Commercial Real Estate Valuation and Financial Feasibility

Author

1759 Avenida del Sol Boca Raton, FL 33432 Phone: (561) 417-5515 Email: info@questorconsulting.com www.questorconsulting.com

Summary
The purpose of this spreadsheet model is twofold: 1) to estimate the valuation of commercial property and 2) to determine the financial feasibility of an investment in the subject property for a 10 year holding period. The uncertainty in this model lies in the many economic factors to be input as assumptions by the user. The most important assumptions in this analysis are the Net Operating Income assumptions (Annual Gross Rent, Vacany and Collection Loss Factor, and Operating Expenses) and the Cap Rate at Purchase. Special attention should be given to these assumptions. Keywords: Real Estate, Property Valuation

Discussion
Commercial property valuation is estimated using 2 factors: 1) The current Net Operating Income (NOI Gross Rent Roll minus vacancy and collection losses and operating expenses) and 2) The Cap Rate. The Cap Rate for the property is best estimated by analyzing comparables. The Market Value and Cap Rate can be calculated using the following formulas: Cap Rate = NOI / Sale Price Market Value = (NOI / (Cap Rate (%) * 100)) * 100 The financial feasibility of the investment is expressed in two factors: 1) The Net Present Value of Real Cash Flow and 2) the After Tax Real Rate of Return. The model calculates these values automatically by creating Pro Forma statements based on the assumptions input by the user.

Risk Analysis with Crystal Ball
Crystal Ball enhances your Excel model by letting you create probability distributions that describe the uncertainty surrounding specific input variables. This model includes multiple probability distributions, which all vary based on market conditions. These distributions are referred to in Crystal Ball as "assumptions." Each assumption cell is colored green and is marked by an Excel note (mouse over the cell to view the note). To view the details of an assumption, highlight the cell and either select Define Assumption from the Define menu or click on the Define Assumption button on the Crystal Ball toolbar. This model also includes several Crystal Ball forecasts: Property Valuation, NPV of Real Cash Flow, and After Tax IRR, all shown in light blue. Forecasts are equations, or outputs, that you want to analyze after a simulation. During a simulation, Crystal Ball saves the values in the forecast cells and displays them in a Forecast Chart, which is a histogram of the simulated values. To view the forecast with Crystal Ball, highlight the cell and either select Define Forecast from the Define menu or click on the Define Forecast button on the toolbar. When you run a simulation, Crystal Ball generates a random number for each assumption (based on how the assumption has been defined) and places that new value in the cell. Excel then recalculates the model. You can test this by selecting Single Step from the Run menu or clicking on the Single Step button

NPV of Real Cash Flow. highlight the cell and either select Define Forecast from the Define menu or click on the Define Forecast button on the toolbar. What is the chance that you will breakeven. that you want to analyze after a simulation. run a new simulation (hint: don't forget to hit the reset button before beginning a new simulation!). NPV of Real Cash Flow. Which variable causes the most variation in the target forecast? Can you somehow reduce this source of uncertainty and improve your overall forecast? Change the assumption parameters or the assumption types. and compare the results. use the Sensitivity Chart. To view the details of an assumption. or you can enter values into the input fields on the frequency chart view. have a NPV of zero? What is the chance you will lose money? (Hint: enter a number into the lower left field and use the Enter button on your keyboard to accept the value. When you run a simulation. and After Tax IRR forecast charts. Excel then recalculates the model. and After Tax IRR. Crystal Ball saves the values in the forecast cells and displays them in a Forecast Chart." Each assumption cell is colored green and is marked by an Excel note (mouse over the cell to view the note). Crystal Ball generates a random number for each assumption (based on how the assumption has been defined) and places that new value in the cell. which is a histogram of the simulated values. This model also includes several Crystal Ball forecasts: Property Valuation. After you run a simulation.) To view which of the two assumptions had the greatest impact on the forecast. You can also generate a report by selecting Create Report from the Run menu or clicking on the Create Report button on the toolbar. all shown in light blue. you will see the Property Valuation. To view the forecast with Crystal Ball. During a simulation. or outputs."assumptions. You can view the statistics or percentile values of the run.e. You can test this by selecting Single Step from the Run menu or clicking on the Single Step button on the toolbar. . i. highlight the cell and either select Define Assumption from the Define menu or click on the Define Assumption button on the Crystal Ball toolbar. Forecasts are equations.

