Real Estate Technical Question

Tell me about the value add acquisition that you did?

5 Milk Street ("the Property") is an 8-story building with 114,668 rentable square feet in the Downtown / Financial District of Boston. It has 21 separate suites, and is currently 74% occupied with AAA tenants such as Google, Athena health, Cubist Pharmaceuticals, and Suffolk Construction. It was built in 1893, renovated throughout the years, and most recently went through a renovation of the lobby and select interior spaces in 2012.

Do you know how to structure a joint venture?

Basically what a JV does is provide a co-investment by multiple parties to fund a real estate deal. This could be a general partnership, limited partnership, or an LLC. Ultimately it is simply a way to link money (capital) providers and people who specialize in real estate services. What a JV tries to accomplish is utilize this link to provide all parties with above average risk adjusted returns and also assess structuring details with regards to an if the deal goes bad. A Joint Venture (JV) is a co-investment model wherein multiple parties are involved through an LLC, limited partnership or general partnership. A JV adjusts average real estate risk and gives benefits to each party. Talk about this in detail.

What is closed-end fund? Open end?

Closed- end means that the fund is limited in life. The investment managers must make acquisitions, manage, and enhance their assets, within a given time period. Open-end means that the investment period is infinite and the fund will achieve success through cash flow, sales, and equity offerings.

How Lenders Calculate Interest on CRE Loans?

Commercial real estate lenders commonly calculate loans in three ways: (Least expensive)30/360, Actual/365 (aka 365/365), and Actual/360 (aka 365/360 the most expensive). - 30/360 this loan calculation assumes that there are 360 days a year and 30 days in each month. This interest calculation method returns a true 4% interest rate. - Actual /365 takes the annual interest rate and dividing it by 365 and then multiplying that number by the amount of days in the current month. - Actual/360 method, the annual interest rate is divided by 360 to get the daily interest rate and then multiplied by the days in the month. This creates a larger dollar amount in interest payments because dividing the annual rate by 360 creates a larger daily rate then dividing it by 365. So, essentially the annual interest rate is divided by 360

What is the FAR, and how does that impact the property size and other parameters?

FAR stands for Floor Area Ratio and tells you the maximum allowable square meters or square feet per square meter or square foot in the lot.

Tell me about the outside organizations? Urban Land Development, Young Real Estate Professionals of New York and New York Real Estate Institute

I was recommended that I join the ULD by a mentor and looking to become a mentee and joining the young leader group where we anticipate in an intimate discussion with influential leaders in the real estate community.

Do you know ARGUS?

I've actually taken a course a Baruch College for Argus with Lam Hillman and had a chance to learn both DCF and enterprise, I still curtly have the software and I'm planning to take the DCF certification in the future. In both Argus DCF AND Enterprise I created a base case scenario for a mixed used office and retail, imputed standard assumptions like building area and hold period, adjusting for inflations, operating expenses and basing it on rentable area or amount such as taxes and adjusting it according to frequency like monthly or annually, inserting tenant rent roll entering lease assumptions ( base rent, term rate, structure (base year stop)) TI and LC. Inserting general vacancy, and entering the purchase price, property resale we used CAP NOI after 12 month of sale, impute a cap rate, adjusted for selling cost (2%), insert debt financing which was 100% and imputed an interest rate, included the discount rate in present value, and exported the report - Argus Valuation DCF is the industry standard commercial real estate cash flow projections, transaction analysis, and asset valuation tool. Using Argus, you will reconstruct the broker's cash flow statement using his input assumptions for five year holding period. Based on third party research sources, what was the market's recent past, present, and projected future trends (no demand, oversupply, etc...).

What is the Gordon Model?

If you expect NOI to grow each year at some constant rate, then the Gordon Model can turn this constantly growing stream of cash flows into a simple cap rate approximation. Suppose we are looking at a building with an NOI of $100,000 and in our analysis we expect that the NOI will increase by 1% annually. How can we determine the appropriate cap rate to use? Using the Gordon Model, we can simply take our discount rate and subtract out the annual growth rate. If our discount rate (usually the investor's required rate of return) is 10%, then the appropriate cap rate to use in this example would be 9%, resulting in a valuation of $1,111,111.

What is the Letter of Intent (LOI)?

Is a critical document that is written up at the beginning of a potential real estate transaction between either a prospective buyer or seller. The letter of intent can be legally interpreted in three ways: (1) a non-binding term sheet, (2) a binding agreement to negotiate in good faith, or (3) a binding contract that solidifies a future transaction. Common Discussion Points worked Out in LOIs: Property address, parcel number(s), square footage Length of due diligence period Confidentiality Financing Contingencies Broker fees Escrow details upon execution of the PSA

Tell me about the core stabilized multifamily acquisition that you did?

A fictitious case study of a called the Lyric (215 10th Ave E in Seattle, Washington in the United States) is a 7-story, 234-unit apartment building in the Seattle-Tacoma-Bellevue metro area. It was built in 2012 and is currently 97% occupied. It has a unit mix consisting of 15% studios, 40% 1-bedroom units, and 45% 2-bedroom units.

