Real estate problems/ Memorize / lists

Back door front door problems

Back door ! Important thing to note is that mortgage payments are monthly so you need to do npv with months. Then once you get your payment at the end multiply by 12 and divide by total amt to get dscr ! Loan to cost is the loan amt over the total project cost before u subtract out construction cost ! Implied cap rate is the same way, use the total project cost before subtracting out construction costs --------------- Front door Multiplication on both sides. In the example they gave us, they did not give us any info on the equity side. This is because they gave us the DSCR, which is payments, which we calculated, over the NOI. is will lead us straight to the NOI Tricky thing is if they give us opex as percentage of noi and the vacany loss: you divide your NOI by 1-that to get to the next line.

Band of investment

(LTV)(Mortgage constant)+(1-LTV)(equity dividend ie cash on cash)

! Why are pure arbitrage opportunities almost impossible in real estate

1.High transaction costs 2.Uncertainty in property market 3.Limited liquidity, that is, it typically takes time to find a buyer, execute a contract, complete due diligence and close on a sale.

Which of the following are valid responses to the statement, "the property must be worth at least $X because it cost that much to build it?

1.Never assume cost equals value. 2.If the project wasn't the highest and best use for the site, the building could have depreciation from day 1. 3. If developers build too much space, supply and demand could be out of balance, causing rents to fall below the level that supports new construction costs.

Which of the following are valid responses to the statement, "minor property damage that is easy to fix is generally curable?

! If the property damage is so minor that it would have no negative impact on value, it is incurable. Minor damage, such as superficial pavement cracks, can actually cost much more to fix than their impact on value. Not necessarily. For example, a light bulb may have some wear or a paint job may have some scuffs, but they may still have remaining useful life such that the cost of replacing them far exceeds the minor benefit of an extended remaining life.

Comp B requires an adjustment for "expenditures immediately after the sale." Would you add or subtract $25,000?

Add This is important, what it is saying is if you are looking for comps for vacant land you have to add on the 25k adjustment of demolition

Which one of the following is NOT correct about the sales comparison approach?

Adjustments must be quantitative, that is, either dollar amount adjustments or percentage adjustments.

Which one of the following is NOT part of the indirect or soft costs?

Contractor profit ?

Ratios to know for Back door Debt

DSCR: NOI/Debt Service -----> / Debt service constant: Payments/Loan value So Noi/dscr= payment payment / dsc = Loan amt

In the cost approach, what is the most suspect or difficult to estimate component?

Depreciaiton

Question 1

Developed to a 16 percent cap on pst and 12 percent market cap. What was the profit on the development. finnese as always. NOI will be the same so plug in 1 for noi and solve for value with 16 percent cap rate. Do the same, 1 in the noi and solve for value using a 12 percent cap rate. The question is worded poorly and should say "return" but it is just N-O/O equation.

Cash-on-Cash Leverage - (This problem is related to the Real Capital Analytics article). Suppose a property was purchased at a 6.40% cap rate (say, for $10,000,000, but, again, you don't need to know the sale price) using a 4.40% interest only loan at 70% loan-to-value. What is the cash-on-cash or equity dividend rate? (Assume NOI = PBTCF) (Enter your answer as a percent in the format #.##)

Easy again. Use the price and cap to get the NOI. seperate the 10 mil into 3mil equity and 7mil debt. The The NOI comes out to be 640,000, however you need to pay debt first. 7 mil times 4.4 percent is 308,000. Subtract that from the NOI to get the NOI that goes to equity. Divide the equity NOI by equity invested of 3mil to get equity dividend or equity return. A: 11.07

Overbuilding in the local market has caused rents to fall to the point that values are far below the replacement cost of properties. What type of depreciation is this?

Economic external obsolescence

Listings should not be considered in the sales comparison approach because they do not reflect an agreed upon price between a buyer and seller, but rather just the price at which a seller is willing to sell,

False

In underwriting an acquisition, a professional engineering firm has forecast capital costs (excluding TIs and commissions) as shown below with $0 cost in all other years of your 7 year model. Calculate the constant annual "replacement reserve" over the 7 year holding period that would have the same present value at a 9.0% discount rate? Year 1 - HVAC Replacement - $75,000 Year 3 - Parking Lot Replacement - $50,000 Year 5 - Elevator Replacement - $125,000

Find present value, of each. add and divide by 7

Which is a more important consideration when evaluating depreciation?

