The Twelve Rs: An Overview of Capitalization Rate Derivation
|
|
- Anissa Webster
- 7 years ago
- Views:
Transcription
1 Joseph H. Martin, MAI, Mark W. Sussman, MAI The Twelve Rs: An Overview of Capitalization Rate Derivation The development proof of the overall rate ( ) in direct capitalization is as important today as it was 10 or 20 years ago. The difference is that today there are 12 ways to prove or disprove an overall capitalization rate, with which even parts of the overall rate can be proven. One way this is accomplished is by using available formulas to solve for components that can alternatively be used to derive the overall rate, then comparing those components against market expectations to test their validity. This article explains the 12 ways an overall rate can be developed tested in the real world. In current Appraisal Institute courses, students are learning ways to create prove an overall rate, a rate necessary to convert one year of income into value, by a process known as direct capitalization. All too often appraisers get comfortable with only one way to create or prove a capitalization rate in their appraisal practice without knowing, checking, or proving their rate with other methods. Some argue that direct capitalization is a thing of the past, that creating or attempting to convert a single year s income into value is a useless academic exercise in today s world of computers data available for conversion of income into value by sophisticated discounted cash flow (DCF) analyses. Even with computers yield analyses, an appraiser must be able to prove his or her rate of conversion, whether it is a capitalization rate or a yield rate, should know the many ways to prove or disprove a rate selection. Further, there are many commercial properties that should be valued by direct capitalization. DCF analysis may be the only way to value investmentgrade real estate, but for the bulk of smaller, noninvestment-grade real estate, direct capitalization simulates the process used by buyers sellers in those types of markets. The authors have determined that there are 12 different ways to derive prove an overall rate for direct capitalization. 1 They are as follows: 1. Most of the formulas discussed here are presented in Appraisal Institute courses Basic Income Capitalization (310) Advanced Income Capitalization (510). Joseph H. Martin, MAI, is president of Martin Appraisal Associates, Inc., Lawrenceville, New Jersey. He received his BS in business administration at Rider College, Lawrenceville, is an instructor for the Appraisal Institute. He is an author of several textbooks on real estate licensing. Mark W. Sussman, MAI, is vice president of John O. Lasser Associates, Inc., Livingston, New Jersey. He provides appraisal consulting services on a wide variety of property types, with emphasis on ad valorem tax litigation condemnation. He received his BA in psychology from Lehigh University, Bethlehem, Pennsylvania, is an instructor for the Appraisal Institute. 149
2 = I O V O (1) This is the universal formula of rate development. It is generally market extracted when the appraiser knows the net operating income (I O ) the value or price (V O ) of a property. The derived by this formula implicitly contains all of the assumptions about investor expectations inherent in that particular sale or value, to be useful should be applied to only those properties that have the same characteristics as the sale (i.e., same l building ratios, use, lease terms, vacancy rates, expense ratios, value or income expectations, level of risk investor motivation). It would be inappropriate to extract an overall rate from a sale of an 80-unit, older, urban, mid-rise apartment complex use it directly to value a newer, 150-unit, suburban garden complex. Expense ratios, appreciation in value, risk, investor motivation between these two properties would be too great to make a direct comparison. However, once the overall rate ( ) is extracted, it can be useful for comparable properties, since it is market extracted, it is very persuasive. = SR + LR + MR + RR (2) This old formula of developing a builtup overall rate is antiquated. Here, an overall rate is built up through a combination of a safe rate (SR), a liquidity rate (LR), a management rate (MR), a risk rate (RR). To assume that an appraiser would have the judgment to assign a proper factor for loss of liquidity, or management, or risk in today s complex changing economic climate, to develop a rate in this fashion are incomprehensible. It can, however, be useful in making comparative judgments once an overall rate has been created through other means. 2 = NIR GIM (3) There are only two ways direct capitalization can be employed: by dividing income by a rate, or by multiplying income by a factor. In the second scenario, multiplying income by a factor, the income can be potential gross income (PGI) or effective gross income (EGI). This approach is generally used in the sales comparison approach to value is not considered a capitalization approach per se. However, two simplistic parts of this formula can be quickly extracted from the market, i.e., the gross income multiplier (GIM) the net income ratio (NIR), which is the complement of the expense ratio. As an example, simple research would indicate what the gross rental would be from the market at the time a property is sold, a gross income multiplier could be developed by dividing the sales price by the potential gross income (SP PGI = PGIM). Further analysis of the comparable sales would indicate the typical expense ratio, 100% less the expense ratio would equal the net income ratio. Once these two figures are known, a potential overall rate can be developed by simply applying the formula expressed above. 