What is waterfall return schedule?

An investment waterfall is a method of splitting profits among partners in a transaction that allows for profits to follow an uneven distribution. The waterfall structure can be thought of as a series of pools that fill up with cash flow and then once full, spill over all excess cash flow into additional pools. This allows equity investors to reward the operating partner with an extra, disproportionate share of returns. This extra share of returns is called "promote", which is used as a bonus to motivate the operating partner to exceed return expectations.

What's the difference between securitized debt and balance sheet lenders?

Securitization offers lenders important benefits, such as liquidity and risk-sharing, relative to the alternative of holding individual loans on the balance sheets. Securitization can reduce lenders' exposure to idiosyncratic risk - risk that does not vary with the business cycle or overall financial market but rather is specific to the loan. Balance sheet lenders retain the portfolio and so collect the interest rate spread over the lifetime of the loans. This increased return and steady cash flow come with the risks of possible loan defaults. As a rule, balance sheet lenders tend to focus on specialized lending, such as subprime short term loans, cash installments, POS loans, merchant cash advances, and factoring. Focus on current profitability and high capital turnover allows these companies to access equity for business growth rather than rely on VC commitments.

Why would two Class A office buildings across the street from each other sell for different prices?

Several different factors can influence this price, such as the building construction whether it's been renovated and can justify the higher rent per square feet, other things such as amenities, management, credit quality of tenant's, occupancy.

What is a look back provision?

The look back provision provides that the sponsor and investor "look back" at the end of the deal and if the investor doesn't achieve a pre-determined rate of return, then the sponsor will be required to give up a portion of its already distributed profits in order to provide the investor with the pre-determined return. Typically the sponsor prefers the lookback provision (since they get to utilize money even if they have to eventually give it back.

What's the difference between the equity multiple and the internal rate of return?

The major difference between the IRR and the equity multiple is that they measure two different things. 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. 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. 1. IRR vs Equity Multiple 2. IRR measuring rate on each dollar then placed a period 3. Equity multiple measuring on a scale the amount to get. 4. Both IRR and Equity Multiple together complimenting each other. 5. IRR had watch with value 6. Equity multiple calculating the total return

What is The Mortgage Constant?

The mortgage constant, also known as the loan constant, is defined as annual debt service divided by the original loan amount. Here is the formula for the mortgage constant: The mortgage constant is the annual debt service amount per dollar of loan, and it includes both principal and interest payments. There are two commonly used methods to calculate the mortgage constant. The first simply divides annual debt service by the total loan amount. The second allows you to calculate the mortgage constant for any loan amount by solving for the payment based on a loan amount of $1.

What is a preferred return?

The preferred return, often just called the "pref", is defined as a first claim on profits until a target return has been achieved. Once this "preference" tier has been met, then any excess profits are split as agreed. Preferred investors could include all equity investors or only select equity investors. In waterfall models this preferred return can either be cumulative or non-cumulative. If the pref is cumulative then it will be added to the investment balance for the next period and accumulate until it's eventually paid out. A preferred return can also be compounded or non-compounded. If the pref is compounded then it's also important to know the compounding frequency. The compounding frequency could be annually, quarterly, monthly, daily, or even continuous.

What are the key metrics you use to analyze and value a property?

The property size - lot size, gross area, and rentable area - is quite important, as are the revenue and expenses. Revenue consists of rental income and then miscellaneous sources such as parking income, food & beverages (for hotels), and so on. Expenses for properties are primarily operating expenses (energy, utilities, maintenance, repairs, and insurance) and property taxes. But the 2 most important metrics for properties are Net Operating Income (NOI) and the Capitalization Rate (Cap Rate). It approximates how much in cash earnings the property is generating each month or each year. The Cap Rate equals the property's Net Operating Income divided by the Property Cost. Cap Rates are the reciprocal of valuation multiples and measure how much you earn in cash for each dollar you invest in the property. A lower Cap Rate (e.g. 5%) means the property is expensive, and a higher Cap Rate (e.g. 10%) means that it's less expensive.

What is the Band of investment method?

This approach takes into account the return to both the lender and the equity investors in a deal. The band of investment formula is simply a weighted average of the return on debt and the required return on equity. For example, suppose we can secure a loan at an 80% Loan to Value (LTV), amortized over 20 years at 6%. This results in a mortgage constant of 0.0859. Further suppose that the required return on equity is 15%. This would result in a weighted average cap rate calculation of 9.87% (80%*8.59% + 20%*15%).

Do you know macros?

With Excel VBA you can automate tasks in Excel by writing so called macros. A macro is a piece of computer code that is written for Excel, using the Visual Basic for Applications (VBA) programming language. First check the developer tab in the custom ribbon tab. Then you have to enable all macros in the trust center. Then you record the macro, in which you can name the macro and generate a shortcut key. Then perform the actions you want the macro to record. Then stop recording. You can use this when building a profroma or use it in calculating inflation rate.

