The Setup.Pptx

HARVARD UNIVERSITY GRADUATE SCHOOL OF DESIGN

GSD 5103: PUBLIC AND PRIVATE DEVELOPMENT

Review Session #1: The Setup

• Real Estate Financial Analysis Jeopardy • Single-Period Return Measures • Capitalized Value • Highest & Best Use Analysis • Verde Lofts Setup Worksheet Q & A

THE SETUP

For What Purposes Would a Developer Conduct a One-Year Analysis of a Property’s Projected Performance?

THE SETUP

For What Purposes Would a Developer Conduct a One-Year Analysis of a Property’s Projected Performance?

A) Determine Whether Listed Sale Price is Reasonable B) Decide Whether Project is Feasible C) Satisfy Mortgage Lender’s Requirements D) Decide Among Competing Opportunities E) All of the Above

THE SETUP

For What Purposes Would a Developer Conduct a One-Year Analysis of a Property’s Projected Performance?

A) Determine Whether Listed Sale Price is Reasonable B) Decide Whether Project is Feasible C) Satisfy Mortgage Lender’s Requirements D) Decide Among Competing Opportunities E) All of the Above

THE SETUP

Which of the Following is Not Part of the Setup?

A) Return Measures B) Income C) Net Proceeds from Sale D) Expenses E) Assumptions

THE SETUP

Which of the Following is Not Part of the Setup?

A) Return Measures B) Income C) Net Proceeds from Sale D) Expenses E) Assumptions

INCOME

When Calculating Potential Gross Income (PGI), Which Measurement is Used to Compute Rent Revenue?

NET SQUARE FOOTAGE GROSS SQUARE FOOTAGE

INCOME

When Calculating Potential Gross Income (PGI), Which Measurement is Used to Compute Rent Revenue?

NET SQUARE FOOTAGE GROSS SQUARE FOOTAGE

INCOME

For Which of the Following Uses is Rent Quoted on a Monthly Basis?

A) Industrial B) Hotel C) Office D) Residential E) Retail

INCOME

For Which of the Following Uses is Rent Quoted on a Monthly Basis?

A) Industrial B) Hotel C) Office D) Residential E) Retail

INCOME

What Accounts for the Difference Between Potential Gross Income (PGI) and Effective Gross Income (EGI)?

A) Rent Concessions B) Credit Loss C) Ancillary Revenue D) Vacancy E) All of the Above

INCOME

What Accounts for the Difference Between Potential Gross Income (PGI) and Effective Gross Income (EGI)?

A) Rent Concessions B) Credit Loss C) Ancillary Revenue D) Vacancy E) All of the Above

INCOME

Which of the Following is Not Considered a Source of Additional Income?

A) Security Deposit B) Pet Fees C) Laundry D) Parking E) Vending Machines

INCOME

Which of the Following is Not Considered a Source of Additional Income?

A) Security Deposit B) Pet Fees C) Laundry D) Parking E) Vending Machines

EXPENSES

Which Measurement is Used to Calculate Expenses Paid by the Building Owner?

NET SQUARE FOOTAGE GROSS SQUARE FOOTAGE

EXPENSES

Which Measurement is Used to Calculate Expenses Paid by the Building Owner?

NET SQUARE FOOTAGE GROSS SQUARE FOOTAGE

EXPENSES

If a Tenant Occupies Space Under the Terms of a Triple-Net (NNN) Lease, Which of the Following Expenses is Paid by the Building Owner?

A) Maintenance B) Insurance C) Utilities D) Replacement Reserve Contribution E) Real Estate Taxes

EXPENSES

If a Tenant Occupies Space Under the Terms of a Triple-Net (NNN) Lease, Which of the Following Expenses is Paid by the Building Owner?

A) Maintenance B) Insurance C) Utilities D) Replacement Reserve Contribution E) Real Estate Taxes

EXPENSES

Which of the Following Would be Considered a Capital Expenditure?

A) Painting B) Annual Elevator Inspection C) Snow Removal D) Irrigation System Winterization E) Solar Panels

EXPENSES

Which of the Following Would be Considered a Capital Expenditure?

