Lecture_400X_Proformas

Lecture_400X_Proformas - Lecture Topic 4 Real Estate Cash...

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Lecture Topic 4 – Real Estate Cash Flow Pro Formas
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The PROFORMA Defn: multi-year cash flow forecast How long? Who needs it? What do the numbers represent? But the proforma can be more useful than just “window dressing”, if done properly. It is the basic vehicle to implement the DCF valuation method
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Two types of Cash Flows: Operating Reversion (Sale of Property, Sometimes partial sales )
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Two ways of defining "bottom line". . . 1) Property level (PBTCF, most common in practice ): Net CF produced by property, before subtracting debt service payments and income taxes. CFs due purely to underlying productive physical asset, not based on financing or income tax effects. 2) Equity ownership after-tax level (EATCF): Determines value of equity only (not value to lenders). Sensitive to financing and income tax effects.
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- Operating Expenses = - OE _____________________ _______ Net Operating Income = NOI - Capital Improvement Expenditures = - CI _____________________ _______ Property Before-tax Cash Flow = PBTCF
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How do we forecast vacancy? 1. Look to the general rental market; adjust for non-stabilized buildings. 2. Look at the history of vacancy in the subject building 3. Forecast space by space, if necessary How do we forecast future sale price? Typically, via direct capitalization What is the expected relationship between the going- in cap rate and the going-out cap rate?
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Operating Expenses: Fixed and variable… Examples? NOTE: OE do NOT include: Income taxes, Depreciation “expense”. Must include mgmt expense even if self-managed. Why?
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Capital Expenditures include: Leasing costs: Tenant build-outs or improvement expenditures (“TIs”) Property Improvements: Major repairs Replacement of major equipment Major remodeling of building, ground & fixtures Expansion of rentable area Goal: To increase value by increasing the rents that can be charged, or by decreasing operating expenses
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This note was uploaded on 06/08/2011 for the course BUAD 400x at USC.

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Lecture_400X_Proformas - Lecture Topic 4 Real Estate Cash...

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