Do you think NOI accurately describes the cash flow that a property can generate? Why or why not?

Yes and no - it's better than Net Income since it excludes Depreciation, but it also excludes Interest and possibly CapEx, so it doesn't represent a property's true cash flow. NOI tends to be more accurate for established properties where there's no Debt and where CapEx is minimal.

I've finished modeling the property and want to calculate the IRR now - how do you determine the net sale proceeds at the end?

You calculate the annual, stabilized NOI and then subtract Maintenance CapEx from that number, also possibly adjusting for inflation. Then, you assume a Cap Rate and use that to determine the price you get - if the stabilized NOI is $10 million and the Cap Rate is 5%, the price is $10 million / 5%, or $200 million. Next, you subtract out the Selling Fees and the repayment of outstanding Debt to get the net sale proceeds.

Could you use a DCF to value a property? Why not do that rather than using Cap Rates?

You could, but it is not taken too seriously in real estate and pretty much everyone uses Cap Rates; often the DCF is just used to cross-check your assumptions. The DCF for real estate has the same problems that it does for normal companies - too much reliance on future assumptions, difficulty in picking the correct Terminal Value, and one added problem: the Discount Rate is more difficult to determine since you can't use WACC and CAPM to calculate it. Mechanically, it's the same as a DCF for a normal company but you'll have to estimate certain numbers (i.e. the Discount Rate) based on comparable properties or market standards rather than calculating them.

How will you value the Multi family, for example?

You have to talk about running DCF, cash flows and other approaches. The Cost Approach - The cost to replace or reproduce the improvements plus land cost. This method is typically used for valuing new construction. The Sales Comparison Approach - Comparison of other recently sold properties that are comparable in size, quality, and location to the subject property. The Income Approach - An objective estimate of what a prudent investor would pay for the property based upon the net operating income the property produces. The Income Approach is used most in estimating the value of multi-family real estate investments because they are income-producing assets owned by investors seeking financial returns on their investments.

Walk me through how the Replacement Cost (AKA Replacement Value) method works.

You would start by calculating the Asking Price per Square Foot or Square Meter for a property you're considering buying - let's say the asking price is $100 million and it has 100,000 square feet, so it's $1,000 / square foot. Then, you would call a developer or someone else in the market to look at the property and estimate how much it would cost to build it yourself - the Land Acquisition Costs, Hard Costs, Soft Costs, and so on

What is Cash on Cash

cash on cash return is a simple measure of investment performance that is calculated as cash flow before taxes divided by the initial equity investment.

What is a Catch up provision?

The catch up provision provides that the investor gets 100% of all profit distributions until a pre-determined rate of return has been achieved. Then, after the investor achieves the required return, 100% of profits will go to the sponsor until the sponsor is "caught up." The investor prefers the catch up provision (since they get paid first and won't have to ask the sponsor to make them whole at the end of the deal).

When interest rates rise what usually happens to cap rates?

The correlation between cap rates and Treasury rates turns out to be tenuous. In fact, there are timing disconnects, lags in appraisals and other variables that influence the bond market and the real estate market very differently. And the fact that Treasuries have enjoyed a 30-plus-year bull market, and interest rates have been on a long downward trajectory, adds to the challenge of understanding the impact of Treasury rates on cap rates. Significantly, there have been several occasions when cap rates did not move in sync with interest rates. This suggests that other key variables may influence cap rate movements, including credit availability, supply-demand dynamic of space markets and inflation. The effect of credit availability, and the importance of commercial real estate mortgages to valuations, cannot be overstated. Currently, US banks have shown an increased appetite for real estate lending. The commercial mortgage-backed securities market has revived. Risks, however, remain: Construction loans are still difficult to obtain and credit can vanish quickly, as happened during the global financial crisis. The second key variable is the supply-demand dynamic. Supply gluts and/or falling demand can lead to a rise in cap rates regardless of what Treasuries are doing. Inflation represents the last of the variables. Real estate may offer protection against rising inflation, mainly in the form of higher cash flow from rents or income.

What is a tier or a hurdle?

The tier is simply the rate return that must be achieved before moving on to the next hurdle. The tier are what trigger the disproportionate profit splits. The Internal Rate of Return (IRR) or the Equity Multiple are commonly used as tiers. The IRR is the percentage rate earned on each dollar invested for each period it is invested. The Equity Multiple is simply the sum of all equity invested plus all profits divided by the total equity invested, or [(Total Equity + Total Profits) / Total Equity]. Since a project will have a sponsor and at least one other investor, the return can be calculated from several different perspectives. The return hurdle could be measured from the perspective of the project itself (which could include both the sponsor and the investor equity), the third-party investor equity only, or the sponsor equity only.

What's the difference types of debt?

