Alternative Investments: Private Real Estate

Question 1

Direct Capitalization Method (real estate valuation)

Answer 1

1. Calculate average cap rates from recent sales (Price/NOI)
2. Apply average cap rate to expected NOI

Question 2

Direct Sales Valuation Method (real estate)

Answer 2

Step 1: Calculate Price per SqFoot for each comparable

Step 2: Multiply step 1 by 1+(age of building (depreciation), location, condition, age of transaction (appreciation))

Step 3: Apply average of step 2 to investment

Question 3

Equity Dividend Rate (real estate investment)

Answer 3

1. Equity (use LTV to calculate)
2. Annual debt service costs (12 X Monthly service costs)
3. Net operating income
4. EDR = (NOI - ADSC) / Equity

Question 4

Levered Rate of Return (real estate)

Answer 4

PMT = NOI - Debt Service

PV = - Equity (use LTV to calculate)

FV = Expected Sale price - Loan payoff

N = Expected holding period

CPT I/Y = Levered IRR

Question 5

Value of Property Cost Approach (real estate)

Answer 5

Replacement cost (include builder profit)
- Curable deterioration
- Incurable deterioration (Vo X (age/total age))
- Total Obsolescence
Building value
+ Land value
Total cost estimate

Question 6

Incurable / Curable Deterioration (real estate)

Answer 6

• Curable: Deferred maintenance that is curable
• Incurable: Depreciation of the building.

Question 7

Appraisal Lag

Answer 7

Appraisal values lag changing transaction values. If prices are rising, they rise first and then appraisals come up. Combat appraisal lag by unsmoothing the index or relying on transaction indexes.