A) Painting B) Annual Elevator Inspection C) Snow Removal D) Irrigation System Winterization E) Solar Panels

EXPENSES

On What Basis are Real Estate Taxes Calculated?

A) Sale Price B) Market Value C) Assessed Value D) Listing Price E) All of the Above

EXPENSES

On What Basis are Real Estate Taxes Calculated?

A) Sale Price B) Market Value C) Assessed Value D) Listing Price E) All of the Above

EXPENSES

Which Government Authority Assesses and Collects Real Estate Taxes?

A) School District B) State C) Federal Government D) Municipality E) Neighborhood Council

EXPENSES

Which Government Authority Assesses and Collects Real Estate Taxes?

A) School District B) State C) Federal Government D) Municipality E) Neighborhood Council

EXPENSES

What is the Best Source for Estimating Real Estate Taxes on a Particular Property?

A) Real Estate Brokers’ Property Listings B) Current Owner C) Current Tenants D) Industry Association Expense Survey Data E) Assessor’s Database

EXPENSES

What is the Best Source for Estimating Real Estate Taxes on a Particular Property?

A) Real Estate Brokers' Property Listings B) Current Owner C) Current Tenants D) Industry Association Expense Survey Data E) Assessor’s Database

EXPENSES

For Which of the Following Could a Building Owner Use Funds from the Replacement Reserve?

A) Water/Sewer Sub-Metering B) Lobby Furniture C) Window Treatments D) Gutter Cleaning E) Deck Staining

EXPENSES

For Which of the Following Could a Building Owner Use Funds from the Replacement Reserve?

A) Water/Sewer Sub-Metering B) Lobby Furniture C) Window Treatments D) Gutter Cleaning E) Deck Staining

DEBT SERVICE

Which of the Following Permanent Debt Service Components Remains the Same over the Entire Loan Term?

A) Outstanding Loan Balance B) Amortization C) Periodic Payment D) Interest E) Principal Repayment

DEBT SERVICE

Which of the Following Permanent Debt Service Components Remains the Same over the Entire Loan Term?

A) Outstanding Loan Balance B) Amortization C) Periodic Payment D) Interest E) Principal Repayment

DEBT SERVICE

With Each Payment, Which of the Following Permanent Debt Service Components Increases?

A) Outstanding Loan Balance B) Amortization C) Periodic Payment D) Interest E) Initial Loan Amount

DEBT SERVICE

With Each Payment, Which of the Following Permanent Debt Service Components Increases?

A) Outstanding Loan Balance B) Amortization C) Periodic Payment D) Interest E) Initial Loan Amount

DEBT SERVICE

How Do You Determine the Outstanding Loan Balance?

A) Subtract Principal Repayment B) Subtract Debt Service Payment C) Subtract Origination Fees D) Subtract Pre-Payment Penalty E) Subtract Interest Payment

DEBT SERVICE

How Do You Determine the Outstanding Loan Balance?

A) Subtract Principal Repayment B) Subtract Debt Service Payment C) Subtract Origination Fees D) Subtract Pre-Payment Penalty E) Subtract Interest Payment

DEBT SERVICE

Which of the Following is True of a Ground Lease?

A) Short-Term Lease B) Has Priority Over the Permanent Mortgage Loan C) Lease Payments are Fully Tax Deductible D) Only Used by Private Land Owners E) May Not Be Combined with Other Debt Sources

DEBT SERVICE

Which of the Following is True of a Ground Lease?

A) Short-Term Lease B) Has Priority Over the Permanent Mortgage Loan C) Lease Payments are Fully Tax Deductible D) Only Used by Private Land Owners E) May Not Be Combined with Other Debt Sources

TAXABLE INCOME

Which of the Following Adjustments are Used to Calculate Taxable Income?

A) Depreciation B) Ground Lease Payment C) Replacement Reserve D) Credit Loss E) Amortization

TAXABLE INCOME

Which of the Following Adjustments are Used to Calculate Taxable Income?

A) Depreciation B) Ground Lease Payment C) Replacement Reserve D) Credit Loss E) Amortization

TAXABLE INCOME

Which of the Following Are Depreciable?

