Reliable Valuations. Session 2 Discount Rates DCF Analyses And others
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1 OFFICE INDUSTRIAL APARTMENT HOSPITALITY Session 2 Discount Rates D Analyses And others RETAIL INDUSTRIAL LAND
2 Session 1 Comparable Sales Capitalization Rates Discount Rates Discounted Cash Flow Band of Investment Return on Investment Cash on Cash Opinion of Value Certified Appraisal Real Time Supply/Demand
3 Valuation Methodologies Comparable Sales Capitalization Rates Discount Rates Discounted Cash Flow Band of Investment Return on Investment Cash on Cash Opinion of Value Certified Appraisal Real Time Supply/Demand
4 Valuation Methodologies Discount Rates Represent the buyer s desired rate of return either before or after tax. The rate at which all future cash flows are discounted back to the Present Value. The investment s Internal Rate of Return
5 Valuation Methodologies Discount Rates The key is selecting an appropriate discount rate that will reflect the marketplace for the anticipated holding period of the investment.
6 Methods for Selecting Discount Rates Build Up Alternate Investments Real risk-free rate + Expected Inflation + Risk premium = Discount Rate From Surveys Implied by Cap Rate Cap Rate + Expected growth in income and value = Discount Rate
7 Discount Rates From Surveys Problems Down Market Data Insufficient Data Segmented Market
8 Discount Rates Alternate Investments Problems Down Market Data Government Influence Capital Market Instability
9 Discount Rates Implied by Cap Rate Cap Rate + Expected growth in income and value = Discount Rate Problems Down Market Data Insufficient Data Segmented Market Government Influence Capital Market Instability
10 Discount Rates Build Up Real risk-free rate + Expected Inflation + Risk premium = Discount Rate Problems Down Market Data Government Influence Capital Market Instability
11 Valuation Methodologies Comparable Sales Capitalization Rates Discount Rates Discounted Cash Flow Band of Investment Return on Investment Cash on Cash Opinion of Value Certified Appraisal Real Time Supply/Demand
12 Valuation Methodologies Discounted Cash Flow Forward Looking Analytics Represents the buyer s The process of desired rate of return either projecting before or after rental tax when income, applied to expense projected and income sale from proceeds an investment. over time based on leases in place and The rate market at which projections. all future cash flows are discounted back to the Present Value.
13 Holding Period Reliable Valuations Discounted Cash Flow Value Before or After Tax Using Projected income from cash flows and sales proceeds to determine value. Before or after tax net proceeds from rental income + Before or after tax proceeds from sale
14 Discounted Cash Flow 0 Purchase Price? 1 NOI or BT or AT 2 NOI or BT or AT Solve for purchase price by discounting future cash flows at the required rate of return. 5 NOI or BT or AT + SPBT or SPAT
15 Discounted Cash Flow 0 Purchase Price? 1 100, , , , , ,200,000 Required rate of return =12%
16 Discounted Cash Flow Required rate of return =12% 0 (1,073,375) purchase price for a 12% return 1 100, , , , , ,200,000
17
18 Discounted Cash Flow 0 Purchase Price? 1 100, , , , , ,200,000 Required rate of return =10%
19 Discounted Cash Flow Required rate of return =10% 0 (1,158,493) purchase price yielding a 10% return 1 100, , , , , ,200,000
20
21 Discounted Cash Flow 0 Purchase Price? 1 100, , , , , ,200,000 Required rate of return =14%
22 Discounted Cash Flow Required rate of return =14% 0 (996,416) value yielding a 14% return 1 100, , , , , ,200,000
23
24 Discounted Cash Flow Value Determined by Discount 10% = 12% = 14% = $ 996,416
25 Creating an Appropriate Discount Rates Build Up Real risk-free rate + Expected Inflation + Risk premium = Discount Rate
26 Build Up Real risk-free rate + Expected Inflation + Risk premium = Discount Rate Discounted Cash Flow
27 Build Up Real risk-free rate + Expected Inflation + Risk premium = Discount Rate Discounted Cash Flow
28 Build Up Real risk-free rate + Expected Inflation + Risk premium = Discount Rate Discounted Cash Flow Cap Rate Spread 560 BPS
29 Discounted Cash Flow Build Up Real risk-free rate + Expected Inflation + Risk premium = Discount Rate 2.00% 2.00% 5.90% 9.90%
30 Discounted Cash Flow Local Economic Market Conditions Macro Economic Conditions Determinants of Risk Premium Demographics and trending
31 Discounted Cash Flow Practical Applications of using Discount Rates 1. Applying different discount rates based on tenant quality 1. Applying different discount rates to types of income 2. Applying different discount rates to more distant income.
