120,000 10,000 12.00

Discounted Cash Flow Analysis for Real Estate Flashcards Suppose an office building has 10,000 square feet of rentable space and rents for an average of $12 per square foot. What is the potential gross income (PGI) for the building?

$120,000 (10,000 * $12.00)

Break-Even PointThe stage at which an investment produces an income that is just sufficient to cover recurring expenditures. For an investment in real property, the point at which gross income is equal to normal operating expenses, including debt service (the stage at which the next cash flow becomes positive).This is sometimes also known as the "default point." Sale ProceedsRepresent the net cash flow received from the disposition of an investment property. This cash flow item shows up in the last period of the holding of the real estate cash flow model.List, in order, the 3 steps for conducting a Discounted Cash Flow (DCF) Analysis for commercial properties.

• Forecast the expected future cash flows.2. Establish the

required total return3. Discount the cash flows back to the present at the required rate of return.Load FactorThe ratio of rentable area to useable area. It is a gauge by which a user can evaluate different sites with comparable rents. Sometimes referred to/known as the "add-on factor." Initial InvestmentNormally shown in time period zero (0) and includes all acquisition costs required to purchase the asset, less any mortgage proceeds. In other words, this is your total out-of-pocket cash outlay required to acquire a property.Weighted Average Cost of Capital (WACC)A calculation of a firm's cost of capital in which each category of capital is proportionately weighted.All sources of capital, including common stock, preferred stock, bonds and any other long-term debt, are included in its calculation. A firm's ____ increases as the beta and rate of return on equity increase, as an increase in ____ denotes a decrease in valuation and an increase in risk.Profit MarginPart of a category of profitability ratios calculated as net income divided by revenue, or net profits divided by sales.Net income or net profit may be determined by subtracting all of a company's expenses, including operating costs, material costs (including raw materials), and tax costs, from its total revenue. These are expressed in percentage terms, and in effect, measure how much out of every dollar of sales a company actually keeps in earnings. A value of 20% for this metric, for example, means the company has a

net income of $0.20 for each dollar of total revenue earned.Equity Dividend Rate (or, Equity Yield Rate) The return on the portion of an investment financed by equity capital.How is the Discount Rate different from the Cap Rate?The discount rate is used to determine value and account's for all years in the holding period, not just a single year like the Cap Rate.If a property's cash flows are expected to increase or decrease over the holding period, then the Cap Rate will be a misleading performance indicator.By completing a multiyear discounted cash flow analysis, we

could quantify exactly how much we can pay for this property with a Net Present Value (NPV), given the investor's discount rate. The Cap Rate, on the other hand, will not be able to answer this question.Vacancy AllowanceLine item on a real estate proforma that accounts for expected vacancy of the property.Vacancy can be calculated in many different ways, including taking a simple percentage of the potential rental income, or using a total dollar amount for each year in the holding period.

Holding PeriodUsually shown in years on the left hand side of the cash flow model/diagram. It is typically assumed that the time of the cash flows occur at the End of the Year (EOY). In commercial real estate, this is typically between 5-15 years for the purposes of financial analysis.The Cap Rate allows us to value a property based on a single year's NOI.If a property had an NOI of $80,000 and we thought it should trade at an 8% Cap Rate, what would its estimated value be?

$1,000,000

Potential Gross Income (PGI), or Gross Potential Income (GPI) A function of both contractual lease terms, as well as market rents.It is the amount of income that could be produced by a real property assuming no vacancies or collection losses--does not include miscellaneous income.Projections often involve accounting for renewal assumptions after a lease expires.Calculated according to rentable square feet (RSF) * rent persquare foot (RPSF).Discounted Cash Flow (DCF) AnalysisA technique used in finance and real estate to discount future cash flows back to the present.Internal Rate of Return (IRR)The percentage rate earned on each dollar invested for each period it is invested. It is also another term people use for interest.Ultimately, this gives an investor the means to compare alternative investments based on their yield.Mathematically, this is found by setting the NPV equation to 0 and solving for the rate of return (r) What's the difference in use between IRR and NPV? IRR tells you the total return on the project, given the projected cash flows.NPV, on the other hand, tells you how much more or less your initial investment needs to be in order to achieve your desired rate of return.BreakpointThe sales threshold over which percentage rent is due. It is calculated by dividing the annual base rent by the negotiated percentage applied to the tenant's gross sales.Operating ExpensesIncludes property taxes, property insurance, property management fees, and utilities.Those expenditures that a business incurs to engage in any activities not directly associated with the production of goods or services.Loan-to-Value (LTV) RatioA lending risk assessment ratio that financial institutions and other lenders examine before approving a mortgage.Typically, assessments with high ratios are generally seen as higher risk and, therefore, if the mortgage is accepted, the loan will generally cost the borrower more to borrow or he or she will need to purchase mortgage insurance.Reversion Cash Flows, or Net Sales Proceeds Estimated in a number of different ways including taking a terminal cap rate and applying it to that year's NOI, or applying the percentage of growth method to appreciate the property over a holding period.After a sales price is