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									                                  April 3, 2012

                Finance 460 – Chapter 10 Outline - Valuation

I.    Market Value (MV) – definition (p. 296)
      A. Basis for Lending and Investing decisions

II.   Appraisal Process – Approaches (estimate of value)
      A.    Sales – rationale (p. 298)
              1.      Analysis of Comps – Sales Grid (Exh 10-2)

      B.     Income Approach
               1.    Direct Capitalization (Value = NOI/R) (p. 302)
                  a.  Cap Rates – comparability

               2.     DCF – discount rate, terminal value (p. 306)
                 A.    Reversion Value – techniques (p. 308)

               3.     Highest & Best Use Analysis (p. 313)

               4.     Mortgage-Equity Capitalization (V = M+E) (p. 315)

               5.     Relationship b/w Changing Market Conditions, Cap Rates &
                      Property Values (p. 318-323)

      C.     Cost Approach (p. 324)
                                         April 10, 2012

                          Guest Speaker: Garrin Royer, Redside CRE

        Finance 460 – Chapter 11 Outline – Investment Analysis & Taxation of
                               Investment Properties

I. Motivation and Strategies for Investing in Real Estate (Strategies - Exh. 11-2)
     a. Rate of Return
     b. Price Appreciation
     c. Diversification
     d. Tax Benefits

II.    Real Estate Cycle – Recovery/Expansion/Balance/Decline

III.   Projecting CF
       a. Income (Rent, Reimbursements, Vacancy)
       b. Expenses (Operating, fixed, variable)
       c. NOI
       d. Expected Reserves/Capital Improvements
       e. Estimated Sale Price (p. 356)

IV.    Intro to Investment Analysis – analyzing a property to evaluate its investment
       a. IRR & NPV

V. Intro to Debt Financing
      a. BTCF – from operations (BTCFo) and sale (BTCFs)
      b. Equity Dividend Rate – “cash on cash” return (p. 359)
      c. DCR – lenders consider LTV as well
      d. BTIRR – adequate return to the investor? (p. 361)

VI. Effect of Taxes – property “held for use in a trade or business”
      a. Taxable Income = NOI – mortgage interest – depreciation
      b. Depreciation – less than econ life to stimulate investment
      c. Depreciable Basis – land vs. property/improvements
      d. Marginal (ordinary) vs. Effective Tax Rates
      e. Capital Gain/Loss = Net Sales Proceeds (Gross sale price – mortgage – selling
          costs) minus Adjusted Basis (cost + improvements – depreciation)
      f. ATCF = BTCF – Taxes (Exh 11-25 & 11-26 & 11-28)
      g. ATIRR (Exh 11-29)
      h. Passive Activity Losses (PAL) – important consideration for investors and tax
                                                April 17, 2012

              Guest Speakers: Josh and Barry Schlesinger – Schlesinger Companies

          Finance 460 – Chapter 12 Outline – Financial Leverage and Financing
Note: we will not discuss “Alternatives to Fixed Rate Loan Structures” (pp. 396-411) due to their irrelevance in the
                                            current lending environment.

    I.      Financial Leverage (defn - p. 381)
            A. BTIRR(E) = BTIRR(P) + [(BTIRR(P) – BTIRR(D)) * (D/E)]
            B. If positive, borrow as much as possible? Limitations?
            C. Negative leverage occurs when ATIRR(D) > BTIRR(P)

    II.     ATIRR is same interpretation of BTIRR above
            A. ATIRR formula is approx due to D/E ratio at sale (assumes amortization)
            B. [ AT Cost of debt = int rate*(1-tax rate) ] – tax deductibility of interest.

    III. BE “i” (p. 388) – “neutral” interest rate; lender and equity returns are equal
         A. BE interest rate gives the investor no risk premium

    IV. Incremental Cost of Debt/Capital – compare existing leverage return to cost of
        additional leverage (pg. 390)

    V.      Leverage increases Risk

    VI. Loan Underwriting
        A. Market Study and Appraisal
        B. Borrower/Sponsor/Guarantor Financials & Compliance Certs
            1. Non-recourse = put option for Borrower
            2. Lock-out, YMP, defeasance – “make-whole” provisions
        C. LTV/DCR – bank’s “hedge”
            1. Probability of Default (PD)
            2. Loss Given Default (LGD)
        D. Terms and Covenants – used to ensure no “material deterioration”
        E. Other financing alternatives and risk
            1. I/O
            2. Mezzanine
            3. Preferred Equity
                                    May 24, 2012

               Finance 460 – Chapter 13 Outline – Risk Analysis

I.    Risk-Return Continuum – Real Estate vs. Alternative Investments

II.   Risk Characteristics of Real Estate
       A. Business Risk – fluctuations in economic activity that affect income
       B. Financial Risk – i.e. leverage, ability to leverage
       C. Liquidity Risk – conversion to cash
       D. Inflation Risk – effect on returns and return
       E. Management Risk – competency of 3rd party or internal
       F. Interest Rate Risk – cap rates and financing
       G. Legislative/Governmental Risk – UGB, approvals, zoning, etc.
       H. Environmental – hazardous conditions, NFA,” phases”

III. Due Diligence – Exhibit 13-2 (pg. 422)

IV. Sensitivity Analysis – “What if”
     A. Establish Base Case
     B. Single variable or multiple scenarios

V.    Partitioning IRR
       A. Look at % contribution of CF and Terminal value to IRR when comparing

VI. Variations in Returns & Risk
     A. Increased variability of returns increases risk
     B. Look at Expected returns, standard deviation/variance (p. 393)
              1. Look at range of Expected Return
              2. Less dispersion indicates less risk
     C. Risk per unit of Exp Return (Std Dev of Exp Rtn/Exp Rtn (IRR))
     D. Reduce variability by diversification (portfolio)

VII. Lease/Rollover Risk
      A. Market Leasing Assumptions
      B. Probability considerations
      C. Space size
      D. Location within project
      E. Place in RE cycle
      F. Retrofit costs (TI’s)
      G. Commissions
      H. Market Rate
      I.   Months vacant

VIII. Risk & Leverage
       A. Unleveraged return vs. Cost of Leverage to achieve positive leverage
       B. Leverage increases risk – increased variance of return

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