- Subordinated "B" Notes -Notes or participation interests in first mortgage loans secured by underlying property Payment priority and lender rights are subordinated to those of any senior note holder Mortgage foreclosure process is a well-established path in the United States Main Advantage Subordinated debt position is typically secured by the same mortgage that secures the senior "A" note. B Note is generally not terminated through foreclosure and can often participate in liquidation proceeds after more senior positions have received payments in full. Main Disadvantage Foreclosing on the mortgage loan documentation will often require more time than for a mezzanine loan (timing is dependent upon the State where the asset is located). Holder of the B Note generally does not have the right to independently exercise remedies - Mezzanine Financing Portion of the capital stack between secured mortgage loans and owner equity Secured by pledge of 100% of ownership interests Offers expeditious foreclosure process in the event of a default Payment priority and lender rights are subordinated to those of any senior note holder Main Advantage Potential for lender to execute an expedited foreclosure of pledged ownership interests and gain full control of an asset from a borrower (provided a Senior Mortgage Lender is either acceptably cured or fully repaid). Main Disadvantage If not acceptably cured or repaid, the Senior Mortgage Lender can execute a foreclosure and terminate the mezzanine lender's interests - Preferred Equity Investment is made as preferred contributions with transaction specific terms and conditions between the property owner and preferred equity investors Granted a preferred return which is paid after all debt payments are satisfied, but prior to distributions to common equity Preferred equity investor protections and remedies are comparable to those of a mezzanine lender Main Advantage Preferred equity commonly receives a premium in pricing relative to mezzanine loans and B note financing structures. Potential for the lender to rapidly step into a control position over the common equity after certain events have occurred. Main Disadvantage Foreclosure by any secured debt tranches will terminate the preferred equity interests. Also, failure to receive the preferred return is not a loan default since there is no loan; however, the preferred equity investor typically have certain rights such as "change of control" triggers comparable to mezzanine loan events of default. - Bond class can be segmented into 4 general categories - Super Senior: classes rated AAA with credit support (usually 30%) exceeding the natural AAA credit support level for the deal and time tranched to shorten principal window of 5- and 10-year classes - Mezzanine: classes rated AAA thru BBB- with natural credit support required by rating agencies and short principal windows - B-Piece: classes rated below investment grade that are pre-placed with a sophisticated real estate investor which investor plays a significant role in determining the final pool composition - Interest-Only: classes that pay interest that is stripped off of certain bond classes based on the pool's weighted average coupon and the coupons on each of the individual bond classes

What is levered IRR?

A levered IRR is just the Internal Rate of Return when you take financing into account. So basically you run a DCF, take out interest payments and calculate the IRR over the hold period. This will be higher mainly because taking on debt juices your returns and more specifically the first year cash flow will be lower because you have debt. 1. Rolls Royce holding a lever applying financing in an account. 2. DCF is running out interest rates with a calculator in hand and an IRR over him holding a period. 3. IRR getting higher in a hot air balloon juicing returns 4. A baby Cash flow is low to the ground because debt is heavy

Why are IO loans risky for lenders, why would we like them?

An IO loan is risky to lender because at the end of the term the asset may not be worth as much as what its own or could potentially depreciate quickly if the market takes a plunge. Even if the prices remain the same, if the borrower has negative amortization they will owe more on the mortgage than what they could get from selling the home. They may find it difficult to refinance and if deciding to sell, may owe the lender more than what would be received from a buyer. Therefore, to compensate lenders for this default risk, the borrower is subject to a risk premium over conventional principal repaying loans. This risk premium takes the form of higher interest rates. This default risk can be offset by this loan's potential to reduce prepayment risk. When the market believes that future defaults are on the decline, some lenders, especially those that securitize these mortgages, will offer the loans at reduced spreads because of their ability to increase yield to maturity (YTM) and affect the value of 'A' rated bond tranches with yields that are directly impacted by prepayment. Why we like it, is because this type of loan is typically used on a short term basis of 3-5 years. Payment will not include any repayment of principal this allows for more cash flow for either cap ex or to equity investors. The result is that the loan balance will remain unchanged. The disadvantage is no monthly payments will be applied to the principle amount and the total amount will be due at the end of the lease term. The home may not appreciate as fast as the borrower would like. Downside is that the interest rate on an IO mortgage tends to be higher than the rate you would pay on a conventional fixed-rate mortgage because people default on interest-only loans more often.

What is an equity multiple?

An equity multiple is another metric used to analyze investor returns. It is calculated as the sum of total cash distributed to the investor including appreciation from sale over the holding period divided by the initial investment. The Equity Multiple is simply the sum of all equity invested plus all profits divided by the total equity invested, or [(Total Equity + Total Profits) / Total Equity]. For example, if the total equity invested into a project was $1,000,000 and all profits from the project totaled $2,500,000, then the equity multiple would be $3,500,000 / $1,000,000, or 3.50x. 1. Multiple home on board game above value making money. 2. Analyzing a metric then returning to investors 3. Sum sign cash giving to investors 4. Different house sold with thumbs up. 5. Person holding a period divided in half 6. Different investors giving me their initial investments 7. [(Total Equity + Total Profits) / Total Equity]. 8. 1 million sitting on couch with a giant 1st sign 9. Bag of money with a profit sign on it of 2.5m 10. be $3,500,000 / $1,000,000, or 3.50x.

