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class powerpoint2: cash flow modeling Flashcards

1
Q

what does the income statement of the cash flow of a property look like?

A

Rental Income + Ancillary Income - operating expenses = NOI (Net Operating Income)

  • Selling, general and administrative expenses

= earnings before interest, taxes, depreciation and amortization (EBITDA)

  • interest and financing expenses
  • depreciation and amortization

= earnings before taxes

  • income taxes

=Net Income

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2
Q

Why is the NOI (net Operating Income) the most crucial component if the income statement?

A

it is used as an approximation of the cash flow generated by the property

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3
Q

are interest and financing expenses, and depreciation and amortization part of cash flow?

A

naaah

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4
Q

why are income taxes not part of what influences cash flow?

A

These do not reflect operations of a building, only the tax position of the owner

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5
Q

are expense recoveries part of rent?

A

yeee

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6
Q

what are major exclusions from the NOI (Net Operating income)?

A

debt service

depreciation

income taxes

capital expenditures

tenant improvements (most of the time)

Leasing commissions (really depends)

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7
Q

why is debt service not part of NOI?

A

Financing costs are specific to the owner/investor

not included in calculating NOI

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8
Q

why is depreciation not part of NOI?

A

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

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9
Q

why are income taxes not part of NOI?

A

income taxes are specific to the owner/investor

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10
Q

why are tenant improvements most of the time not part of NOI?

A

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

Tenants are paid for the improvements to make but if they it cost more than the cheque they are given, tant pis

Its more of an investment as an expense so not day to day operation expense

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11
Q

why leasing commissions sometimes not part of NOI?

A

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

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12
Q

why capital expenditures not part of NOI?

A

Capital expenditures are expenses that occur irregularly for major repairs and replacements

expenses that occur from time to time

Ex: elevator repair, redoing the roof, etc

You have enhanced the value of your building

Not a day to day operating expense

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13
Q

do capital expenditures include minor repairs and maintenance?

A

naaah boy

those would be considered operating expenses

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14
Q

rent

A

periodic payment received from tenants for the use of real property

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15
Q

how is rent expressed in commercial leases?

A

usually expressed as a dollar amount per square foot per year

Usually expressed on annual basis, if you want to find per month divide by 12

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16
Q

how is rent expressed in commercial leases?

A

usually expressed as a dollar amount per square foot per year

Usually expressed on annual basis, if you want to find per month divide by 12

Example: a 5,000 square foot space has a rent of $30/sq. ft. The tenant will pay rent of $12,500 per month

(5,000 βˆ—$30)/(12 π‘šπ‘œπ‘›π‘‘β„Žπ‘ )

= $12,500

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17
Q

are commercial leases usually long term or short term?

A

long term

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18
Q

why will rent generally increase during the term of the lease by a set amount or some other adjustment factor like inflation (CPI)?

A

because leases are more long term

In the long term, you want to rent revenue to be adaptable to inflation

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19
Q

what is it that defines the total rent?

A

Base rent

Percentage rent

Expense recovery

Rent free period

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20
Q

where are all elements of the rent be documented?

A

in the lease

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21
Q

why is it important to read all leases?

A

Cant afford to make mistakes, especially for larger properties such as malls

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22
Q

percentage rent

A

a rental payment that is based on the sales or income earned by the tenant

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23
Q

percentage rent breakpoint

A

certain level of sales or income over which percentage rent will begin

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24
Q

why would landlords include percentage rent in a lease?

