1. © JR DeLisle, Ph.D. Introduction to Discounted Cash Flow Analysis by James R. DeLisle, Ph.D. March 18, 2014

2. © JR DeLisle, Ph.D. Lecture Preview The Value Proposition Frontdoor/Backdoor Models DCF Prelude DCF: A Visual Overview One Word: GiNiTiBtAtNR Basic Inputs Introduction to Discounted Cash Flow Schedule 1: Pro Forma Cash Flow Schedules II-III: Depreciation and Loan Amortization Schedules IV-V: Capital Gain Taxes and Net Reversion Schedules VI: Financial Ratios DCF Schedules

3. DCF PRELUDE: FRONTDOOR/BACKDOOR

4. © JR DeLisle, Ph.D. The Value Proposition: Value => Cost? Land & Hard Costs Unknown Fees Known Soft Costs & Fee Costs TRCm Value = Income Rate $’s Cost = Create Value Value ?? TRCm = Total Replacement Cost market

5. © JR DeLisle, Ph.D. FD/BD Value Proposition: Cost Value ? Value * Rate = Income Value * Rate Income Frontdoor Value * Rate => Income Value <= Income Rate Backdoor User

6. © JR DeLisle, Ph.D. Frontdoor Model: Sequence Land Hard & Soft Costs TRCm NIr * Wcc / NIR GIr NIR = 1 – (Er + Ptx + Vr)

7. © JR DeLisle, Ph.D. Backdoor Model: Reverse Engineered Land Hard & Soft Costs TRCj NIm / Wcc / NIR GIm NIR = 1 – (Er + Ptx + Vr)

8. © JR DeLisle, Ph.D. Backdoor to Unleveraged DCF Analysis Land Hard & Soft Costs TRCm NIm / Wcc * NIR GIm Market

9. Frontdoor/Backdoor vs. DCF Frontdoor/Backdoor Annuitized Leveraged/Unleveraged Constant Dollars – Before Tax – Before Sale Discounted Cash Flow Non-annuitized Leveraged/Unleveraged Present Value (TVM) – After-tax – After Sale

10. DCF MODELS: A VISUAL PERSPECTIVE

11. © JR DeLisle, Ph.D. Equity Justified: PV of CF + PV Net Reversion NIr GIr PV CF +

12. © JR DeLisle, Ph.D. Net Reversion TRCm NIr GIr Stabilized NOI Sales Price - Sales Exp Net Reversion Appreciation Land Value Depreciation Amortization Mortgage CG Appr x 15% CG Depr x 25% Pb Net Sales Price

13. © JR DeLisle, Ph.D. Equity Justified: PV of CF + PV Net Reversion = Ej NIr GIr Sales Price - Sales Exp - Tax on Sale - Mtg. Bal. Net Reversion PV CF + PV NR

14. © JR DeLisle, Ph.D. Cash Flow: The One Key Word GINITIBTATNR Gross Income Net Income Taxable Income Before Tax Cash Flow After Tax Cash Flow Net Reversion

15. DCF CASE STUDY: INPUTS AND SCHEDULES

16. © JR DeLisle, Ph. D. Real Estate Fundamentals © JR DeLisle, Ph. D. Cash Flow Variables and TRC/FD/BD Inputs Selling Expense Exit Cap Rate DeprLife39 CGTxR15.00% CGTxV25.00%

17. © JR DeLisle, Ph.D. Discounted Cash Flow and Financial Ratios Schedule I: Cash Flow Schedule II: Depreciation Schedule III: Loan Amortization Schedule IV: Net Reversion Schedule V: Capital Gain Tax Schedule VI: Financial Ratios

18. © JR DeLisle, Ph.D. Schedule I: Cash Flow Overview

19. © JR DeLisle, Ph.D. Schedule I: Cash Flow Overview

20. © JR DeLisle, Ph.D. Schedule I: GI to NI

21. © JR DeLisle, Ph.D. Schedule II: Depreciation $3,436,567*(1/39) = $88,117

22. © JR DeLisle, Ph.D. Schedule III: Loan Amortization Calculate Payment Calc. Principal Balance Calc. Prin. Reduction Calc. Interest

23. © JR DeLisle, Ph.D. Schedule III(b): Loan Amortization

24. © JR DeLisle, Ph.D. DCF: NI to BTCF

25. © JR DeLisle, Ph. D. Real Estate Fundamentals © JR DeLisle, Ph. D. Schedule I: BTCF to ATCF If TI > 0, -TI * MtxR If TI < 0, TI * MtxR

26. © JR DeLisle, Ph.D. Schedule IV-V: CGTaxes on Sale & AT Proceeds Schedule IV: AT Proceeds Schedule V: Capital Gain Tax On Sale If, CapGain * 15% AccDepr * 25%

27. © JR DeLisle, Ph.D. Schedule I: Cash Flow 1- 10

28. INTRODUCTION TO DCF RATIOS: KEY FINANCIAL INDICATORS

29. © JR DeLisle, Ph.D. Schedule VI: Financial Ratios

30. © JR DeLisle, Ph.D. Schedule VI: Financial Ratios

31. © JR DeLisle, Ph. D. Real Estate Fundamentals © JR DeLisle, Ph. D. Debt Coverage Ratio Interpretation – DCR provides a measure of the safety of the mortgage position, indicates the cushion between required payments and NOI. – DCR’s should normally be 1.2 or more Equation DCR: 1.3 Target

32. © JR DeLisle, Ph.D. Lecture Review The Value Proposition Frontdoor/Backdoor Models DCF Prelude DCF: A Visual Overview One Word: GiNiTiBtAtNR Basic Inputs Introduction to Discounted Cash Flow Schedule 1: Pro Forma Cash Flow Schedules II-III: Depreciation and Loan Amortization Schedules IV-V: Capital Gain Taxes and Net Reversion Schedules VI: Financial Ratios DCF Schedules