Basics of Commercial Real Estate Transactions Day Two

Transcription

1 Basics of Commercial Real Estate Transactions Day Two John Rockwell, Partner Energy October 12, 2016 PG&E refers to the Pacific Gas and Electric Company, a subsidiary of PG&E Corporation Pacific Gas and Electric Company. All rights reserved.

2 Using GoToWebinar Minimize or expand the pane View Attendee List Choose audio mode Type Questions 2

3 Course Agenda Basics of Commercial Real Estate Introduction to Valuations The Proforma Process MUP Measures and Affects Investor Confidence Project (ICP) Multifamily Upgrade Program Basics of CRE (Day 2) 3

4 Course Agenda Basics of Commercial Real Estate Introduction to Valuations The Proforma Process MUP Measures and Affects Investor Confidence Project (ICP) Multifamily Upgrade Program Basics of CRE (Day 2) 4

5 Day 1 Review Real Estate Business Cycle Multifamily Upgrade Program Basics of CRE (Day 2) 5

6 Day 1 Review Asset Managers: Roles and Responsibilities Multifamily Upgrade Program Basics of CRE (Day 2) 6

7 Day 1 Review Asset Manager Tasks Strategic Decision Making o Evaluate the business plan o Execute the business plan o Ride the Wave Tactical Decision Making o Monitor Cap Ex projects o Property Manager Oversight o Re-underwriting/Valuation Multifamily Upgrade Program Basics of CRE (Day 2) 7

8 Day 1 Review Asset Manager Tasks Strategic Decision Making o Evaluate the business plan o Execute the business plan o Ride the Wave Tactical Decision Making o Monitor Cap Ex projects o Property Manager Oversight o Re-underwriting/Valuation Multifamily Upgrade Program Basics of CRE (Day 2) 8

9 Day 1 Review Asset Manager Tools Property-level budgets Market data o Marco/micro economic trends o Competitor sales or leases o Real estate cycle 3 rd party professional data o Appraisals o Due diligence site assessments Pro Forma Multifamily Upgrade Program Basics of CRE (Day 2) 9

10 What is the Pro Forma A tool used to calculate financial results of investment in the real estate asset Fundamentally a return analysis Three Critical Components: Initial Investment Amount Cash Flow or pro forma over the hold period Exit or Terminal Value Multifamily Upgrade Program Basics of CRE (Day 2) 10

11 Six Key Assumptions Multifamily Upgrade Program Basics of CRE (Day 2) 11

12 Key Pro Forma Assumptions General Economic Conditions Rental Rate Growth Occupancy Exit Cap Rates Loan Underwriting Parameters LTV and DCR ratio tests Year of Exit Multifamily Upgrade Program Basics of CRE (Day 2) 12

13 Key Pro Forma Assumptions General Economic Conditions Rental Rate Growth Occupancy Exit Cap Rates Loan Underwriting Parameters LTV and DCR ratio tests Year of Exit Multifamily Upgrade Program Basics of CRE (Day 2) 13

14 Key Pro Forma Assumptions General Economic Conditions Rental Rate Growth Occupancy Exit Cap Rates Loan Underwriting Parameters LTV and DCR ratio tests Year of Exit Multifamily Upgrade Program Basics of CRE (Day 2) 14

15 Key Pro Forma Assumptions General Economic Conditions Rental Rate Growth Occupancy Exit Cap Rates Loan Underwriting Parameters LTV and DCR ratio tests Year of Exit Multifamily Upgrade Program Basics of CRE (Day 2) 15

16 Key Pro Forma Assumptions General Economic Conditions Rental Rate Growth Occupancy Exit Cap Rates Loan Underwriting Parameters LTV and DCR ratio tests Year of Exit Multifamily Upgrade Program Basics of CRE (Day 2) 16

17 Key Pro Forma Assumptions General Economic Conditions Rental Rate Growth Occupancy Exit Cap Rates Loan Underwriting Parameters LTV and DCR ratio tests Year of Exit Multifamily Upgrade Program Basics of CRE (Day 2) 17

18 Key Pro Forma Assumptions General Economic Conditions Rental Rate Growth Occupancy Exit Cap Rates Loan Underwriting Parameters LTV and DCR ratio tests Year of Exit Multifamily Upgrade Program Basics of CRE (Day 2) 18

19 Valuation Methods Multifamily Upgrade Program Basics of CRE (Day 2) 19

20 Valuation = Dollar Value of Real Estate Multifamily Upgrade Program Basics of CRE (Day 2) 20

21 Three Popular Approaches Multifamily Upgrade Program Basics of CRE (Day 2) 21

22 Valuation Methods Appraisal Approaches Income Approach E.g., Apartment building Comparable Value E.g., Single family home Replacement Cost E.g., New construction commercial Multifamily Upgrade Program Basics of CRE (Day 2) 22

