, and "power" centers with a "category-dominating" anchor tenant like Home Depot or Wal-Mart. Retail properties are most broadly influenced by the state of the national economy generally, especially such indicators as employment growth and consumer confidence levels. More local factors include the property location and its traffic flow; population demographics; and local household incomes and buying patterns. Retail store leases frequently contain a base rent plus a "percentage rent" based on the tenant's gross sales figures. Leases also often have long terms; as with office buildings, this means that after a while lease rates may lag current market rates, and step-ups may need to wait until lease expirations. New tenants may also demand more in the way of space improvements that contribute to the "look and feel" of their business.

Double Net lease

The tenant is responsible for base rent plus a pro-rata share of property taxes and property insurance. The landlord covers expenses for structural repairs and common area maintenance. The tenant once again is responsible for their own janitorial and utility expenses.

Free and Clear Return

The total unlevered (before debt) pre-tax cash flow of a real estate project divided by the total capital invested, generally expressed as a percentage on an annual basis. While the Free and Clear Return does not account for taxes and does not take into account the time value of money, it is a useful screening tool used by investors when evaluating potential investments. The Free and Clear Return is the unlevered equivalent of the Cash-on-Cash Return, and thus sometimes referred to as the Unlevered Cash-on-Cash Return. Will's Return on Cost?

You have a $100 property. Debt on the property has a 50% loan-to-value ratio. Interest rate on the loan is 5%. NOI is $10. What is your unlevered return? What is your levered return?

The unlevered return is simply the NOI divided by the equity investment: 10/100 = 10%. The property is carrying $50 worth of debt. With the 5% interest rate, annual debt payments are $2.5. Since the levered return is equal to the net operating income after debt divided by the equity investment, you can calculate: (10 - 2.5)/(50) = 7.5/50 = 15%.

Hospitality market

This is a very different sector because income is transient, no long term leases, this makes them risky. Either full service or limited service.

Lease up period

Time when building is not stabilized or fully occupied

Equity Multiple

Total cash distributions / total equity invested

Discounted cash flow

Typically where you discount back (at a reasonable discount rate) the cash flow (after capital items) for a real estate investment over a holding period and then assume a reversion (sale-less costs of sale) of the real estate at the end of the holding period. The discounted present value of the cash flow and reversion is a measure of the value of the real estate. Directly models and measures an investment.

Income Approach

Usually involves using the cap rate of a property to determine its investment-worthiness.

Mutli-family valuation

Usually performed on a cap rate basis. DCF analysis is somewhat less useful since the leases are relatively short term. Comparable sales on a price per unit and price per SF basis are also important. Cap rates for these have fallen because of low mortgage interest rates, lower equity yield expectations, and expected increases in NOI.

Multi-tenant industrial lease

Usually takes the form of a modified gross lease, or industrial lease, where the landlord pays for RE taxes, fire insurance, roof and outside wall maintenance, but tenant pays for other operating costs.

How to value forever holds/trophy assets

Value of forevor holds: avoids transaction fees of selling, take advantage of value growth, own assets free & clear once debt is paid 1) extend time frame to 25-30 years; major financial goal 2)track property and equity value annually 3)track time frame in which all equity invested in returned either in op cf or refinance; test when 4) run in-depth market analysis - will it last for long time will u wanna be there in decades 5) shift focus from irr and em to cash flow and equity value targets (cash on cash or actual cash value amount)

Internal Rate of Return

When the net present value of all cash flows is zero. A value that describes the sum of all future cash flows according to when they occur in time. For investors concentrated on the best application of funds over a shorter period of time, a stronger IRR might be more relevant than EM.

Industrial Valuation

Would include direct capitalization of NOI (Before TI and LC but after replacement reserves), DCF analysis, and comparison to recent sales on a SF basis.

A. Commercial Mortgage backed security

a. CMBS are a type of Mortgage backed security that is secured by mortgages on commercial properties, instead of residential real estate. b. CMBS can provide liquidity to real estate investors and commercial lenders. c. As with other types of MBS, the increased use of CMBS can be attributed to the rapid rise in Real Estate prices over the years. i. Because CMBS are not standardized, there are a lot of details associated with them that make their valuation differed. ii. However, when compared to residential mortgage backed securities, a CMBS provides a lower degree of prepayment risk because commercial mortgages are most often set for a fixed term.

