Alternatives

Question 1

Property:

Heterogenous

Homogenous

Answer 1

Heterogenous = different

Homogenous = similar

Question 2

Highest and best use

Measured as % return or actual profit?

Answer 2

Highest and best use relates to both vacant land and brown sites

Actual profit
ie $5m 20% margin is better than $3m 40% margin

Question 3

Limitations of sales comparison method

Answer 3

1) Weak markets and low transactions volumes can make it difficult
2) difficulty finding comparable buildings

Question 4

Real Estate Operating Company =

Answer 4

REOC = Does not have any tax advantages like REITs, they make money from buying and developing properties and selling at higher prices. Low initial investment levels but less earnings predictability.

Question 5

What is the capitalisation rate =

Market Value with Cap rate =

Market Value with All Risk Yield =

Answer 5

Cap rate = discount rate - growth rate

(cap rate is lower than discount rate)

Market value = NOI / Cap rate

Market value = Rent / All Risk Yield

Question 6

Market extraction approach of cap rates

Market value of Property given cap rate =

NOI given taxes =

Answer 6

(NOIa/Sale price + NOIb/Sale price = NOIc/Sale price) / 3 = Average cap rate

MV Property = Overall NOI / Avg Cap Rate

NOI = Potential gross income - property taxes

Question 7

All Risk Yield Given current rent =

Answer 7

All Risk Yield = Current Market rent / Current mkt price of comparable properties

Question 8

Valuation Method =

Answer 8

Assumes tenant bears all operation costs, constant rent which is discounted at the ARY.

Question 9

Value given unrenovated NOI and Renovated NOI?

Answer 9

Unrenovated NOI + [(Renovated NOI (1+g) / r - g] / 1+r

Question 10

If which is larger, current/reversion rent > contract rent/term rent then:

Layer Method =

Term & Reversion method =

PV of term rent =

Answer 10

Reversionary potential for rent increases exists

Layer Method = PV of term rent + PV of incremental rent

Term & Reversion method = PV of term rent + PV reversion to ERV

PV Term rent = old rent / ARY

Question 11

ERV (Estimated Rental Value), Higher Yield, old rent.

PV of incremental rent

PV of reversion to ERV given cap raate

Cap rate =

Answer 11

PV of incremental rent = (ERV - Old rent / Higher yield) x (1 / 1 + Higher Yield)^n

PV of reversion to ERV = (ERV / Cap rate) / 1 + Cap rate

Cap rate = [Discount rate - growth rate] or [NOI / MV]

Question 12

Curable depreciation vs incurable depreciation

Value of incurable depreciation =

Property value =

Answer 12

Curable is where the cost to fix is less than the value it will add and vice versa.

Value of incurable depreciation = [Effective age / Full life of building] x [property value - incurable deprecation]

Property value = cost of building - curable depreciation - incurable depreciation

Question 13

Comparative property 2 stage given age% condition% location%

Answer 13

Stage 1: Comparable property / sq foot = price per sq foot

Price per square foot x 1+ (Age% +/- condition% +/- location%) = adjusted price per square foot

Adjusted price per sq foot x comparable property sq footage = Value of comparable

Question 14

Transaction based property index

vs

Appraisal Based property index

Answer 14

Transaction based property index: Hedonic regression, repeat sales, regularly updated but ‘noisy’ due to volatile transactions.

Appraisal Based property index: Valued for shorter periods, less volatile.

Question 15

Equity dividend rate (cash on cash rate) given NOI, equity and debt service =

First year cash flow =

Debt service ie 6% on £4m =

Equity in context of property?

Debt service coverage ratio =

Answer 15

EDR = First year cash flow(NOI - Debt service) / equity

First year cash flow = NOI - debt servicing

Debt service = 0.06 x 4m = 240k

Equity = difference between purchase amount and mortgage amount

Debt service coverage ratio = First year NOI / Debt service

Question 16

DownREIT

UpREIT

Answer 16

DownREIT = The REIT itself owns properties and partnerships at the REIT level “DownREITpartnerships”

UpREIT = General partner with contolling interest of other partnerships - more common “Upgencontroller”

Question 17

REITs with shorter terms

REITs which are employment sensitive

REITs with high volatility and cyclicality

REITs with less cyclicality

Answer 17

REITs with shorter terms = hotels and residential

REITs which are employment sensitive = Office

REITs with high volatility and cyclicality = Hotels

REITs with less cyclicality = Industrial REITs (logisitics)

Question 18

Private Equity Distributed to Paid In Ratio (DPI) =

RVPI =

Answer 18

DPI = All years distributions / all years paid in capital

A low DPI suggest few successful exits.