Functional utility of a building attribute

are Terminal Cap Rates typically higher or lower than going in cap rates?

Higher Why: prolly cuz the decrease in property value and increase in risk, increase in capx etc. think about equation

Discount rates are typically higher or lower than current cap rates

Higher: discount rate = Cap rate + Growth rate

Most probable use

Highest probabilty

You were hired to acquire properties on behalf of a German investor who requires a 150 basis point premium on their investment returns due to taxes and currency risks associated with investing in the US. When you explained this to a colleague, he replied, "you're just not a buyer in this market." What did he mean by that, in more technical terms. (mark all correct terms)

If you add this premium to the market discount rate in a DCF approach, your value conclusion will be well below all other likely bidders You will always be at the lower tail of the buyers' reservation price distribution and, thus, outside of the sellers' reservation price distribution IV < MV, so competent decision making suggests that you shouldn't buy property in this market

Which of the following are limitations or shortcomings of the Front Door / Back Door model?

Ignores time value of money concepts Single year, static model Market dynamics over time are not considered

! why is there a difference between

Implied cap rate and going in cap rate

Current mortgage terms allow an investor to borrow 70 percent of acquisition costs at a 5.0% interest rate with a 20 year amortization. If equity investors require a 10.0 percent initial cash-on-cash return, what cap rate would you estimate using the "band of investment" approach (in percent)?

Just do the band of investment. Only thing to remember is that for band of investment we use the mortgage constant, payment/ loan amount.

How to do proforma

Just go thru the proforma, discount to present value. Add the reversion to the last year. To get the reversion price do the last year NOI over terminal cap rate. Then just subtract out cost of sales

Identify which of the following are among the fundamental real estate formulas incorporate directly into the Front Door / Back Door model. (mark all correct answers)

Land/Site Cost + Construction Cost = Total Project Cost Basic real estate operating pro forma MC = ADS / Loan Amount PBTCF = Annual Debt Service + Equity Cash Flow

! Which of the following are reasons that Investment Value and Market Value may differ? (mark all correct answers)

List to remember. find list 1.Investor tax exemption (say, a non-profit buyer) 2.Unique locational advantage for an owner-occupant, say for a physician medical practice adjacent to its affiliated hospital 3. Last parcel needed in a development assemblage 4. Green Bay Packers' Hall of Fame adjacent to Lambeau Field 5. oreign investor are subject to "FIRPTA" tax, whereas domestic investors are not

Cash on cash, debt service etc.

MISSING!!!

Proforma from class

Monthly rent x units less vacancy = EGI Operating expenses management fee insurance cam property taxes NOI HVAC replacement Capital reserve capital expentures PBTCF

On the equity side

NOI- Payments= investor cash flow investor cash flow / return on equity = equity investment

Implied cap rate calculation

Once you have the NPV, do the first year NOI divided by NPV Value

At the end of back door

Once you have the two amounts of investment, subtract out expenses of claims and other expected improvements to get a value

Consider the Madison student housing market. Assume that the market remained in equilibrium after the opening of the new The Hub project on State Street and rents at The Hub are $1,000 per bed. Across the street at The Towers, a much older property, rents are $700 per bed. What type of depreciation is reflected in the difference between the Hub rents and The Towers rent? (Mark all that apply.)

Physical, functional depreceation

Order of transaction adjustments

Real property rights appraised Financing terms Conditions of sale expenditures immidiiatly after Market conditions

Final review

Rember to proforma in yearly terms, so if you have monthly income multiply by 12

Suppose a property has some superadequacy, such as an oversized HVAC system or excessive structural foundation. In which approach would you depreciate the cost of these superadequacies?

Reproduction cost approach

You can get TI as percent of value and cash flow growth as percent of value

TI as percentage is the TI added up divided by the NPV Cash flow growth is the change in PBTCF divided by the NPV

Which of the following are true about the "effective age / economic life" method of estimating depreciation.

The approach assumes a linear relationship between age and depreciation, which isn't necessarily a valid assumption. Although it makes sense conceptually that a building's "effective age" may be less than its actual physical age due to ongoing capital reinvestment, estimating "effective age" is highly subjective.

What do we mean by "market value" when considering the normal price dispersion in a market?

The mean, or expected price, at the center of the price probability distribution

Although the cost approach is rarely the primary approach used in valuation, understanding the relationship between cost and value is critical for which of the following reasons?

