FUNDAMENTALS OF PROJECT FINANCIAL AND INVESTMENT ANALYSIS. This presentation will lay the groundwork for the remainder of the course, reviewing basic principles of finance as they relate to real estate project financial-investment analysis and evaluation. There will be four sessions:
This presentation will lay the groundwork for the remainder of the course, reviewing basic principles of finance as they relate to real estate project financial-investment analysis and evaluation.
There will be four sessions:
I. Structuring a real estate feasibility analysis
II. Evaluating the risk/return tradeoff for real estate projects
III. Developing techniques of financial analysis
IV. Examining problems and pitfalls of financial investment analysis.
This introductory session will address the concept of feasibility and real estate investment analysis; development of the first-year pro forma; and the usefulness of the CAP rate.
x L x
Direct Costs real estate...
Office building: 205,000 sq. ft. at $43/sq. ft.
Above grade: 22,420 sq. ft. at $24/sq. ft.
Below grade: 125,000 sq. ft. at $28/sq. ft.
Tenant improvements: 176,000 sq. ft. at $11/sq. ft.
Architectural & Engineering
6% of hard costs ($14,984,000)
5% of $15,883,040
$16,667,192WILSHIRE BOULEVARD OFFICE BUILDING
Indirect Costs real estate...
Real estate taxes
1% of direct cost plus land; 15 mos./2
Permits, legal fees, title, escrow, insurance
Development fee: 3% of hard costs
Leasing commission: 3% on $22 x 176,000 x 5 years
Lease-up expense: $4/sq. ft. x 176,000 sq. ft. for 6 mos.
$1,855,815WILSHIRE BOULEVARD OFFICE BUILDING
TOTAL DIRECT AND INDIRECT COSTS real estate...
Financing cost: 16% for 15 mos./2 on total costs
& financing cost ($20,581,119)
TOTAL COST INCLUDING FINANCING
$23,581,119WILSHIRE BOULEVARD OFFICE BUILDING
CASH FLOW ANALYSIS
Flow at End of
- Break-even Points
Rate of Return
- CAP Rates
- Price/Rent Ratios
- Expense Ratios
A. Multiple IRR solutions
B. Mutually exclusive investments with different timing of cash flows
C. Mutually exclusive investments with scale differences
D. Reinvestment rate substantially different from IRR