A. Mortgage backed security

a. MBS allows a bank to move a mortgage off its books by turning it into a security and selling it to investors. b. When a bank is able to move mortgages off the books, it frees up room for more lending capital. c. With investors encouraged by the traditional strength of the housing market and the ratings on MBS, there was steady demand for these repackaged mortgages. d. type of asset backed security that is secured by a mortgage or collection of mortgages. e. The security must also be grouped in one of the top two ratings as determined by an accredited credit rating agency, and usually pyas periodic payments that are similar to coupon payments. f. Furthermore, the mortgage must have originated from a regulated and authorized financial institution. g. An MBS can be bought and sold through a broker and the minimum investment varies between issuers.

1.) What are the best and worst performing asset classes in current market situation?

a. Retail is going downhill with brick and mortar being replaced by online shopping. b. Healthcare is an industry that is beginning to rise and will continue to rise with the baby boomer population. i. Currently 13% of population is 65+ and by 2022 it is expected to be around 20% of population 65+.

closing costs

a. additional costs related to services more often than not performed by others when a loan is originated. Sometimes the lender will charge certain closing fees, but I realized in terms of what were learning in this class, think of these costs going elsewhere - they cover expenses associated with getting a loan (taxes, insurance, appraisals, etc). That is why they are not included when we are deducting the fees from the original amount when calculating the lender's yield on a loan - these cost's may not affect them, only me as the borrower.

A. Walk me through a pro forma, ending at after-tax cash flow

a. potential gross income- vacancy allowance+ other income to arrive at your effective gross income. then subtract your operating expenses to get your NOI. b. Once a NOI you subtract off capital improvement expenditures to arrive at property before tax cash flows.

1.) Discuss what you view as some of the opportunities, risks, and challenges that investors face in today's real estate market

a. risks: Retail is a risky market because of the collapse of brick and mortar with everyone moving to amazon to shop. b. Opportunities i. Raleigh Durham there is great opportunity to expand multi-family housing and rental properties because 23% of people living in the area are between ages 20-34 and are typically high paid professionals that graduated from UNC or DUKE. ii. Texas shows great opportunity for businesses with there being no corporate income tax.

A. CMBS structure

a. underlying loans that get securitized into CMBS include loans for properties such as apartment complexes and buildings, factories, hotels, office buildings and shopping malls. b. CMBSs are a group of commercial loans on these property types that are bucketed into various tranches. Though these securities are customized, generally they have three or four tranches. i. tranches are typically ranked for senior, or highest quality, to lower quality. 1. Highest quality tranches will receive both interest and principal payments and have the lowest risk. 2. Securities are structured so as the tranches go down in rank, they take on more risk and are designed to absorb most of the potential losses that can occur over the life of the security. 3. Lowest tranche in a CMBS's structure will contain the riskiest loans of the portfolio and possibly speculative loans.

cash on cash return

annual income/ total investment -What return you get every year on an investment. =If you invest 100 the first year you get $8, your cash on cash is 8% -calculates the cash income earned on the cash invested in a property -It measures annual return the investor makes on the property in relation to the down payment only.

straightlined rents

averaging out the base rent over the term of the lease.

junior claim borrower

borrowed money that ranks below other loans and securities. In the case of default, they will be paid last after senior debt

senior claim borrower

borrowers money that a company must repay first if it goes out of business.

why is going in cap rate usually lower than going out cap rate?

cap rate is a measure of risk. -It is easier to predict what cap rates will be today, so going in is lower risk because you can forecast it. -It is harder to predict the future because you don't know what will happen, so it places it at a higher going out cap rate.

cap rate definition

cap rate is the rate of return on a real estate investment property based on the income that the property is expected to generate. -Its used to estimate the investor's potential returns on her investment. The cap rate is equal to the net operating income divided by the value of the asset. A higher cap rate reflects more risk, such as uncertainty in future cash flows or in future interest rates.

Multi-family market

characterized usually by free market rents, moderate occupancy (low 90's), and annual tenant turnover levels often above 50%. New York is unique with a huge inventory of fully occupied, rent controlled, and stabilized units. Employment is the key driver for rents, but housing affordability and new construction also matter. Management fees are usually 3-5% of EGI. CapEx consists of recurring expenditures such as costs on turnover and repair.