What is the direct cap method

Calculates the direct take the NOI and divided by the cap rate in year 10.

How do you value a property?

Cap Rates are the most common way to value properties, but you may also create a property-level DCF it's the same as a normal DCF but much simpler. You would determine the Discount Rate based on comparable property transactions and you could calculate the Terminal Value using the Exit Cap Rate or Long-Term Growth Rate methods. Many people in real estate don't take the DCF seriously because of its dependence on future assumptions, so it's used more often to check the values implied by Cap Rates. Replacement Cost is another valuation methodology where you estimate the cost of rebuilding an entire property from the ground up, and then compare that to the current asking price. The main problem is that finding the data can be close to impossible depending on the region, the property type, and what different developers tell you. As with the DCF, the Replacement Cost method is used more often to check your existing valuation output and the price you're paying for a property. Run a DCF to take into account future cash flows, use comps in the market, and look at what it would cost to replace the building. You need to talk about the building features, tenancy, credibility and other factors. 1. Cap with a rate sign being worn by common staring a monopoly asking what is the value of each properties 2. Creating a building using DCF 3. You a scale of comparing different properties transactions to find a discount rate.

Where are cap rates in NYC

Cap rates in Manhattan traditionally trade below the nation. Cap rates in first tier markets such as New York, San Francisco and Washington, D.C. have already seen compression and have likely reached a bit of a plateau or a bottom for cap rates with some office properties selling at cap rates that have dipped below 5 percent. That pressure on cap rates is continuing to push capital out to secondary markets that offer higher yields, such as Minneapolis, Denver and Seattle.

What are the different types of Debt and Equity you might see for a real estate development?

Developer Equity: This is cash that the developer itself puts down to finance the property, in exchange for a % ownership. • 3rd Party Investor Equity: This is cash that outside investors put down to finance the property, in exchange for a % ownership. • Mezzanine: This is a riskier type of Debt with higher interest rates than senior notes; it's in between Equity and senior notes in the capital structure. • Senior Notes: This is a less risky type of Debt than mezzanine, with lower interest rates; it may also be secured by collateral (the building). You may see variations of these as well - for example, you might have different groups of Equity investors or you might have several tranches of senior notes.

What is a discount rate?

Discount rate is the interest rate you need to earn on a given amount of money today to end up with a given amount of money in the future. The discount rate accounts for the time value of money, which is the idea that a dollar today is worth more than a dollar tomorrow given that the dollar today has the capacity to earn interest. The discount rate is the rate of return used in a discounted cash flow analysis to determine the present value of future cash flows. Higher the discount rate, the lower the initial investment needs to be in order to achieve the target yield. Investors normally consider their opportunity cost of capital when determining the appropriate discount rate. It's the rate of return the investor could earn in the marketplace on an investment of comparable size and risk. 11. Interested rate sign 2. Email saying you Earned given amount of money today 3. Crystal ball money in the future 4. Weight machine of time and money 5. Dollar is leaders futures on TV 6. Alayla giving returning the rate 7. Giant DCF sign 8. Gold bar with bow that has the value on it 9. Crystal ball of cash flow 10. High discount rate 11. Low investment in change 12. Target with yield sign 13. Investor with large pockets of money look at different opportunity investments when calculating discount rate. 14. U-turn sign with a rate sign 15. Different market being weighed on a scale to compare them on size and risk

Walk me through a DCF

Discounted cash flow analysis is a technique used in finance and real estate to discount future cash flows back to the present. 1. Forecast the expected future cash flows 2. Establish the required total return 3. Discount the cash flows back to the present at the required rate of return 1. Forecasting the expected future cash flows involves creating a cash flow projection, otherwise known as a real estate pro-forma. 2.For an individual investor, this is typically their desired rate of return. In the case of a corporate investor, the required return is typically the weighted average cost of capital (WACC). 3. Ascertaining the discount rate also includes accounting for the perceived riskiness of the project compared to alternative investment opportunities. Once the cash flows have been forecast and the discount rate has been established, a discounted cash flow analysis for a real estate project can be used to determine the internal rate of return and net present value However, if the property's net operating income stream is complex and irregular, with substantial variations in cash flow, only a full discounted cash flow analysis will yield a credible and reliable valuation.

What is the difference between equity and debt investors?

Equity real estate investors spend their time modeling the upside while their debt partners spend their time modeling the down side. Equity investors generally focus on an investment's internal rate of return, cash-on-cash return, equity multiple and other return metrics while debt investors focus on debt coverage, loan to value, debt yield and refinance risk.

Where would you put your money in Real Estate?

