Property Project Review

Exam 3

What does it mean to default on a loan?

 Fail to meet an obligation or requirement.

What is the difference between a recourse and a non-recourse loan?

Recourse - lender can seek other assets to satisfy loan.

Non-Recourse - lender cannot seek other assets to satisfy loan.

What does the reciprocal of the capitalization rate tell you?

The NOI Multiplier, or the years to payback.

A comparable property recently sold for 5,000,000. At the time of the sale it was generating 450,000 in effective gross income. The subject property is generating 100,000 in effective gross income. What is the subject property worth?

500,000 / 450,000 =  11.11

11.11 x 100,000 = 1,111,111

A comparable property recently sold for 5,000,000. At the time of the sale it was generating 350,000 in effective gross income. The subject property is generating 100,000 in effective gross income. What is the subject property worth?

500,000 / 350,000 =  14.28

14.28 x 100,000 = 1,428,000

Property A is generating 1,200,000 in effective gross income. The operating expense ratio is 20 percent. Using a capitalization rate of 8 percent, what would be the value indication?

1,200,000 x .20 = 240,000

1,200,000 - 240,000 = 960,000

960,000 / .08 = 12,000,000

If your discount rate is 10%, what would you prefer: 10,000 in 5 years or 20,000 in 10 years?

PV of 10,000 at 10% at 5 years = 6,209  PV of 20,000 at 10% at 10 years = 7,710


If your discount rate is 15%, what would you prefer: 10,000 in 5 years or 20,000 in 10 years?

 10,000 in 5 years

What kind of financing occurs when the bank holds the deed until the loan is paid off? 

Murabahah

Who prefers a non-recourse loan, a borrower or a lender? 

 Borrower

What are the two factors used to calculate a payment in an adjustable rate loan that are not used in a fixed rate loan?

 Index and margin

Name four ways to increase the yield on a commercial real estate property investment.

 Increase rent, lower vacancy, lower operating expenses, increase net leasable area, positive leverage.

What is the definition of Internal Rate of Return?

The rate at which all positive and negative cash flows are equal.

The rate at which the net present value is zero.

What is the maximum LTV ratio in Saudi Arabia?

 70%

What organization regulates the real estate financing industry in Saudi Arabia?

SAMA

If the capitalization rate is 4.0%, what is the NOI multiplier?

1 / 0.04 = 25 

If the capitalization rate is 6.0%, what is the NOI multiplier?

1 / 0.06 = 16.67

 If NOI decreases, what happens to the equity dividend rate of return?

decrease

 If the estimated loan payment is 300,000 and the NOI is 350,000, will a Saudi bank provide a non-recourse loan?

 300,000 / 350,000 = 85.7%, greater than 70%, therefore no loan.

Section 2:  13 questions 4 point each – 52 points possible

17. My target rate of return is 12 percent. Should I purchase the following property? PV = 1,912,886, therefore  NO

Purchase price: 2,000,000

Cash Flows:

1             180,000

2             160,000

3             190,000

4             290,000

5             2,300,000

18. My target rate of return is 9 percent. Should I purchase the previous property?

 PV = 2,146,807,  therefore  Yes

19. If your target rate of return is 8 percent, what is the maximum you should you pay for a property with the following cash flows? PV = 825,127

1             100,000

2             (50,000)

3             50,000

4             75,000

5             1,000,000

20. If your target rate of return is 12 percent, what is the maximum you should you pay for a property with the previous cash flows? PV = 700,105

Use the following information to answer the next six questions:

The asking price is 15,000,000

The gross building area is 3,000 square meters

10 percent of the building is common area.

The potential gross income is 900 per square meter of net leasable area.

The vacancy rate is 10 percent.

The operating expenses are around 1,200,000 a year.

21. What is the property generating in NOI?

987,000

22. What would be the overall capitalization rate if it sold at the asking price?

 6.6%

A bank will loan 70 percent of the price at 5 percent rate amortized over 20 years.

23. What is the equity dividend rate?

 3.2%

24. What is the mortgage constant rate?

 8.0%

25. Will the buyer have positive or negative leverage?

 negative

26. If the new owner can reduce vacancy to 5% and reduce operating expenses to 600,000, what will the equity dividend rate be?

