Alternative Investments Flashcards Preview

CFA Level 2 > Alternative Investments > Flashcards

Flashcards in Alternative Investments Deck (25):

Real Estate Valuation Approaches

1) Income Approach
2) Cost Approach
3) Sales Comparison Approach


Net Operating Income (NOI)

A measure of income after deducting expenses but before deducting financing costs and taxes.

NOI = income - vacancy - operating expenses


Cap Rate

Cap Rate = Discount Rate - Growth Rate

Cap Rate = NOI/Value

Cap Rate = NOI/Sale Price


Stabilized NOI

The NOI that is used if it is currently not getting full market rents because of renovations for example. It is the NOI that the building would get once renovations are complete.



When fixing a problem on a property, it will add value that is at least as great as the cost of the cure. Ie: fixing a roof will add at least as much value as the cost of fixing.


Debt Service Coverage Ratio (DSCR)

The ratio of the first-year NOI to the loan payment. Includes both interest and principal.

DSCR = NOI/Debt service


Mortgage REITS

REITs that invest the bulk (75% or more) of their assets in interest bearing mortgages, mortgage securities, or short-term loans secured by real estate.


Hybrid REITs

REITs that own and operate income-producing real estate, as do equity REITs, but invest in mortgages as well.



The REIT has a controlling interest in and serves as the general partner of a partnership and may own properties at both the REIT level and the partnership level.



The REIT owns more than one partnership and may own properties at both the REIT level and the partnership level.


Book Value Per Share

Based on accounting values


Net Asset Value Per Share

Based in market values

NAV = (NOI/Cap Rate) - Liabilities


Funds From Operations (FFO)

Accounting net earnings - depreciation - deferred tax charges (the deferred portion of race expense) - gains or losses from sales of property and debt restructuring


Adjusted Funds from Operations (AFFO)

Also known as funds available for distribution (FAD) or cash available for distribution (CAD), is a refinement if FFO that is designed to be a more accurate measure of current economic income.

AFFO = FFO - non cash rent - maintenance capex - leasing costs


Non Cash Rent

An amount equal to the difference between the average contractual rent over a lease term (the straight-line rent) and the cash rent actually paid during a period.


Private Equity Gross IRR

Relates to cash flows between the private equity fund and and it's portfolio companies and is often considered a good measure of the investment team's track record in creating value.


Private Equity Net IRR

Related to cash flows between the private equity fund and the LPs, and so captured the returns enjoyed by investors.


Return Components on an LBO

The return on preference shares, the increase in price multiples on exit, and the reduction in debt claims.



Typically used in venture capital investments where the acquisition price paid for portfolio companies by private equity firms is tied to the companies' future performance.


Dilution in a Private Equity Transaction

The implicit cost of reduced investor value when firms take on additional financing or when stock options are granted (and exercised) by management.


Back-Fill Bias

When a new hedge fund is added to an index and the fund's historical performance is added to the index's historical performance. The problem is that only funds that survived will have their performance added to the index, resulting in an upward bias.


Distribution Waterfall

Identifies the profit allocation between LPs and GPs and specifies when GPs can receive carried interest.



Refers to the equity allocation between shareholders and management. Enables management to increase its equity allocation depending on the company's performance and the return achieved by the private equity firm.


Clawback Provision

Requires the general partner in a private equity transaction to repay part of previously distributed profits if the fund subsequently underperforms.


Hedonic Price Index

Relies on transaction data and the regression model explains the variation in transaction prices based on differences between individual properties sold.