Comparable approach

compare to similar homes that have sold in the area or rented in a period of time and compare.

If you had to decide a project's merit on basis of one performance indicator what would you use? (lending)

debt service coverage ratio - net operating income/ total debt service. -measures of cash flow available to pay current debt obligation. -good indicator for lending because you always need to know the risk that you are taking on with a loan.

debt versus equity

debt: more like dating, you see a lot of deals. -which deals do i want to lend on, you see a lot. equity: marriage, long term and you don't see as many deals -You are married to the deal and you really need to know every little detail.

Cap rate pros

easy calculation

fixed rate

fully amortizing loan where the interest rate on the note remains the same through the term of the loan.

Floor Area Ratio (FAR)

gross floor area/area of plot A ratio expressing the relationship between a building's floor area (currently built or permitted) and the land on which the property is located. A higher FAR ratio indicates a higher density (i.e. the more square feet legally permissible to be built on the land). For example, if a plot of land is 10,000 SF and there is a FAR of 6. The allowable buildable square footage is 60,000 (10,000 x 6). Higher FARs allow for larger buildings, increasing sales and leases, and lower per-project expenditures.

Legal docs will specify

how cash flows are split, how promote interest is calculated, when promoted interst is triggered

leverage

how much debt you put on a property (measured by equity multiple)

Cash on Cash vs. ROI

https://www.mashvisor.com/blog/cash-on-cash-return-vs-roi/

LTV compared to DSCR

i. LTV is more of a balance sheet thing. ii. Measures your leverage on a property. iii. Looks at your total assets and liabilities, which would impact how much you can put down on loan. 1. How much debt you are putting in versus equity

replacement value

i. the cost to replace an asset of a company at the same or equal value, and the asset to be replaced could be a building, investment security, accounts receivable, or lien. ii. Replacement cost can change depending on changes in market value of the asset and any other costs required to prepare the asset for use. b. Breaking it down c. Replacing an asset can be an expensive decision, and companies analyze the net present value (NPV) of the future cash inflows and outflows to make purchasing decisions. Once an asset is purchased, the company determines a useful life for the asset and depreciates the asset's cost over the useful life.

a. Breaking MBS down

i. when an investor invests in a mortgage backed security, he is essentially lending money to a home buyer or business. ii. An MBS is a way for a smaller regional bank to lend mortgages to its customers without having to worry about whether the customers have the assets to cover the loan. iii. Instead the bank acts as a middleman between the home buyer and the investment market participants.

if the lp hits their preferred return before the sale, does gp stilll earn promoted interest every time cash is distributed

it depends but primarily depends on specific language in partnership agreement; promoted interest generally only earned in capital event on deal; capital event is either sale or refinance; this means that in many standard jvs, promote won't be earned until capital event; this won't come into play usually for irr structure waterfalls since return of capital is necessary to trigger this which usually does require massive value creation with refinance or sale

1.) Who are the biggest REITs in: b. Multifamily c. Office d. Industrial e. Malls f. Medical

it depends on the metrics you are asking. Gross square footage would be industrial, retail falls, then office. Revenue invested would definitely be multi family.

cap rate cons

just one year snapshot in time. -market cap rate can be difficult to determine.

A. Over how many years do you depreciate land?

land doesn't depreciate

amortization

length of time it will take you to pay off your entire mortgage. - The longer amortization period, reduces your monthly payments as you are paying your mortgage off over a greater number of years. -However, you pay more interest over the life of the mortgage.

mortgage term

length of time you are committed to a mortgage rate, lender, and conditions set out by lender.

