commercial real estate financial analysiscommercial real estate financial analysis: cash flow model...
TRANSCRIPT
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Commercial Real Estate Financial Analysis:
Cash Flow Model
BRUBAKER Group
Commercial & Industrial Properties
Brian Brubaker | Broker, M.E.
Chairman, BH/GLAAR Commercial Real Estate Committee
Director, BH/GLAAR Board of Directors
Director, California Association of REALTORS®
California Association of REALTORS® Region 20
California Commercial Alliance (CCA)
©2014 BRUBAKER Group. All rights reserved.
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In commercial real estate financial analysis, it’s
customary to prepare a “setup”
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The “setup” is usually provided within the
marketing package for a listed property
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The setup typically includes cash flow and other financial analysis
calculations and investment indices
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Let’s take a look at a standard multifamily
residential income property setup…it’s the easiest for us to develop and understand a cash
flow model
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Work with a setup model you like…your commercial mortgage brokers can help
you with this
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We’ll start with income…and then move to expenses…then calculate
cash flow
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Actual or current numbers vs. “pro forma” or “market” numbers
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Scheduled Gross Income (SGI) = Total Monthly Income
“Annualized”
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Vacancy Rate Reserve = Vacancy Rate % X SGI
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Gross Operating Income (GOI) = SGI - Vacancy Rate Reserve
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Total Expenses = Property Taxes + Ordinary Expenses +
Capital Expense Reserves
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We know what Ordinary Expenses are, but what are
Capital Expenses?
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U.S. companies report financials according to GAAP
(Generally Accepted Accounting Principles), which
are established by FASB (Financial Standards Accounting Board)
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Under GAAP, Ordinary Expenses are “expensed”
during the year the cost was incurred
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Capital Expenditures add to the life of an asset and must be depreciated over a cost recovery period of years
(useful life), so we reserve for these anticipated costs
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Common examples of capital expenses:
•Roof •Hot water boiler •Elevator
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The reserve is a financial analysis recognition of an
anticipated capital cost…the owner doesn’t actually put money into an account that gets transferred upon sale
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Here’s an example… There’s ten years of life left in
the roof, and a new roof is $60,000, what should be
reserved each year for this anticipated cost?
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$60,000/10 years remaining = $6,000 per year to be
reserved
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Net Operating Income (NOI) = GOI - Expenses
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Pre-Tax Cash Flow = NOI – Loan Payments
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This is called “positive” cash flow, and it’s very important
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Total Return Before Taxes = Pre-Tax Cash Flow + Principal Reduction
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Total Rate of Return (ROR) = Total Return / Down payment
(This is also called the
“Cash-on-Cash” Return)
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The Cash-on-Cash Return is the ROR based upon the
total return and the investor’s actual cash
outlay (down payment)
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Debt Service Coverage Ratio DSCR = NOI/Loan payments
(The Debt Service is the
total of the loan payments, principle + interest)
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In this example,
DSCR = $91,885/$69,089
DSCR = 1.33
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Capitalization Rate (CAP Rate) = NOI/Price
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The CAP Rate is analogous to a ROR (Rate of Return),
which is commonly used to rate the performance of
many types of investments
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For example, if you invest $100,000 into a CD
(Certificate of Deposit) and your annual return
(interest) is $10,000…what is your ROR?
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If your client invests $1,000,000 into an
apartment building and the net operating income is
$70,000…what is the CAP Rate?
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A building is listed for $10M and the net operating
income is $500,000
What is the CAP Rate?
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Get to know the average “CAP Rates” within the market areas you serve
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Gross Rent Multiplier (GRM) = Price/SGI
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Therefore, using algebra...
Price = GRM X SGI
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Which means...the Price is expressed by the
GRM in “multiples” or “orders of magnitude” of
the annual income
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GRM is a function of:
•Price •Income
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CAP Rate is a function of:
•Price •Income •Expenses
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Investor Success
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Questions?
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