 19.2%

For the next three questions: A property is generating 500,000 in NOI.

27. The maximum debt service ratio a lender is willing to accept is 1.30, how much would the maximum payment be?

500,000 / 1.3 = 384,615

28. If the lender were to amortize the maximum loan over 20 years at 4%, what would the loan amount be?

 PV of 20 payments of 384,615 at 4% = 5,236,176

29. If the maximum LTV ratio is 70%, what can someone pay for the property and get a bank loan?

5,236,176 / 0.7 = 7,480,251

Exam 3 Questions

1. If your discount rate is 12%, what would you prefer: 5,000 in 5 years or 10,000 in 9 years?
2. What are the two ways you can finance real estate in Saudi Arabia?
3. What kind of financing occurs when the bank holds the deed until the loan is paid off? 
4. What kind of financing occurs when the bank puts a lien on the deed until the loan is paid off?
5. What are the six elements that appear in a mortgage financing note?
6. Who is in charge of regulating the real estate mortgage market in Saudi Arabia?
7. What is needed to increase trust in the real estate financing market?
8. What is a default?
9. What is the difference between a recourse and a non-recourse loan?
10. Would you prefer a fixed rate or adjustable rate mortgage and why?
11. What is a margin on an adjustable rate loan?
12. What is the difference between possession and title?
13. How can you improve yield on a commercial property investment?
14. Why do we use ratios in real estate analysis?
15. What are the three categories on ratios?
16. What is the internal rate of return?
17. If the NOI multiplier is 15, what is the capitalization rate?
18. What is the building efficiency ratio?
19. How do you calcuate the mortgage constant rate?
20. When do you use leverage ratios?
21. What is the maximum LTV ratio in Saudi Arabia?
22. What is the minimum DCR banks like to see?
23. Can you estimate EGIM without talking to the building owner?
24. What does a LBR of 7.5 mean?
25. If the capitalization rate is 6.0%, what is the NOI multiplier?
26. If the EGIM is 12 and your property has an effective gross income of 100,000 a year, what is your estimate of value?

Assume the following cash flows:

Period	Cash Flow
0	(1,000)
1	100
2	110
3	105
4	112
5	1,050

27. What is the IRR?
28. If you paid 800 instead of 1,000, what would be your IRR?
 
Assume the following cash flows:

1	5,000.00
2	6,000.00
3	5,000.00
4	9,000.00
5	100,000.00

29. What is the maximum you should pay for this property if your target rate was 9.0%?
30. What is the maximum you should pay for this property if your target rate was 7.0%?

Exam 3 Review

Daniel Goodwin Legal Presentation

CH 15 - 18

CH 9 - 14

Exam 3 Preparation 2

Use the following information to answer the following questions:

The asking price is 15,000,000

The gross building area is 3,000 square meters

10 percent of the building is common area.

The potential gross income is 700 per square meter of net leasable area.

The vacancy rate is 10 percent.

The operating expenses are around 800,000 a year.

1. What is the property generating in NOI?

2. What would be the overall capitalization rate?

A bank will loan 60 percent of the price at 5 percent rate amortized over 20 years.

3. What is the equity dividend rate?

4. What is the mortgage constant rate?

5. Will the buyer have positive or negative leverage?

6. If the new owner can reduce vacancy to 5% and reduce operating expenses to 600,000, what will the equity dividend rate be?

Exam 3 Preparation 1

Exam 3 will cover chapters 9, 10, 14, 15, 16, 18, and 19.

Topics include:

Financing
Time Value of Money
PV - Present Value
IRR - Internal Rate of Return
DCF - Discounted Cash Flow
Investment Analysis with Rates and Ratios

PV and IRR

PV and IRR questions

A. Assume the following cash flows:

1. 5,655
2. 4,434
3. 6,000
4. 7,800
5. 80,000

1. What should I pay if my target is an 8.0% rate of return?

2. What should I pay if my target is an 12.0% rate of return?

3. What should I pay if my target is an 10.0% rate of return?


B. Assume the following cash flows:

1. 5,000
2. 6,000
3. 7,000
4. 6,000
5. 90,000

 4. If I paid 100,000, what would be the rate of return?

5. If I paid 70,000, what would be the rate of return?

6. If I paid 50,000, what would be the rate of return?

Final Exam

MGT 374 Real Estate Analysis
The Mandatory Comprehensive Final Exam will be:
Tuesday May 26th from 1:00pm to 3:30pm
Rooms
Men B1-022
Women B2-019

Exam 2

Multiple Choice 15 questions at 4 points each = 60 points potential.