1.) Explain how Brexit impacts commercial real estate

less investments in Eurozone, so there may be a positive impact on U.S CRE investments. - increase in inflow of global funds to US markets as they are considered more stable and secure. -The value of sterling dropped relative to the U.S dollar, so U.S goods are worth more. -U.S treasury rates dropped to record low. (low treasury rates keep inflation steady and low). -If t-bills give high rates people will buy and decrease money supply in economy, so money will be more scarce and bring down inflation

different between limited and general/ managing/ developer partner

limited= takes limited risk and less return because they take on limited risk. They are doctors, lawyers, and family that fund the project without expertise Managing partner: Get paid last and take on the most risk. They put money in first and if project fails they don't get paid until everyone else does. But they get highest return

Loan to value

loan amount/property value

non-recourse loan

loan secured by collateral, which is usually property. -if borrower defaults, the issuer can seize the collateral but cannot seek out the borrower for any further compensation, even if the collateral does not fully cover the full value of the defaulted fault.

recourse loan

loan that allows a lender to seek financial damages if the borrower fails to pay the liability, and if the value of the underlying asset is not enough to cover it the lender can go after the debtor's assets that were not used as loan collateral in case of default.

CBRE Q2

mass exodus from cities - tho will be short term; basically no transaction volume 70% decrease overall quarter 2 to q2 and 91.2% decrease in hotel transaction volume industrial saw lowest drop in 41.2% REITs down most institutional down least; extremely low interest rates cancel out extra risk; Pricing has yet to adjust to current market conditions actually increases in property types other than hotels (-5.4%) and retail with industrial YOY +7.6% interest rates drop cancel out inc. to risk premium keeping cap rates and pricing consistent; even with spreads widening all in rates for loans still at rock bottom pricing

low treasury rates mean?

mean people force little inflation. It means low cost government borrowing, meaning that the government is paying small amounts of interest on recently issued debt.

NOI

measures all revenue from property- all necessary operating expenses

adjustable rate

mortgage where the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets.

debt service coverage ratio

net operating income/ total debt service -Measure of cash flows to pay current debt oplication

Why take a 20% IRR deal over 25% IRR deal

o Absolute returns § 25% IRR on a $1 investment has lower absolute returns than a 20% IRR on a $100 investment o Timing § 20% IRR deal could turnaround in 1 year while 25% IRR deal could turnaround in 10 years, more risk in a longer holding period o Other reasons § Risk - 25% IRR deal could have higher risk and be too risky for a conservative fund § Portfolio Diversification / Expertise - 20% IRR deal could provide more diversification benefits / expertise in terms of markets or asset class

• All property types as a whole

o Each property type must be evaluated differently. The influence of regional economic considerations, market supply and demand, lease terms, tenant credit, and any "pass through" of operating costs on a commercial property vary significantly depending on what type of property is being discussed. o Because variation, a prudent investor might consider diversifying across several of the major property types in order ot reduce his overall investment risk.

Industrial

o Manufacturing facilities, warehouses, distribution centers, and research and development space. o Manufacturing and R&D (research and development) properties tend to be built to suit buildings that can be difficult to "re-tenant" without extensive modifications, while warehouse and distributing centers can be more generic buildings. Industrial properties are also less influenced by local job growth than by larger economic driers such as global trade growth (important and exports) and corporate inventory levels. o As with office buildings and retail centers, industrial properties leases leases tend to have longer terms, so that over time lease rates can fall behind "market". ♣ Perhaps most importantly, industries properties tend to be occupied by a single tenant, adding another level of risk to the property.

data mining

o Practice of examining large databases in order to generate new information

multi family

o Residential buildings vary by location (urban and suburban) and size of structure (high rise or garden apartments). o Economics drivers of apartment drivers of apartment buildings include demographic tends, home ownership and household formation rates, and local government growth. o Leases are typically short term (one to two years), and adjust quickly to market conditions. o Larger apartments are only minimally affected by any single vacancy. o Multi-family properties are generally considred to be one of the most defensive investment types within commercial Real Estate, though they are still subject to competitive pressures from newer construction.

- Two buildings are next to each other and look the same, but have different valuations

o Tenant quality § Tenant credit (investment grade vs non-investment grade) - higher credit rating and stable income/sales means less missed rent payments, less chance of vacating the space § Tenant mix (especially important in retail) - a neighborhood center with complementing set of necessity retail tenants such as fitness, beauty, discount, restaurant uses will generate better traffic flow and sales than a fully service-oriented center o Lease terms and lease structures § Long-term leases provide stable rental cash flows whereas short-term leases are riskier because of the uncertainty of what tenants will do at lease expiration § Different lease types affect valuation such as NNN, which are beneficial for the landlord since tenants take care of major operating expenses o Other factors § Occupancy - one may be completed rented out, one might be struggling to find tenants - gap in cash flows generated § Depreciation schedule - one may be built 10 years ago, one might be newly developed, gap in values due to condition and age § Accessibility and visibility - one may be near a major intersection with many ingress/egress points, one may be obstructed from view § Additional value-add component - air rights or potential development § Amenities