RVPI = NAV After Distibutions / Called Down (CUMULATIVE!!) capital

Realised Value Paid In is value relative to paid in capital.

Question 19

IRR of PE given called down capital yearly and operating results yearly =

IRR called down is a negative figure

Answer 19

CF0 = called down1 + Operating result0
CO1 = called down2 + Operating result 1
CO2 = called down3 + operting result 2
CO3 = Operating result 3
CPT: IRR = gross IRR

Question 20

Venture Capital Ownership Fraction =

Ownership fraction =

Answer 20

Venture Capital Ownership Fraction = no. shares x [ownership fraction / 1 - ownership fraction]

Ownership fraction = value invested / value of venture

Question 21

Management Fee given called down =

IRR Operating result =

Answer 21

Management Fee given called down = Cumulative called down x Management fee

IRR Operating result =

Question 22

Check hurdle rate 7% £35m business is sold in Y2?

Answer 22

CF0 = 35m
c01 = 0
C02 = 40m
CPT: IRR = 6.9%
(Does not clear hurdle rate)

Question 23

Land NAV =

NAV ignores what?

Answer 23

NAV = (Operating real assets + Cash & Land) - (MV debt and liabilities)

NAV ignore soft values usch as goodwill and deferred tax.

Question 24

AFFO

vs

FFO

Answer 24

AFFO = Removes straight line adjustment to ‘cash rent’

AFF = FFO - non cash rent - recurring maintenance capex

vs

FFO = Uses a straight line rent and adds back depreciation.

FFO = NI + Depreciation - gain from sales

Question 25

Buyout funds vs Venture capital For: asset based, leverage, debt or equity finance and working captial

Answer 25

Buyout funds = low working capital, lots of leverage and debt, strong asset base, predictable exit vs Venture capital = weak asset based, little use of leverage, primarily equity finance and high working captial

Question 26

VC % Ownership required = POST Money valuation given exit of £36m @ 30%r in 5 years PRE - Money Valuation = No. shares required =

Answer 26

VC % Ownership required = VC Investment / POST Money Valuation POST Money valuation = PV of exit 36 / (1.3)^5 = 9.7m PRE - Money Valuation = Post Money Valuation - VC Investment No. shares required = founders shares x [VC% / (1- VC%)]

Question 27

PE Funds Ratchet Mechanism Vintage year PE fund closed or open ended? Key man clause = Funds become diluted why? Risks to PE

Answer 27

PE Funds Ratchet Mechanism = determines allocation between management and shareholders Vintage year = year fund was launched PE fund closed or open ended? = closed ended Key man clause = General partner is prohibited from making new investments Funds become diluted why? = Additional financing plans, management stock option plans. Risks to PE = Reliance on management and government regulation.

Question 28

Waterfall carried interest =

Answer 28

Waterfall carried interest = carried interest x ( Investment profit - Investment)

Question 29

Commodities Backwardation = Contango = F and S Benefit of underlying vs interest and storage

Answer 29

Backwardation = F < S Contango = F > S Backwardation = Benefit of owning underlying is more than cost of interest and storage costs and vice versa

Question 30

Calendar spread Negative = Positive =

Answer 30

Calendar spread = spot price - futures price ``` Negative = contango Positive = backwardation ```

Question 31

Commodity Insurance Perspective Theory = Hedging pressure hypothesis = Theory of storage futures price given convenience yield = Convenience yield

Answer 31

Commodity Insurance Perspective Theory = Commodity producers go short their crop in the futures market to avoid price risk. Hedgers provide a premium to encourange long positions. Hedging pressure hypothesis = The commodity producer which is short ends up receiving a premium in contango markets. Theory of storage futures price = commodity spot price + direct storage cost - convenience yield Convenience yield = benefit of physically holding a scarce rare commodity over holding the future. "convenience of holding the real thing"

Question 32

Roll return = Collateral return = Total return swap vs excess return swap = Basis swap

Answer 32

Roll return = positive roll return is convergence of futures price toward spot price over time Collateral return = interest paid on futures position usually always positive. Total return swap vs excess return swap = Total return swap includes collateral yield Basis swap = where one commodity is more liquid than another ie brent vs central american oil.

Question 33

S&P GSCI Commodity index weighted how? Rogers intl commodity index vs Deutsche and Bloomberg commodity idicies?

Answer 33

Production value weighted to oil producers may make up a larger proportion. Rogers is rebalanced monthly, the others are rebalanced annually.