Technicals Flashcards
(96 cards)
Different property classes
Class A (premium); Class B (value add opp); Class C (30+yrs) ; Class D (Distressed Assets)
Main RE investment strategies: (know the diferentes)
Core, Core+, Value Add, Opportunistic
Capital Stack
Describes the diff sources of funding used to finance a project. High risk - low risk
Common Equity – opportunity to earn outsized returns
Preferred Equity – Hybrid security blends dent & common equity but only senior to common equity and subordinate to all debt, structure is flexible
Junior debt – bridges gap b/w senior debt & equity, lenders here posses the right to take control of a property in the events of default
Senior debt – interest rate at the lowest since is form of secured financing, these are first in priority of repayment
Phases of a RE cycle:
Recovery, Declining vacancy rates + no new construction
Expansion, Declining vacancy rates + new construction
Hyper supply, Increasing vacancy rates + new construction
Recession, Increasing vacancy rates + excessive supply
How is the cap rate used to value a property?
Cap rate = NOI/ Property Value
Cap rate = the expected rate of return on an income generating property
The primary shorthand of which different investment properties with comparables risk return profiles can be analyzed side by side
Credit losses:
monetary losses came from property owners pocket from inability to collect rent from tenants
NOI
Measure the profit potential of income generating properties before subtracting non operating costs
NOI = (Rental income + ancillary income) - direct operating expenses
Vacancy losses
% of units available for rent but left unoccupied
Effective gross income (EGI)
Potential gross income - vacancy & credit losses
Compare the cap rates for the main property types?
Hotels: Highest cap rates b/c cyclicality, demands fluctuates
Office sector: leases are renewed
Retail: Riskiest b/c secular shifts during the broader market (ecommerce)
Industrial: top performer
Multifamily sector: Most stable, but economic conditions can have material impact on demand that reduced occupancy rates
Cap rate and risk?
Cap rates measure of potential return so measure of risk, 2 sides of the same coin
High Cap rate = riskier = lower pricing & potential high return = lower property value = lower NOI multiple
Low cap rate = Low risk= low return = Negative growth in NOI = higher property value = higher NOI multiple
Cash on cash:
measure the annual pre-tax cash flow received per dollar invested
fund from operations (FFO) measure?
the operating performance of REITS by estimating a REITS capacity to continue to generate sufficient cash
Adjsuted FFO
FFO + Non recurring items - Maintenance capital expenditures
difference between NOI and EBITDA:
NOI measure the property profit potential, EBITDA reflects the operating profitability of an entire cooperation
methods of appraising a property?
1) Income approach; “Direct capitalization method” value = NOI / Market cap rate
2) Sales comparison approach: comps
** Assume all final sale recorded
3) Cost approach: “Replacement cost method” value is based on total costs of replacing the property
** Value = Land value + (cost new - accumulated depreciation)
Walk me through the income approach to a real estate valuation?
- Project forward NOI → must be stabilized (its fully functional)
- Determine market cap rate
- Estimate property value - NOI / Market cap rate
Difference b/w the Yield on cost and cap rate:
YoC is the forward looking cap rate
YOC = NOI/ Total project cost
Loan to value
LTV = loan amount/ Property Value
Measures the risk of real estate lending proposal
High LTV: Greater credit risk + higher interest rate
low LTV: less credit risk + lower interest rate
Distressed assets may have LTV ratios in the range of 50-60%, compared to 70-80% for stable assets.
Debt Yield
= NOI/ Total Loan
* Measures the riskiness of a real estate loan based on the estimated ROI
Lower yield = risk to the lender is higher because the property operating cash flows might not meet the mandatory debt service
Higher yield = The less risk it poses due to the reduced likelihood of the borrower defaulting on the obligation
( how quick a lender could recoup their original funds in the event of default)
Debt service coverage ratio
measure of cash flow available to pay current debt obligation.
DSCR = NOI/ Annual Debt Service
= 1.0x → break even point
<1.0x → insufficient income
>1.0x → sufficient income
How does Loan sizing work?
The process which lender perform diligence on the credit risk of a potential borrower and determine the appropriate debt burden than be supported by the NOI
Loan to value ratio (LTV) {70%}
DSCR {1.25x}
Debt yield{10%}
Difference between the going-in and terminal cap rate?
Going in = Stabilized NOI/ Purchase Price
Return on the date of property stabilization
Terminal= Expected NOI/ Anticipated Sale Price
Estimate return in the exit year
Timing:
The going-in cap rate is used at the time of acquisition, while the terminal cap rate is used at the time of sale.
Market Conditions:
Going-in cap rates reflect current market conditions when you acquire the asset.
Terminal cap rates reflect the anticipated market conditions, which may change over the holding period (e.g., rising interest rates, economic shifts, etc.).
When would you want each to be higher? (going-in and terminal cap rate)
You want a higher going-in cap rate when purchasing in a risky market or to ensure a favorable acquisition price.
You expect a higher terminal cap rate in markets with increasing risk or economic uncertainty that may result in lower property values at exit.