$100 M to invest

o Two initial questions § Is it my money or 3rd party capital? If it was my money, I'd invest in things I'm more familiar with and take on more creative investments § Is there an existing portfolio or is this the start of my fund? If there's an existing portfolio, I would loo at what's already been purchased, what my expertise is in a given market or asset class, and consider whether my investment fits and/or offers diversification benefits o If I could use leverage, I could invest in more than $100 million and enhance returns, but if only equity, I'd split $100 million across different markets and risk levels o $50 million: Invest in Student Housing portfolios in markets with a large student population like Austin, Ithaca, or Ann Arbor § Student housing is a stable investment with stable demand, since college enrollments are not susceptible to market fluctuations like other asset classes like retail or hotel § Although the construction pipeline for student housing is substantial, it is counterbalanced by an increase in demand, as college enrollment has skyrocketed in recent years from both the domestic and international population § Rent payments are more secure in nature as well, since rent payers tend to be creditworthy parents rather than students § Lastly, student housing portfolios have attracted strong interest from foreign investors such as SWFs, if we're thinking about potential exit strategies down the line o $50 million: Invest in Shared Workspaces in cities with emerging tech markets § Tech companies are moving out of San Francisco as they are being priced out by the cost of living/operating their business there § They are instead moving to emerging tech markets such as Seattle, Raleigh, Dallas § Many of these tech companies are small businesses or startups who seek out small office spaces § Invest in empty office spaces, turn each floor into co-working environments, spruce up each floor with amenities that ultimately give off a creative vibe to attract these tenants § High risk involved with having small businesses as your tenant profile, but not only is the demand high, but also instead of renting a whole floor to one tenant, I can earn a higher total rental income and ultimately a higher return by splitting a space up into multiple rent-paying spaces § "Sum of the parts is greater than the whole"

• Lease step down

o a lease providing for specified retn decreases at certain future dates. Opposite of lease up.

• Retail

o includes everything from smaller neighborhood shopping centers ( encompassing, for example, a small grocery store, pharmacy and a few other restaurants or clothing stores) to large "super regional" malls that have entertainment activities and can draw shoppers from a great distance. o In the remainder of the spectrum are community shopping centers, fashion or specialty malls, outlet malls, and "power" centers with a "category dominating" anchor tenant like Home Depot or Wal-Mart. o Most broadly influenced by the state of the national economy generally, especially such indicators as employment growth and consumer confidence levels. o More local factors include the property location and its traffic flow; population demographics; and local household incomes and buying patterns. o Retail store leases frequently contain a base rent plus "percentage rent" based on the tenants gross sales figure. o Long term leases, as with office, this means that after a while lease rates may lag current market rates, and step ups may need to wait until lease expirations. o New tenants may also demand more in the way of space improvements that contribution to the "look and feel" of their businesses.

office

o office buildings range from large multi-tenant structures in city business districts to single- tenant buildings (like a hospital's medical office building). o Rent and valuations are influenced by employment growth, a region's economic focus (finance and high tech centers need more office space), and productivity rates. o Individualized tenant improvements are usually not very involved, but credit quality of tenants is key; re-leases of office space typically require some lead to consummate. o Office properties typically have longer term leases that can lag current market lese rates, so that "steps up" (or steps downs) of rental rates are not infrequent when leases expire. o Because these buildings are often leased to businesses (not just individuals), the tenants often demand special features in the leases, including rights of first refusal to rent contiguous space, signage rights, or even building purchase options.

audit

o official inspection of an individuals or organizations accounts, typically by an independent body.

Lease step up

o step up lease is a lease agreement which stipulates that the rental rate will increase by predetermined amounts at various points in the future. o Though the rent increases in the future, the lessor hopes to hedge against various risks such as inflation and other cost increases. o Breaking it down ♣ Step up leases are typically employed in longer term leases spanning several years into the future. ♣ In these cases, the lessor incurs considerable risks by locking in a fixed rental rate while inflation and other costs remain variable. ♣ In residential Real estate, such as apartment complexes, lessors can mitigate these risks by offering only one or two year fixed rate leases and adjusting rates when leases come up for renewal. But in commercial and Industrial real estate, firms require long term leases due to the costs involved in setting up operations and value of establishing a well known location.

