Alternative Investments Flashcards
Office
Industrial
Retail
Multi-family
Job growth
The overall economy
Consumer spending
Population growth
Calculating NOI
Rental income at full occupancy + Other income (such as parking )= Potential gross income (PGI) – Vacancy and collection loss = Effective gross income (EGI) – Operating expenses (OE) = Net operating income (NOI)
Cap rate
Discount rate – Growth rate
=NOI/Value
=NOI/Sale price of comparable
Market value
= Rent/ARY
Again, this valuation is essentially the same as dividing NOI by the cap rate as discussedearlier except the occupant is assumed to be responsible for all expenses so the rentis divided by the ARY.7 ARY is a cap rate and will differ from the required total return (the discount rate)an investor might expect to get by future growth in NOI and value. If rents are expectedto increase after every rent review, then the investor’s expected return will be higherthan the cap rate. If rents are expected to increase at a constant compound rate,then the investor’s expected return (discount rate) will equal the cap rate plus the growth rate.
Value
.
=NOI/(r – g)
reversionary potential
Ifthe current market rent is greater than the contract rent, then the rent is likelyto be adjusted upward at the time of the rent review
layer method
It assumes that onesource of income is the current contract rent as if it would continue indefinitely(perpetuity) and then adds to the value of this income the value from the incrementalrent expected to be received after the rent review
Valuation approaches and for which property and how
cost =New property
.
sales comparison : Similar property recently sold
income approach: DCF Commercial as based on rate of return
Income Approach types
What is
The Direct Capitalization Method
DCF method
The Direct Capitalization Method=Value is based on capitalising the first year NOI of the property using cap rate
DCF method: PV of future cash flows
The value of the shopping center after renovation
Stabilised NOI/(r – g)
Renovation loss
difference in NOI before and after then get PV
Gross income multiplier
sales price/gross income
value =gross income * gross income multiplier
it ignores vacancy rates and operating expenses
What is the main difference between direct capitalization and discounted cash flow(DCF) analysis?
Direct capitalization applies a capitalization rate or an income multiplier to theforecasted first-year NOI. Thus, expected increases (growth) in NOI in the futuremust be implicit in the multiplier or cap rate. In contrast, when doing a DCF, thefuture cash flows are projected each year until sale of the property. Then each year’scash flow and the expected resale proceeds are discounted using a discount rate. Thus,the future income pattern, including the effect of growth, is explicit in a DCF. Furthermore,DCF often considers other cash flows that might occur in the future that are not reflectedin NOI, such as capital expenditures.
Upreit
umbrella reit avoid recognition of tax if if appreciated property transferred to reit
serves as GP have controlling interest
Downreit
owns more than one partnership reit and the partnership level