What are the three types of depreciation considered under the cost approach?

A. cost, sales, income

B. equity, debt, market

C. short-lived, long-lived, non-reproducing

D. physical, functional, external

 ________________ stores cluster and ____________ stores disperse

A. comparison, convenience

B. magnet, big box

C. retail, wholesale

D. convenience, comparison

A building is 10 years old and has an economic life is 30 years. The cost new is 5000 per square meter. What is the effective rate?

A. 3,333

B. 6,500

C. 1,667

D. 6,667

Can you value a property if there are no comparable building sales and no income?

A. yes

B. no

If a property is superior to the subject, what kind of adjustment do you make to the sale price of the comparable?

A. positive

B. negative

What do you call a situation where you have a tenant but they don’t pay rent?

A. vacancy loss

B. equity loss

C. expense loss

D. credit loss

If you manage your own building, should you charge a management fee in your income statement?

A. yes

B. no

What does the reciprocal of the capitalization rate tell you?

A. the years to recover the purchase price

B. the earnings to price ratio

C. the reversion rate

D. the yield rate

If a comparable property sold at an 8 percent capitalization rate, and it is superior to the subject property, what capitalization rate should you use?

A. greater than 8 percent

B. less than 8 percent

C. 8 percent

D. between 7 and 9 percent

If a property sold last year for 100,000 and then resold last week for 124,000, how much should I adjust for changes in market conditions?

A. +2 percent per month

B. -2 percent per month

C. +5 percent per month

D. no adjustment necessary

Property A has a NOI of 100,000 and sold for 1,250,000. Property B has an NOI of 250,000 and sold for 3,125,000.

Which one has the higher capitalization rate?

A.  A

B. B

C. both the same

I have analyzed three sales. Sale 1 indicates an 8.0% rate, Sale 2 indicates 7.5%, and Sale 3 indicates 9.0%.

If I give Sale 3 a weight of 50% and the other two 25% each, what is the weighted indication?

A. 8.167%

B. 9.5%

C. 8.375%

D. 8.735%

What expenses do owners typically not include in their income statements?

A. credit and vacancy loss

B. depreciation and interest

C. management and reserves for replacements

D. reversion and reconstructed

If the average capitalization rate is 7 percent, but one sale is judged to be most comparable and is generating a 9 percent rate, what rate should you use?

A. 7 percent

B. 9 percent

C. between 7 and 9 percent

D. 8 percent

Can a building be new and still suffer from depreciation?

A. yes

B. no

Short Answer: 5 questions at 8 points each = 40 points potential

16. Value the property using the cost approach and the income approach using the direct capitalization method.

The rectangle-shape land measures 110 meters by 70 meters. The gross building area is 7,500 square meters. Common area hallways use around 1,200 square meters. The economic life for buildings in this neighborhood is estimated at 40 years. The building is 16 years old. It costs 1,200 riyals per square meter to building a new building similar to the subject property. Land values in the neighborhood are estimated at around 3,000 per square meter.

The building is rented out to seven tenants. They each have 900 square meters. Two tenants pay 400,000 a year and the other five pay 500,000 a year. You estimate credit and vacancy loss at 5 percent of potential gross income. Based on historical operating statements you estimate expenses at 24 percent of the effective gross income.

You have reviewed recent sales and estimate a capitalization rate of 8 percent.

A. What is your estimate of value under the cost approach?

 We will review this question in class.

B. What is your estimate of value under the income approach?

We will review this question in class.

17. Matched-Pair Analysis. Use the following table to answer the next four questions:

We will review this question in class.

A. What two comps would you use to make an adjustment for differences in the date of the sales?  What would the percentage adjustment be?

B. What two comps would you use to make an adjustment for differences in sizes?  What would the percentage adjustment be?