23 Two Investment Approaches Multifamily Upgrade Program Basics of CRE (Day 2) 23

24 Valuation Methods Variants of the Income Approach Single-period Metrics Cash-On-Cash (Return on Equity) Income Capitalization using Capitalization Rate Multi-period Metrics or Discounted Cash Flow (DCF) Analysis Net Present Value (NPV) Internal Rate of Return (IRR) Multifamily Upgrade Program Basics of CRE (Day 2) 24

25 Time Value of Money Multifamily Upgrade Program Basics of CRE (Day 2) 25

26 Time Value of Money (TVM) Value of money today and over time More is better than less Sooner is better than later Decision: $100 now or $100 in 5 years No Risk Higher Purchasing Power Opportunity Cost (Interest Earned) Multifamily Upgrade Program Basics of CRE (Day 2) 26

27 Time Value of Money (TVM) Your Choice: $100 now or $100 in 5 years Take it now What if $100 in 5 years with 10% interest Present Value: $100 Time: 5 Years Interest: 10% compounded Year 1 Year 2 Year 3 Year 4 Year 5 $110 $121 $133 $146 $161 Multifamily Upgrade Program Basics of CRE (Day 2) 27

28 Time Value of Money (TVM) Your Choice: $100 now or $100 in 5 years Take it now What if $100 in 5 years with 10% interest Present Value: $100 Time: 5 Years Interest: 10% compounded Year 1 Year 2 Year 3 Year 4 Year 5 $110 $121 $133 $146 $161 Multifamily Upgrade Program Basics of CRE (Day 2) 28

29 Time Value of Money (TVM) Now: $100 vs 5 years: $161 +$61 easy choice! Multifamily Upgrade Program Basics of CRE (Day 2) 29

30 Time Value of Money (TVM) Now: $100 vs 5 years: $161 +$61 easy choice! Or is it? Multifamily Upgrade Program Basics of CRE (Day 2) 30

31 Time Value of Money (TVM) Now: $100 vs 5 years: $161 +$61 easy choice! Or is it? Remember, Opportunity Cost Can I put today s $100 to work and make more than $61 in 5 years? Multifamily Upgrade Program Basics of CRE (Day 2) 31

32 Valuation Methods Variants of the Income Approach Single-number Analyses Cash-On-Cash (Return on Equity) Income Capitalization using Capitalization Rate Discounted Cash Flow (DCF) Analysis Net Present Value (NPV) Internal Rate of Return (IRR) Multifamily Upgrade Program Basics of CRE (Day 2) 32

33 Valuation Methods Variants of the Income Approach Single-number Analyses Cash-On-Cash (Return on Equity) Income Capitalization using Capitalization Rate Discounted Cash Flow (DCF) Analysis Net Present Value (NPV) Internal Rate of Return (IRR) Which is best? Multifamily Upgrade Program Basics of CRE (Day 2) 33

34 Which method is best? Discounted Cash Flow (DCF) is the only truly valid way to measure returns Fully accounts for time value of money Allows for variable cash flows Allows for differential growth rates of income and expense items Yields two key benchmarks Net Present Value (NPV) Internal Rate of Return (IRR) Multifamily Upgrade Program Basics of CRE (Day 2) 34

35 Pause: Where are we now? Multifamily Upgrade Program Basics of CRE (Day 2) 35

36 Pro Forma = tool for financial return analysis Multifamily Upgrade Program Basics of CRE (Day 2) 36

37 Valuation = method for determining property value Multifamily Upgrade Program Basics of CRE (Day 2) 37

38 Discounted Cash Flow (DCF) = preferred valuation method Multifamily Upgrade Program Basics of CRE (Day 2) 38

39 We know that Asset managers evaluate returns in a pro forma tool using DCF valuation methodology Multifamily Upgrade Program Basics of CRE (Day 2) 39

40 Inherent Risks Stabilized pro forma net operating income Projected changes in operating expenses and revenue base Projected selling price or refinancing value Estimated holding period Reinvestment opportunities Tax effects and financing effects Multifamily Upgrade Program Basics of CRE (Day 2) 40

41 DCF Basic Requirements Investment Outlays Operational Characteristics Financing Reversion Taxation Multifamily Upgrade Program Basics of CRE (Day 2) 41

42 DCF Basic Requirements Investment Outlays Operational Characteristics Financing Reversion Net Sale Proceeds Taxation Multifamily Upgrade Program Basics of CRE (Day 2) 42

43 DCF Basic Requirements Investment Outlays land costs building costs depreciation method useful life Multifamily Upgrade Program Basics of CRE (Day 2) 43

44 DCF Basic Requirements Operational Characteristics rental income vacancy and collection factors operating expenses changes over time Multifamily Upgrade Program Basics of CRE (Day 2) 44

