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Lecture 7 FNCE 232 M - FNCE 232 Real Estate Investments Lecture 7 Market and Lease Decisions Professor C F Sirmans Office Room 443 School of

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FNCE 232 Real Estate Investments Lecture 7 Market and Lease Decisions Professor C. F. Sirmans Office: Room 443 School of Business Office Hours: 2:30 - 3:30 Tu & Th
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Review From Lecture 6 What are the basic legal and financial aspects of leases? Do you understand the “mechanics” of leases? See Problem Set 2 What are some of the major categories of operating expenses? What is the definition of “leased-fee” value? Can you forecast the NOI and NSP for an investment?
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Overview Understanding the importance of market and lease assumptions in making the investment decision How “sensitive” is the investment decision to market and lease inputs? Some Investment Decision Examples Review for Exam 1
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N N N t t y NSP y NOI V ) 1 ( ) 1 ( 1 + + + = = The Basic Investment Model
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Another Basic Equation A fundamental Valuation Equation is V = NOI/R NOI is the first year’s Net Operating Income and R is the “Overall Cap Rate”
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Sensitivity Analysis Using our basic valuation/investment model, what would be the effect on the value, NPV or IRR of changing the input assumptions? How does NOI and NSP vary with the assumptions?
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Sensitivity Analysis How sensitive is the investment decision to changes in the following inputs? A. Rents B. Vacancies C. Operating Costs
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Sensitivity Analysis To Illustrate the sensitive of the investment decision to assumptions about NOI and NSP, let’s first review the Small Apartment Case in detail. Review assumptions and NPV/IRR calculations for the Small Apartment Case.
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Sensitivity Analysis Using the Small Apartment Case, show the sensitivity of the original NPV (+$6,831) to the following changes in input assumptions (make the changes individually).
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Sensitivity Analysis Cont . Decrease Rents From $750 per month to $725: NPV = -$22,184 Decrease Rent Growth from 2% to 1.0%: - $60,730 Increase Vacancy from 7% to 10% per year: - $51,804 Increase Operating Expense Ratio from 50% to 55%: - $86,754 Increase Operating Expense Growth Rate from 3% to 4.0%: -$29,439
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Valuation Effects Rather than measuring the effects of a change in inputs on the NPV of an investment, suppose we wanted to show the effects of a change on the amount the investor was willing to bid for a project?
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Valuation Effects For example, what is the maximum amount the investor is willing to bid for the Small Apartment Investment, given the assumptions? That is, what price would make the NPV exactly equal to zero? At $850,000, the NPV is + $6,831. Does that mean that the investor is willing to bid $856,831?
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Close, but not exactly. Why? Acquisition Costs depend on the price paid. Using your spreadsheet, what
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This note was uploaded on 04/22/2008 for the course FINANCE 232 taught by Professor Sirmans during the Spring '08 term at UConn.

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Lecture 7 FNCE 232 M - FNCE 232 Real Estate Investments Lecture 7 Market and Lease Decisions Professor C F Sirmans Office Room 443 School of

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