32 Crossroads Center 19,694 SF, single story retail building Sarasota, FL
33 Crossroads Center Sarasota, FL
34
35 Site Information 160 feet 2.3 acre site 160 feet of frontage Pier 1 America s Best 84 parking spaces ,000 cars/ day parking
36 Crossroads Center Frontage View
37 Crossroads Center
38 Crossroads Center
39 Crossroads Center
40 5, 10, 20 minute drive time
41 5 minute drive 10 minute drive
42 5 minute drive 10 minute drive
43 Psychographics How are the residents of the market area spending their money?
44
45 Older Population
46 Three Oldest Tapestry Segments
47 Holding Period Reliable Valuations Discounted Cash Flow Value Before or After Tax Using Projected income from cash flows and sales proceeds to determine value. Before or after tax net proceeds from rental income + Before or after tax proceeds from sale
48 Crossroads Center Tenants Pier 1 America s Best Eyeglasses La Casa Mexicana Grandma Tony s Pizza Hair Images Shishkebob House 11,250 sf 3,470 sf 1,219 sf 1,114 sf 1,086 sf 1,555 sf
49 Lease Abstract Annual Base Rent Income $249,835 Pier 1 pays pays percentage rent of 4%
50 Annual Income Pier 1 pays pays percentage rent of 4%
51 Discounted Cash Flow Pier 1, Americas, La Casa, Grandmas, Hair, Shishkabob Value? 249,835 Based on contract rent Based on contract rent Based on contract rent Value of Crossroads Center with all future income treated equally 5 Based on contract rent + Sale Proceeds
52 Applying a different discount rate to each tenant
53 Applying a different discount rate to each tenant All Income 0 Value
54 Applying a different discount rate to each tenant All Income Individual Income 0 Value 0 Value 0 Value =
55 Discounted Cash Flow Pier 1 Americas La Casa Grandmas Hair Shishkabob 0 Value Value Value Value Value Value
56 Applying a different discount rate to each income type Pier 1 Total Value =
57 Applying a different discount rate to each income type Pier 1 Total Pier 1 Base Rent Pier 1 % Rent 0 Value 0 Value 0 Value =
58 Discounted Cash Flow Pier 1 Americas La Casa Grandmas Hair Shishkebob Higher Discount Rate for More Distant Cash Flow 4 5
59 Discounted Cash Flow Pier Use higher discount rates to account for additional risk
60 Applying a different discount rate to each income type 0 1 Value Value Discounting Cash Flows from Operations at a different rate than Sales Proceeds Sale Proceeds
61 Discounted Cash Flow Pier 1, Americas, La Casa, Grandmas, Hair, Shishkabob Value 249, % + 3% + 3% + 3% + Sale Proceeds Determining sales price at the end of the holding period is typically done either by applying a projected cap rate to the next year s NOI, or applying an annual compound growth rate
62 Discounted Cash Flow Pier 1, Americas, La Casa, Grandmas, Hair, Shishkabob Value 249, % + 3% + 3% + 3% + Sale Proceeds If income increases at 3% per year, then the sales price at the end of the holding period can be estimated by applying a like increase.
63 Discounted Cash Flow Pier 1, Americas, La Casa, Grandmas, Hair, Shishkabob Value 249, % + 3% + 3% + 3% + Sale Proceeds An estimate of a likely market cap rate five years hence can be used to determine the sales price at the end of the holding period.
64 Discounted Cash Flow Pier 1, Americas, La Casa, Grandmas, Hair, Shishkabob 0 1 PV = 90,909 PV = 62, , Each value discounted at 10% 5 + SP = 100,000
65 Valuation Methodologies Comparable Sales Capitalization Rates Discount Rates Discounted Cash Flow Band of Investment Return on Investment Cash on Cash Opinion of Value Certified Appraisal Real Time Supply/Demand
66 Valuation Methodologies Band of Investment Based on the concept that a capitalization rate/discount rate can be built by taking into account the required returns for all parties to the transaction (debt and equity).