C. What two comps would you use to make an adjustment for differences in locations?  What would the percentage adjustment be?

D. What is the subject property worth? Explain your reasoning.

18. You have been asked to analyze a property.

The asking price is 25,000,000

The land is 3,000 square meters

The gross building area is 6,000 square meters

10 percent of the building is common area.

The potential gross income is 500 per square meter of net leasable area.

The vacancy rate is 5 percent.

The operating expenses are around 800,000 a year.

A. What is the property generating in NOI?

1,765,000

B. What would be the overall capitalization rate if it sold for the asking price?

7.06%

19. What are the 8 steps in the appraisal process?

Identify the Problem 

Determine the Scope of Work 

Collect Data and Describe Property 

Perform Data Analysis 

Determine Land Value 

Apply Approaches to Estimate Market Value 

Reconcile Indicated Values from the Approaches 

Report Final Value Estimate

20. What are the four transaction adjustments under the sales approach?

Rights Conveyed

Financing

Conditions

Date of the Sale or Market

CH 8

CH 7

CH 5 & 6

Property Value Exercise

Value the property using the cost approach and the income approach using the direct capitalization method.
The rectangle-shape land measures 80 meters by 100 meters. The gross building area is 5,000 square meters. Common area hallways use around 1,000 square meters. The economic life for buildings in this neighborhood is estimated at 40 years. The building is 8 years old. It costs 1,000 riyals per square meter to building a new building similar to the subject property. Land values in the neighborhood are estimated at around 2,500 per square meter.

The building is rented out to five tenants. They each have 800 square meters. Two tenants pay 400,000 a year and the other three pay 500,000 a year. You estimate credit and vacancy loss at 5 percent of potential gross income. Based on historical operating statements you estimate expenses at 20 percent of the effective gross income.

You have reviewed recent sales and estimate a capitalization rate of 7 percent.

What is your estimate of value under the cost approach?

What is your estimate of value under the income approach?

Property Projects

Full Name	Building
Abdulaziz Ahmed Alsaleh 140408	Granada Center
Abdulrahman Alhabib 120126	AlNakheel Mall
Abdulrahman Jamal Altowirgi 10110265	AlAnoud Tower
Abdulrauf Mohammed Binhussain 10110259	Balsharaf's Apts.
Ahmed Alabdulatif 120158	Nojoud Mall
Ahmed Mohammed Alhawary 120416	????
Ahmed Saleh Alobud 140407	Admas Building
AlAnoud Turki Alsaud 121112	Siracon Building
Aljohara Omar A Alsheikh 131352	Localizer Mall
Areen Mohammed Alwabil 121072	Gallery Mall
Bader Majed Abdulkader 130348	Rabeeh Square
Badr Khaled Aldamer 120441	Mirah Building
Dana Talaat ALQahtani 131330	Hayatt Mall
Fahdah Abdulilah Al Saud 121244	Centeria Mall
Faisal Ameen Najm 140262	Green Hill Project
Faisal Walied Awamar 130149	Abdar Building
Fhad Saleh Alrowaitee 120422	Al Mezan Tower
Ghada Bahashwan 121261	Maathar Tower
Khalid Sultan AlSaud 140376	Al Mohammadyah
Khalid Hussein Aldamer 91010191	?????
Lama Albathi 121074	Olaya Mall
Majed Alsemari 120194	Hitteen Plaza
Mashehor Ahmed Alsakkaf 91010028	Alsallash
Mohammed Ali Alali 120376	Andalus Center
Saad Mohammad Alnemer 130442	Alnemer Center
Samy Kareem Jamali 130440	Tawaren Center
Sarh Sami AlRasheed 131195	Kingdom Tower
Saud Abdulaziz AlSaud 130192	Alnimer Center
Saud Fahed meshari Alsaud 120079	Olaya Street?
Saud Abdulellah Alshaikh 91010188	McDonalds Riyadh
Sultan Khalid Alsaud 120193	???
Sultan Mohammed Binhussain 10110259	Leaders Towers
Thamer Khaled Alenazi 120080	ARA building
Turki Mansour AlSharbatly 120519	Al Habib