Commercial Real Estate Interview Questions Flashcards

Commercial Real Estate Interview Questions Flashcards What is the difference between NOI and EBITDA? - The net operating income (NOI) metric measures the profitability of a real estate firm before any corporate-level expenses such as capital expenditures (Capex), financing payments, and depreciation and amortization (D&A)- NOI = Rental/Ancillary Income - Direct Real Estate Expenses- NOI is frequently used among real estate firms because it captures the property-level profitability of the firm prior to the effects of corporate expenses.-EBITDA-- which stands for "Earnings Before Interest, Taxes, Depreciation, and Amortization" -- is most commonly used to measure the operating profitability of traditional companies, meaning that NOI can be thought of as a "levered" variation of the EBITDA metric.Compare the cap rates and risk profiles for each of the main property types.

- Hotels: Higher cap rates due to cash flows being driven

by extremely short-term stays.- Retail: Higher risk due to

increasing creditworthiness concerns as a result of the rise

of e-commerce.- Office: Closely correlated with the broader

economy but with longer-term leases, making the risk

profile a bit lower.- Industrial: Lower risk profile as a result

of continued trends in e-commerce and longer-term leases.If you had two identical buildings in the same condition and right next to each other, what factors would you look at to determine which building is more valuable?

• The primary focus here should be on the cash flows,

especially around the risk associated with the cash flows (and the creditworthiness of the tenants).- Average Rent

and Occupancy Rates: Specifically, the average rents and

occupancy rates of the buildings must be closely examined, as this sort of analysis can reveal differences in management and leasing (and potential issues).- Credit

Risk: The riskiness of the cash flows is also a critical

consideration, in which the creditworthiness of the existing (and future) tenants and the specific terms of the leases

are used to gauge the credit risk.- NOI and Cap Rate: The

NOI and cap rate of each property must be calculated, too.In summary, the property with a higher cash flow and less risk will be more valuable.

Which is used more in real estate investment banking: NPV

or IRR?

• Both the net present value (NPV) and internal rate of

return (IRR) are important metrics to consider for all real estate investors.- However, the IRR is arguably used more frequently because the IRR represents the discount rate at which the NPV of future cash flows is equal to zero.- In other words, the minimum required return on an investment is based on the implied IRR.- Further, the IRR is more

easily used to compare the returns on real estate investments relative to other asset classes such as equities, fixed income, and other types of real estate investments.What are the different types of leases?- Full Service: A lease structure in which the landlord is responsible for paying all of theoperating expensesof the property, meaning the rental rate is all-inclusive as it accounts for expenses such as taxes, insurance, and

utilities.- Triple Net: A lease structure in which the tenant

agrees to pay for all of the expenses of the property, including taxes, maintenance, and insurance, all in addition (and separately) to rent and utilities. Because these expenses aren't left to the landlord to pay, the rent on a triple-net lease is typically lower than in other lease

structures.- Modified Gross Lease: A lease structure in

which the tenant pays the base rent at the beginning of the lease, and then takes on a proportion of other expenses such as property taxes, insurance, and utilities.What is the difference between positive and negative net absorption?

Positive Net Absorption: More commercial real estate was

leased relative to the amount made available on the market, which suggests there is a relative decline in the supply of commercial space available to the

market.Negative Net Absorption: More commercial space

has become vacant and placed on the market compared to the amount that was leased, indicating the relative demand for commercial real estate has declined in relation to the total supply.Walk me through a basic pro forma cash flow build for a real estate asset.

- Revenue: The calculation starts with revenue, which is

primarily going to be rental income, but could include other