Transcript Stone Arch Village

Fundamentals of Real Estate
Lecture 3
Spring, 2003
Copyright © Joseph A. Petry
www.cba.uiuc.edu/jpetry/Fin_264_sp03
Investment Property Analysis
Commercial Property By Type
Apartments
Hotels and motels
Restaurants
Warehouses
Service stations
Automobile repair shops
Automobile dealerships
Parking lots and garages
Hospitals
Nursing homes
Continuing-care retirement centers
Senior assisted living properties
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Source: REP, p. 64
Recreational properties
Rental houses
Commercial properties (freestanding)
Shopping centers
Office buildings
Farms, orchards and groves
Mixed-use properties
Specialty properties
Resorts
Grain elevators
Lumber yards
Amusement parks
Investment Property Analysis

In Depth Evaluation of a Potential Property
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We will assume that you are interested in apartments,
in particular campus related apartments.
You contact a broker, and ask for current listings.
Your broker says that right now the market is tight, but
there is one nice apartment building for sale that
might be worth looking at.
You ask for information regarding the property
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You receive a “Rent Roll”, and an asking price of $4,000,000.
There are only a few comps, and it will take some digging.
A list of operating expenses will take a few weeks to
assemble
Investment Property Analysis
Campus Apartments
Rent Roll As of 12-31-02
Unit
sq ft
type
rent
1-24
1200
4 bedroom $ 1,750
50
350
Parking $
60
Monthly PGI
$ 45,000
Annual PGI
$ 540,000
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Investment Property Analysis
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Constructing Pro-forma Financial Statements
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You’ll want to create:
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Operating Statement
Amortization Schedule
Sale Proceeds Table
Some of the more important items that you will
require to create each of these statements include:
Rents
Operating expense ratios
Real estate taxes
Price movements
Vacancy rates
Utility expenses
Financing terms
Investment Property Analysis
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What have been the experiences of comparable
properties regarding each of these items recently?
Over longer periods of time?
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It is not enough to have only current values for these items.
Appraisers, realtors, other apartment owners are all
good sources of information.
As we will see later on, your assumptions are key. If
they are off, they will dramatically impact the results of
the investments.
Be cautious with your assumptions at this stage.
Investment Property Analysis
Campus Apartments
General Amenities: limited atomsphere. Location drives price. Year of
construction, parking and security, and number of bedrooms also major factors.
Green St. Towers
JSM
Johnstowne Apts.
JSM
408 E. Healey*
CPM
408 E. Springfield*
*sq ft, baths estimated
7
Square feet
1200
Bedrooms
4
Baths
2/4
Rent
2000
$/sq ft
20.00
1200
4
2
1850
18.50
1200
2/3/4
2
1775
17.75
600
2
1
830
16.60
Investment Property Analysis
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Campus Apartments
Input Assumptions
Input
Assumption
Asking Purchase Price
4,000,000
Number of residential units
25 1200 sq ft each
Residential Rents
$
1,800 per unit, per month
Number of rental parking spaces
50 spaces
Parking Rents
$
60 per month
Projected Rental Increase
2% per year
Vacancy and Collection Losses
5% per year
Operating Expenses
-39% of gross rents
Expected Holding Period
10 years
Expected Selling Price
$ 4,800,000 2% appreciation per year
Selling Expenses
2.50% of sale price
Mortgage Financing:
Loan-to-Value ratio
80% of construction costs
Interest Rate
7%
Maturity
25 years
Up-front Financing Costs
0% points
Investment Property Analysis
Reconstructed Operating Statement
+
=
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Potential Gross Income (PGI)
Vacancy and Collection (VC)
Miscellaneous Income (MI)