Single tenant Industrial leases

often leased on a triple net basis. For modern bulk warehouse/distribution properties, usually long term triple net leases to credit quality tenants, which are very desirable.

Adaptive Reuse

one property type into another Hotel into office/residential

institutional investor

organization that invests on behalf of its members. -Examples include endowment funds, commercial banks, mutual funds, and hedge funds. - they face fewer protective regulations because it is assumed they are more knowledgeable and better able to protect themselves.

Internal rate of return (IRR)

percentage rate earned on each dollar invested for each period it is invested. -Measures profitability of potential investment -A discount rate that makes the net present value of all cash flows from a particular project equal to zero.

A. Walk me through a pro forma, ending at NOI

potential gross income- vacancy allowance+ other income to arrive at your effective gross income. then subtract your operating expenses from EGI to get NOI

PRO-RATA

proportional

income approach

relies on calculating cap rate. = you would be given the rental income per month or some measure and use that to estimate the value of the house.

Fee simple

rights in realty if all of the rights in a property are owned by a single agent.

Common Reit companies

simons property group : Cap 59.2 billion. -Ventas: healthcare rent -Blackstone mortgage trust.

cost approach

states that the property is only worth what it can reasonable be used for. It is estimated by summing the land value and the deprecated value of any improvements.

what form of depreciation do we use in CRE?

straight line depreciation

NOI

the annual income generated by an income-producing property after taking into account all income collected from operations, and deducting all expenses incurred from operations. NOI is positive when operating income exceeds gross operating expenses, and negative when operating expenses exceed gross operating income. For the purposes of real estate analysis, NOI can either be based on historical financial statement data, or instead based on forward-looking estimates for future years (also known as a proforma).

I'm analyzing a deal with an irr that exceeds the preferred return, but the lp and gp cash on cash returns are equal. why is that?

the cash on cash is calculated net of refinance and sale proceeds (capital events); so until preferred return is hit, many structures call for cash flows to be split pari passu to investors based on their percentage interest in the deal; gp contributes 1-10%; example: gp - 10k lp = 90k yr 1 distribution = 10k gp gets 1k, lp gets 9k 1k/10k =10% and so on

Internal Rate of Return (IRR)

the discount rate that makes the NPV of an investment zero; TVM metric, representing true annual rate of earnings on an investment. IRR is used with other return metrics such as equity multiple, cash on cash return, and average rate of return to compare real estate investmsents and make investment decisions

Leased fee

the landlord's rights in realty.

face rent

the quoted rental rate before taking into account incentives or increases

Net rent

the rent calculated excluding building costs.

Gross rent

the rent calculated inclusive of all building costs

Effective rent

the rental rate averaged out over the term of the lease, including consideration of rent-free periods or up-front incentives.

rights in realty

the right to use and enjoy a property and collect income from it. what is traded in a real estate transaction.

Leasehold

the tenant's rights in realty.

equity mulitple

total asset value/ total net equity It measures financial leverage. High equity multiple indicates that a larger portion of asset financing is attributed to debt.

equity multiple

total asset value/ total net equity -measures financial leverage - companies finance their operations with equity or debt. High equity multiple indicates that a larger portion of a asset financing is attributed to debt and not their own money. -variation of the debt ratio.

adjusted NOI

total income- operating expenses- interest expense on debt.

Economic cap rate

typically cap rate after deducting any CapEx.

nominal cap rate

typically cap rate before deducting any CapEx

How oil prices impact commercial real estate

volatile commodity pieces like oil impact all elements of the U.S economy, both positively and negatively. -For example, higher oil prices are good for some industries, and yet bad for others. same goes for lower prices. -so overall, price fluctuations will affect different property types.

WACC

weight average cost of capital. average rate of return a company expects to compensate all its different investors. The weights are the fraction of each financing source in the company's target capital structure.

where do you want to buy and sell with cap rates?

you want to buy at a high cap rate and wait for it to stabilize, then sell at lower cap rates so you get more money.