3 (4) Commonly referred to as the underwriter s method of developing an overall rate used by lenders with their own requirements for debt coverage ratio (DCR), mortgage or loan-to-value ratio (M), mortgage constant (R M ), it is a good tool when it is market derived. All appraisers should check with their mortgage sources on the type of property they are appraising know these components of lender requirements. It is based on the premise that the lender establishes the control on various properties by controlling the amount of risk they will take (loan-to-value ratio or M), the interest rate term they require (the mortgage constant or R M ), the amount of net operating income they deem safe to cover the debt (debt coverage ratio or DCR). The loan-to-value ratio mortgage constant are used in both the b of investment the Ellwood formula for developing overall rates, debt coverage ra- 2. Charles B. Akerson, Builtup Blended Rates, Capitalization Theory Techniques Study Guide (Chicago: American Institute of Real Estate Appraisers, 1984), 21. It should be acknowledged that these builtup rates are truly yield rates, therefore, even if an appraiser has the judgment or expertise to develop an overall rate by this method, he or she would have to convert the yield rate to an overall capitalization rate. 3. Ibid., 18. The problem in this approach to prove an overall rate is that it may not be possible to determine the true expenses in a sale property, unless the appraiser is involved in the transaction or has direct knowledge of this information. Relying on third-party information for the actual expenses at the time of sale may be insufficient to develop an accurate overall rate. However, if the appraiser is cautious uses typical expressed expense ratios, it still becomes a good check on other methods developed here. 150 The Appraisal Journal, April 1997
3 tios are easily surveyed or acquired from mortgage research sources such as the American Council of Life Insurance Companies Investment Bulletin. 4 If the assumptions of loan-to-value ratio (M), mortgage constant (R M ), debt coverage ratio (DCR) come from a specific lender rather than comparable market data, the overall rate will reflect the lender s value rather than market value. Appraisers who use the Ellwood or b of investment method to develop an overall rate ( ) would do well to check this rate by using the formula: R DCR = O M RM If the debt coverage ratio (DCR) calculated using this formula is inconsistent with current bank lending criteria applicable to the subject property, then the overall rate derived through the Ellwood or b of investment method may be flawed. 5 + (1 M)R E (5) Known as the b of investment method of developing an overall rate, this is based on the presumption that a capitalization rate should amount to a weighted average of debt equity funds, dependent on the risk quality of the property investment. Also known as the mortgage equity analysis, the formula simply states that the overall rate ( ) is the weighted average of the mortgage capitalization rate (the mortgage constant or R M ), the equity capitalization rate (R E ). The overall rate generated by this formula must satisfy both the mortgage requirement of the lender the pre-tax cash flow requirement of the equity participant. Since it is a composite rate, weighted in proportion to the investment represented by debt equity, it is believed by some to be infallible because the greatest weight toward the overall rate is the debt requirement which can be easily obtained by a survey of lenders in the type of investment property to be valued. It is a popular method used by appraisers to develop an overall rate, but is often misused because the data used to develop the rate is from surveys of lenders equity participants, not from hard market data. It is a good way, however, to test a capitalization rate developed from better marketoriented sources. 6 = L R L + B R B (6) Another b of investment technique is derived using the relationship of known physical components of property, i.e., the l the buildings. The ratio of l value /or building value to the overall property value must be known, as well as the capitalization rate for each physical component. Used primarily in l /or building residual techniques where one value is known, the income for that value can be extracted from the net operating income by multiplying the appropriate capitalization rate by the known value. The residual income is then capitalized into a value estimate by its appropriate rate. It is a good technique in highest best use analysis where building values are known or can be reasonably estimated the question is what is the most profitable use of the l. 7 (7) When an appraiser expects that income value will remain unchanged during a holding period, the property is basically valued by capitalization in perpetuity, i.e., the overall capitalization rate the yield rate are synonymous. In other words, the yield to the property investment is equal to the rate of return. a (8) When there is a change in income /or value over a holding period, the above formula can be adjusted accordingly. This is a general purpose formula to develop an overall capitalization rate where is the cap rate, Y O is the property yield rate, O is the change in property value a is the appropriate conversion factor. At present, there are three variations of the conversion factor based on the appraiser s perception of anticipated changes in income value over a projected 4. American Council of Life Insurance Companies, Investment Bulletin (Washington, D.C.: American Council of Life Insurance Companies). 5. The Appraisal of Real Estate, 10th ed. (Chicago: Appraisal Institute, 1992): Ibid., Ibid., 472. Martin/Sussman: The Twelve Rs: An Overview of Capitalization Rate Derivation 151
4 holding period, each of which will change the overall rate ( ). 8 1 S n (9) If it is forecasted that income will remain level value will change over the projected holding period, the overall change in value ( O ) is multiplied by the sinking fund factor or SFF (calculated based on the yield rate the holding period) to derive an appropriate capitalization rate. Typically, it would be unusual for net income to remain completely level over a holding period still have an expected change in value. However, this may be appropriate in those situations where a property is under a long-term net lease at a flat rent, property values are increasing or decreasing due to supply dem factors or are in an inflationary market. 1 n (10) Where it is assumed that both income value change on a straight-line basis during a holding period, the overall change in value ( O ) is multiplied by the inverse of the number of years in the projected holding period (1 n). CR (11) If both income value are expected to change at a constant ratio (compound rate) over a holding period, then the overall rate ( ) is simply the expected yield rate (Y O ) adjusted by the rate of change (CR). It sts to reason that if the investor s expected yield rate is 12%, both income value change at +2% per year, then the overall capitalization rate is 10%, or 12% less 2%. 9 = Y M(Y + P 1 S R ) 1 S E E n M O n (1 + I J) or (K) (12) Most readers will recognize this as the Ellwood formula which derives an overall capitalization rate that incorporates equity yield requirements mortgage financing terms. Developed by L. W. Ellwood redefined by Charles B. Akerson, it is the algebraic equivalent of DCF analysis. 