A) Land B) Replacement Reserves C) Routine Maintenance D) Building Cost E) Acquisition Cost

TAXABLE INCOME

Which of the Following Are Depreciable?

A) Land B) Replacement Reserves C) Routine Maintenance D) Building Cost E) Acquisition Cost

TAXABLE INCOME

Which Depreciation Schedule Should be Used for a Mixed-Use Building Consisting of Hotel & Retail?

A) 20 Years B) 27.5 Years C) 30 Years D) 39 Years E) 50 Years

TAXABLE INCOME

Which Depreciation Schedule Should be Used for a Mixed-Use Building Consisting of Hotel & Retail?

A) 20 Years B) 27.5 Years C) 30 Years D) 39 Years E) 50 Years

TAXABLE INCOME

Which Depreciation Schedule Should be Used for a Mixed-Use Building Consisting of Apartments & Retail?

A) 20 Years B) 27.5 Years C) 30 Years D) 39 Years E) 50 Years

TAXABLE INCOME

Which Depreciation Schedule Should be Used for a Mixed-Use Building Consisting of Apartments & Retail?

A) 20 Years B) 27.5 Years C) 30 Years D) 39 Years E) 50 Years

Apportion Residential & Commercial Building Costs, Depreciate Separately on Appropriate Depreciation Recovery Schedule

TAXABLE INCOME

How Might a Building Owner Apply Passive Losses?

A) Apply to Other Passive Income B) Suspend Losses Until Building is Sold C) Carry Losses Forward D) Apply Accrued Losses to Reduce to Capital Gain in Excess of Depreciation E) All of the Above

TAXABLE INCOME

How Might a Building Owner Apply Passive Losses?

A) Apply to Other Passive Income B) Suspend Losses Until Building is Sold C) Carry Losses Forward D) Apply Accrued Losses to Reduce to Capital Gain in Excess of Depreciation E) All of the Above

CASH FLOWS

Which Cash Flow is the Most Important Determinant of Building Value?

A) Net Operating Income (NOI) B) Potential Gross Income (PGI) C) Cash Flow After Taxes (CFAT) D) Effective Gross Income (EGI) E) Cash Flow After Financing (CFAF)

CASH FLOWS

Which Cash Flow is the Most Important Determinant of Building Value?

A) Net Operating Income (NOI) B) Potential Gross Income (PGI) C) Cash Flow After Taxes (CFAT) D) Effective Gross Income (EGI) E) Cash Flow After Financing (CFAF)

INCOME Potential Gross Income (PGI) (Vacancy & Credit Loss) Additional Income Effective Gross Income (EGI) RETURN ON TOTAL EXPENSES (Operating Expenses) ASSETS (ROTA) = (Real Estate Taxes) (Replacement Reserve) Year 1 NOI Net Operating Income (NOI) TDC or Asset Price

DEBT (Annual Debt Service) (Ground Lease Payments) Cash Flow After Financing (CFAF)

TAXES (Tax Payment) Cash Flow After Taxes (CFAT)

SINGLE-PERIOD RETURN MEASURES

DEBT (Annual Debt Service) (Ground Lease Payments) $100,000 = 10% Cash Flow After Financing (CFAF) $1,000,000

TAXES (Tax Payment) Cash Flow After Taxes (CFAT)

SINGLE-PERIOD RETURN MEASURES

DEBT (Annual Debt Service) (Ground Lease Payments) Return on Cost (ROC) Return on Assets (ROA) Cash Flow After Financing (CFAF ) Going-In Yield/Cap Rate Overall Cap Rate TAXES (Tax Payment) Cash Flow After Taxes (CFAT)