67 Band of Investment Equity % x Required Yield % = X.XX% Debt % x Required Yield % = + X.XX% Capitalization Rate by BOIM X.XX% Step 1: Calculate weighted portions for debt and equity Step 2: Add the weighted portions to derive Cap Rate by BOIM
68 Band of Investment Bank 1 Bank 2 Bank 3 25% Equity x 11.00% = % Debt x 8.50% = Capitalization Rate by BOIM % Equity x 12.00% = % Debt x 8.00% = Capitalization Rate by BOIM % Equity x 13.50% = % Debt x 7.00% = Capitalization Rate by BOIM
69 NOI of $249, ,835 / 9.13% = $2,736, ,835 / 9.20% = $2,715, ,835 / 9.60% = $2,602,448 Value range by BOIM, approximately 5.2%
70 Valuation Methodologies Comparable Sales Capitalization Rates Discount Rates Discounted Cash Flow Band of Investment Return on Investment Cash on Cash Opinion of Value Certified Appraisal Real Time Supply/Demand
71 Valuation Methodologies Return on Investment The relationship of NOI to purchase price over time
72 Return on Investment IRR = 12.91% NOI / Purchase Price 0 (1,037,375) 1 100,000 Cap Rate = 9.64% 2 105,000 ROI = 10.12% 3 110,000 ROI = 10.60% 4 115,000 ROI = 11.09% 5 120,000 ROI = 11.57% + 1,200, % increase in ROI over 5 years
73 Valuation Methodologies Comparable Sales Capitalization Rates Discount Rates Discounted Cash Flow Band of Investment Return on Investment Cash on Cash Opinion of Value Certified Appraisal Real Time Supply/Demand
74 Valuation Methodologies Cash on Cash The relationship of cash flows before or after tax to the initial equity input.
75 Cash on Cash The relationship of cash flows before or after tax to the initial equity input.
76 Crossroads Cash on Cash Assume a 9.2 Cap Rate and an NOI of $249,835 Giving an indicated value of $2,715,598 Also assume Bank 2 financing, 70% Loan to Value 25 year 8%, monthly payments 2,715,598 X 70% L/V = $1,900,000 loan $176,000 annual debt service 249,835 (NOI) 176,000 (ADS) = $73,835 BT
77 $14, X 12 = $175, ADS
78 Crossroads Cash on Cash 0 (815,598)(.30 X $2,715,598) 1 73,835 C/C = 9.05% 2 76,050 C/C = 9.32% 3 78,331 C/C = 9.60% 4 80,681 C/C = 9.89% 5 83,101 C/C = 10.19% 3% increase in C/C Does not include % rent
79 Valuation Methodologies Comparable Sales Capitalization Rates Discount Rates Discounted Cash Flow Band of Investment Return on Investment Cash on Cash Opinion of Value Certified Appraisal Real Time Supply/Demand
80 Valuation Methodologies Opinion of Value Comparable Sales Capitalization Rates Cash on Cash
81 Valuation Methodologies Comparable Sales Capitalization Rates Discount Rates Discounted Cash Flow Band of Investment Return on Investment Cash on Cash Opinion of Value Certified Appraisal Real Time Supply/Demand
82 Valuation Methodologies Certified Appraisal Comparable Sales Capitalization Rates Discount Rates Discounted Cash Flow Band of Investment Reproduction Cost
83 Valuation Methodologies Comparable Sales Capitalization Rates Discount Rates Discounted Cash Flow Band of Investment Return on Investment Cash on Cash Opinion of Value Certified Appraisal Real Time Supply/Demand
84 Valuation Methodologies Real Time Supply/Demand Based on the concept that in the absence of historical data, real time supply and demand data can yield good indications of value. Existing Bid/Ask data can be used in conjunction with other data to create another avenue to establish value.
85 Valuation Methodologies Real Time Supply/Demand Sources of Data MLS LoopNet CoStar CCIM Mailbridge Commercial Offices
86 SUPPLY, Sarasota FL
87 7.43% cap SUPPLY, Sarasota FL 5.40% cap 6.50% cap
88 $413/SF $136/SF SUPPLY, Sarasota FL $129/SF $185/SF $122/SF $145/SF
89
90
91 Valuation Methodologies Comparable Sales Capitalization Rates Discount Rates Discounted Cash Flow Band of Investment Return on Investment Session 2 Methodologies Cash on Cash Opinion of Value Certified Appraisal Real Time Supply/Demand
92 OFFICE INDUSTRIAL APARTMENT HOSPITALITY End Of Session 2 RETAIL INDUSTRIAL LAND
93 Local Economic Market Conditions Session 3 Case Study Macro Economic Conditions Demographics and trending
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