Honestly I'd look into multifamily in second tier cities such as DC, Austin, Nashville, San Antonio, and Portland which have a lower cost of living but are still within a main hub. In addition to capitalizing on the industrial hot market which is expected to increase in rental rates for the next 3 years I would capitalize on that sectors and further look into mixed used building that would easily convert to either a fully functional industrial building within a primary market. I'm also interested in office as well and with the maturing recovery which has led to job growth, which in turn has strengthened the commercial sector I'd capitalized on the dominant trend towards open office plans and with the decrease average square foot per worker this would present opportunity for a value added investments. The ULI reports that office vacancies have decreased 90 basis points last year and rents are increased 2.9 percent year-over-year, trends that look certain to continue in 2016. Best approach to owning investment real estate is simple; invest capital across a diversified set of cash-flowing deals (or funds) with best-in-class operators, collecting checks each quarter, while seasoned professionals oversee the execution.

What is your favorite property type and why?

I love multi-family because I'd say I'm the most familiar with it and I'd like to learn more about it because I aspire to one day open my own investment shop with multi-family investments. I also like the growth perspectives with more people renting because the millennial are waiting until their 30's to start a family and then shift to urban areas. I really like mixed used building because of the long term lease on both which can.

Where do you get market information? Operating expense?

I used Real estate information service, to cross check several of my assumptions and also have a family and I used recently sold information from MLS to determine that right price range. For the core investment I used an apartment market study. You can you a number of sites to find operating expense information such IREM, NAIOP and ICSC and just making property managers friends that can give you information about the market. Also getting information from the seller you would always ask for 2 years of operating information.

What is the Net Present Value (NPV)

Is an investment measure that tells an investor whether the investment is achieving a target yield at a given initial investment? NPV also quantifies the adjustment to the initial investment needed to achieve the target yield assuming everything else remains the same. Depends on the discount rate. Formally, the net present value is simply the summation of cash flows (C) for each period (n) in the holding period (N), discounted at the investor's required rate of return (r): The NPV will tell you which asset provides the highest value stream of cash flows. What is the following stream of cash flows worth at a particular discount rate, in today's dollars? NPV tells us is how far off the mark we are from the investor's desired rate of return. If Negative this mean that in order to achieve our desired return we'd have to reduce our initial investment in the property Advantage - is that it is a direct measure of the dollar contribution Disadvantage - is that the project size is not measured. 1. A net is putting investment in a measuring cup 2. Yelling at the screen of different investors about running up a hill achieving to different investments 3. Playing target with yield sign with investor's initial investments. 4. Measuring NPV on scale and making adjustments in investment. 5. Investors running up hill trying to get top to play target practice on yield sign 6. NPV sum sign river of cash flow 7. Person holding a period 8. Investors counting disk using a u-turn sign 9. NPV yelling that asset 10. High river of cash flow

That seems very arbitrary. How can you tell whether the Cap Rate is too low or too high? Isn't there a better way to do the analysis?

It is very arbitrary, but Cap Rates are the universal method in real estate. There are many flaws with Cap Rates discrepancies in how NOI is calculated, lack of data in certain geographies, and inability to know how the median rates will change over time. All you can do is look at a sensitivity table and calculate how the IRR changes at different purchase prices and selling prices.

What is a Developer Promote, and why might the 3rd Party Investors want to use them and give up some of their returns in the process?

Let's say that the Developer owns 10% of a property and the 3rd Party Investor owns 90%. Therefore, the Developer would get 10% of the returns and the 3rd Party Investor would get 90% of the returns. With a Developer Promote, the Developer might get more than 10% of the returns if the IRR hits a certain threshold. So maybe up to a 10% IRR, the Developer just gets 10%. But then if the IRR is above 10%, the Developer gets 15% of any returns between 10% and 15%, and then 20% of any returns above 15%. The net effect is that the Developer may earn more than the 10% he was originally entitled to if the property development goes well and they achieve a high IRR. It's similar to how federal taxes work in many countries: you pay a certain percentage up to a certain income level, then an increased percentage up to another income level, and so on. A 3rd Party Investor would agree to this to incentivize the Developer to perform well - when all is said and done, they are not really giving up that much since they often own 90%+. By giving up a small chunk of their returns, they can get the Developer to finish construction more quickly and therefore make the project more successful for everyone This whole structure is called the "waterfall" and it applies to any situation where the returns allocated to each Equity investor differ at different IRR levels.

How to use IRR and NPV?

Let's say you have $1 million to invest and you've identified 5 potential commercial properties where you can invest your capital. Completing a discounted cash flow analysis for each of these real estate projects will enable you to make a decision regarding which asset to acquire. Comparing the internal rates of return for each project will tell you which asset will provide the highest return. Alternatively, given your desired rate of return, the net present value will tell you which asset provides the highest IRR- what rate of return will I achieve, given the following stream of cash flows. Both NPV and IRR take into account when your money is invested and for how long it is invested. However, in deciding which to use, I suggest run both calculations. Sometimes the IRR can be really high, but if the payback period is very short, the money you will make may not be worth the effort. Also, it's very difficult to compare alternative investments if you only have the NPV in dollar terms. The net present value (NPV) and internal rate of return (IRR) are the two most commonly used methods to examine a proposed investment. 1. 1 million you want to put into 5 different monopoly building. 2. Have 5 different computer screens to run DCF 3. Jim Cramer giving you yelling at you to make a decision on which asset to acquire. 4. 5 different scales comparing the IRR and the best is the one with high return. 5. Commercial saying that you will be given U-Turn sign 6. A net with a bow and the value tag on it 7. 5 different IRR with a balloon with one being the highest 8. Question mark U-turn sign 9. Stream of cash flow .

