overhead set 5 typical downtown office building 1986 n.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Overhead Set #5: Typical Downtown Office Building--1986 PowerPoint Presentation
Download Presentation
Overhead Set #5: Typical Downtown Office Building--1986

Loading in 2 Seconds...

play fullscreen
1 / 11

Overhead Set #5: Typical Downtown Office Building--1986 - PowerPoint PPT Presentation


  • 90 Views
  • Uploaded on

Overhead Set #5: Typical Downtown Office Building--1986. Size: 450,000 ft 2 Land: 15% of total property value Depreciation: straight-line over 19 years Debt: 75% loan-to-value; interest only; 9% Price: $170.78/ft 2 Effective Gross Rent: $21.73/ft 2 Net Operating Income: $14.17/ft 2.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Overhead Set #5: Typical Downtown Office Building--1986' - vaughn


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
overhead set 5 typical downtown office building 1986
Overhead Set #5: Typical Downtown Office Building--1986
  • Size: 450,000 ft2
  • Land: 15% of total property value
  • Depreciation: straight-line over 19 years
  • Debt: 75% loan-to-value; interest only; 9%
  • Price: $170.78/ft2
  • Effective Gross Rent: $21.73/ft2
  • Net Operating Income: $14.17/ft2
slide2
Gross Potential Income -----------

-Vacancy/Bad Debt-----------

Effective Gross Income 9,778,500

-Operating Expenses3,402,000

Net Operating Income 6,376,500

-Debt Service5,187,443

Before-Tax Cash Flow 1,189,059

+Principal Repayment 0

-Depreciation3,438,071

Taxable Income (Loss) (2,249,014)

Tax Bill (Savings) (1,124,507)

After-Tax Cash Flow 2,313,564

important calculations
Important Calculations

1. Effective Gross Rent: $21.73*450,000 = $9,778,500

2. Net Operating Income: $14.17*450,000 = $6,376,500

==> note that operating expenses are the difference between these two figures (approximately 35% of effective gross)

3. Debt Service

a. Property Value: $170.78*450,000 = $76,851,000

b. Mortgage Amount: $.75*$76,851,000 = $57,638,230

c. Interest Payment: $.09*$57,638,230 = $5,187,443

==> you now know before-tax cash flow; it is positive at $1.2 million

important calculations1
Important Calculations

4. Principal Repayment: $0, as loan is interest only

5. Depreciation Deduction

a. Depreciable Basis: .85*$76,851,000 = $65,323,350

b. Annual deduction: $65,323,350/19 = $3,438,071

important calculations2
Important Calculations

==> while actual before-tax cash is positive, the large depreciation deduction allows the owner to claim the project is losing money; the taxable loss is $2.2 million

==> at the 50% top marginal bracket then in effect, the value of this taxable loss is $1.1 million

==> after-tax cash flows attributable to ownership of this building is $2.3 million, assuming full use of loss offsets

treatment of activities that increase the depreciable basis
Treatment of Activities That Increase the Depreciable Basis

1. Original Depreciation--i.e., no new tenant improvements

a. Depreciable Basis=(.85)*(76,851,000)=$65,323,350 as computed above

b. Annual Deduction=$65,323,350/19 = $3,438,071 (in 1986)

2. Now consider the impact of $1,000,000 in new tenant improvements that increase the depreciable basis

a. New Basis: +$1,000,000

b. 1,000,000/19=$52,632

==>new line #9 = $3,438,071+$52,632=$3,490,703

slide7
Gross Potential Income ---

-Vacancy/Bad Debt---

Effective Gross Income 9,778,500 9,778,500

-Operating Expenses3,402,0003,402,000

Net Operating Income 6,376,500 6,376,500

-Debt Service5,187,4435,187,443

Before-Tax Cash Flow 1,189,059 1,189,059

+Principal Repayment 0 0

-Depreciation3,438,0713,490,703

Taxable Income (Loss) (2,249,014) (2,301,644)

Tax Bill (Savings) (1,124,507) (1,150,822)

ATCF 2,313,564 1,339,881

where $1,339,881=$1,189,059+1,150,822-$1,000,000

slide8
Note: actual BTCF is $1,189,059, but do not let that affect the taxable income calculation if the item cannot be immediately expensed so that the base for taxation is reduced on a dollar-for-dollar basis

Note: this is not a real estate specific issue; cash flow is $1,000,000 lower in any industry; real estate specific rules apply to what is immediately expensible and what must be capitalized or amortized.

slide9
Impact of Taxes:
  • Depreciation
  • Loan Points
  • Effective Tax Rate = [1 - BTIRR/ATIRR]

Impact of Leverage

  • Positive or Negative
  • Breakeven Interest Rate

ATIRRDebt = ATIRRProperty

ATIRRDebt = BTIRRDebt(1-)

BTIRRDebt = [ATIRRProperty / (1-)]

investment analysis
Investment Analysis
  • Should a property be purchased?
  • How long should it be held?
  • How should it be financed?
  • What are the tax implications?
  • How risky is the investment?
measure of investment performance
Measure of Investment Performance

1. Price/SF

2. Cap Rate = NOI / Sale Price

3. Break-even Ratio = (Operating Exp + Debt Serv)/Gross Inc

4. Equity Dividend Rate = BTCF / Equity

5. Debt Coverage Ratio = NOI / Debt Service

6. Net Present Value (NPV)

7. Internal Rate of Return (IRR)

BEWARE: (BTCF + Principal Repayment) / Equity (BTCF + Tax Effect) / Equity