Introduction to Commercial Real Estate, Investment and Development Analysis
Learning objectives. This introductory seminar assumes that those attending have little knowledge of commercial real estate and introduces the fundamentals of commercial real estate and financial analysis and discusses the issues, complexities and dangers involved in listing and selling commercial properties and development sites. Specific objectives are; 1. To provide a good understanding of the basic financial measures use to evaluate and determine the value of commercial properties, development sites and land value. To explore the advantages and disadvantages of the financial measures and when they are appropriate. 2. To provide an in-depth overview of the capitalization rate and explain the factors that influence the capitalization rate. 3. Show how to analyze apartments buildings and how to re-do the finacial statements so that they more realistically reflect the financial performance of the building. 4. How to analyze commercial buildings and carry out long term investment analysis including and introduction to discounted cash flow analysis, the Internal rate of Return (IRR) and the Net Present Value (NPV) 5. How to read leases. An overview of key terms and clauses used in a lease. 6. How to determine land value through development analysis and the dangers associated with using simplistic approaches to valuing land. Factors that influence land value. 7. Potential problems and pitfalls for inexperienced realtors selling businesses or leasing commercial space. 8. The importance of having a professional engineer carryout an assessment of the building on behalf of a buyer.
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Instructional Strategies and teaching methodology
Teaching methods include: 1. A guided workshop manual for note taking that has been designed to actively involve the students during the seminar. 2. The presentation includes a combination of a PowerPoint presentation and overheads which is used to teach the basic financial measures and how to value income properties coupled with the workshop manual. 3. Real estate analysis software “Investit” is used to show how to analysis income properties, development sites and carryout long term real estate investment analysis using case studies. 4. Photographs and illustrations are used to show actual examples of factors that influence the value of a property. 5. The students are actively involves through short questions and exercise and are continually asked to provide local examples.
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Introduction to Commercial Real Estate, Real Estate Investment and Development Analysis
Time: 3 hours Workshop manual: A 25 page workshop manual is used for guided note taking and for reference and review. Seminar outline. Reading Leases Explanation of important terms and clauses in a lease. What to look for when reading a lease. Introduction to the key financial measures used to evaluate and value an income property Introduction to the Gross Rent Multiplier, Cap Rate, Return on Equity, Operating Expense Ratio, Debt Service Ratio, Default Ratio (Breakeven Point) Income and Expense Statement Analysis: How to use the Operating Expense Ratio to identify whether the expenses are realistic or not. Example showing how to make adjustments to the Income and Expense Statement. Typical Operating Expense Ratios. Development analysis. How to analyze development sites, determine the land value and calculate the development profit. Factors that influence and lower land values such as soil conditions, the location and characteristics of adjacent buildings. Zoning and design constraints that reduce the buildable area and lower the land value. Overhead photographs and diagrams are used to provide examples. The impact of the size of the site on land values. Case Studies. Determining the land value for a multifamily project and office building Sensitivity analysis. The multifamily example is used to show which variables have the most impact on the development profit. Investment analysis: An introduction to the basics of long term real estate investment analysis and the development of before after tax cash flows and return on investment. Introduction to the Internal Rate of Return (IRR) and the Net present Value (NPV) Other Topics The criteria for a good real estate investment. Pitfalls for the unwary buyer of a building.
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Schedule
1. Introduction and overview: Time: 10 minutes 2. Reading Lease Time: 15 minutes Explanation of important terms, clauses and conditions. How to read a lease. The ambiguity of the term “Triple Net”. Basic Rent versus Additional Rent Recoverable expenses, Pass through’s, Tim’s and Cam’s Demolition clauses Assignment and subleasing Terms and option to renew What does “free Rent” mean? Hints for reading a lease 3. Financial Measures used to evaluate income properties Time: 1 hour 05 minutes Gross Income Multiplier. Cap Rates and the capitalization process and the inbuilt assumptions. How to determine the Net Operating Income (NOI) The importance of ensuring the income and expenses statement is realistic Items that must not be included in the Income and Expense Statements. The impact on the value if minor capital expenditures or non recurring expenses are incorrectly included in the Income and Expense statement.
4. BREAK 10 minute break 5. Financial Measures used to evaluate income properties continued. Time: 30 minutes Understanding Cap Rates. Relationship between Cap Rates, capital appreciation and risk What factors influence Cap Rates How to determine Cap Rates Examples of Cap Rates for different kinds of properties and locations The sensitivity of income property values to the Cap Rate and rents What factors influence the value of the Cap Rate? Steps involved in analyzing and income property Return on Equity (ROE) or the Cash on Cash Return Debt Coverage Ratio Determining whether the expenses are realistic using the Operating Expense Ratio. Typical Operating Expense ratios The Default Ratio or Breakeven Point How to determine whether the building can be refinanced Other measures used by buyers and sellers Which financial measure should you use to value a property? Steps involved in analyzing and valuing an income property
6. Case Study. Determining the value of a rental apartment building. Time: 10 minutes
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7. Introduction to Development Analysis and Valuing Land. Time:15 minutes The steps involved in analyzing development sites. Factors that influence land values such as soil conditions, zoning regulations etc. The importance of sketch plans to determine the building area Determining how much to pay for the land to achieve the desired developer’s profit. Calculating the long term financing and equity required by the buyer or the developer if the developer decides to keep the project. Case Studies: Condominium development 8. Introduction to Long term Investment Analysis and Discounted Cash Flow Analysis Time: 15 minutes Introduction, explanation and application of the “Internal rate of Return IRR” and “Net Present Value (NPV) The Net Cash Flow or T-Bar diagram Steps involved in carrying out long term real estate investment analysis Case Study
9. The importance of engaging professional engineers to inspect a property. Time: 10 minutes Examples of building and structural problems such as concrete rot, the failure of post tensioning cable systems, thin wall copper pipe etc and other structural and equipments problems associated with buildings that can be costly to remedy.
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