10 The Akerson format expressed algebraically is as follows: = (M R M ) + (1 M) Y E M P 1 S n 1 S n The Akerson format as it is more commonly used is shown below. When presented in this manner, it is easier for most people to comprehend to solve step by step than the algebraic formula. Mortgage ratio (M) Mortgage constant (R M + Equity ratio (1 M) Equity yield rate (Y E Weighted average Adjustment for Equity Buildup: Mortgage ratio (M) Part paid off (P) Sinking fund factor (1 S n Basic rate (r) Adjustment for Appreciation/Depreciation: (+ O ) Sinking fund factor (1 S n Overall rate ( ) The first part of Akerson s format closely resembles the simple b of investment method with one important difference: The equity rate used here is the equity yield rate (Y E ), not the equity capitalization rate (equity dividend rate or R E ) found in the b of investment. The next line adjusts the mortgage/equity-weighted average for the equity buildup that accrues to the investor as the mortgage is paid off, this adjusted rate is known as the basic rate (r). The last line adjusts the basic rate for total anticipated appreciation or depreciation over the holding period to arrive at the overall capitalization rate ( ). Originally the Ellwood formula was developed only for level income streams, was later refined to allow for variations when different income patterns were anticipated, by the use of the Ellwood J-factor or the K- factor. However, with the use of today s financial calculators personal computers, a simpler method, no matter what pattern of income is expected over a holding period, is to find the equivalent level income Ibid., Ibid., 498. It is unrealistic in the real world to expect both income value to change at the same rate during an anticipated holding period. The only exception to this may be in a leased fee analysis where the lease is written to guarantee both a constant increase in income a resale price at the same rate of growth. 10. Some argue that the Ellwood technique is obsolete with the widespread availability of easy-to-use spreadsheet programs that can perform complex DCF analyses quickly, accurately, inexpensively. See Wayne Kelly, Donald R. Epley, Phillip Mitchell, A Requiem for Ellwood, The Appraisal Journal (July 1995): An excellent reference on how to calculate equivalent level income can be found in Course 510, Session 6: Stabilizing Income Yield Capitalization (DCF) Using an Equity Yield Rate. 152 The Appraisal Journal, April 1997
5 Knowing the 12 Rs provides the appraiser with a complete bag of tools with which to test, develop, reason, prove value. As an example, assume an appraiser is valuing a property with a net operating level income of $300,000. This income should remain stable for the foreseeable future. This appraiser s stard operating procedure is to use only the b of investment method to develop an overall capitalization rate ( ). A survey of local lenders indicates that they would lend money based on a loan-to-value ratio of 70%, at a fixed interest rate of 10% with monthly payments for a term of 20 years. Further, a survey of investors indicates that they expect a 12% cash-on-cash return (R E ). The overall capitalization rate would be derived through the b of investment method as follows: + (1 M) R E = = = The overall value (V O ) would then be: $300, = $2,562,788 (rounded) $2,560,000 Further investigation would have also disclosed that lenders typically expect a DCR of 1.35, that investor s holding periods are generally not more than 10 years, that the yield expectation for investors is 14%. A check on the b of investment rate selection could be made by (a) the underwriter s method, (b) the Ellwood formula, as follows: = = V O = $300, = $2,741,478 (rounded) $2,740,000 (a) = Y E M(Y E + P 1 S n R M ) o 1 S n (1 + I J) or (K) (b) = ( ( ) ) ( ) = ( ) = = V O = $300, = $2,532,500 (rounded) $2,530,000 The value estimates obtained by deriving the overall capitalization rate ( ) through two different methods range from $2,530,000 to $2,740,000. This reflects a difference of 8.3% or $210,000 a significant divergence although both methods are based on the same set of facts. The question begs itself: Which is the correct way to develop an overall rate, which value estimate is right? The answer lies in the type of property being valued the most likely way an investor in the market for the subject property develops or creates his or her capitalization rate. As another example, assume a similar set of facts. The subject property is expected to continue to produce a level net operating income of $300,000. A market investigation indicates that local lenders will lend money based on a loan-to-value ratio of 70%, at a fixed interest rate of 10% with monthly payments for a term of 20 years, an expected debt coverage ratio (DCR) of Investor s holding periods are generally not more than 10 years, investors yield expectations are 14%. The market for this class of property is expected to appreciate approximately 50% over a 10-year holding period, or 4.14% per year compounded. (This was not an unusual assumption during periods of rapid inflation such as the mid-1980s, when some markets experienced increases of 15% 20% per year.) A market survey indicates that investors are willing to accept a cash-on-cash return (R E ) of 6% probably due to the anticipation of significant appreciation in property value. The appraiser in our example consistently uses the Ellwood mortgage-equity analysis presented in the Akerson format. After all, this advanced technique accounts for every component of value in the overall capitalization rate, including the investors required equity yield (Y E ), mortgage financing, the equity buildup (P) accrued by making mortgage payments over the holding period, thereby reducing the principal balance, the effects of any appreciation or depreciation in property value ( O ). The overall capitalization rate ( ) is derived as follows: Martin/Sussman: The Twelve Rs: An Overview of Capitalization Rate Derivation 153