What's included on the ProForma?

Net operating income (NOI) is simply 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. Potential Rental Income - Potential Rental Income, or just PRI, is the sum of all rents under the terms of each lease, assuming the property is 100% occupied. If the property is not 100% occupied, then a market based rent is used based on lease rates and terms of comparable properties. Vacancy and Credit Losses - Vacancy and credit losses consist of income lost due to tenants vacating the property and/or tenants defaulting (not paying) their lease payments. For the purposes of calculating NOI, the vacancy factor can be calculated based on current lease expirations as well as market driven figures using comparable property vacancies. Effective Rental Income - Effective rental income in the net operating income formula above is simply potential rental income less vacancy and credit losses. This is the amount of rental income that the owner can reasonably expect to collect. Other Income - A property may also collect income other than rent derived from the space tenants occupy. This is classified as Other Income, and could include billboard/signage, parking, laundry, vending, etc. Gross Operating Income - This is simply the total of all income generated from the property, after considering a reasonable vacancy and credit loss factor, as well as all other additional income generated by the property. Operating Expenses - Operating expenses include all cash expenditures required to operate the property and command market rents. Common commercial real estate operating expenses include real estate and personal property taxes, property insurance, management fees (on or off-site), repairs and maintenance, utilities, and other miscellaneous expenses (accounting, legal, etc.). Net Operating Income - As shown in the net operating income formula above, net operating income is the final result, which is simply gross operating income less operating expenses.

With interest rates so low these days what do you see in store for real estate investing and more specifically acquisitions and dispositions activity?

Now taking advantage of ease of financing. A deal might not be deal without the ability to lock in artificially low rates. And two by investors are searching for yield with rates so low, and will be looking to real estate to provide that consistent cash flow and above average risk adjusted return.

What driver's of value are you looking at for Office, MF, Hotel, Industrial, Retail, Self-Storage, Medical Office, and Senior Housing?

Office- GDP, Employment, and access to transportation. MF- Population (20-35), housing affordability, and employment. Hotel- Tourism, GDP, Employment Industrial- GDP, Employment, and Manufacturing Retail-Employment, GDP, Income Self-Storage- GDP, Employment, Single Family Housing Medical Office- Elderly population, transportation, health care employment Senior Housing- Same as medical office but just look at employment

What is an IRR?

The IRR is the discount that makes your NPV zero. It is metric used to analyze investor returns and is often associated with IRR hurdle rates and promotes. Ultimately, IRR gives an investor the means to compare alternative investments based on their yield. Mathematically, the IRR can be found by setting the NPV equation equal to zero (0) and solving for the rate of return (r).IRR tells you the total return on the project, given the projected cash flows. And seems to answer what rate of return will I achieve, given the following stream of cash flows? 1. Rolls Royce Making disc and counting them. 2. Pullum Analyzing a metric 3. Investor returns 4. IRR is jumping through hurdles then gets promoted 5. Give Investors meat in the fridge 6. Different building with a weight scale comparing yield sign. 7. Magnifying glass on IRR 8. Setting sign = 0 9. SOLVE question mark above , percent mark and U turn sigh 10. Total sign, U-turn sign, investment 11. Crystal ball and cash flow 12. What U-turn 13. Guy on a mountain 14. Given more time 15. Stream of cash flow.

What's the Loan-to-Cost (LTC) ratio, and how do you pick the proper values to use?

The Loan-to-Cost ratio tells you how much Debt vs. Equity you're using to finance the development. For example, if the Total Development Costs are $100 million and the LTC ratio is 80%, you would use $80 million of Debt and $20 million of Equity. You look at comparable property developments and speak with banks and lenders to determine an appropriate value.

What are the advantages and disadvantages of the Replacement Cost method?

The advantage is that it's grounded in fundamental construction costs as opposed to the prevailing Cap Rates in the market - so it's also less subject to fluctuations in the real estate prices. The disadvantage is that determining accurate values is close to impossible - ask 10 different developers and they'll give you 10 different answers. Especially for large and complex properties, estimates vary widely and are still highly dependent on assumptions. So the Replacement Cost method is used more as a sanity check for the values implied by Cap Rates and other methods rather than as a strict valuation methodology.

What are the most important property-level expenses, and how do you calculate them?

The two most important categories are Operating Expenses and Property Taxes. Property Taxes are determined by local zoning regulations, and you calculate them based on the square feet or square meters of the property. Operating Expenses are divided into categories such as energy and utilities, repairs and maintenance, insurance, and general & administrative (to pay for the staff, for example). Normally you also link these to the square feet or square meters in the building, but with residential properties you might link them to the number of apartments or homes instead; for hotels you might link them to the number of rooms or make them a percentage of revenue.

