Week 3

Question 1

define cash flow

Answer 1

Cash Flow = Cash flow is the amount of cash and cash equivalents moving into and out of a business/development project/ asset.

o Only actual movement of cash is considered ‘cash flow

example:
You bought a house for 1 million in 2016, and its value increases to 1.1 million this year, is the capital growth of 0.1 million a cash flow? = Not a cash flow as money does not enter into bank account only a rise in investment.
o You sell this property for 1.1 million in March, and the date of settlement is in May. Assuming you receive the money of selling this property on the date of settlement. Does this 1.1 million cash flow happen in March or in May?
May, As the 1.1 is deposited into the bank account in May

Question 2

what is the holding period

Answer 2

o How far into the future the cash flow should be estimatd
o E.g. when the property is expected to be sold
o Or assume notional sale after 5-10 years
o Analysis beyond 10 years may not be accurate due to; difficult prediction cash flows, distant receipts have little effect on today’s value

Question 3

Forecast the expected cash flows from an investment based on reasonable expectations

explain the Three major cash flows for property investment

Answer 3

1. Cash flow related to purchasing the property (Property price/Initial investment outlay – used to Analyse the feasibility of the investment)
2. Cash flows from operation (NOI/after tax CFs)
3. Cash flow from resale of property (expected selling price /Resale proceeds after tax)

Question 4

explain Purchasing property Cash Flow – Initial outlay:
The money invested by the investor when acquiring an income-producing property (equity)
Majority of cash outflow

Answer 4

purchasing price of property
(+) costs of acquisition
(+) any additional repairs or improvements required to make the property leasable
(-) the amount of borrowed funds

= the initial outlay

Question 5

cost of acquisition includes

Answer 5

o	Stamp duty
o	Legal fees (solicitor/conveyance)
o	Building inspections
o	Mortgage application fees
o	Mortgage insurance
o	Other settlement and related fees

Question 6

define gross floor area

Answer 6

The total area of the building at all floor levels

Question 7

Define NLA

Answer 7

Excludes external walls, standard services e.g. stairs, lifts

Question 8

Define efficient ration

Answer 8

The proportion of leasable space in a building to the total space
=NLA / GFA

Question 9

Define gross income

Answer 9

The total of all rental income (annual) derived directly from the property assuming that there is no vacancy
•
How to calculate this?

Net Lettable Area (NLA) X Market rent per m2 per annum

Current market rents are determined by comparison with recent new lettings of similar premises

Question 10

efficient ratio formula

Answer 10

=NLA / GFA

Question 11

potential gross income formula

Answer 11

Net Lettable Area (NLA) X Market rent per m2 per annum

Question 12

explain vacanncy and collection allowance

Answer 12

Estimated income lost due to tenants vacating the property and/or tenants defaulting (not paying) their rent
• Is expressed as a % of potential gross income
Example:
Potential gross income per annum is $480,000
Ratio of vacancy and collection allowance is 2%
Vacancy and collection allowance= $480,000*2%=$9,600

Question 13

what is miscellaneous income

Answer 13

Any income other than the rental income
Examples
◦	Naming rights
◦	Satellite dish space 
◦	Communication towers
◦	Subsidy from government

Question 14

explain the break down of operating costs

Answer 14

Recurrent expenses arising from ownership or operation of the property, property related only. Include:

1. Fixed expenses– real estate tax and insurance expense
2. Variables expenses-operating expenses that generally vary with the level of occupancy or the extent of services provided (e.g. the more you use the property the higher the expenses e.g. utility)
3. Replacement allowance- provides for the periodic replacement of building components that wear out more rapidly than the building’s the economic life
   (Some components in a building depreciate at a faster rate than the life of a building – short life items)

Question 15

Property operating expenses (outgoing)(unrelated to the property)
• Excludes:

Answer 15

1. Debt service
2. Investors‘ income tax and corporation operating costs
3. Book depreciation of property

Question 16

calculating outgoings estimation

Answer 16

Method 1 – For relatively standardized structures, the size of the building is multiplied by the square metre cost of OPEX
Total OPEX = GFA x OPEX per m2 per annum

Method 2 – The costs of the individual OPEX components in the building are estimated individually and added together

Question 17

define capital expenditure

Answer 17

Expenses that occur irregularly for major repairs, replacements or improvements.
Capital expenditure should be deducted from reselling price to calculate capital gain.

Question 18

explain NOI

Answer 18

Reflects property related income after property related operating expenses are deducted, but before investors’ income taxes and interest are deducted.

o Often considered the best measure to assess the financial health of a property
o Provide investors with an idea of the income a property might provide, as it shows the remaining cash balance after OPEX are paid.
o Net Income ratio: The ratio of NOI to PGI

see example (coffee :))

Question 19

selling expenses

Answer 19

Real estate agents’ fees and transfer fees
% of the resale price
Agents’ commissions on a sliding scale
If resale price is $250,000, selling expenses would be about 4%
$5 million – 1.5%

Question 20

how to calculate capital gains

Answer 20

When a property is sold for more than it was purchased, it is a ‘capital gains tax event’

property resale price:
(-) estimated selling costs
(-) costs of acquisition and other related costs
(-) Total of capital expenditure incurred during holding period
= capital gain

see examples

Question 21

tax on capital gains

Answer 21

Tax due on Capital gains:
 Depends on country’s tax policies
 Australia – 30%, some owners are entitled to discount their realised capital gains before calculating taxes
◦ Individuals, partnerships, trusts – 15%(30%*0.5)
◦ Super funds – 20% (30%-30%/3)
◦ Companies – 30% no discounts
 Using the above example, calculate capital gain tax for three scenarios

Question 22

calculate resale proceeds after tax

Answer 22

expected selling price 
(-) selling expenses
(-) outstanding loan
(-) taxes due on capital gains
= resale proceeds after tax

Question 23

what is the replacement allowance

Answer 23

Funds raised to provide for the periodic replacement of building components that wear out more rapidly than the building’s the economic life.

Question 24

1. You are considering investing in a small office building using the interest-only loan, and this investment has the following inputs.
   Selling price $ 1,600,000
   Loan amount $ 1,280,000
   Gross floor area 1000m2
   Efficiency ratio 75%
   Gross rent per m2 $300 per annum
   Miscellaneous income $20,000 per annum
   Operating expenses $ 95 per annum per m2 of net lettable area (NLA)
   Vacancy and collection allowance 7% per year of potential gross income
   Loan interest rate 8% per annum
   Corporate tax rate 30%

Compute the NOI and after-tax cash flow from operation for year 1.

Answer 24

:) poppy andrews