6 Weighted Average: 70.0% Mortgage Mortgage constant = % Equity Equity yield rate = Weighted average: Less Equity Buildup: 70.0% Mortgage Part paid off Sinking fund factor = Basic rate: Appreciation/+ Depreciation: 50.0% Appr Sinking fund factor = Overall capitalization rate (rounded) 8.74% Capitalizing the net operating income of $300,000 at the indicated overall rate of 8.74% results in a value estimate of $3,432,500. The appraiser, after checking his calculations twice concludes a value of $3,432,500. Once more, the formulas presented here can be used to check the validity of the derived overall capitalization rate of 8.74%, including (c) the underwriter s method, (d) the b of investment technique: (c) R DCR = O M RM = = 1.08 Clearly, this analysis shows a debt coverage ratio significantly lower than the 1.25 DCR required by lenders as found in the appraiser s market investigation. Something is wrong should be a red flag to the appraiser that further investigation a review of the assumptions on which the overall rate is based may be needed. + (1 M)R E R E = (M R M ) 1 M ( ) = = or 2.11% (d) Similarly, this analysis indicates a cashon-cash return (equity dividend rate, R E ) of 2%, far below the 6% return required by market participants. Again, there is an inconsistency this type of check can warn an appraiser to review the assumptions on which the overall rate is based. If the appraiser uses these techniques as a check, the inconsistencies will become readily apparent. He or she reviews the assumptions finds that the anticipated appreciation of 50% over the 10-year holding period is overly aggressive, tempers the expected increase in property value to 25%. The resulting Ellwood/Akerson capitalization rate derivation now appears as follows: Weighted Average: 70% Mortgage Mortgage constant = % Equity Equity yield rate = Weighted average: Less Equity Buildup: 70.0% Mortgage Part paid off Sinking fund factor = Basic rate: Appreciation/+ Depreciation: 25.00% Appr Sinking fund factor = Overall capitalization rate (rounded) 10.04% The appraiser again applies the same formulas to check the consistency of his assumptions finds the following: (e) R DCR = O M RM = = 1.24 The indicated debt coverage ratio is now consistent with the DCR required by local lenders as found in the appraiser s market investigation. + (1 M)R E R E = (M R M ) 1 M ( ) = = or 6.45% (f) Again, using the formula as a check indicates a cash-on-cash return (equity dividend rate, R E ) that is consistent with the 6% return required by market participants. 154 The Appraisal Journal, April 1997
7 This process of testing capitalization rates resulted in revising the overall capitalization rate from 8.74% to 10.04%. Based on a first-year net operating income of $300,000, the estimated value is reduced from $3,432,000 to $2,988,000. This reflects a decrease of 13%, which is significant in any appraisal assignment. As has been shown in this article, it is imperative in today s real estate investment world to look at all the ways an overall capitalization rate can be developed to use all the data available in the market to develop test overall rates for every income valuation problem. Martin/Sussman: The Twelve Rs: An Overview of Capitalization Rate Derivation 155
INCOME APPROACH Gross Income Estimate - $198,000 Vacancy and Rent Loss - $9,900
INCOME APPROACH The Income Approach considers the return on Investment and is similar to the method that investors typically use to make their investment decisions. It is most directly applicable to income
More informationIncome Capitalization Analysis Re: Example Property By: Your Name of Your Company Name
Income Capitalization Analysis Re: Example Property By: Your Name of Your Company Name To obtain a reliable indication of a property's Market Value from the Income Capitalization Approach, it is necessary
More informationAN INTRODUCTION TO REAL ESTATE INVESTMENT ANALYSIS: A TOOL KIT REFERENCE FOR PRIVATE INVESTORS
AN INTRODUCTION TO REAL ESTATE INVESTMENT ANALYSIS: A TOOL KIT REFERENCE FOR PRIVATE INVESTORS Phil Thompson Business Lawyer, Corporate Counsel www.thompsonlaw.ca Rules of thumb and financial analysis
More informationUnderstanding the Appraisal
Understanding the Appraisal Understanding the Appraisal Much of the private, corporate and public wealth of the world consists of real estate. The magnitude of this fundamental resource creates a need
More informationFormulas, Symbols, Math Review, and Sample Problems
Formulas, Symbols, Math Review, and Sample Problems Mathematics and Analytical Skills Review... 1 Summary of Basic Formulas... 11 Direct Capitalization... 11 Yield Capitalization... 13 Present Value of
More informationChapter 38. Appraising Income Property INTRODUCTION
Chapter 38 Appraising Income Property INTRODUCTION The income appraisal approach estimates the current market value for a real property by projecting and analyzing the income that the property could generate.
More informationUnderwriting Commercial Loans
Underwriting Commercial Loans T he objective of this study is to understand the basic principles of underwriting for multifamily housing and commercial real estate loans. As a mortgage broker, real estate
More informationState Tax Commission. Basic Income. MAAO Prerequisite Course. Published July 2014
State Tax Commission Basic Income MAAO Prerequisite Course Published July 2014 All rights reserved. This material may not be published, broadcast, rewritten or redistributed in whole or part without the
More informationICASL - Business School Programme
ICASL - Business School Programme Quantitative Techniques for Business (Module 3) Financial Mathematics TUTORIAL 2A This chapter deals with problems related to investing money or capital in a business
More informationProperty that is capable of generating rental income, and for which an investor
features Where the Overall Cap Rate Meets the Discount Rate by Tony Sevelka, MAI abstract This article explores the relationship between the overall capitalization rate (R o ) and the discount rate (Y
More informationEquity Returns and Refinancing
Equity Returns and Refinancing Elaine Sahlins, Senior Vice President HVS International San Francisco HVS INTERNATIONAL SAN FRANCISCO 116 New Montgomery Street Suite 620 San Francisco, CA 94105 (415) 896.0868
More informationProperty Report : House in Dallas
Property Report : House in Dallas Generated on: Jul 6, 2016 Author: Guest Page 1 of 11 Table of Contents Executive Summary 3 Property Description 4 Operational Effectivness 5 Financial Effectivness 6 Financing
More informationPurchase Price Allocations for Solar Energy Systems for Financial Reporting Purposes
Purchase Price Allocations for Solar Energy Systems for Financial Reporting Purposes July 2015 505 9th Street NW Suite 800 Washington DC 20004 202.862.0556 www.seia.org Solar Energy Industries Association
More informationNOTICE: For details of the project history please look under the Work Plan section of this website.
