Chapter 11 Traditional Investment Criteria 4 Rules of Thumb Criteria –General Characteristics –Payback Period Methods Gross Income Multiplier Net Income Multiplier BTCF Multiplier (R e ) ATCF Multiplier

Chapter 11 Traditional Investment Criteria 4 Rules of Thumb Criteria –Average Rate of Return Methods Average Rate on Net Operating Income Average Rate on Before Tax Cash Flow Average Rate on After Tax Cash Flow Adjusting for Reversion –Decision Rules –Limitations of Rules of Thumb

Chapter 11 Traditional Investment Criteria 4 Ratio Analysis –Leverage and Operating Ratios Mortgage Debt to Property Value Ratio (LTV) Debt Coverage Ratio (DCR) Default Ratio (DR) Total Asset Turnover Ratio (TAT) Operating Expense Ratio (OER)

Chapter 11 Traditional Investment Criteria 4 Ratio Analysis –Profitability Ratios Profit Margin Ratio Return to Equity on Total Investment Return on Equity “System of Financial Analysis” –Limitations of Ratio Analysis

Chapter 11 Traditional Investment Criteria 4 Traditional Appraisal Methods –Key Concepts Anticipation - TVM Change - Four Forces Substitution Contribution

Chapter 11 Traditional Investment Criteria 4 Traditional Appraisal Methods –Sales Comparison Approach Comparable sales data –Selection –How many comparables?

Chapter 11 Traditional Investment Criteria 4 Traditional Appraisal Methods –Sales Comparison Approach Adjustment of sales data –Elements of comparison »Property rights conveyed »Conditions of sale »Financing terms »Market conditions »Locational characteristics »Physical characteristics

Chapter 11 Traditional Investment Criteria 4 Traditional Appraisal Methods –Cost Approach Estimating site value Estimating Building Cost –Reproduction cost –Replacement cost Estimating accrued depreciation –Physical deterioration –Functional obsolescence –Economic obsolescence Entrepreneurial Incentive

Chapter 11 Traditional Investment Criteria 4 Traditional Appraisal Methods –Income Approach Gross income multiplier Net income capitalization Discounted cash flow