Exam 12: Advanced Micro-Level Valuation

The NOI is $1,000,000, the debt service is $800,000 of which $700,000 is interest, the depreciation expense is $250,000. What is the Before-tax Cash Flow to the equity investor EBTCF) if there are no capital improvement expenditures or reversion items this period?

For the same property as above, suppose the underwriting criteria is a maximum loan/value ratio LTV) of 80%, and we estimate property value by direct capitalization using a rate of 7% on the stated NOI. By this criterion what is the maximum loan amount?

What does each partner bring to the deal in a typical real estate development joint venture arrangement between a local entrepreneur and national capital source? What does each partner expect to get out of the deal?

What we have called in class the "canonical" formula for determining the OCC of a development project investment is based on all of the following except:

Based on the information below, analyze whether the development project should be undertaken, and state what is the maximum land value that could support economic development. Also compute the "canonical" OCC of investment in this development project, and compare that to the project's going-in IRR at the given land price. State clearly any assumptions you feel you must make beyond the information provided. You must clearly show your work and steps for full credit and you may ignore the potential value of waiting to invest later). • Time zero price of the site is $1,000,000. • Total construction cost is projected to be $3,000,000, and construction is expected to take 1 year T =1), with payment for work done owed to the contractor projected to occur in a single payment of $3,000,000 at the end of the 1-year construction phase. • Construction completion is expected to be followed by 1 year of absorption lease-up), that can be represented by a single projected net operating cash flow at the end of year 2 of negative $200,000. • Stabilized operation beginning at the end of Year 2 includes projected NOI = $400,000/yr with projected growth of 1% per year thereafter based on rental market projections. • OCC going-in IRR) for investments in stabilized property projected to be 8% per annum. • OCC for lease-up asset investments is 200 basis-points greater than the OCC for stabilized investment. • OCC of construction cost cash flows is 3.50%.

Why is it important to apply separate DCF analyses to the development construction) phase and to the stabilized operational phase of an investment in a development investment?

Consider a 20-year monthly-payment), 8%, $80,000 mortgage with 2 points prepaid interest up front. What is the yield to maturity?

A certain housing development has the following projected equity net cash flows per year in thousands): Year 1 2 3 4 5 Project\nobreakspacenet\nobreakspacecash\nobreakspaceflows \8 ,000) \4 ,000) \2 ,000 \6 ,000 \1 0,000 There are to be two classes of investors providing the equity capital. A preferred investor is committed to provide $6 million with a 10% preferred return computed on a current basis, accumulated with compounding). The subordinated or residual) equity partner will put in the first $3 million, and then whatever is required after the preferred investor puts in their $6 million. Set up the projected capital accounts of these two classes of investors with their projected cash flows each year, and compute the projected IRR for: a) The underlying project equity as a whole; b) The preferred equity investor; and c) The subordinated equity investor.

According to real option theory, even if construction were instantaneous and the property market were perfectly liquid, it might be optimal not to immediately build a project whose value currently exceeds its construction cost, because:

A REIT has expected total return on equity of 15%, interest on their debt is 9%, and their debt-to-total-value ratio is 40%. What is the REIT's average cost of capital?

Consider a 6.5% loan amortizing at a 20-year rate with monthly payments. What is the maximum amount that can be loaned on a property whose net operating income NOI) is $1,000,000 per year, if the underwriting criteria specify a debt service coverage ratio DCR) no less than 120%?

All of the following are characteristics of the classical "Simple Financial Feasibility Analysis" SFFA) procedure for real estate development projects, except:

The NPV investment decision rule is applicable even in the case of a real option, such as a real estate development investment decision, because:

In translating construction cost cash flows across time to arrive at the present certainty-equivalent value of the construction cost as of time zero, the opportunity cost of capital OCC) that should be used as the discount rate is best described as follows:

Fill in the table below assuming end-of-month draws, 8% interest per annum compounded monthly, and no payments owed for either interest or principal during the construction. Month New Draw Current Interest New Loan Balance 1 \ 500,000 2 \ 700,000 3 \ 400,000

Consider a 30-year monthly-payment), 6%, $300,000 mortgage with 3 points prepaid interest up front. What is the yield to maturity?

Discuss the statement: "Developers don't really use the NPV Rule in making development decisions."

Two loans have the same interest rate and maturity. Loan A has a 15-year amortization rate. Loan B has a 30-year amortization rate. In comparing these two loans from a borrower's perspective: