REE-4313 Lecture Notes - Lecture 3: Earnings Before Interest And Taxes, Capitalization Rate, Cash Flow

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- Investment Basics
o Investment Conditions
Site evaluating its best use
Use looking for a site
Funds looking for an investment
o Typical Decisions Considered
Whether to acquire, develop, or redevelop a property
Whether to sell the property
How best to use property (to maximize cash flow)
o Fundamental to the Investment Decision
What is the value of the property to the investor?
How much to bid for the property (investment value)?
How much to pay to redevelop?
How much will it cost to reposition/renovate the property?
The value to the investor amount paid = net present value of the
property
NPV= [the PV of the cash inflows, less the PV of the cash outflows]
o Value of an Income Property is Determined By
Magnitude of its expected cash flows
Timing of its expected cash flows
Certainty of its expected cash flows
o Two Primary Methods to Estimate Value
Direct Capitalization
Value= NOI/Ro
Discounted Cash Flow Analysis (DCF)
Value= PV of the expected cash flows
o Net cash flow from operating the property
o Net cash flow from the sale of the property
o To Determine Value, We Need To:
1. Estimate the property’s net operating income
2. Identify the appropriate capitalization rate
OR
1. Estimate the expected cash flows from operations
2. Estimate the expected cash flows from sale
3. Identify the investors’ required return (discount rate)
- Net Cash Flow from Operations
o Potential Gross Income
o Vacancy & Collection Losses
o + Miscellaneous Income
o + Expense Reimbursements
o Effective Gross Income
o Operating Expenses
o = Net Operating Income
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