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Fina 210 > chapter 5 book: property valuation > Flashcards

chapter 5 book: property valuation Flashcards

1
Q

what is the common way to find property valuation?

A

Value of property = Stabilized NOI / cap rate

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2
Q

why is it important to know that stabilized NOI and cap rate are just appoximations?

A

because the property is not always going to behave as expected

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3
Q

what does the actual NOI vary year after year?

A

because of the fluctuations between revenues and expenses

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4
Q

when calculating the stabilized NOI, what must you subtract from the NOI?

A

management fees

vacancy allowances

capital reserves

leasing costs

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5
Q

why consider vacancy allowances when adjusting NOI?

A

because you have to check history of asset

if in the past, it was a bit ratty, you have to consider it

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6
Q

why consider capital reserves when adjusting NOI?

A

you often need it for non-revenue generating capital expenditures

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7
Q

on-revenue generating capital expenditures

A

expenditures that maintain revenue stream, they don´t enhance it

ex: replacing a roof

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8
Q

in the cap rate valuation analysis, how should leasing costs be modeled as?

A

the same way as capital expenditures

lease expiration should be reviewed

expected vacancies or renewals should be listed

estimated leasing commissions or allowances should be calculated

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9
Q

what determines cap rates?

A

general economic conditions (cost and demand for capital)

perceived risks of asset class

unique attributes of a market

unique attributes of a property

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10
Q

how does cost and demand for capital affect cap rates?

A

if investors are not willing to buy properties, sellers will have to lower prices, and raise cap rates doing so

if investors are willing to buy properties, sellers will increase prices, which will then lower the cap rates

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11
Q

what does it mean when people say that real estate investment can be illiquid?

A

it takes a lot of capital to be able to get properties

this limits the number of participants

with the limited number of participants, it is not easy to find someone who will immediately be down to buy the property you’re selling

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12
Q

why will the same properties in different locations not have the same cap rates?

A

location plays a big role in cap rates and pricing

the property in the best location will have a lower cap rate, and as a result, will have higher price

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13
Q

which is the primary driver of cap rates in RE?

A

the overall strength of a market

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14
Q

an experienced investor will want to invent in gyu properties or challenged properties? why?

A

gyu properties

it presents lower risks and it is better long term

more predictable returns

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15
Q

what are the two basic strategies buyers of challenged assets have?

A

leave the challenged asset as it is

improve the asset, bringing it to a competitive level

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16
Q

what do market cap rates reflect?

A

the general economy

the perception of real estate as an asset class

the market position of an individual property

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17
Q

what does it take for a recent transaction to be relevant?

A

must have happened in market conditions similar to the ones experienced atm

ideally, it would be the same property type as well

same geographic region

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18
Q

can the tenant credit quality drive the cap rate? what is the assumption?

A

yeeeee

the tenant’s ability to pay his rent is more important than the residual value worth of the real estate

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19
Q

how does the discounted cash flow (DCF) method value properties?

A

sums the present value of its future cash flows over an investment period to its terminal value, ultimate sale value, or liquidation value

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20
Q

what are the three major elements in the discounted cash flow method?

A

the annual cash flows during the investment term

the terminal value at the end of the investment period

the discount rate used to calculate the present value of these quantities

21
Q

what can affect expected cash flows

A

lease expirations

tenant replacements

lease-up of vacancy

operating expenses

non-revenue generating capital expenditures

expansions and renovations

22
Q

what is the difference regarding expenses when we use the DCF method and stabilized NOI method?

A

in the latter, we consider expenses of the year that just passed

in the former, we must forecast future expenses and the changes

23
Q

Future Value formula

A

PV * ((1+r)^t)

PV = present value
r = interest
t= periods
24
Q

present Value formula

A

FV / ((1+r)^t)

FV = future value
r = interest
t= periods
25
Q

yield curve

A

a graph of investment returns against time

26
Q

if a yield curve is used, what must be chosen?

A

and index rate

27
Q

the terminal value

A

the residual value of the property at the end of the investment period

28
Q

how is the terminal value calculated?

A

using an estimate of the total asset value based the cap rate method

Stabilized NOI in the final year is divided by exit cap rate

29
Q

exit cap rate

A

an estimate of the asset’s cap rate at the end of the investment period

30
Q

why is it hard to estimate the terminal value?

A

we have to rely on assumptions involving the distant future

31
Q

how do discount rates (interest rates) influence the importance of the terminal value?

A

the higher the discount rate and the longer the intended holding period, the lower the impact of the terminal value on overall investment value

in low interest environments, the TV is an important driver of the total DCF value

32
Q

when do you set the exit cap rate? how do you set them (strategies)?

A

you set the exit cap rate at the beginning of the investment

if you believe market conditions are going to be gyu at time of sale, you set it higher

if you believe market conditions are going to be wack at time of sale, you set it lower

33
Q

when is it more appropriate to use the DCF method?

A

with properties that are likely to experience a significant change in their performance over time

34
Q

comparable sales method of valuing an asset

A

simple method of valuing real estate

comparing the property with similar ones that traded recently in similar market conditions

35
Q

what are the steps of using the comparable sales method?

A
  1. market data
  2. common denominator
  3. adjustments to comparable data
36
Q

what is the most common denominator to use when comparing properties?

A

price per unit of space

37
Q

what are the steps to find adjustments to comparable data (step 3 of comparable sales method)?

A
  1. adjust for the unique location of each asset
  2. comparison of physical condition of each asset
  3. review the status of current leasing

–> all these steps create an index of comparison

  1. multiply unadjusted value by the comparison index
38
Q

unadjusted value of asset

A

quantity of space X average price per measure of space

39
Q

cost approach of valuing an asset

A

current cost of replacing the property is estimated

40
Q

why use the cost approach?

A

you want to see how much it would cost to build a property

as an investor, you want to see if it would be worth it

41
Q

when wouldn’t you use the coast approach as an investor?

A

when the costs of replacing a property are higher than the trading prices of the comparable properties

42
Q

how do you find the value of equity?

A

value of asset - mark to market value of debt = value of equity

43
Q

do you include debt when calculating asset value?

A

nah

44
Q

when does debt actually lower the value of a property?

A

when the debt has unfavorable terms and cannot be repaid without penalty

45
Q

how do investors look at return on equity?

A
  1. cash-on-cash return

2. longer term returns to equity such by using figures of merit

46
Q

cash-on-cash return

A

the periodic cash flows available to cash invested

the current return available after paying the debt service, including principle and amortization payments

47
Q

what are figures of merit?

A

PV

NPV

etc.

48
Q

when does the debt trade at premium?

A

when the current balance trades above the mark to market value of interest rates

Fina 210 (28 decks)

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