Professional Documents
Culture Documents
• Rationale
– Impact of interest payments on value of money over time
• Future value
– Definition:
A way of determining the eventual value of an investment based on the amount of
the initial investment, the reinvestment rate, and the number of years under
consideration.
– Calculated
TIME VALUE OF MONEY
Future Value of €1
• How much money will you have in the future if you invest €1 today?
• If you invest €1 today at 6% interest rate, how much will you have in 3
years if the interest is compounded?
• Formula P x (1 + i ) n
€1 x 1.06 x 1.06 x 1.06 =
€1.19
P = Principal
i = Interest
n = Time
TIME VALUE OF MONEY
Compute Answer
Time Beginning Compounded Ending Value
(Years) Value
• Present Value
– Definition
The projected annual net cash flows of a project are discounted to their
present value. Interest rate is either a required rate of return (e.g. 6%) or the
IRR.
– Calculated
• Discounting factor
Present Value of €1
What is the current value of €3.00 which we will get in 3 years from today
with discounting factor at 6%?
(in other words how much do I need to invest today to get to €3.00 in 3
years )?
Answer
PV = P x (1+ i)-n
PV = 3 x (1+0.6)-3
= 3 x 1.06-3
= € 2.52
P = Principal
i = Interest
n = Time
TIME VALUE OF MONEY
1 2 3 4
1 100.00 102.00
• Annuity
– Definition
An annuity is a terminating "stream" of fixed payments, i.e., a
collection of payments to be periodically received over a specified
period of time.
– Types of annuities
• Variable Annuity
• Level Annuity
• Ordinary Annuity
• Annuity Due
Example : FV of an annuity
1-(1.16)-3 = €449,177.90
€200.000 x 0.16
TIME VALUE OF MONEY
Answer computed
• Amortization
– Definition
Gradual paying off of a debt by periodic installments, generally in
equal payments, at regular intervals, over a specific period of time.
– Calculated
• Mortgage calculation
TIME VALUE OF MONEY
AMORTIZATION EXAMPLE
Example 1
Year 0 Year 1 Year 2 Year 3 Total
Repaid
Example 2
Year 0 Year 1 Year 2 Year 3 Total
Repaid
– Calculated
What is the value today using a 10.0% discount rate of an investment that
pays € 100 at the end of year 1, € 200 at the end of year 2 and € 3700 at the
end of year 3?
Answer computed
The flow of funds would be
Answer computed
The flow of funds would be
Year 0 Year 1 Year 2 Year 3
Cash Flow (€ 2800) € 100 € 200 € 3,700
When doing the calculation make sure the sign of each reflects whether the payment is an inflow or
out flow. Since the mathematical formula to compute the internal rate of return (IRR) is
complex, a financial calculator with IRR capability should be used.
• Equity Multiple
– Total proceeds divided by equity invested
– Secondary but important investment criterion
– Usually combined with time frame (eg max. 5 years)
• Range
• 2.0 and above – high value added / opportunistic –
development projects
• Bellow 1.5-2.0 – value added projects (lower risk)
FINANCIAL STATEMENTS
• Purpose
• Balance Sheet
– Defined
A balance sheet or statement of financial position is a summary of the
financial balances of an economic unit. Assets, liabilities and ownership
equity are listed as of a specific date, such as the end of its financial year.
A balance sheet is often described as a "snapshot of a company’s financial
condition". It discloses, at a given point in time, the assets of the economic
unit, the depreciated costs or other indicated values, the liabilities and the
ownership equity.
The companies financial position is shown in form of a scorecard.
On a Balance sheet the assets equal liabilities plus equity. In other words
equity equal assets minus liabilities.
FINANCIAL STATEMENTS
BALANCE SHEET AT 31.12.12
ASSETS LIABILITIES
• NOI = net income – payments by tenants to cancel leases – proceeds from the
sale of property – earned interest + depreciation + amortization of tenant
improvements and tenant allowances + mortgage interest.
• That is ordinary income produced from operating the property minus
expenses incurred from operating the property.
• The NOI for the Belgium center for calendar year 2013= € 280,000 - € 100,000
- € 500,000 + € 920,000 + €600,000 = € 1,200,000
• FFO for the Belgium Center for calendar year 2013 is Net Income – gain from
the sale of property - cancellation of leases + depreciation + amortization.
• FFO does not reflect capital expenditures, tenant improvements or leasing
commissions.
• EBITDA = Net Income excluding interest, income taxes, depreciation and
amortization.
= € 280,000 + € 600,000 + € 920,000 = € 1,800,000
FINANCIAL STATEMENTS
• Purpose
• Types
– Current ratio
– Debt to equity
– Return on equity
– Operating margin
– Return on investment
– Loan to value
– Debt coverage
– Cash on cash
FINANCIAL STATEMENTS
ACCOUNTING BASICS
• Replacement Value
– Defined
– Use
• Comparable Value
– Defined
– Use
– Conditions that should be compared
• Sale price
• Financing terms
• Market conditions
• Location
• Physical characteristics
• Quality of income
VALUING PROPERTY
– Rationale
– Formula components
• Value = NOI
CAP Rate
• CAP Rate = NOI
Value
• NOI = CAP Rate x Value
VALUING PROPERTY
• Yields
– Initial yield
– Reversionary yield
– Equivalent yield
– “Broker yield”
• Basic assumptions
– Perpetuity principle !
