Exam 10: The Basic Idea: DCF and NPV

The table below shows the projected net cash flows (including reversion) for Property A and Property B. If both properties sell at fair market value for a cap rate (initial and terminal net cash yields) of 7%, then which statement below correctly describes the relative investment risk in the two properties? Arnuel net cast flow prajectians for twaprapeties ( \1 ,000,000) Year: 1 3 4 5 6 7 8 9 10 \ 1.0000 \ 1.0000 \ 1.0000 \ 1.0000 \ 1.0000 \ 1.0000 \ 1.0000 \ 1.0000 \ 1.0000 \ 15.2857 \ 1.0000 \ 1.0200 \ 1.0404 \ 1.0612 \ 1.0824 \ 1.1041 \ 1.1262 \ 1.1487 \ 1.1717 \ 18.6093

What is the projected terminal (going-out) cap rate?

What is wrong with the following statement: Only a fool would invest in real estate without financing most of the purchase with a mortgage; borrowing allows you to increase your expected return by using other people's money!

What is the current market value of the property?

Suppose you expect that one year from now, a certain property's before-tax cash flow (PBTCF = NOI - CI) will equal only $15,000 per year under a plausible pessimistic scenario or as much as $25,000 per year under a plausible optimistic scenario. If you borrow an amount such that the loan payments will be $10,000 per year (for certain), then what is your range of expected income return component (equity yield) under the no-leverage and leverage alternatives, assuming that the property price is $200,000 and the loan amount is $100,000?

In the problem above, what is the after-tax cash flow to the equity investor if the income tax rate is 35%?

Which of the following should be true about the ex ante micro-level performance attribution (IRR parsing components) of this property investment?

You are trying to apply a multi-year DCF analysis to evaluate an investment property with some long-term leases in it. You observe that other properties with similar lease structure and risk have been selling at cap rates around 8% (based on NOI with no capital reserve). You believe these other properties typically face capital expenditures on the order of 2% of property value per year in the long run, and that given such expenditures their net cash flows and values would reasonably be expected to grow in the long run at about 1% per year. What discount rate should you apply to your subject property in your DCF valuation?

A tenant has a gross lease with an ''expense stop''of $2.75/SF. If the building has 200,000 square feet of leasable space, reimbursable operating expenses of $750,000, and the tenant rents 25,000 SF, then how much does the tenant owe the landlord in expense reimbursements (the total $ amount)?

Suppose the lease on a certain space will expire at the beginning of 2010. You believe that the probability of the existing tenant renewing is 75 percent. If they renew, you will need to spend only an estimated $5.00/SF to upgrade his space. If they do not renew, it will take $20.00/SF to modernize the space and there would be 4 months of expected vacancy in that case. What expected cash flow forecast should you put in year 2010 of your pro-forma for this space, if you expect triple-net market rents on new leases in 2010 to be $20/SF?

Use the following information to answer the following two questions. You are making a 10-year cash flow pro-forma for a lender, on a non-residential commercial building which you have just purchased (on January 1) and plan to own for 10 years (the maturity of the loan you are requesting). The building has a single tenant in a 20-year lease that commenced at the time of building purchase (January 1). -Purchase Price: $3,000,000 including $500,000 in assessed land value. -Tenant Improvement Expenditures (all spent on building made at time of purchase, beginning of lease): $1,000,000. -Leasing Brokerage Commission (paid at time of purchase, beginning of lease): $300,000. -Capital Gains Tax Rate (on economic gain): 15%. -Recapture Tax Rate: 25%. -Ordinary Income Tax Rate: 35%. Be completely realistic in your treatment of all sources of capital gains and recapture tax. -What is the difference between the before-tax and after-tax reversion cash flow at the end of Year 10 in the pro-forma if you project net property resale proceeds at that time of $4,000,000?

Bob has $1,000,000 of his own equity capital available to make a real estate investment. He finds a bargain, a property with a market value of $1,100,000 that he can buy for $1,000,000. By how much can he enhance the market value of his net wealth by leveraging his purchase of this bargain property using borrowed money from a bank to finance 50% of his investment?

The NOI is $1,000,000, the debt service is $800,000 of which $700,000 is interest, the depreciation expense is $250,000. What is the Before-tax Cash Flow to the equity investor (EBTCF) if there are no capital improvement expenditures or reversion items this period?

All of the following are typical "GIGO" mistakes in common application of the DCF method to real estate investment analysis except:

All of the following are true about the NPV and the IRR hurdle investment decision rules, except:

Use the following information to answer the following two questions. You are making a 10-year cash flow pro-forma for a lender, on a non-residential commercial building which you have just purchased (on January 1) and plan to own for 10 years (the maturity of the loan you are requesting). The building has a single tenant in a 20-year lease that commenced at the time of building purchase (January 1). -Purchase Price: $3,000,000 including $500,000 in assessed land value. -Tenant Improvement Expenditures (all spent on building made at time of purchase, beginning of lease): $1,000,000. -Leasing Brokerage Commission (paid at time of purchase, beginning of lease): $300,000. -Capital Gains Tax Rate (on economic gain): 15%. -Recapture Tax Rate: 25%. -Ordinary Income Tax Rate: 35%. Be completely realistic in your treatment of all sources of capital gains and recapture tax. -By how much would the tax on the reversion increase (looking only for the increment here) if the projected net resale proceeds were $4,500,000 instead of the $4,000,000 of the previous question?

Which of the following is not one of the three approaches discussed in Chapter 11 to determine the appropriate discount rate or opportunity cost of capital in property valuation?