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

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Published on 3 Oct 2018

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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