• Types of Financing
– Equity (return, avaiability, risk profile)
– Debt (intrest, LTV, …)
– Mezzanine (intrest, avaiability,..)
•Purpose
•Requirements
•Characteristics
SYNTHETIC LEASES
• Defined
An operating lease that is structured in a way so that it is not recorded as a liability on
the balance sheet. Instead, it is considered to be an expense on the income statement.
Synthetic leases are designed under current accounting rules to achieve off-balance
sheet treatment. When structured as intended, neither the asset nor the liability
appear on the lessee’s balance sheet and lease payments are classified as operating
expenses. Return on assets (ROA), return on equity (ROE), interest-coverage ratios and
leveraging ratios (debt to equity) are improved relative to the on-balance sheet
alternative.
• Purpose
Some companies use it as a financial instrument that gives it the tax benefits of
ownership without the accounting burdens of ownership.
Basically, a synthetic lease allows a company to control real estate without being
required to show the real estate as an asset on the financial statements.
What will you take back?
WORKBOOK
RETAILER STATEMENTS
ASSETS LIABILITIES
INCOME
Sales 300,000
Cost of goods sold 112,500
Gross margin € 187,500
EXPENSES
Minimum rent 50,000
Overage (turnover) rent 0
CAM 5,000
Real estate tax 2,000
Tenancy (occupancy costs) 57,000
Depreciation 5,000
Utilities and repairs 5,000
Occupancy 67,000
Salaries (including Manager) 100,000
Loan amortization (principal €3000.00 and interest 6,000
€3,000)
Other 3,000
Total Expenses 179,000
PRE-TAX PROFIT 8,500
Tax (2,100)
After Tax Profit € 6,400
TATER TOT CAFÉ 2013
CASH FLOW STATEMENT
Tater Tot Café has told you it’s going to close its restaurant because of poor
performance. You want to determine whether you should enforce the lease,
negotiate a rent reduction, or negotiate a termination.
TATER TOT CAFÉ 2013
CONGRATULATIONS!
You have just won a lump sum payment of €1,000,000 from
Publishers Family of Magazines
Now that the hoopla has settled down and your relatives and salesmen have stopped calling, you have
to decide how to invest this for the next year.
Your two options are:
1. Invest in a 5% US Treasury note, or
2. Buy €1,000,000 worth of stock in a start-up firm you read about in your dentist’s office. You think
this place has the hottest idea since NetBank and, with a €1,000,000 investment, you could walk away
at the end of a year with €2,100,000 if the article is to be believed.
What to do?
A) With the US-backed securities being a pretty sure bet, at least for now anyway, you would have a
certain €1,050,000 at the end of one year by purchasing a US Treasury note. Your original
€1,000,000 plus €50,000 in interest constitutes a 5% return.
B) Having done some research about the start-up company, you estimate their chance of success in
the next year to be 50-50. Therefore, the expected value of the stock investment after one year is:
0.50 x €2,100,000 = €1,050,000
Your original €1,000,000 plus €50,000 in interest is a 5% return.
Assume that the following tenant was billed late as noted. If we
assume an 8% interest rate and payment is be received on the first of
March, the “effective cost” of late billing would be as follows:
Tenant Bill To Be Sent Rent Due Bill Sent Bill Paid Mo. Rent # Of Days
Assume that Pietro Pet Store wants to terminate its lease early.
They are paying rent of €2,750, common area maintenance of
€600 and real estate tax of €400 = €3,750 monthly and have 72
months remaining on their lease.
DATA:
Mall GLA 20,000 SQUARE METRES (A)
Sales per square meter €6000 (B)
Market rent per sq. Meter €600 (C)
Rent to sales ratio
Market rent €600 = 0.10 (D)
Sales M² €6000
FORMULA:
1.Sales per square meter x 1% = 1% sales increase per square meter
€6000 (B) x .01 = €60 (E)
2. Rent to sales ratio x 1% sales increase per square meter = Additional rent per square
meter
0.10% (D) x €60 (E) = €6 (F)
3. Additional rent psf x Mall GLA = Potential additional rent
€ 6 (F) x 20,000 (A) = €120,000 (G)
4. Additional rent divided by 10% cap rate = Increased value
€120,000 / 0.10 = €1,200,000
CENTER REFINANCING
If you borrow €100,000 for 10 years at 10% to provide a tenant allowance what additional
income would need to be earned to pay off the loan.
From the mortgage constant tables, the annual mortgage constant to pay off a loan over
10 years at 10% is 0.1586 and the monthly mortgage constant is 0.013217
To pay off the loan the landlord would need to increase the monthly rent by €100,000 x
0.013217 = €1,322
CENTER REFINANCING