Study Session 13 - Alternative Investment and Commodities

Question 0

what is the value of an equity investir’s interest

Answer 0

value of the property less the outstanding debt

Question 1

what are the dimensions in real estate investment

Answer 1

1st dimension: debt or equity investment

2nd dimension: private or public market

debt/private: mortgage
debt/public: MBS
equity/private: direct investment
equity/publuc: REIT and REOC

Question 2

advantage of public real estate investment

Answer 2

more liquid and enable investors to diversify by participating in more properties

Question 3

Real Estate Characteriatics

Answer 3

Heyerogeneity
High unit value
Active management
High transaction costs
Depreciation and desirability
Cost and availability of capital
Lack of liquidity
Difficulties in determining price

Question 4

Differences between residential and non-residential

Answer 4

Residential: single-family (owner-occupied) homes and multi-family properties, such as apartment. Residential real estate purchased with the intent to produce income is usually considered commercial real estate property

Non-residential real estate incluses commercial properties, other than multi-family properties, and other properties such as farmland and timberland

Question 5

Reasons to invest in real estate

Answer 5

Current income
Capital appreciation
Inflation hedge
Diversification
Tax benefits

Question 6

Principal risks in real estate

Answer 6

Business conditions
New property lead time
Cost and availability of capital
Unexpected inflation 
Demographic factors
Lack of liquidity 
Environmental issues
Availability of information
Management expertise
Leverage

Question 7

variables that influence Office property

and

differences between gross and net lease

Answer 7

Demand is heavily dependent on job growth, especially in industries that are heavy users of office space like finance and insurance

In a gross lease, the owner is responsible for the operating expense, and in a net lease the tenant is responsible

Question 8

variables that influence industrial properties

Answer 8

demand is heavily dependant on the overall economy. demand is also affected by import/export activity of economy

Question 9

variables that influence retail properties

and

what is percentage lease

Answer 9

Demand is heavily dependent on consumer spending

Retail tenant are often required to pay additional rent once sales reach a certain level

Question 10

Valuation approches in real estate

Answer 10

Cost approach
sales comparison approach
income approach

Question 11

Premise of the cost approach

Answer 11

buyer would not pay more for a property than it would cost to purchase land and construct a comparable building

Because of the difficulty in measuring depreciation and obsolescence, the cost approach is most useful when the subject property is relatively new

Question 12

Premise of the sales comparison approach

Answer 12

buyer would pay no more for a property than others are paying for similar properties

Most useful when there are a number of properties similar to the subject that have recently sold, as is usually the case with single-family homes

Question 13

Premise of the income approach

Answer 13

value is based on the expected rate of return required by a buyer to invest in the subject property

Question 14

Implied land value

Answer 14

Value when completed
- construction cost
____________________
Implied land value

Question 15

valuation methods in the income approach

Answer 15

Direct capitalization: value is based on capitalizing the FIRST YEAR NOI of the property using a capitalization rate

Discounted cash flow method: value is based on the present value of the property’s future cash flow using an appropriate discount rate

Question 16

NOI Calculation

Answer 16

Rental income if fully occupied
\+ Other income
= Potential Gross income
- Vacancy and collection lost
= Effective gross income
- Operating expense
= NOI

Question 17

Cap rate

Answer 17

Discount rate - Growth rate
or
NOI1 / Value

if the cap rate is unknown, it can be derived from recent comparable transactions as follows:
NOI1 / Comparable sales price

Question 18

What is all risks yield (ARY)

Answer 18

Rent divided by comparable sales
Then we can use the rate to calculate the value: Rent1 / ARY

When tenant are required to pay all expenses, the cap rate can be applied to rent instead of NOI

Question 19

Gross Income Multiplier

Answer 19

Sales price / Gross income

Value = Gross income * Gross income multiplier

Question 20

Using the DCF method requires the following estimates and assumptions:

Answer 20

Project income fron existing lease
lease renewal assumptions
Operating expenses assumptions
Capex assumptions
Cacancy assumptions
Estimated resale assumptions
Appropriate discount rate (>mortgage rate)

Question 21

Steps involved in applying the cost approach

Answer 21

1- Estimate the market value of the land

2- Estimate the building’s replacement cost

3- Deduct depreciation including physical deterioration, functional obsolescence, locational obsolescence, and economic obsolescence (also: effective age/economic life)

Question 22

Appraisal-Based Indices return calculation

Answer 22

(NOI-Capital expenditire+(end value - beg market value))/ beg market value

Question 23

Appraisal-based indices vs actual transactions

Answer 23

Appraisal-based indices tend to lag actual transactions because actual transactions occur before appraisals are performed. The lag tends to smooth the index; reduce its volatility and correlation with other assets

Question 24

Transaction-based indices

Answer 24

Repeat-sales index: relies on repeat sales of same property

Hedonic index: requires only one sale then a regression is developed

Question 25

Debt service coverage ratio

Answer 25

first year/NOI

Question 26

Loan-to-value

Answer 26

loan amount/ appraisal value

Question 27

Equity dividend rate

Answer 27

first year cash flow / equity

Question 28

Convenience yield

Answer 28

the monetary benefit from holding a physical commodity versus being long the equivalent contract

Question 29

effect of commodities that are expected to be in short supply in the future on the convenience yield

Answer 29

higher convenience yield

Question 30

the theory of storage page 120

Answer 30

there is a inverse relationship between inventory levels and convenience yield: the higher the level of inventories, the lower the convenience yield will be

Question 31

Backwardation

Answer 31

Futures price will be lower than the current spot price

Question 32

Contango

Answer 32

futures price is above the spot price

Question 33

current futures price of the commodity contract

””””””” with storage cost (U)

”””””””””””””””””””” and convenience yield (Y)

Answer 33

S0 * e^(r*T)

S0 * e^((r+U)*T)

S0 * e^((r+U-Y)*T)

Question 34

Total return on commodity investment

Answer 34

spot return + roll return + collateral return + rebalancing return

page 126

Question 35

Roll return calculation

Answer 35

(Ft-1,T - Ft,T) / Ft-1,T

=

(St - Ft,T) / St

Question 36

When the commidity’s term structure is in backwardination (contango), roll return will be…

Answer 36

positive (negative)