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Due Dates NOTE - ALL INDIVIDUAL AND GROUP ASSIGNMENTS ARE DUE ON SATURDAYS AT MID NIGHT EASTERN STANDARD TIME. POST INDIVIDUAL AND GROUP ASSIGNMENTS TO THE GRADING PORTAL SETUP BY WEEK IN CANVAS. FOR GROUP ASSIGNMENTS ONLY ONE MEMBER OF THE GROUP SHOULD SUBMIT. Real Estate Definitions Real Estate DefinitionsDefinition Common Area Maintenance (CAM)Expenses required to maintain “common areas” in the building, often paid on a pro rata basis (i.e. cleaning, repairs, snow removal, etc.) Loan-to-Value (LTV)The ratio between the amount of debt versus equity in a loan. The value is often based on the appraised value and/or property valuation (NOI/Cap Rate). For example, an 80/20 LTV ratio on a $1,000,000 loan indicates that the developer received $800,000 in debt financing while contributing $200,000 in equity. Loan-to-Cost (LTC)Represented as a percentage value, loan-to-cost is the percentage of the construction loan amount relative to the total project cost. It is a metric utilized by lenders when determining the amount of a construction loan. Appraisal Cap RateThe capitalization rate aka going in cap rate/direct cap, is the ratio of net operating income to the overall property asset value. For example, if the yearly net operating income (NOI) is $100,000, and the asset is valued at $2,000,000, the cap rate would be 0.05, or 5%. Loan TermThe loan term is the time associated with the life of a loan, or the period by which the loan will need to be repaid. Deleted "refinance"…could be a sale. AmortizationAmortization is paying down a loan at during the prescribed time period by making planned periodic payments of both principal and interest. The amortization is often a longer period than the total loan term. Loan ConstantThe loan constant is a percentage rate that shows the relationship between the annual debt service as compared to the overall amount of the loan principal. Typically shown as an annual percentage though calculated on a monthly basis. Return on Investment (ROI)The return on investment percentage earned when comparing the amount of money invested in a project versus the money made on an investment. For example, if an investor’s all-in-cost for a project was $10,000,000, and it was sold for $15,000,000, the return on investment was 50%, or the $5,000,000 in profit divided by the original cost. Unleveraged Internal Rate of Return (IRR)The IRR is the discount rate at which the present value of the stream of income equals the amount of the investment, or percentage rate earned on each dollar invested for each period it is invested. Leveraged Internal Rate of Return (IRR)The rate of return that makes the present value of the projected cash flows after the effects of debt service and debt repayment equal to the initial investment. Unleveraged Cash On Cash ReturnUnleveraged Cash on Cash Return is calculated by dividing the cash generated by a property by the cash invested (annual before tax cash flow/cash invested). Leveraged Cash On Cash ReturnLeveraged Cash on Cash Return is calculated by dividing the cash generated by a property by the cash invested (annual before tax cash flow/cash invested). In this case, leverage is used, and cash invested is reduced by the loan proceeds from borrowing, and cash generated is reduced by the annual debt service payment. Debt ServiceThe amount required to keep the loan current. Could be interest only or some amount of principal in addition to interest. Reimbursable ExpensesReimbursable expenses are expenses one incurs on behalf of a tenant and are later reimbursed for - these are typically set forth in the lease and can be partially reimbursed or fully reimbursed. ReservesAn amount of money set aside to account for unexpected costs associated with a project (repairs or replacement reserves), or money that is used to “carry” a project during the initial lease-up period (lease-up and/or operating deficits reserves). Net Operating Income (NOI)Net operating income is the income produced by an asset when one has accounted for all income sources, minus operating expenses, vacancy allowance, etc., resulting in NOI. Triple Net (NNN)Triple net is a type of lease, most often associated with retail leases, where the tenant is responsible for all expenses and maintenance associated within their space and some allocation of common area expenses as well. Typically, NNN means tenants must also pay for real estate taxes, building insurance and common area maintenance in addition to their own utility costs. Full-ServiceFull service is essentially the opposite type of lease from a triple net, most often found in office buildings where the landlord assumes all, or “full” responsibility for maintenance to the building. Usually associated with a gross lease structure. Back-of-the-Envelope (BOE)Back of the envelope is a rough, shorthanded method for determining the potential cost or value of an asset. Most often associated with cap rates and NOI, the result of the NOI divided by the cap rate will produce a “back of the envelope” estimate. This is almost always a single period analysis. Direct Capitalization Method of ValuationThe method of valuation using NOI and dividing it by the capitalization rate (sometimes referred to as the "cap rate" and designated as R). The cap rate is determined by dividing NOI by the transaction price. Value = NOI / R. Discounted Cash Flow Method of ValuationDCF Method of Valuation (also "Discounted Present Value Method") The DCF is an income capitalization technique that is based on the principle that investors will pay no more for a property than the PV of all future