SINGLE-PERIOD RETURN MEASURES

IRR® Viewpoint 2015 National Real Estate Market

2014 Capitalization Rates, Discount Rates, and Reversion Rates (Table 4)

RETURN ON TOTAL

ASSETS (ROTA) =

Atlanta, GA Austin, TX Baltimore, MD Birmingham, AL Boise, ID Boston, MA Broward-Palm Beach, FL Charleston, SC Charlotte, NC Chicago, IL Cincinnati, OH Cleveland, OH Columbia, SC Columbus, OH Dallas, TX Dayton, OH Denver, CO Detroit, MI Fort Worth, TX Greensboro, NC Greenville, SC Hartford, CT Houston, TX Indianapolis, IN Jackson, MS Jacksonville, FL Kansas City, MO/KS Las Vegas, NV Long Island, NY Los Angeles, CA Louisville, KY Property Type Year 1 NOI CBD Ofﬁce 6.75 6.25 6.75 8.00 7.00 4.75 6.30 7.00 6.00 5.75 8.25 8.25 7.75 8.50 6.25 10.50 5.75 8.75 6.50 8.00 7.75 8.25 7.50 8.50 8.00 8.00 8.00 7.50 6.50 5.50 7.50 Suburban Ofﬁce 7.50 6.50 7.00 8.25 7.75 6.25 7.10 8.25 7.75 7.50 8.50 8.25 8.25 8.25 6.50 8.50 TDC6.50 8.50 7.00 or9.00 Asset7.75 8.50 8.00 8.00Price7.50 8.00 7.75 8.00 6.50 6.50 7.25 Industrial 6.25 6.00 5.25 8.25 7.50 6.25 7.10 8.25 7.25 6.50 8.50 8.50 7.00 8.00 6.00 9.00 6.75 8.75 6.25 9.00 7.25 8.75 7.50 6.75 9.50 7.50 7.25 8.00 5.50 6.00 7.50 Flex Industrial 7.75 7.75 7.00 8.75 7.75 8.00 7.60 8.50 8.50 7.50 8.50 9.00 7.75 8.50 7.50 9.00 7.25 8.50 7.50 8.50 8.00 8.75 7.75 8.25 9.00 8.50 9.00 8.00 6.25 6.50 8.00 Urban Multifamily 5.00 5.50 5.50 6.00 5.75 4.00 5.10 5.80 5.00 5.25 6.50 6.50 6.25 6.00 5.00Cap8.00 5.00Rates7.00 5.25 Vary6.50 6.00 by5.75 Market5.50 5.75 6.50 Area5.65 5.50, 5.50 5.00 4.00 7.00 Suburban Multifam 5.50 5.75 5.50 6.00 6.00 5.00 5.60 6.50 5.50 6.00 7.00 6.50 6.00 6.00 5.75 6.75 5.25 6.50 5.75 6.00 6.00 6.00 6.00 6.00 6.50 6.00 5.50 5.50 5.00 4.25 6.50

CLASS A CLASS Regional Mall Retail 6.75 7.00 7.25 7.25 6.00 5.50 7.00 7.25 5.75 8.50 8.00 7.00 7.50 6.50 8.25 6.00 7.00 Asset6.50 8.00 7.00Type7.50 8.00 7.00 9.50 7.50 6.50 5.75 5.00 6.50 6.50 Community Retail 7.00 6.75 5.75 7.00 7.50 6.50 6.80 7.75 7.25 7.00 8.25 8.50 7.50 8.00 6.75 8.50&6.50 Over8.00 6.75 a 8.00Market7.50 8.50 7.50Cycle8.00 8.50 8.25 7.25 7.00 6.00 6.75 7.50 Neighborhood Retail 7.25 7.00 6.00 7.00 7.75 6.25 7.40 7.25 7.00 7.75 8.75 9.00 7.00 8.00 7.00 8.75 6.25 8.75 7.00 8.00 7.00 8.50 7.50 8.50 9.00 7.75 7.50 7.50 6.50 7.00 7.50 GOING-IN CAP RATES (%) RATES GOING-IN CAP Lodging - Full Service 7.75 7.50 8.00 9.25 6.75 8.00 8.75 7.50 8.50 9.00 8.25 8.50 8.00 8.50 7.50 7.50 8.00 9.25 8.25 8.50 8.00 8.50 10.00 8.25 9.50 9.25 7.50 7.50 10.00 Lodging - Limited 8.75 8.25 8.75 8.25 7.75 8.50 9.25 8.75 9.00 9.00 9.00 9.00 9.00 9.00 8.00 8.00 9.00 9.75 9.25 9.50 9.00 9.50 11.00 9.25 9.00 9.00 8.00 8.25 8.50

