Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Accounting for Risk in DCF Analysis  Ex. #1: Suppose you are considering the acquisition.

Slides:

Advertisements

Similar presentations

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University Creative Financing Structures Common Forms of Creative Financing Assumable Loans Advantages:

Advertisements

Chapter 8 Valuation Using the Income Approach

INCOME CAPITALIZATION APPROACH TO VALUE  A BASIC INVESTMENT PREMISE IS: THE HIGHER THE EARNINGS, THE HIGHER THE VALUE.  THE PRINCIPLE OF ANTICIPATION.

Chapter 19: Investment value: NPV and IRR. Outline DCF framework Discounting NOI.

Net Present Value and Other Investment Criteria

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University  TVM - Compounding $ TodayFuture $ Discounting Time Value of Money.

Finance 1: Background 101. Evaluating Cash Flows How would you value the promise of $1000 to be paid in future? -from a friend? -from a bank? -from the.

Chapter 4: Time Value of Money

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University Interest Rates Base Interest Rate Minimum interest rate Risk Premium Spread Measures:

1 Risk, Return, and Capital Budgeting Chapter 12.

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Types of Real Options  Abandonment or Shutdown Options  Investment Timing Options.

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Chapter 15 Valuation Analysis: Income Discounting, Cap Rates and DCF.

BASIC VALUATION: "DCF" & “NPV”...

INVESTMENT DECISION MAKING LEARNING OBJECTIVES Identify the basic types and characteristics of investment properties. Forecast annual cash flows, net of.

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Chapter 14 Cash Flow Analysis.

Chapter 16 Analyzing Income- Producing Properties.

VALUATION OF INCOME PROPERTIES: APPRAISAL AND THE MARKET FOR CAPITAL

Real Estate Valuation. Real Estate Valuation: Market Comparison Approach.

Supply and Demand in the Space Market

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Growing Annuities  Definition –  Mathematically:

Basics of Valuation By Norm Miller, PhD. Introduction  Value as a concept is theoretical in nature  PRICE is usually factual in nature  Value by nature.

2 8/21/ Chapter 2 Income Concepts. 2 8/21/ Chapter Objectives Upon completion of this chapter, the participant will be able to: –Contrast.

Fundamentals of Real Estate Lecture 14 Spring, 2003 Copyright © Joseph A. Petry

Outline The Property Cash Flow Discounted Cash Flow

VALUATION BY INCOME CAPITALIZATION LEARNING OBJECTIVES Explain the difference between appraisal and investment analysis. Estimate the NOI in a reconstructed.

Capital expenditure decisions: an introduction

Chapter 8: Income Capitalization Approach

Return, Income, Value and Capitalization Learning objectives: –Understand the meaning of investment decision making. –Understand the role of the appraisal.

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University  In general, the riskiness of a portfolio (  portfolio ) will -  Systematic vs.

The Arena is Compliant with I-91 $14 Million ÷ $200 Million = 7.0% > 2.7% = I-91 Compliance In secured annual revenues City/County Investment Annual return.

Multi-Period Analysis Present Value Mathematics. Real Estate Values Set by Cash Flows at different points in time. Single period Analysis revisited 

Growth Options Martin Development Co. is deciding whether to proceed with Project X. The cost would be $9 million in Year 0. There is a 50 percent chance.

Chapter 9: Leased Fee and Leasehold Valuation. Introduction  Leases affect typical investment returns by impacting:  Net operating income  Reversionary.

Ch 19 Analyzing Income Producing Properties. 2 Outline  I. Advantages of Real Estate Investment  II. Disadvantages of Real Estate Investment  III.

Opportunity Cost of Capital and Capital Budgeting

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University Interest Rate Determination Classical Theory Marginal Efficiency of Capital (MEI) –

©2014 OnCourse Learning. All Rights Reserved. CHAPTER 10 Chapter 10 The Basic Idea: DCF and NPV SLIDE 1.

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Constructing Pro-formas Real Estate I/S Potential Gross Income (PGI) - Vacancy &

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved McGraw-Hill/Irwin Slide 1 CHAPTER TEN VALUATION OF INCOME PROPERTIES: APPRAISAL AND THE MARKET.

Fundamentals of Real Estate Lecture 4 Spring, 2002 Copyright © Joseph A. Petry

Discounted Cash Flow Valuation. 2 BASIC PRINCIPAL Would you rather have $1,000 today or $1,000 in 30 years?  Why?