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on the Define Forecast sumption (based on how en recalculates the on the Single Step button Flow. and u want to analyze after a and displays them in a t with Crystal Ball.e. and After Tax IRR can enter values into the en. of Real Cash Flow. i.note (mouse over the either select Define e Crystal Ball toolbar. port from the Run menu or . have a NPV of wer left field and use the se the Sensitivity Chart. ow reduce this source of ers or the assumption ning a new simulation!).

511) 132.) Analyze results.120) 173.517 (53.795 (10.795 (10.493 (52.104 433.131 2 204.247 (6.961 10 237.130 (12.398 175.787) 38.232) (28.890) 8 224.934) 61.318) 140.472) (28.448 141.467) 153. first year Vacancy and Collection factor Operating Expenses.471 155.324) 55.284) (28.272 (57. Source 39 Omnibus Budget Reconciliation Act of 1993 15.82% DECISION ANALYSIS FACTORS year Real Cash Flow to Owner Present Value of Real Cash Flow NPV of Real Cash Flow: After Tax Real Internal Rate of Return: PROFORMA INCOME STATEMENT year Annual Gross Rental Income Vacancy and Collection Losses Effective Rental Operating Expenses Net Operating Income Interest Expense Depreciation (cost recovery) Taxable Income Income Tax Liability Net Income After Tax 0 na na na na na na na na na na 1 182.905 (66.059 (11.) Run simulation.534 (5.895 (10.313 (9.394) 178.400 (9.324) 85.313.165 97.120) 2 187.356) 149.324) 35.0% 6.204 3 193.293 (10.870 107.900) 11 245.556) 42.0% 8.781 33.640) 26.675) 183.376 (7.257) Developed by Questor Consulting LLC (561) 417-5515 .0% 75.90 45.910 (56.540) 117.478 (12.324) 40.208 11 245.624 (46.286 8 181.324) 45.386) 136.460 5 205.0% 25 85.324) 72.059 (11.307) 144.890) 1 35.740 (58.171 4 192.313 (9.206) 121.324) 61.045) 34.657 $1.0% 3.508 (9.113 (68.329 (11.394) 3 193.573) 200.588 (51.0% 9.922) 124.) Define all assumption distributions to reflect current and local market conditions. CALCULATED BY MODEL Loan Amount Equity Required Mortgage Loan Constant 182.936 (4.302 (6.324) 66.822) 72.573) 7 217.312 10 935.553) 219.71% 0 (324.400 (9.0% 8.233 (44.817) (28.650 117.872 (9.890 7.324) 79.0% IRS .355) 47.506 (70.293 (10.641) 158.879 (64.690) 128.257) 232.219 (9.Varies based on income tax bracket $1.455 5 189.265) 195.329 (11.) Conduct comparables analysis of similar properties to estimate the cap rate at purchase.343 7 217.Commercial Real Estate Valuation and Financial Feasibility ASSUMPTIONS Annual Gross Rent.280 (55.0% 9.324) 30. 4.906 9 231.087) (28.540 3.820 6 211.216) 9 231.621 7 183.452 (10.508 (9.535 89.216) 213. please call us at (561) 417-5515.154.966) 189. first year Annual % change in rent Annual % change in expenses Loan to Value ratio Stated Annual Interest rate Loan Term (years) Percent of price in improvements CPI Annual Increase After tax.265) 6 211.991 (11.805 (49.150 (47.Varies based on taxable income 5.299. Real Discount rate Cap Rate assumed at date of sale Transaction costs as % of sales price Cap Rate at Purchase DEFINED VARIABLES Recovery period (years) Income tax rate (Corporate) Capital Gains tax rate Property Valuation: ECONOMIC VALUES.296 2 187.134 11 0 0 PROFORMA CASH FLOW STATEMENT year Annual Gross Rental Income Vacancy and Collection Loses 0 na na 1 182.069 (11.480) (28.042) 56.930) (28. For information regarding this model or for requests.431) (28.238 3 195.509 128.833 (58.860) 67.348 (60.890) 206.183) 52.966) 5 205.1% Commercial Real Estate Valuation and Financial Feasibility NOI Assumptions INSTRUCTIONS: 1.452 (10.878 9 178.036 8 224.478 (57. Better Decisions. 2.257 4 199.414) (28.991 (11. Model developed by Questor Consulting LLC.900) 226.698 (8.130 (12.324) 50.949 (10.330) 30.874 (74.045) (28. 3.872 (9.0% 3.50 974.977 6 186.400 5% 55.658 (55.028 (62. Better Analysis.553) 10 237.675) 4 199.669 324.558.091 (72.533) (28.890) (324.0% IRS .

