03_Valuation

Question 1

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Perpetuity

Answer 1

• annual cash flow that occurs forever at end of every period

PV = CF / r

Question 2

Perpetuity Factor

Answer 2

1 / r

r = discount rate (cost of capital, interest rate, opportunity cost)

Question 3

Growing Perpetuity

Answer 3

• annual cash flow that grows forever
• same cash flow at end of every period (year)
• first CF at end of 1st period

PV = CF / (r-g)

g = growth rate of CF and g < r

Question 4

Annuity

Answer 4

• constant annual cash flow for a number of periods
• same CF at end of every period
• First CF at end of 1st period
• last CF at end of last period T

PV = CF/r x (1 - (1/(1+r)^T))

Question 5

Annuity with Growth

Answer 5

PV = [CF / (r-g)] x [1 - ((1+g)/(1+r))^T]

Question 6

4 Kinds of Cash Flows

Answer 6

• future cash flow
• cash flow stream
• (growing) perpetuity
• (growing annuity)

Question 7

3 groups of PV formulas

Answer 7

• discount factor
• perpetuity factory (with growth)
• annuity factor (with growth)

Question 8

2 investment criteria

Answer 8

• NPV
• IRR

Question 9

What is an asset from a business perspective

Answer 9

• asset is a **sequence of cash flows **
• valuing an asset requires valuing a sequence of cashflow at Present Value

Question 10

2 types of Cash Flow in context of Real Estate

Answer 10

• operating
• reversion (sale of property)

Question 11

Potential Gross Income
PGI

Answer 11

Rent x sqm

Question 12

Net Operating Income
**NOI **

Answer 12

Potential Gross Income
- Vacancy Allowance
+ Other Income (e.g. parking, laundry)
- Operating Expenses

Question 13

Vacancy allowance

Answer 13

vac. rate x PGI

PGI = Potential Gross Income

Question 14

Property Before-tax Cash Flow
PBTCF

Answer 14

Net Operating Income (NOI)
- Capital Improvement Expenditures (CI)

Question 15

Operating Cash Flow
Formula

Answer 15

**PGI **
-v
+OI
-OE
= NOI
- CI
= PBTCF

Question 16

Reversion Cash Flow
Formula

Answer 16

Property Value at time of sale (V)
- Selling Expenses (e.g. broker) (SE)
= Property before-tax cash flow (PBTCF)

Question 17

Vacancy allowance
Definition

Answer 17

• expected effect of vacancy in the net cash flow of the property
• usually expressed as % of PGI
  - Estimation:
• Projected vacant periods / average tenant period
• long-term local market vacancy rate + spread between building vacancy rate and market vacancy rate

Question 18

Examples
Operating Expenses

fixed vs variable

Answer 18

Fixed
- property taxes
- property insurances
- security
- management

Variable
- maintenance & repairs
- utilities (not paid by tenants)

for small properties: usually 5% to 10% of EGI per year
for office properties: usually 2% to 3% of EGI per year

Question 19

Capital Expenditures
Examples

Answer 19

Leasing Costs:
- tenant build-outs or improvement expenditures (TIs)
- Leasing commissions to brokers

Property Improvements
- major repairs
- replacement of major equipment
- major remodeling ofbuilding, ground & fixtures
- expansion of rentable area

• projections for most types of commercial property should average at least 10% to 20% of NOI
• or annual average of about 1% to 2 % of property value

Question 20

Reversion Cash FLow
Definition

Answer 20

• sale price - txs costs
• projected **NOI next year of the sale / terminal cap rate **

Question 21

Capital Improvement Expenditures
Abbreviation

Answer 21

CI

Question 22

Property Cash Flows

Answer 22

PBTCF / (1+r) ^T

= (NOI - CI) / (1+r)^1 …. + (V(T) - SE(t))/ (1+r)^T

Question 23

What is not considered in Operating Cash flow Analysis

Answer 23

• depreciation
• income tax