Exam 3 ReviewFinancing
Time Value of MoneyLeverage
Rates and RatiosIRR
Finance
AdvantagesDisadvantages
What would you rather have?
1,000 in 5 yearsor
2,000 in 10 years?
What would you rather have?
Depends on the discount rate
Years FV 10% 20%
5 1,000 620.92 401.88
10 2,000 771.09 323.01
Financing
MurabahahMortgages
Murabahah
bank buys propertysells with payments
deed transferred at end
Mortgageowner buys property
bank loansdeed at beginning
lien - recover in default
Two Documents
NoteMortgage
Note
details termsborrower and lender
Mortgage
pledges property as security
Noterate of interest
early payoffpersonal liabilitylate paymentsdue on sale
call due option
Notedefault
foreclosure
Ratesfixed
adjustable - ARMindexedLIBORmargincaps
teaser
Paymentsmonthly
amortizinginterest-only
termballoon
Interest Onlypay only interest
pay principal balance at maturity
“bullet loan”
Balloon Mortgageamortize over 25-30 years
maturity 5-15 years
must be prepared to payoff loan at maturity
Pre-Paymentsright
penalty
Personal Liabilityrecourse
non-recourse
Demand Clausemust pay now
Defaultfailure to meet a
requirement
foreclosure
Foreclosurecourt-orderedorder of liens
Possessionoccupy property
Titlelegal ownership
The Effects of Time and Risk
on Value
Time Value
(1 + r)n
compounding
multiplying
Time Value
discounting
(1 + r)n
1
dividing
what is r?
includes all risk factors
Commercial Mortgages
Commercial vs. Residential in the U.S.
more riskshorter terms
higher down LTVnon-recourse
Commercial vs. Residential in Saudi
less riskrecovering property
Commercial Loans
Construction LoanPermanent Loan
Yield AnalysisHow can you improve yield?
Leverage
Leverage
Using other people’s money to make more money on my money.
Two Elements
Equity - ownerDebt - lender
Yield AnalysisPurchase Price 1,000,000
NOI 100,000
Overall Rate 10.0%
Loan 750,000
Years 30
Rate 8.0%
Payment 66,621
Yield Analysis
Debt 750,000 66,621 8.9%
Equity 250,000 33,379 13.4%
Total 1,000,000 100,000 10.0%
Value NOI Rate
Chapter 18
Investment Decision Ratios
Why Ratios?
Allows us to make comparisons
Ratios
Physical FinancialLeverage
Physical RatiosPrice per Square MeterLand to Building Ratio
Building Efficiency RatioOperating Expense Per Square Meter
NOI Per Square Meter
PPSMPrice Per SM
Price÷
Size
LBRLand to Building Ratio
Land Size÷
Building Size
BERBuilding Efficiency Ratio
Net Leasable Area÷
Gross Building Area
OEPSMOperating Expense Per
SMOperating Expense
÷Gross Building Area
NOIPSMNOI Per SM
NOI÷
Gross Building Area
Financial RatiosCapitalization Rate
Net Income MultiplierEffective Gross Income Multiplier
Operating Expense Ratio
RoCapitalization Rate
NOI÷
Price or Value
NIMNet Income Multiplier
Price or Value÷
NOI
inverse of Ro, years to payoff
EGIMEffective Gross Income
MultiplierPrice or Value
÷Effective Gross Income
OEROperating Expense Ratio
Operating Expenses÷
Effective Gross Income
OEROperating Expense Ratio
Operating Expenses÷
Effective Gross Income
Leverage RatiosLoan to Value Ratio
Debt Coverage RatioEquity Dividend Rate
Debt Yield RatioMortgage Constant Rate
LTVRLoan to Value Ratio
Loan Amount÷
Price or Value
DCRDebt Coverage Ratio
NOI÷
Loan Payment
ReEquity Dividend Rate
NOI after Debt Payment÷
Down Payment
DYRDebt Yield Ratio
NOI÷
Loan Amount
RmMortgage Constant Rate
Loan Payment÷
Loan Amount
Internal Rate of ReturnIRR
The rate at which all cash flows
(negative and positive) balance
Internal Rate of ReturnIRR
rate that will make the net present value
equal to zero
=IRR(values)
Excel
Excel Workbook
PVRatesIRR
Multiple Analysis
1. If my target rate of return is ____,what should I pay ?
2. If I pay______,what is my rate of return ?
PV
IRR