Opportunity Cost of Capital and Capital Budgeting Chapter Three Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University “In general, the value of a parcel of real estate is the present value of the expected.

Chapter 30: LEASES & LEASING STRATEGY: LEASE CHARACTERISTICS AFFECTING VALUE OR RENT: Space - location, size, shape, adjacent uses (synergy,

©2014 OnCourse Learning. All Rights Reserved. CHAPTER 11 Chapter 11 Nuts and Bolts for Real Estate Valuation: Cash Flow Proformas and Discount Rates SLIDE.

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Real Estate Investment Analysis  What is this course about?  Real –  Estate –

Valuation Using the Income Approach. The Income Approach to Appraisal A. Rationale: Value = present value of future income Income capitalization: converting.

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University Finance Theory and Real Estate Goal – Asset Valuation: Risk vs. Uncertainty.

CHAPTER 9 Net Present Value and Other Investment Criteria.

Making an investment decision. Value  Investment value: The value determined in view of investment objectives, goals and constraints.  Market value:

BARTRAM & COCHRAN Real Estate Math for Attorneys Marc Louargand, Ph.D., CRE ®, FRICS & Maura Cochran, CRE ®

Investing in Real Estate ADVANTAGES Pride of Ownership Personal Control Self Use Competitive Returns Safety of Capital Cash Flow Leverage Tax Benefits.

Fundamentals of Real Estate Lecture 8 Spring, 2003 Copyright © Joseph A. Petry

LEARN ABOUT THE PROCESSES OF SAVING AND INVESTING YOUR MONEY AND SOUND FINANCIAL PLANING Savings and Investment Planning.

IS NPV IS SUPERIOR TO IRR

CH 9 NET PRESENT VALUE AND OTHER INVESTMENT CRETERIA.

REAL ESTATE Investments Vocabulary Rental Property – real estate available for being rented and an alternative to investment opportunities available.

NCREIF Database for Appraisers Jeffrey D. Fisher, Ph.D. NCREIF Consulting Director of Research Professor, Indiana University.

1 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin CHAPTER 3 INVESTMENT DECISIONS Forecast cash flows from operations.

Investment Method also known as Income Capitalization Approach

Chapter 8 Valuation Using the Income Approach

Alternative Investments

Chapter 19 Investment Decisions: NPV and IRR

The Residual Method Introduction:

The Income Capitalization Approach

Chapter 8 Valuation Using the Income Approach

Valuation Using the Income Approach

Commercial Real Estate Why the is in More Demand?.

The Income Capitalization Approach

Valuation Notes Tom Nelson

Presentation transcript:

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Accounting for Risk in DCF Analysis  Ex. #1: Suppose you are considering the acquisition of an income producing property. The building is currently leased for the next 5 years with annual (year-end) cashflows of $2,000,000. At the end of the current lease, you expect rents to increase to $2,500,000 (annually) for the foreseeable future. You anticipate selling the property ten years from today, at an expected multiple of 12 times the prevailing market rent. Market rates (OCC) are currently 8%, but given the uncertainty surrounding future rental rates a 2% risk premium must be added to interlease rates.

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Intra- and Inter-lease CF’s Revisited  What is the value of this property (to you) today?  Assuming this project is representative of other similar projects we may wish to evaluate in the marketplace, what “blended IRR” would be appropriate for analyzing these alternative instruments?  Confirm your answer:

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University The Value of Certainty  Ex. #2: Now suppose we have the opportunity to extend our existing tenant lease for an additional two years (at the expected market rate of $2,500,000).  Would the tenant like this? Why/Why not?  How would this change the value of our investment?

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University The Value of Certainty, cont.  At what rent would you be indifferent to locking in a two-year extension?  Verify your answer:

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Valuation Short-Cuts  Direct Capitalization  Advantages:  Disadvantages:  Gross Income Multiplier (GIM)  Advantages:  Disadvantages:

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Common Mistakes in DCF Analysis  GIGO –   Conceptual Errors –   Conclusion:

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Estimating Inter-lease Discount Rates  Ex. 10A: Suppose in a certain property market the typical lease term is 5 years, the cap rate (cash yield) is 7%, long term property value and rental growth rate is 1% per year, leases provide rent step-ups of 1% per year (per the expected growth rate), and the tenant borrowing rate (intralease discount rate) is 6%. What is the inter-lease discount rate?