A

Protection against high inflation

To attract or keep tenants

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25
how does percentage rent protect landlords against inflation?
Inflation would make the sales go above the breakpoint more recurrently so they can get more and more cash each year
26
how does percentage rent attract or keep tenants?
It lowers their risk by lowering the base rent, so if they mess sup, they don’t pay much rent, but if they succeed, as a landlord your cashflow is still there
27
The most common formula for percentage rent is:
π‘ƒπ‘’π‘Ÿπ‘π‘’π‘›π‘‘π‘Žπ‘”π‘’ π‘Ÿπ‘’π‘›π‘‘ = (π‘Žπ‘π‘‘π‘’π‘Žπ‘™ π‘ π‘Žπ‘™π‘’π‘  π‘π‘Ÿπ‘’π‘Žπ‘˜π‘π‘œπ‘–π‘›π‘‘) βˆ— π‘π‘’π‘Ÿπ‘π‘’π‘›π‘‘π‘Žπ‘”π‘’ π‘“π‘Žπ‘π‘‘π‘œπ‘Ÿ
28
Expense participation
when a tenant pays their proportionate share of certain operating expenses of the property
29
on which basis is the proportionate share of an expense participation calculated?
calculated as leased area/total leasable area
30
which are the most common expense participation clauses?
Gross Lease Single Net Lease Double Net Lease Triple Net Lease
31
Gross Lease
rent is all-inclusive landlord pays all or most expenses associated with the property, including taxes, insurance and maintenance out of the rents received from tenants
32
single net lease
the tenant pays base rent plus a pro-rata share of the building's property taxes
33
double net lease
the tenant is responsible for base rent plus a pro-rata share of property taxes and property insurance
34
triple net lease
the tenant is responsible for base rent plus a pro-rata share of property taxes, property insurance and all other property operating expenses
35
which is the most popular type of expense participation in retail RE? why?
triple net lease favors the landlord as it protects him against rising expenses
36
what is the use of True-Ups or CAM adjustments?
These are used to get the real year expenses and then either bill or refund the tenants Expenses are estimated at the start of the year and adjusted to actuals at the end of the year
37
why do tenants hate True-Ups or CAM adjustments?
this because they do not know what to expect and they rarely get refunded
38
why will a landlord will often offer a rent-free period at the beginning of the lease?
as an incentive to the tenant
39
how is a rent free period beneficial to the tenant?
At the beginning of a lease the tenant often has expenses related to moving or starting-up his business The rent-free period will help offset these costs
40
how are rent free periods accounted for?
accounted for on a straight-line basis must be adjusted for when calculating cash flows
41
what are the steps of the cash flow modeling?
1. Model each leasable space separately 2. Consider any leases expiring during the forecasted period 3. Forecast expenses for the period under consideration 4. Estimate any non-revenue-generating capital expenditures 5. Estimate any financing costs 6. Estimate income taxes to be paid 7. Prepare different scenarios by varying certain key assumptions: tenant retention, market rates, CPI, interest rate, economic conditions, etc.
42
what must you consider when you model each leasable space separately (1)?
Consider any rent adjustments or escalations under the lease This may necessitate estimating CPI over a number of years
43
how can you estimate future percentage rent when modeling each leasable space separately?
looking at historical sales figures and growth applying certain assumptions for their future growth (economic outlook, CPI, etc.)
44
how do you estimate expense recoveries (expense participation) when modeling each leasable space separately?
recoveries a forecast of expenses must be established any changes to the leasable areas must be taken into consideration
45
when considering any leases expiring during the forecasted period (2), what must be considered?
Consider any renewal options the tenant has the likelihood of them renewing the lease the new rent
46
when considering any leases expiring during the forecasted period (2), what must be forecasted if there is a lease termination expectation?
Period of vacancy New rent levels considering current market rents Any rent-free periods that are likely to be offered Leasing commissions on the new lease Tenant allowances to prepare the space for the new tenant
47
what must taken under consideration when forecasting expenses (3)?
historical costs in order to identify all relevant expenses Consider and adjust for any non-recurring items Increasing historical costs by applying an escalation factor (CPI is the most widely used basis) any new costs that are likely to arise
48
when estimating any non-revenue-generating capital expenditures (4), what can historical trends maybe indicate?
may indicate a certain level of capital expenditure is required to replace and adjust the structure and its mechanical systems
49
what must be considered when estimating financial ring costs (5)?
Consider in place financing or any future financing May require forecasting of interest rates
50
what are the different scnerios when preparing different scenarios by varying certain key assumptions: tenant retention, market rates, CPI, interest rate, economic conditions, etc. (7)?
Most likely Optimistic Pessimistic
51
what does the cost of bringing new commercial space to the market include?
development construction costs
52
when do development costs usually begin?
will start before construction begins
53
how are development costs also known as?
soft costs
54
what costs do development costs include'
professional services environmental studies and land remediation land acquisition (sometimes included as a hard cost) permits and zoning project management costs lease-up and operating costs to bring a property to a stabilized level financing costs
55
what do professional services in development costs usually include?
legal architecture engineering surveyors
56
can land acquisition sometimes be considered a hard cost?
ye boooy
57
what do the construction costs or hard cost consist of?
site preparation actual building costs building access roads and ramps, landscaping
58
what is site preparation
leveling demolition clearing
59
how do construction companies operate?
will often give a fixed price contract based on the approved building plans
60
where can average constructions costs be obtained?
third party sources in the market
61
once more, are capital expenses part of operating expenses?
nah boy
62
what is an expense stop?
an expense stop is a certain level of participation expense where anything under the stop will be paid by landlord tenant will pay any expenses that go over the stop for ex: if expense stop is $10 per square foot and expenses are $12.00 per square foot, then tenant will pay $2.00 of participation expense per square foot

Fina 210 (28 decks)

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