NOTICE: This Exposure Draft is available to show the historic evolution of the project. It does not include changes made by the Board following the consultation process and therefore should not be relied
More informationReal Estate Appraisals Common Issues and Best Practices
Real Estate Appraisals Common Issues and Best Practices Real estate appraisals are the first line of credit risk defense Common Issues Key Takeaways Common areas for improvement Selecting the best appraisers
More informationIntroduction to Real Estate Investment Appraisal
Introduction to Real Estate Investment Appraisal Maths of Finance Present and Future Values Pat McAllister INVESTMENT APPRAISAL: INTEREST Interest is a reward or rent paid to a lender or investor who has
More informationDISCLAIMER: Copyright: 2011
DISLAIMER: This publication is intended for EDUATIONAL purposes only. The information contained herein is subject to change with no notice, and while a great deal of care has been taken to provide accurate
More informationIssues in Comparing Capitalization Rates for Leased Fee and Fee Simple Estates
January 23, 2001 Issues in Comparing Capitalization Rates for Leased Fee and Fee Simple Estates Jeffrey D. Fisher, Ph.D. A. Scruggs Love, Jr., MAI, CRE There are three traditional approaches used by appraisers
More informationPeeling The Onion on Capitalization Rates
The compression in cap rates during the 2005-2007 commercial real estate (CRE) bubble led to miscalculations on the part of many sophisticated investors in regards to exit valuations. As we quantitatively
More informationLecture Notes. Dollars and Sense of Building Rehabilitation. Attracting Equity and Debt. National Development Council
1 Dollars and Sense of Building Rehabilitation Attracting Equity and Debt 2 Lecture Notes 927 Dudley Road Edgewood, KY 41017 ph: 859-578-4850 fax: 859-578-4860 2006 All rights reserved. Version: August
More informationMULTI-FAMILY LOAN OVERVIEW
MULTI-FAMILY LOAN OVERVIEW A BORROWER S GUIDE MULTI-FAMILY LOAN OVERVIEW GUIDE Multi-Family Mortgage Underwriting Guidelines and Process Commercial financing for multi-family properties is underwritten
More informationReal Estate Investment Analysis and Advanced Income Appraisal BUSI 331
Real Estate Division Real Estate Investment Analysis and Advanced Income Appraisal BUSI 331 Presentation by Graham McIntosh Outline 1. Introduction 2. Investment Analysis vs. Appraisal 3. The After Tax
More informationDiscussion of Discounting in Oil and Gas Property Appraisal
Discussion of Discounting in Oil and Gas Property Appraisal Because investors prefer immediate cash returns over future cash returns, investors pay less for future cashflows; i.e., they "discount" them.
More information+ Parts, Pieces, and Totals. + Economics of Real Estate. + Practice Makes Perfect
+ Parts, Pieces, and Totals + Economics of Real Estate + Practice Makes Perfect Contents Preface vii Introduction: How to Use This Book viii p T PARTS, PIECES, AND TOTALS 1 CHAPTER 1 Fractions, Decimals,
More informationEnding inventory: Ending Inventory = Goods available for sale Cost of goods sold Ending Inventory = $16,392 - $13,379 Ending Inventory = $3,013
BE7 1 CHAPTER 7 MERCHANDISE INVENTORY BRIEF EXERCISES The inventory purchases made by Hewlett-Packard during 2008 can be calculated as follows: Beginning inventory $ 8.0 billion + Purchases X Cost of Goods
More informationDiscretionary Capital Expenditures. Discretionary Capital Expenditure. Presented by Byron Smith, CCIM
Discretionary Capital Expenditures Discretionary Capital Expenditure Presented by Byron Smith, CCIM Discretionary Capital Expenditure Case Study Overview During the holding period of a commercial real
More informationEFFECTIVE TAX RATE In Direct Capitalization. Effective Tax Rate in the Capitalization Rate instead of Real
Effective Tax Rate, ETR, and Direct Capitalization Page 1 of 16 EFFECTIVE TAX RATE In Direct Capitalization Example using Direct Capitalization to estimate value and using Effective Tax Rate in the Capitalization
More informationFINANCIAL ANALYSIS GUIDE
MAN 4720 POLICY ANALYSIS AND FORMULATION FINANCIAL ANALYSIS GUIDE Revised -August 22, 2010 FINANCIAL ANALYSIS USING STRATEGIC PROFIT MODEL RATIOS Introduction Your policy course integrates information
More informationInternational Valuation Guidance Note No. 9 Discounted Cash Flow Analysis for Market and Non-Market Based Valuations
International Valuation Guidance Note No. 9 Discounted Cash Flow Analysis for Market and Non-Market Based Valuations 1.0 Introduction 1.1 Discounted cash flow (DCF) analysis is a financial modelling technique
More informationBefore you develop or acquire a property, you must know how big it is size is the key metric for real estate.
Real Estate Development Key Terms If you want to understand real estate development, you need to know the key terms used to describe properties whether you re developing the properties from the ground
More informationA Basic Introduction to the Methodology Used to Determine a Discount Rate
A Basic Introduction to the Methodology Used to Determine a Discount Rate By Dubravka Tosic, Ph.D. The term discount rate is one of the most fundamental, widely used terms in finance and economics. Whether
More informationMatching Cash Flows and Discount Rates in Discounted Cash Flow Appraisals
Matching Cash Flows and Discount Rates in Discounted Cash Flow Appraisals Introduction by C. Donald Wiggins, DBA, ASA, CVA Business Valuation Review March 1999 There are many conceptual and practical problems
More informationHow To Calculate Financial Leverage Ratio
What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? HOCK international - 2004 1 HOCK international - 2004 2 How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated? HOCK
More informationDETERMINING AGENCY VALUE PART 5
DETERMINING AGENCY VALUE PART 5 VALUATION METHODOLOGY (continued) By: Chuck Coyne, ASA This month we continue our discussion of how to determine an agency s value. Last month we discussed many of the typical
More informationValuing the Business
Valuing the Business 1. Introduction After deciding to buy or sell a business, the subject of "how much" becomes important. Determining the value of a business is one of the most difficult aspects of any
More informationThe impact of loan rates on direct real estate investment holding period return
Financial Services Review 13 (2004) 111 121 The impact of loan rates on direct real estate investment holding period return James E. Larsen Department of Finance and Financial Services, Raj Soin College
More informationCommercial Mortgage Types and Decisions
Commercial Loans vs Home Loans Fin 5413 Commercial Mortgage Types and Decisions Commercial mortgages and notes are not as standardized as home loans Although this is changing with growth in commercial
More informationValuation of a business, Part 2
Valuation of a business, Part 2 By TOM McCALLUM, FCGA, CBV This is the second of three articles by Mr. McCallum on Valuation of a business to be carried on PDNet. Introduction Business valuation Approaches
More informationLeases Summary of outreach meetings with investors and analysts on proposed accounting by lessees May September 2013
Introduction 1. This summary outlines the feedback that the IASB and the FASB (the boards) received at meetings with investors and analysts on the lessee accounting proposals included in the Leases Exposure
More informationReal Estate. Refinancing
Introduction This Solutions Handbook has been designed to supplement the HP-2C Owner's Handbook by providing a variety of applications in the financial area. Programs and/or step-by-step keystroke procedures
More informationWhat is the fair market
3 Construction Company Valuation Primer Fred Shelton, Jr., CPA, MBA, CVA EXECUTIVE SUMMARY This article explores the methods and techniques used in construction company valuation. Using an illustrative
More informationManagement Accounting Financial Strategy
PAPER P9 Management Accounting Financial Strategy The Examiner provides a short study guide, for all candidates revising for this paper, to some first principles of finance and financial management Based
More informationThe principle of excess land is a fundamental concept in appraisal practice,
A Discussion of Excess Land Concepts and Theory by Joseph M. Webster, MAI The principle of excess land is a fundamental concept in appraisal practice, but surprisingly few articles have been devoted to
More informationHow to Sell Your Home FAST And For FULL PRICE!!
