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Fina 210 > class 4 pp: Real Estate Valuation > Flashcards

class 4 pp: Real Estate Valuation Flashcards

1
Q

What are the 3 main types of Real Estate Valuation

A

Income Approach

Comparable Sales Approach

Cost Approach

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2
Q

two types of income approach

A

Capitalized NOI

Discounted Cash Flow

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3
Q

The most widely used method to estimate the value of a commercial property

A

the Capitalized NOI approach

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4
Q

the Capitalized NOI approach formula

A

stabilized NOI / cap rate

= value of property

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5
Q

the Capitalized NOI approach theory

A

valuation method presumes that a property will generate its stabilized NOI in perpetuity

The value and cap rate are an inverse relationship

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6
Q

in the Capitalized NOI approach, what does it mean when we say that the value and cap rate are an inverse relationship?

A

The higher the cap rate the lower the value

and vice versa

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7
Q

what are the steps to find the Stabilized NOI?

A
  1. find effective rental income
  2. find the gross operating income
  3. find the stabilized NOI
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8
Q

how do you find effective rental income?

A

potential rental income - vacancy and credit allowance

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9
Q

vacancy and credit allowance

A

You need to find what’s the average vacancy for similar properties

Credit allowance:
All the money that you won’t get directement

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10
Q

potential rental income

A

all types of rent included assuming 100% full, no vacancy

the sum of all rents (including expense participation) under the terms of each lease

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11
Q

how do you find gross operating income?

A

effective rental income + other miscellaneous income

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12
Q

how do you find stabilized NOI

A

Gross operating Income - operating expense

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13
Q

how do you find potential rental income if property is not 100% occupied?

A

a market-based rent is used based on lease rates and terms of comparable properties

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14
Q

Vacancy and Credit Losses

A

income lost due to tenants vacating the property and/or tenants defaulting (not paying) their lease payments

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15
Q

how can one determine Vacancy and Credit Losses ?

A

A historical average or a specific analysis

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16
Q

other miscellaneous income

A

income other than rent derived from the space tenants occupy

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17
Q

operating expenses

A

all expenditures required to operate the property and command market rents

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18
Q

exclusions from NOI

A

debt service

depreciation

income taxes

tenant improvements

sometimes, leasing commissions

19
Q

debt service

A

Financing costs are specific to the owner/investor and as such are not included in calculating NOI

20
Q

depreciation

A

Depreciation is not an actual cash outflow, but rather an accounting entry

therefore, not included in the NOI calculation

21
Q

income taxes

A

Since income taxes are specific to the owner/investor they are also excluded from the net operating income calculation

22
Q

tenant improvements

A

construction within a tenant’susable spaceto make the space viable for the tenant’s specific use

23
Q

leasing commissions

A

the fees paid to real estate agents/brokers involved in leasing the space

24
Q

capitale expenditures

A

expenses that occur irregularly for major repairs and replacements

usually funded by a reserve for replacement

25
Q

what are the NOI adjustments to make

A

usually includes management fees

sometimes, recurring non-revenue generating capital expenditures and leasing commission

26
Q

what does it mean if no management fees are reported?

A

the seller is usually the one doing management himself

property management costs are under reported

27
Q

what do you do when there no management fees reported?

A

you estimate them by looking at market how much management costs are for similar properties in similar conditions

28
Q

capitalization rates

A

can be viewed as the annual return that an investor will get

29
Q

what are some determinants for cap rates?

A

Other investment yields (especially GOC rate)

Perceived risk of asset class

The market

Property characteristics

30
Q

risk premium

A

the additional risk an investor gets from investing in a certain asset because he wants to obtain higher returns

31
Q

what composes a property’s characteristics?

A

Type (retail, office, hotel, etc)

Quality

Size

Quality of the rent roll

32
Q

when will cap rates on similar properties sold be examined and adjusted for the factors listed?

A

In determining the cap rate for a particular property

33
Q

where can cap rate from recent transactions be obtained?

A

from third party service firms

34
Q

discounted cash flow (DCF)

A

values a property by adding together the present value of its future cash flows including its Terminal Value

35
Q

terminal value (TV)

A

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

calculated based on the NOI at that time

36
Q

how do you find value of property using DCF?

A
  1. Calculate all individual NOI of the next 5 years
  2. Calculate all individual cash flows for 5 years
  3. Calculate the expected NOI for year 6
  4. Calculate terminal value at end of year 5
  5. Find present value of the terminal value
37
Q

discount rate used on DCF?

A

should reflect the rate of return required by an investor for an investment with this level of risk

38
Q

can a discount rate for TV be different than discount rate for cash flows in the DCF method? if so, on which condition?

A

yeee

if the condition of the property is expected to change

39
Q

The Comparable Sales Approach

A

estimates the value of a property by comparing it with the recent selling price of properties that have similar characteristics

40
Q

for which type of property is the Comparable Sales Approach most often used?

A

single family houses

41
Q

Comparable sales should be for properties of the same or similar…

A

Type

Location

Age

Condition

42
Q

How does the Comparable Sales Approach work?

A

data from the comparable sales is converted to some common factor

–> doors, square feet or units

The appraiser must then use judgement to determine the value after considering the different characteristics (condition, age, location, etc.) of the properties

43
Q

The Cost or Replacement Cost Approach

A

estimates the current cost of replacing the subject property using industry sourced construction cost data

44
Q

how is the Cost or Replacement Cost Approach useful for investors?

A

informs the investor of the likelihood of new properties being developed

Fina 210 (28 decks)

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