Real Estate Private Equity Interview Questions Flashcards

Real Estate Private Equity Interview Questions Flashcards What are the main financial differences between multifamily properties and office, retail, or industrial properties?pro-forma numbers tend to be "lumpier" for office, retail, and industrial properties because they have fewer tenants with more customized leases, and there are often long periods of downtime in between tenants and significant concessions when new tenants move in.Capital costs such as Leasing Commissions and Tenant Improvements are also far more significant, which reduces cash flow for these properties.These items are much lower for multifamily properties, but unit turnover is much higher, and they may have more staffing and sales & marketing needs as a result.Also, rent, occupancy rates, and expenses for multifamily properties tend to change much more quickly if there's a downturn because the leases are short-term.Walk me through a real estate development model. First, you make assumptions for the land required, the construction costs, and the Debt and Equity to use. Then, you project the costs, initially draw on Equity to pay for them, switch to the Construction Loan past a certain point, and draw on the loan as needed, capitalizing the interest and loan fees.When construction finishes, you assume a refinancing, project the lease-up period for individual tenants, and then build a Pro-Forma with debt service based on the Permanent Loan.Then, you assume the property is sold in the future based on its NOI and a range of Cap Rates, and you calculate the IRR to Equity Investors.You acquire a multifamily property for $10 million at a Going-In Cap Rate of 5%, LTV of 70%, and Debt with a 5% Interest Rate and a 3-year interest-only period followed by

• years of 2% principal repayments.

The NOI each year is $10 million * 5% = $500K, and you use $7 million of Debt and $3 million of Equity.Assuming no capital costs, Cash Flow to Equity in Years 1 to 3 = $500K - $7 million * 5% = $150K.In Years 4 and 5, Cash Flow to Equity is approximately $150K - $7 million * 2% = $10K.In Year 5, you sell the property for $500K / 4% = $12.5 million and must repay ~$6.7 million of remaining Debt, resulting in just under $6 million in Equity Proceeds.You invested $3 million and earned back just over $6 million if you count the Cash Flow to Equity in Years 1 - 3.This is a 2x multiple over 5 years, so the approximate IRR is 15%. In Excel, it's 14%.What is the waterfall returns schedule, and why is it widely used in real estate?The waterfall schedule allows the Equity Proceeds from a deal to be split up in a non-proportional way if the deal performs well enough.For example, if the Developers contribute 20% of the Equity, normally they would receive

20% of the Equity Proceeds.But a waterfall schedule lets them receive 20% up to a certain IRR and then 30% or 40% of the Equity Proceeds above that IRR if the deal performs well enough.This structure incentivizes the Developers or Operators to perform while taking away little from the Investors or LPs.You are analyzing two office buildings on the same street in Chicago. The buildings have the same rentable square

feet, are the same age, and are both "Class A." Why might one building sell for a lower Cap Rate than the other?The more valuable building, i.e., the one selling for a lower Cap Rate, might have higher-quality tenants, more

favorable lease terms, a higher occupancy rate, or lower ongoing capital costs.How do Preferred and Catch-Up Returns work in waterfall models?Preferred Returns give one group, such as the Investors or Limited Partners, 100% of the positive cash flows from the property until they reach a specific Equity IRR or Multiple, such as 10% or 1.0x.Then, the other group(s) may receive Catch-Up Returns that "catch them up" to that same Equity IRR or Multiple, which means that the other group(s) will receive 100% of the next available positive cash flows up to that level.Once these thresholds are reached, the Equity Proceeds will be split based on percentages.How do Senior Loans and Mezzanine differ, and why do many deals use both?Senior Loans are secured Debt where the property acts as collateral, they tend to have the lowest interest rates (either fixed or floating), and they often have amortization periods that far exceed their maturities (e.g., 30-year amortization vs. 10-year maturity).Senior Loans fund property acquisitions up to a certain LTV that lenders will accept, such as 60% or 70%. If the sponsor wants to go beyond that, it will have to use Mezzanine, which is unsecured Debt that is junior to Senior Loans.Mezzanine has higher, fixed interest rates, either paid in cash or accrued to the loan principal, amortization is rare, and the maturity is almost always shorter than the maturity of Senior Loans.How do you value a property? What are the trade-offs of these methodologies?Cap Rates, DCF Analysis, and the Replacement Cost methodology.Cap Rates are simple to apply, but they don't work as well in smaller regions with more limited data; people also disagree about how to calculate NOI.The DCF is the most theoretically correct methodology, but it's based on far-in-the-future assumptions and is less useful for stabilized properties that don't change much.Replacement Cost estimates the cost of reconstructing the entire building from scratch today and compares it to the property's asking price.Why real estate?It's a very tangible asset class that's rooted in real cash flows and it combines financial analysis with real-life, on-the-ground knowledge.It's also one of the oldest asset classes and will likely be around in some form forever.What are the main property types, and how do they differ from each other?-office, industrial, retail, and multifamily properties.-Office, industrial, and retail properties have businesses as tenants and offer long-term leases of 5-10 years. The lease terms are highly variable and often include different rental rates, rental escalations, free months of rent, expense reimbursements, and tenant improvements.-Industrial properties can be built more quickly and cheaply and tend to have fewer tenants, while office and retail properties take