Effective Gross Income (EGI)
Fixed Operating Expenses (OE)
Variable Operating Expenses (OE)
Net Operating Income (NOI)
Investment Property Analysis
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Campus Apartments
Reconstructed Operating Statement
Potential Gross Income (PGI)
Less: Vacancy and Collection Losses (VC)
Effective Gross Income (EGI)
Less: Operating Expeses (OE)
Fixed Expenses
Real estate taxes
($86,400)
Insurance
($13,680)
($100,080)
Variable Expenses
Capital Reserves
($16,416)
Elevator
($5,400)
Maintenance
($27,360)
Management
($21,888)
Miscellaneous
($10,944)
Refuse
($2,500)
Utilities
($27,360)
($111,868)
Total Expenses
Net Operating Income (NOI)
Debt Service (DS)
Cash Flow (CF)
$
$
$
$
$
576,000
28,800
547,200
($211,948)
335,252
($271,403)
63,849
Investment Property Analysis
Amortization Table for Campus Apartments
MonthTotal Payment Principal
Interest
RMB
1 $22,616.93
$3,950.27
$18,666.67 $3,196,049.73
2 $22,616.93
$3,973.31
$18,643.62 $3,192,076.42
3 $22,616.93
$3,996.49
$18,620.45 $3,188,079.93
4 $22,616.93
$4,019.80
$18,597.13 $3,184,060.13
5 $22,616.93
$4,043.25
$18,573.68 $3,180,016.88
6 $22,616.93
$4,066.84
$18,550.10 $3,175,950.05
7 $22,616.93
$4,090.56
$18,526.38 $3,171,859.49
8 $22,616.93
$4,114.42
$18,502.51 $3,167,745.07
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Investment Property Analysis
Year
1
2
3
4
5
6
7
8
9
10
12
$
$
$
$
$
$
$
$
$
$
PGI
576,000
587,520
599,270
611,256
623,481
635,951
648,670
661,643
674,876
688,373
-VC
($28,800)
($29,376)
($29,964)
($30,563)
($31,174)
($31,798)
($32,433)
($33,082)
($33,744)
($34,419)
$
$
$
$
$
$
$
$
$
$
Campus Apartments
Net Operating Income
=EGI
-OE
547,200 ($211,948) $
558,144 ($216,187) $
569,307 ($220,511) $
580,693 ($224,921) $
592,307 ($229,419) $
604,153 ($234,008) $
616,236 ($238,688) $
628,561 ($243,462) $
641,132 ($248,331) $
653,955 ($253,297) $
=NOI
335,252
341,957
348,796
355,772
362,888
370,145
377,548
385,099
392,801
400,657
-DS
($271,403)
($271,403)
($271,403)
($271,403)
($271,403)
($271,403)
($271,403)
($271,403)
($271,403)
($271,403)
$
$
$
$
$
$
$
$
$
$
=BTCF
63,849
70,554
77,393
84,369
91,484
98,742
106,145
113,696
121,398
129,254
Investment Property Analysis
Campus Apartments
Sales Proceeds After Year 10
Expected Selling Price
Expected Selling Expenses
Net Sale Proceeds
Remaining Mortgage Balance (RMB)
Net Cash Flow from Sale
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$4,800,000
($120,000)
$4,680,000
($2,516,269)
$2,163,731
Investment Property Analysis
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Financial Analysis of “Campus Apartments”
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We will go into much more depth on the types of
measures that are typically used to do this type of
analysis starting next time.
For now, we will begin with a few basic measures of
the financial returns.
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DSCR=Debt Service Coverage Ratio. NOI/Debt Service
Return on Equity. BTCF/Down payment.
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BTCF=Before Tax Cash Flow
Capitalization (Cap) Rate=NOI/Purchase Price
IRR (Internal Rate of Return)
GRM (Gross Rent Multiplier)=Purchase Price/PGI
Investment Property Analysis
Campus Apartments
Financial Viability Ratios at Stabilization
Ratio
Estimated Minimum
DSCR
124%
120%
Return on Equity
7.98%
12%
Effective Cap Rate
8.38%
9%
Internal Rate of Return 18.02%
12%
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Ratio
GRM
Estimated Maximum
6.94
6.50
Investment Property Analysis
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Sensitivity Analysis
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Impact from differing assumptions
What happens to your return calculations if:
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Operating expenses go to 45% of EGI?
Purchase price goes down by 250,000?
If your vacancy rate goes to 15%?
Your cost of borrowing goes to 9%?
Investment Property Analysis
Campus Apartments
Sensitivity Analysis
Ratio
DSCR
Return on Equity
Effective Cap Rate
Internal Rate of Return
Ratio
GRM
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