The relationship between property value and development cost is the primary consideration that triggers new development and subsequent changes in supply. The cost of building new supply serves as a benchmark for the long run equilibrium value in property markets. When underwriting a real estate investment, knowing whether the price being paid is above or below the replacement cost for new supply is critical in evaluating the risk of the investment.

Which type of adjustments come first in the sales comparison adjustment?

Transactional

After you have identified your comparable sales, but before you begin the transactional adjustments, what adjustment puts the sales into a common format?

Unit of comparison adjustment

Expected use

Wheighted average with probabilty

Do these problems over again by hand: things to remember:

When getting the reversion price for the dcf, you have to get the nsp. The net sales price is Noi in year after sale divided by terminal cap rate. THEN take out selling expenses to get NSP. You can have a seperate equity IRR which is just the cash flows going to equity discouted to zero NPV

For the demolition HBU stuff

Your continued use is just the subject properties current value. You are trying to figure out if another use has a greater value for the property. We find out the value of another use by using a comp. In our example, the other use is a condo. What is the value of a Condo property? First we get the value as if vacant for condo development by adding the demolition cost to the cost of acquisition. Then we subtract our acquistion cost.

For size adjustment

divide price by square foot for its own square footage. add or subtract based on if you are trying to get to og property

You confirmed a property sold for $10,000,000 at a 6.00% cap rate, but this cap rate was based on an NOI after capital reserves. The capital reserve was 10.0% of NOI (before reserves). Calculate the cap rate using the "textbook" approach with NOI before reserves. (Note: You didn't need to know the sale price to solve this problem.) (Enter your answer as a percent in the format #.##)

easy still finnesse the NOI should have been 10 percent higher. You can get the NOI by using the cap rate and value to find that NOI is 600,000. Then use the equation X*.9=600,000 to get the new NOI. Then just divide by the property value. A; 6.67

You confirmed a property sold for $10,000,000 at an 8.40% cap rate, which seemed unusually high, considering it has a new roof, parking lot and façade. Investigating further, you discovered that the buyer spent $2 million to replace the roof, parking lot and façade immediately after the purchase. Adjusting the price to reflect the total capital invested to get the property to its current condition, what would be the indicated cap rate? (Enter your answer as a percent in the format #.##)

easy, just finesse the numbers. Use the first two data points to get NOI. Use that NOI with new value A: 7 percent

James opens next to the towers and rent drops

external obslecesnse

For the demolition land value HBU type questions

for the other property, you add the price to acquire plus the demolition cost, minus the demolition cost of the subject property. If you need to adjust to Price per acre or what not, do so.

Terminal cap rates are

higher than current rates

Remember

if IV> MV, then you will buy.

Rememeber

management fee is a line item in opex

Mortgage constant

payment/ loan amount

IRR

prob wont have to know but is the discount rate that makes your npv 0

Market conditons

property might appreciate

process vs direct results

share price - direct discounted cash flow- process cap rate comps- direct results Cost approach - process Sales comp approach- Direct results

What is the spread?

subtract the two rates

HBU

the one that has the biggest value

Question 3 is another finesse question

u have the cap rate so u can get you own NOI over value by putting value as 100 and NOI as whatever get u that cap rate. Then do 100 times the LTV to get the amount of the loan, and calculate the payment using their terms. Once you have the payment, subtract that from the NOI to get amt going to equity. Then divide that by the equity side of the LTV.

You confirmed that a property sold for a 7.00% cap rate based on a "trailing" year NOI. Assuming it was a stable property with 3% annual NOI growth, calculate the equivalent cap rate based on Year 1 NOI? (Hint: Guess at an NOI and use the simple cap rate formula.) (Enter your answer as a percent in the format #.##)

use 100,000 as a starting value. With a 3 percent growth that would mean 103,000. Important to not that the "trailing noi" is previous data, so the 103,000 is the year 1, whcih we use to calculate the cap. The value from the trailing noi was $1,428,571.43, so if we use that same value with the new NOI, we get the cap rate of 7.21. Steps: 1. put in noi of 100,000 and divide by old cap rate to get value. do new NOI divided by that value. a: 7.21

Would you take a deal with a 0 NPV?

yeah you could because you are getting your requried return

Just remember

you can get cap rate by discount minus growth rate. What I dont know and prolly should is when it talks about constant growth vs idealized vs realistic Idealized: no transaction cost, constant growth Realistic: transaction costs, declining long term growth