012) 1.073 3 938.910 94.640) 36.386) 136.512 1.245 (52.480) 17.961 918.245 (53.042) 229.732 (6.752 7 850. beginning of year Annual Mortgage Payment Interest Portion of Payment Amortization of principal Balance Owed.431) 31.496 na 1.854 na 36.245 (57.206 Developed by Questor Consulting LLC (561) 417-5515 .073 76.860) 232.774 850.697 ANALYSIS OF REVERSION ON SALE Net Operating Income Projected.280 (55.165 219.045) 25.732 (5.BV) Capital Gains Tax Mortgage Balance Owed Reversion in nominal dollars to owner at sales date 158.318) 140.112 4 918.947 236.150 153.245 (46.232) 30.909 (178.020.602 na 216.355) 222.525 76.233 8.845 na 216.690) 128.512 11 740.284) 19.511) 132.576 39.814 708.732 (10.552 8 825.091 (70.014 740.087) 21.137 123% 183.471 189.947 1.414) 18.904 2 956.472) 23.890) 173.245 (58.245 (55.904 76.245 (51.890) na (324.348 (60.890) (324.200 825.398 183.556) 219.321) 783.799.897 (1.104 232.712 798.245) (4.552 76.602 113% 192.732 (9.702 130% 134% 178.206 232.158 896.879 (64.113 (68.817) 22.448 195.650 206.787) 216.693 116% 189.137 na 226.624 94.870 213.597 109% 195.245 (49.765 956.597 na 213.732 (8. end of year 0 1 974.506 226.112 76.540) 117.740 (76.870 na 222.805 94.693 na 219.245 (44.874 (74.588 94.307) 144.533) 26.526 6 874.905 (66.245 (47.732 94.00% 1.509 200.428 874.732 (6.934) (11.525 10 770.854 103% 35.781 178.356) (72.045) 213.245 (56.752 76.922) 124.732 (7.732 (10.179 740.840 9 798.495 na 229.493 94.669 76.028 (62.233 na na na na na na na MORTGAGE LOAN AMORTIZATION SCHEDULE year Balance Owed. Year After Sale (Year 11) Cap Rate At Sale Date Capitalized Value (Sale Price) Transaction Cost Net Sales Price Book Value At Sales Date (cost-dep) Capital Gain ( Net Price .020.Effective Rental Operating Expenses Net Operating Income Debt Service Income Tax Liability Equity Dividend (cash to owner) Down Payment/Reversion Total Cash Flow to Owner Purchasing Power Adjustment Real Cash Flow to Owner na na na na na na (324.641) 158.658 94.954 76.977.478 (57.870 119% 186.840 76.330) 216.833 (58.467) 149.930) 28.954 5 896.512 76.845 106% 204.526 76.517 94.016.495 127% 181.831 938.256.183) 226.206) 127.444 94.315 770.535 935.

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