FREE Special Report: Compliments of www.bobbuysfast.com How to Sell Your Home FAST And For FULL PRICE!! DISCOVER how you can sell your home fast and for Full Price even if your house has been on the market
More informationwww.commercialloansinalaska.com
Financial Corporation 5313 Arctic Blvd., Suite 206 Anchorage, Alaska 99518 (907)279-8551 www.commercialloansinalaska.com CHAPTER 1 INTRODUCTION TO COMMERCIAL LOANS Commercial Loans are defined as: "Any
More informationThe Law of First Impressions A Practical Guide to Mortgage Applicants
The Law of First Impressions A Practical Guide to Mortgage Applicants Increased Importance of Borrower Financial Statements For Commercial Real Estate Financing Robert T. Gibney Real estate investors prepare
More informationPre and Post Tax Discount Rates and Cash Flows A Technical Note
Pre and Post Tax Discount Rates and Cash Flows A Technical Note Wayne Lonergan When discounting pre tax cash flows it is often assumed that discounting pre tax cash flows at pre tax discount rates will
More information1. What is the difference between nominal returns and real returns?
End of Chapter 11 Questions and Answers 1. What is the difference between nominal returns and real returns? Answer: Nominal returns include inflation while real returns have inflation netted out. For example,
More informationGENERAL MATH PROBLEM CATEGORIES AND ILLUSTRATED SOLUTIONS MEASUREMENT STANDARDS WHICH MUST BE MEMORIZED FOR THE BROKER TEST
Chapter 17 Math Problem Solutions CHAPTER 17 GENERAL MATH PROBLEM CATEGORIES AND ILLUSTRATED SOLUTIONS MEASUREMENT STANDARDS WHICH MUST BE MEMORIZED FOR THE BROKER TEST Linear Measure 12 inches = 1 ft
More informationUNDERWRITING RED FLAGS LOAN APPLICATION:
UNDERWRITING RED FLAGS There are many items in a loan file that could cause an underwriter to become concerned with the type of documentation or the quality of the file. The following are common red flags
More informationasset classes Understanding Equities Property Bonds Cash
NEWSLETTER Understanding asset classes High return Property FIND OUT MORE Equities FIND OUT MORE Bonds FIND OUT MORE Cash FIND OUT MORE Low risk High risk Asset classes are building blocks of any investment.
More information5+ Key Components To Most Adjustable Rate Mortgages
5+ Key Components To Most Adjustable Rate Mortgages 1. Index rate The rate to which the interest rate on an adjustable rate loan is tied. One of the more popular indexes used is the 1-year U.S. Treasury
More informationAn Appraisal Tool for Valuing Forest Lands
An Appraisal Tool for Valuing Forest Lands By Thomas J. Straka and Steven H. Bullard Abstract Forest and natural resources valuation can present challenging analysis and appraisal problems. Calculations
More informationCOMMERCIAL LOAN OVERVIEW
COMMERCIAL LOAN OVERVIEW A BORROWER S GUIDE COMMERCIAL LOAN OVERVIEW GUIDE Commercial Mortgage Underwriting Guidelines and Process Commercial financing for commercial properties is underwritten on a case
More informationTime Value of Money. Critical Equation #10 for Business Leaders. (1+R) N et al. Overview
Time Value of Money Critical Equation #10 for Business Leaders (1+R) N et al. Overview The time value of money is fundamental to all aspects of business decision-making. Consider the following: Would you
More informationReverse Mortgage. by Jeffrey D. Smith
There are finance companies that are offering the "Reverse Mortgage" to seniors (at least age 62). Seniors with a substantial amount of equity in their residence are targets of this aggressive predatory
More informationAppraisal A written analysis prepared by a qualified appraiser and estimating the value of a property
REAL ESTATE BASICS Affordability Analysis An analysis of a buyer s ability to afford the purchase of a home, reviews income, liabilities, and available funds, and considers the type of mortgage a buyer
More informationDiscussion Paper. Accounting for Depreciation of Income-Producing Property
Discussion Paper Accounting for Depreciation of Income-Producing Property Prepared Jointly By: National Association of Real Estate Companies National Association of Real Estate Investment Trusts December
More informationInterpretation of Financial Statements
Interpretation of Financial Statements Author Noel O Brien, Formation 2 Accounting Framework Examiner. An important component of most introductory financial accounting programmes is the analysis and interpretation
More informationSample Property 930 LaVergne Ln La Vergne, TN 37086
Property Report Sample Property Presented by: My Company 123 Main St Anywhere, CA 12345 Office: Mobile: Fax: You can customize the footer too! 1 Overview Sample Property Purchase Info Square Feet (2 Units)
More informationNature and Purpose of the Valuation of Business and Financial Assets
G. BUSINESS VALUATIONS 1. Nature and Purpose of the Valuation of Business and Financial Assets 2. Models for the Valuation of Shares 3. The Valuation of Debt and Other Financial Assets 4. Efficient Market
More informationReturn on Investment (ROI) Explained
Return on Investment (ROI) Explained Introduction Long-term investment projects by an organisation may be assessed by calculation of its estimated account rate of return (ARR) and, comparing it with a
More informationInvestment Appraisal INTRODUCTION
