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picture1_Business Power Point Slides 32049 | 07a Real Estate Metrics And Terminology   The Devil Is In The Details (powerpoint) Thomas Nealon, Thomas Kaufman


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File: Business Power Point Slides 32049 | 07a Real Estate Metrics And Terminology The Devil Is In The Details (powerpoint) Thomas Nealon, Thomas Kaufman
goals introduce business economics terminology and drafting discuss finance terms and business impacts give examples of practical effect or implementation of these terms give specific drafting examples and discuss 2 ...

icon picture PPTX Filetype Power Point PPTX | Posted on 09 Aug 2022 | 3 years ago
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                         Goals
    • Introduce Business Economics, 
      Terminology and Drafting
       –Discuss Finance Terms and Business Impacts
       –Give Examples of Practical Effect or 
         Implementation of These Terms
       –Give Specific Drafting Examples and Discuss 
                                                      2
               How Much Do You Pay?
                  (What is Fair Market Value)
    Capitalization Rate (Cap Rate)
    • “Cap Rate” the return demanded by investor on the asset
    • Cap Rate developed pre-computer
    • Cap Rate = Net Operating Income (NOI)(Stabilized)
                   Purchase Price
      Purchase = Net Operating Income (NOI)(Stabilized)
      Price        Cap Rate
    • Multiplier = 1/Cap Rate
    • e.g., If Cap Rate = 10%
      Purchase Price = 10 (=1/.10) x Income
               If Cap Rate = 5%
      Purchase Price = 20 (=1/.05) x Income
                                                    3
                 How Much Do You Pay?
                    (What is Fair Market Value)
     Why do you care about Cap Rate?
       1.  Cap Rate increase (decrease) decreases (increases) sale 
           price of asset and therefore affects return on investment
       2.  Many other and better valuation methods 
          •   Discounted cash flow
          •   Internal rate of return
       3.  The best spreadsheet does not determine who wins in a real 
           estate investment  or  who maximizes their return
       4.  Cap Rate adjustments by rating agencies
       5.  Cap Rate change effects on value are minimized as length of  
           holding period increases
                                                               4
                                            How Much Do You Pay?
                                                  (What is Fair Market Value)
            Required Increase in NOI as a percentage to maintain constant Fair Market 
                                              Value given an increase in Cap Rates
                      Cap                              NOI 
                      Rate                             Increase
                      New   /               5%              6%               8%             10%              12%
                      Old
                           4%              25%             50%             100%             150%            200%
                           5%                              20%              60%             100%            140%
                           7%                                               14%             43%              72%
                           9%                                                                11%             33%
                          10%                                                                                20%
                                                                                                                                       5
                 How Do You Finance ?
               (Debt Covenants in Loan Documents)
    Debt Service Coverage Ratio (DSCR)
    Definition:  The ratio of net operating income (NOI) to the annual debt service 
       on a property     DSCR  =  NOI / annual debt service
    •  Often used in financial covenants to:
       – Impose cash management restrictions (lock box or additional consent 
         requirements)
       – Condition a loan extension
       – Increase or decrease interest rate
       – Allow “earn out” advances
       – Trigger defaults or mandatory reductions in outstanding principal
       – Condition permitted assumptions of loans
       – Release guarantors
       – Release of reserve
       – Requires a reserve to be set up
                                                          6
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...Goals introduce business economics terminology and drafting discuss finance terms impacts give examples of practical effect or implementation these specific how much do you pay what is fair market value capitalization rate cap the return demanded by investor on asset developed pre computer net operating income noi stabilized purchase price multiplier e g if x why care about increase decrease decreases increases sale therefore affects investment many other better valuation methods discounted cash flow internal best spreadsheet does not determine who wins in a real estate maximizes their adjustments rating agencies change effects are minimized as length holding period required percentage to maintain constant given an rates new old debt covenants loan documents service coverage ratio dscr definition annual property often used financial impose management restrictions lock box additional consent requirements condition extension interest allow earn out advances trigger defaults mandatory red...

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