45 DCF Basic Requirements Financing amount of equity amount of debt amortization schedules interest rates required rate of return Multifamily Upgrade Program Basics of CRE (Day 2) 45

46 DCF Basic Requirements Reversion aka how much $$ do we get? holding period terminal value debt retirement plans reversion period expenses Multifamily Upgrade Program Basics of CRE (Day 2) 46

47 DCF Basic Requirements Taxation ordinary income capital gains recapture provisions minimum tax, preference items Multifamily Upgrade Program Basics of CRE (Day 2) 47

48 Pro Forma Vocabulary Multifamily Upgrade Program Basics of CRE (Day 2) 48

49 Pro Forma Vocabulary INCOME Scheduled Rents Actual Rents Loss to Lease Reimbursement Income Other Income Gross Projected Rents Vacancy Rate Occupancy Rate Rent Concessions Office/Model Unit Delinquency Total Vacancy Effective Gross Income EXPENSE Real Estate Taxes Payroll Building O&M Utilities Soft Costs Reserves & Capital Expense Total Operating Expense NOI Net Operating Income Multifamily Upgrade Program Basics of CRE (Day 2) 49

50 Income Vocabulary Scheduled Rents A statement of proposed rents determined by the owner or property manager. Long term rent goals for the property Actual Rents Actual in-place rents at the property Loss to Lease Difference between Scheduled Rents and Actual Rents Multifamily Upgrade Program Basics of CRE (Day 2)

51 Income Vocabulary Reimbursement Income RUBS (Ratio Utility Billing Systems) A method of calculating a residents utility bill based on occupancy, apartment square footage, or beds Other Income Parking Laundry Storage Gross Projected Rents Sum of Actual Rents, Other Income, and RUBs Multifamily Upgrade Program Basics of CRE (Day 2) 51

52 Income Vocabulary Vacancy Rate A calculated value based on all available units that are vacant or unoccupied Occupancy Rate A calculated value based on all unavailable units that are occupied Rent Concessions Benefit offered to tenants. Typically based on number of free months of rent or other monetary value Multifamily Upgrade Program Basics of CRE (Day 2) 52

53 Income Vocabulary Office/Model Unit Unavailable unit(s) used as a model or office Delinquency Unpaid rent amount Total Vacancy Sum of Vacancy, Concessions, Model, and Delinquency Effective Gross Income Sum of Total Vacancy and Gross Projected Rents Multifamily Upgrade Program Basics of CRE (Day 2) 53

54 Expense Vocabulary Real Estate Taxes Annual Taxes paid on real estate. Can have periodic increases or transactional increases based on market rate of property Payroll Salaries and benefits for property staff including leasing agents, property managers, facilities staff, engineers Multifamily Upgrade Program Basics of CRE (Day 2) 54

55 Expense Vocabulary Building Operations and Maintenance Landscaping Repairs and Maintenance Apartment Turnover/Prep Utilities Water/Trash Electricity/Gas/Other Purchased Fuels Multifamily Upgrade Program Basics of CRE (Day 2) 55

56 Expense Vocabulary Soft Costs Marketing Office Management Administrative Insurance Management Fee Reserves/Capital Expenditures Multifamily Upgrade Program Basics of CRE (Day 2) 56

57 Net Operating Income NOI = Effective Gross Rents less Total Operating Expenses Multifamily Upgrade Program Basics of CRE (Day 2) 57

58 Multifamily Upgrade Program Basics of CRE (Day 2) 58

59 Potential Gross Income Multifamily Upgrade Program Basics of CRE (Day 2) 59

60 Potential Gross Income Effective Gross Income Multifamily Upgrade Program Basics of CRE (Day 2) 60

61 Potential Gross Income Effective Gross Income Operating Expenses Multifamily Upgrade Program Basics of CRE (Day 2) 61

62 Potential Gross Income Effective Gross Income Operating Expenses Net Operating Income Multifamily Upgrade Program Basics of CRE (Day 2) 62

63 Potential Gross Income Effective Gross Income Operating Expenses Net Operating Income DCF 9% Multifamily Upgrade Program Basics of CRE (Day 2) 63

64 Potential Gross Income Effective Gross Income Operating Expenses Net Operating Income DCF 9% Sale 9% Multifamily Upgrade Program Basics of CRE (Day 2) 64

65 Potential Gross Income Effective Gross Income Operating Expenses Net Operating Income DCF 9% Sale 9% Multifamily Upgrade Program Basics of CRE (Day 2) 65

66 Questions Multifamily Upgrade Program Overview 66

67 MUP Administration Team Program Administrators: TRC Program Manager: Mike Maroney Technical Manager: Stephanie Berkland Marketing Manager: Melissa Buckley Website: Phone: Multifamily Upgrade Program Basics of CRE (Day 2) 67