8 Investment Appraisal INTRODUCTION After reading the chapter, you should: understand what is meant by the time value of money; be able to carry out a discounted cash flow analysis to assess the viability
More informationTaxation of Owner-Occupied and Rental Housing
Working Paper Series Congressional Budget Office Washington, D.C. Taxation of Owner-Occupied and Rental Housing Larry Ozanne Congressional Budget Office Larry.Ozanne@cbo.gov November 2012 Working Paper
More informationKicking The Tires: Determining the Cost of Capital
- 1 - Kicking The Tires: Determining the Cost of Capital Howard E. Johnson The cost of capital refers to the discount rate or capitalization rate that is used by corporate acquirers in assessing the value
More informationPreparing cash budgets
3 Preparing cash budgets this chapter covers... In this chapter we will examine in detail how a cash budget is prepared. This is an important part of your studies, and you will need to be able to prepare
More informationSpecial Report Data Centers: Financing Strategies for Data Centers
Special Report Data Centers: Financing Strategies for Data Centers AUGUST 2010 FINANCING STRATEGIES OVERVIEW Data Center projects present unique financing challenges. The highlyspecialized infrastructure
More informationSTATEMENT OF CASH FLOWS AND WORKING CAPITAL ANALYSIS
C H A P T E R 1 0 STATEMENT OF CASH FLOWS AND WORKING CAPITAL ANALYSIS I N T R O D U C T I O N Historically, profit-oriented businesses have used the accrual basis of accounting in which the income statement,
More informationReal Estate Investment Newsletter July 2004
The Case for Selling Real Estate in California This month I am writing the newsletter for those investors who currently own rental properties 1 in California. In any type of investing, be it real estate,
More informationAPPENDIX 3 TIME VALUE OF MONEY. Time Lines and Notation. The Intuitive Basis for Present Value
1 2 TIME VALUE OF MONEY APPENDIX 3 The simplest tools in finance are often the most powerful. Present value is a concept that is intuitively appealing, simple to compute, and has a wide range of applications.
More informationOrdinary income. Net income. (Millions of Yen) (Millions of Yen) 13,683 6,902 5,333 5,332 4,300 4,500 - 13,683 6,849 5,280 5,279 4,257 4,500 -
January 9, 2014 For Immediate Release Advance Residence Investment Corporation (Securities Code: 3269) 3-26 Kanda Nishiki-cho, Chiyoda-ku, Tokyo Kenji Kousaka, Executive Director Asset Management Company:
More informationTo understand and apply the concept of present value analysis in management decision making within the framework of the regulatory process.
Present Value Analysis Effective management decision making means making the best possible choices from the available investment alternatives consistent with the amount of funds available for reinvestment.
More informationSECTION FOUR DEBT SERVICE COVERAGE RATIO
SECTION FOUR DEBT SERVICE COVERAGE RATIO The previous Section thoroughly covered Income and Expense on commercial real estate. Once the Net Operating Income (No1) is accurately calculated it is then used
More informationTHE VALUATION OF INCOME PROPERTIES USA 1. INTRODUCTION 1
Investit Software Inc. Real Estate Investment, Buy vs. Lease, Lease & Development Analysis Software www.investitpro.com 1-877-878-1828 Email: Investit@investit.ca THE VALUATION OF INCOME PROPERTIES USA
More informationHotel Investment Analysis II: What s the Real Deal? 167
Hotel Investment Analysis II: What s the Real Deal? Bernice T. Dowell More than 15 years ago, I studied the impact of a trade name on the business of an operating hotel and how it should be looked at from
More informationTHE ARLA REVIEW & INDEX
THE ARLA REVIEW & INDEX for Residential Investment FOURTH Quarter 2014 Fourth Quarter 2014 Compared with three months ago, the average weighted rental return for houses is up from 5.0% to 5.1%, its second
More informationPaper F9. Financial Management. Fundamentals Pilot Paper Skills module. The Association of Chartered Certified Accountants
Fundamentals Pilot Paper Skills module Financial Management Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FOUR questions are compulsory and MUST be attempted. Do NOT open this paper
More informationFIN-331 PHASE 2 HOMEWORK QUESTIONS (ERRATA: 10-24-2015)
FIN-331 PHASE 2 HOMEWORK QUESTIONS (ERRATA: 10-24-2015) Chapter 7: Key Terms Accrued depreciation Appraisal Comparable properties Market value Property adjustments Replacement cost Reproduction cost Restricted
More informationCOMMERCIAL REAL ESTATE INVESTING
REDEFINING REAL ESTATE INVESTING CRE101: INTRODUCTION TO COMMERCIAL REAL ESTATE INVESTING COMMERCIAL REAL ESTATE INVESTING ABOUT REALCROWD RealCrowd is a private, secure and simple-to-use online platform
More informationUsing the FRR to rate Project Business Success
Using the FRR to rate Project Business Success The purpose of this note is to explain the calculation of the financial rate of return (FRR), with a view, firstly to clarify the FRR concept and its determination,
More informationCash Flow Analysis Multi-Family Building For Sale Boston, Massachusetts 02215
Property Report Cash Flow Analysis Presented by: Pantheon Property Group 665 Beacon Street, Suite #305 Boston, Massachusetts 02131 Office: Mobile: (830) 660-5265 Data Analysis Provided by Pantheon Property
More informationHotel Valuation Techniques
