1. Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Constructing Pro-formas Real Estate I/S Potential Gross Income (PGI) - Vacancy & Collection (V&C) Effective Gross Income (EGI) + Other Income - Operating Expenses Net Operating Income -Capital Improvement Exp. (CI) Property Before-tax Cashflow (PBTCF) Finance I/S Sales - COGS Gross Profit - S&A Expenses EBIT

2. Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Potential Gross Income (PGI) # of units x rent per unit; rent/ft 2 x # of ft 2  Forecasting Growth:  In Equilibrium –  Disequilibrium:  Excess Supply –  Excess Demand – What about Functional or and/or Economic Depreciation?

3. Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Intra-building Lease Analysis  Suppose you are tasked with projecting the future rental income of a 10-unit commercial property. The facility currently is fully leased, with each tenant originally signing a five-year lease upon their occupancy date (which varies by tenant). Existing lease terms are: TenantRemaining Lease Term (Yrs)RentFT 2 11$64,0008,000 21$96,00012,000 32$81,50010,000 42$122,00015,000 53$50,0006,000 63$210,00025,000 74$160,00018,000 84$70,0008,000 95$200,00022,000 105$150,00016,000

4. Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Calculating PGI  What is PGI for Year 1?  What is PGI for Year 2?  Notes: 

5. Real Estate Investments David M. Harrison, Ph.D. Texas Tech University What Drives PGI???  Individual Tenant Rents  Tenant #1 –  Tenant #2 –  PGI 2 =  Additional Considerations 

6. Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Calculating PGI, cont.  Now suppose you are analyzing a brand new 36 unit apartment complex set to open next fall across the street from the local university. You believe that under current market conditions, you can fully lease the facility at a rate of $1,200 per month. Each lease will be for a 1 year term, and general inflation is forecast to be 4 percent for the foreseeable future. A quick market analysis reveals the following information about similar complexes in the area: ComplexRent/MonthSizeAge Armadillo Estates$8251,05014 Cottonpatch Cabins$1,3751,4002 Red Raider Row$8001,00012 Sunset Suites$1,0501,1006 Tejas Towers$70090022 Victor’s Vintage Villas$1,1251,50026

7. Real Estate Investments David M. Harrison, Ph.D. Texas Tech University PGI Example #2, cont.  What is PGI 1 ?  If real estate is an inflation hedge, calculate PGI for years 2 – 10:  Does age influence rent?