How would you calculate Developer Promotes and allocate investor returns?

This is almost impossible to explain in words, but you have to keep track of the amount of Equity invested so far, and then calculate what the investors would need to earn on that capital to hit a certain IRR. Then, you subtract that from the amount of capital they actually have earned and allocate that depending on the ownership percentages and developer promotes before moving to the next tier. Here's a quick example: let's say that the Developer and 3rd Party Investor invested $20 million altogether and earn back $40 million in 5 years when the building is sold, which is around a 15% IRR. If they had only earned back $32 million, that would be around a 10% IRR. So if the Developer owns 10% and the 3rd Party Investor owns 90% that $32 million would be divided and the Developer would get 10%, or $3.2 million, and the 3rd Party Investor would get 90%, or $28.8 million. Now there's $8 million left to allocate. Between 10% and 15% IRR, the Developer gets 15%, so they get 15% of that $8 million, or $1.2 million, and the 3rd Party Investor gets 85%, or $6.8 million. So the end result is that the Developer earns a 17% IRR rather than a 15% IRR, and the 3rd Party Investor still gets nearly a 15% IRR, lower by only around 0.2%. This whole structure is called the "waterfall" and it applies to any situation where the returns allocated to each Equity investor differ at different IRR levels.

What do you look for in a possible real estate investment?

This totally depends but you might want to go with something that creates value and provides above average returns to investors. Maybe you purchase it at a discount to replacement cost, lease it up, stabilize the asset, and then sell it.

What makes a great real estate investor?

Tough question. Thinking about people I've met in the industry and admire, I would have to say deal flow, abstract reasoning and market knowledge. I think it's all about just see and battling out a ton of deals. Because it's always that one thing you haven't seen before or thought about that turns a deal to shit and the guys I really admire just seem to have seen/done everything and they have the "battle scars" of deals that went south that keep them sharp. Next most important is market knowledge. It's still finance and the efficient market hypothesis still exists in some form although obviously not to the extent of the public markets. Finding that piece of info that no one else has is incredible difficult (especially in the first tier cities), even if it's getting to a deal a week before anyone else that could make your investment. "Those who know more will make more" as an old boss once said.

What do you think is the future of real estate investing?

We're in an interesting spot right now. The housing market is clearly coming back but we're in an unprecedented interest rate environment so how much of the recovery is propped up by Bernanke is hard to say. By 2020 though we're going to need a ton of new housing, some estimates go as high as 10-12 million new homes. Currently new home starts are under 1 million per year so there has to be growth to meet the demand. The global investable real estate universe will expand substantially, leading to a huge expansion in opportunity, especially in emerging economies. Fast-growing cities will present a wider range of risk and return opportunities. Technology innovation and sustainability will be key drivers for value. Collaborating with governments will become more important. Competition for prime assets will further intensify. A new and broader range of risks will emerge.

Where can you find Vacancy rate information? And operating expense

Use research report to find what to set vacancy rate at (Cushman locker report). Can look at the 2 year historical, can ask appraisers, or property managers operating statements.

Do you know VBA?

VBA (Visual Basic for Applications) is the programming language of Excel that gives you the ability to extend those applications. You can also use VBA to build new capabilities into Excel (for example, you could develop new algorithms to analyze your data, then use the charting capabilities in Excel to display the results), and to perform tasks that integrate Excel. Programming objects relate to each other systematically in a hierarchy called the object model of the application. The object model roughly mirrors what you see in the user interface. You can manipulate objects by setting their Properties and calling their Methods. Setting a property changes some quality of the object. Calling a method causes the object to perform some action. Collection objects are used to perform an action on multiple items in the collection. Later on, this article discusses how to use the Worksheets collection to change the name of each worksheet in a workbook.

What's Cap rate?

he capitalization rate, often just called the cap rate, is the ratio of Net Operating Income (NOI) to property asset value. So, for example, if a property was listed for $1,000,000 and generated an NOI of $100,000, then the cap rate would be $100,000/$1,000,000, or 10%. One way to think about the cap rate intuitively is that it represents the percentage return an investor would receive on an all cash purchase. A 5% cap rate acquisition versus a 10% cap rate acquisition for a similar property in a similar location should immediately tell you that one property has a higher risk premium than the other. Another way cap rates can be helpful is when they form a trend. If you're looking at cap rate trends over the past few years in a particular sub-market then the trend can give you an indication of where that market is headed 1. Hat (Cap) with a rate logo 2. Ratio balancing NOI and property value 3. Property listing for 1m, different screen you calculate NOI of 100K 4. $100,000/$1,000,000, or 10%. 5. Brain 6. Percentage representing 7. Investor getting back money 8. Me putting all cash down. 9. 5 vs 10 rate almost identical house 10. One property yelling I have a higher risk premium 11. Using binoculars to look in the past trends 12. Trend is giving you indication which market to head to.