Hotel Valuation Techniques By Jan deroos, Ph.D., and Stephen Rushmore, CHA, MAI Jan deroos, Ph.D., is the HVS International Professor of Hotel Finance and Real Estate at the Cornell University School of
More informationHow to Assess Your Financial Planning and Loan Proposals By BizMove Management Training Institute
How to Assess Your Financial Planning and Loan Proposals By BizMove Management Training Institute Other free books by BizMove that may interest you: Free starting a business books Free management skills
More informationLesson 13: Applying for a Mortgage Loan
1 Real Estate Principles of Georgia Lesson 13: Applying for a Mortgage Loan 2 Choosing a Lender Types of lenders Types of lenders include: savings and loans commercial banks savings banks credit unions
More informationHow a Hotel Valuation is Undertaken and What a Bank Really Needs from a Valuation
Hotel Valuation How a Hotel Valuation is Undertaken and What a Bank Really Needs from a Valuation This summary paper outlines what is involved in a hotel valuation, and how it can be useful, as well as
More informationAchieving your goals through Financing. Cooperative Financing Models that may work for you
Achieving your goals through Financing Cooperative Financing Models that may work for you Overview Cooperative Financing Overview of the environment Interest Rates Why now is the best time to borrow Reasons
More informationEHDOC Robert Sharp Towers II Limited Partnership (A Florida Limited Partnership) Financial Report October 31, 2014
EHDOC Robert Sharp Towers II Limited Partnership Financial Report October 31, 2014 Contents Independent Auditor's Report 1 Financial Statements Balance sheet 2 3 Statement of income 4 Statement of changes
More informationTHE STOCK MARKET GAME GLOSSARY
THE STOCK MARKET GAME GLOSSARY Accounting: A method of recording a company s financial activity and arranging the information in reports that make the information understandable. Accounts payable: The
More informationA Tutorial on Argus Portfolio Analysis
Tutorial on Argus Portfolio- Level Analysis A Tutorial on Argus Portfolio Analysis Background Since most developers, investors and other parties actively involved in real estate have multiple properties,
More informationAccounts Payable Accounts Receivable Amortization Annual Interest Rate Annual Percentage Rate Attorney Fees Bridge Financing
Accounts Payable Accounts payable are business debts that must be paid off within a relatively short period of time, as opposed to long term debt such as mortgage loans and equipment loans. Accounts payable
More informationLease-Versus-Buy. By Steven R. Price, CCIM
Lease-Versus-Buy Cost Analysis By Steven R. Price, CCIM Steven R. Price, CCIM, Benson Price Commercial, Colorado Springs, Colorado, has a national tenant representation and consulting practice. He was
More informationBroker Final Exam Review Math
Broker Final Exam Review Math Copyright Gold Coast Schools 1 Minimum Annual Production Page 73 A brokerage office had 200 sales last year. After paying sales commissions to the associates, there was $229,000
More informationFinancial and Cash Flow Analysis Methods. www.project-finance.com
Financial and Cash Flow Analysis Methods Financial analysis Historic analysis (BS, ratios, CF analysis, management strategy) Current position (environment, industry, products, management) Future (competitiveness,
More informationWhite Paper. LIHTC Apartments Mortgage Risk Why They Do Not Default. By George Vine, CFA
White Paper LIHTC Apartments Mortgage Risk Why They Do Not Default By George Vine, CFA Introduction People generally know that LIHTC mortgages (first mortgages on low income housing tax creditfinanced
More informationAnnouncement 08-16 June 25, 2008
Announcement 08-16 June 25, 2008 Amends these Guides: Selling Bankruptcy, Foreclosure, and Conversion of Principal Residence Policy Changes; and Revised Property Value Representation and Warranty Requirements
More informationCorporate Credit Analysis. Arnold Ziegel Mountain Mentors Associates
Corporate Credit Analysis Arnold Ziegel Mountain Mentors Associates I. Introduction The Goals and Nature of Credit Analysis II. Capital Structure and the Suppliers of Capital January, 2008 2008 Arnold
More informationFinancial Statements December 31, 2014 and 2013 Josephine Commons, LLC
Financial Statements Josephine Commons, LLC www.eidebailly.com Table of Contents Independent Auditor s Report... 1 Financial Statements Balance Sheets... 3 Statements of Operations and Members Equity...
More informationArkansas Development Finance Authority, a Component Unit of the State of Arkansas
Arkansas Development Finance Authority, a Component Unit of the State of Arkansas Combined Financial Statements and Additional Information for the Year Ended June 30, 2000, and Independent Auditors Report
More informationAPPENDIX. Interest Concepts of Future and Present Value. Concept of Interest TIME VALUE OF MONEY BASIC INTEREST CONCEPTS
CHAPTER 8 Current Monetary Balances 395 APPENDIX Interest Concepts of Future and Present Value TIME VALUE OF MONEY In general business terms, interest is defined as the cost of using money over time. Economists
More informationGenworth MI Canada Inc. BRIAN HURLEY, Chairman and CEO
Genworth MI Canada Inc. BRIAN HURLEY, Chairman and CEO Genworth MI Canada Inc. 1 Scotia Capital Financial Summit September 2012 Forward-Looking and Non-IFRSs Statements This presentation includes certain
More information