NOIs. The technique mathematically discounts cash flows over the life of the investment using intelligent assumptions and in-depth knowledge of present value mechanics. Equity MultipleTotal cash distributions divided by cash invested over the life of an investment. These cash amounts are on a non discounted basis. Similar in concept to the "payback" formula in ratio analysis used in classic finance texts. An equity multiple of less that 1.0x means that the investor is not getting all of their invested capital back. An equity multiple of 2.5x means that for every dollar invested, the investor receives $2.50 in return (undiscounted). Stabilized AssetA stabilized asset is a term most often associated with the early years of a project, of meeting a certain threshold, perhaps a certain percentage leased, when it is then deemed “stabilized.” Operating Expense vs. Capitalized ExpenseBoth types of expenses are associated with running a business. Capital expenditures are typically large purchases, perhaps hardware needed to run the company, or a large piece of equipment. Operating expenses though are items such as insurance costs, even travel associated with the business, that are often deducted at the end of a year. Visuals for FO Known Facts on FO Known Facts Let's start with these assumptions and as the semester progresses each group will adjust to their OWN GTI Business Plan25-Year Hold, Purchase Price $6.9 million, Unleveraged IRR 15% and exit cap rate of 10%, 3% cost of sale Executive Summary:We learn by doing…setting the stage…it’s FALL 2019 and a group of friends known as Georgetown Investors (“GTI”) is fresh off from obtaining their Real Estate Graduate Degree from the acclaimed Georgetown University School of Real Estate. They are now seeking to apply the knowledge gained from the program to acquire their first real estate investment….and make money in an ethical manner. Last week GTI uncovered an office building that is located in an established trade area in Bel Air, Harford County, Maryland 21014. The Property:The property is known as Freedom Office (“FO”) (located at: 212 S Bond Street, Bel Air, MD 21014). Freedom Office is leased to multiple tenants. The Opportunity:The property is on the market for sale by the current owner a priced noted above (listed with a 3rd party broker) who was the original developer of the office building. The current owner is experiencing some financial difficulty with other assets in his portfolio (large concentration of residential development projects) and needs to raise cash quickly. The seller hired a local broker who has marketed the center for sale over the past four weeks. Interest from prospective buyers has been moderate. Three buyers including GTI have signed “Confidentiality Agreements” which allowed them to download the “Offering Memorandum” from a secure data site. The site includes executed leases with amendments, historical operating statements, utility bills, vendor contracts (for snow plowing, landscaping, repairs, maintenance, common area utilities) arrearages schedules, tax bills and assessment notices, prior engineering and environmental reports, ALTA survey and “as built” plans. Hint - analyzing real estate assets is all about underwriting the projected cash flow. Carefully review provided lease terms to uncover and accurately project likely cash flow streams. The Strategy:GTI’s strategic plan is to purchase the office and address upcoming lease expirations thereby adding value to the property. The strategy is to seek debt financing and an equity partner (limited partner) to raise the necessary capital. GTI will then create a capital event by selling Freedom Office to another investor or refinance. The Objective:Over the next Eight weeks, each group will: 1. Establish the business model for GTI 2. Perform a quick evaluation the opportunity with provided facts 3. Perform a market analysis and compare to provided market facts 4. Create a multi-year cash flow pro forma 5. Assess the value of your investment 6. Size and place debt to the asset 7. Create an a structure for your partnership with equity investor 8. Establish a plan for Tenant rollover Size:Suburban office building built in 2005 totaling 12,000 gross SF, 10,000 rentable SF. Walkup, interior hallways, nominal common areas. Land Area:52,881 sf Market Rent:Conclude from market data using stats, assume growth of 1% Rent Roll:Review posted MedStar lease for important information that will impact your forecast. Med Star - Refer to posted lease for rent, term and who pays what in terms of taxes, insurance and Cam. RiseCo -2,500 sf. Lease expires 12/31/19 and tenant has provided notice they do not intend to renew. Harford County Government - 2,500 sf, lease began January 2016, $25.00/sf rent that increases $.50 cents per year, 10 year term, tenant pays no expenses, full service. Researcher:GTI engaged the services of a local market researcher who graduated from the Georgetown RE program and excelled in the market analysis class (who used Costar and LoopNet) to verify the market data set. The analyst was charged with the following: 1. Inspected each of the comps (interior and exterior) and reported back type of hallways (interior, exterior), condition of building and layout of the physical space (long hallways, deep bays etc.), elevator served, and onsite parking 2. Called each broker of record to verify “who pays what in terms of expenses” then (a) Adjust comps from gross, semi gross to FO’s quoted NNN basis and (b) Adjust comps to FO’s locational and physical attributes (REMEMBER BEFORE USING STATISTICS THE DATA SET MUST BE APPLES TO APPLES IN TERMS OF