CBD Ofﬁce 7.75 7.00 8.50 8.75 7.25 5.50 7.70 8.50 7.50 6.25 9.25 9.00 7.75 9.00 7.00 11.25 6.50 9.00 7.50 10.00 7.75 9.25 7.50 9.00 10.25 9.00 8.50 7.75 7.50 6.00 8.00 Suburban Ofﬁce 8.50 7.50 8.00 9.00 8.25 7.25 7.40 9.25 8.25 8.50 9.50 8.75 8.00 8.75 7.50 9.25 7.00 8.75 7.50 10.00 8.00 9.00 8.00 8.50 9.00 9.25 8.50 8.50 7.50 7.00 8.00 Urban Multifamily 6.00 6.25 6.00 7.25 6.75 5.00 6.10 7.00 6.00 6.00 7.50 7.25 6.75 7.00 6.25 8.50 5.50 7.50 6.25 8.00 6.50 8.75 5.50 7.00 7.00 6.15 6.50 6.50 6.00 5.25 8.00 CLASS B CLASS © KristenGOING-IN Hunter 2016 Suburban Multifam

CAP RATES (%) RATES CAP 6.50 6.25 6.25 7.50 7.00 6.00 6.35 6.23 6.75 6.75 7.50 7.25 6.75 7.00 6.75 7.50 6.00 7.25 6.75 8.00 6.75 6.75 6.00 7.50 7.00 6.75 6.75 6.50 6.00 5.25 7.00

CBD Ofﬁce 7.75 7.75 8.00 9.00 9.00 6.25 8.80 8.25 7.00 7.25 9.50 9.50 9.00 9.50 7.75 12.00 7.50 10.00 7.75 9.50 9.00 8.75 8.50 9.75 9.00 8.75 8.75 9.25 7.25 7.00 9.00 Suburban Ofﬁce 8.50 8.00 8.25 9.25 9.75 7.75 8.30 9.50 8.25 8.75 9.75 9.50 9.75 9.25 8.00 9.75 8.00 10.00 8.00 10.00 9.25 9.00 9.00 9.25 8.50 9.25 8.50 9.25 7.25 8.00 9.00 Industrial 7.50 7.25 6.25 9.25 9.50 7.25 8.00 8.50 8.50 7.75 9.75 9.50 8.50 8.75 7.50 9.75 7.50 10.00 7.75 9.50 9.00 10.00 8.50 7.75 10.50 8.50 8.25 9.25 6.75 7.50 9.00 Flex Industrial 9.00 9.00 8.25 9.75 9.75 8.75 8.25 9.50 8.75 8.50 9.75 9.75 9.00 9.25 8.75 10.00 8.25 9.75 8.75 10.00 9.25 10.00 8.75 9.25 10.00 9.50 10.00 9.50 7.25 8.00 9.00 Urban Multifamily 6.25 7.50 6.50 7.25 8.75 5.25 6.25 7.30 6.50 6.00 8.00 8.25 8.00 7.75 7.25 9.00 7.50 8.25 7.50 8.00 8.25 7.50 6.50 6.75 8.00 6.75 6.50 8.00 6.50 6.00 8.50 Suburban Multifamily 6.75 8.00 6.50 7.00 9.00 6.25 7.10 8.00 5.75 7.00 8.50 8.25 8.00 7.75 7.75 7.75 7.75 8.00 7.75 8.00 8.25 8.00 7.00 7.25 7.50 7.50 6.75 8.00 6.50 6.25 9.00

CLASS A CLASS Regional Mall Retail 8.50 8.75 8.75 9.25 8.00 6.50 8.25 10.00 7.25 9.75 9.00 9.00 8.50 8.75 8.50 7.00 8.00 8.75 10.00 8.75 8.50 9.00 8.00 10.50 9.00 7.50 8.00 6.50 8.50 8.50 Community Retail 8.75 8.25 6.75 8.50 9.50 7.75 7.80 9.00 8.50 8.25 9.50 9.50 9.25 9.00 8.00 9.00 7.75 8.75 8.00 9.50 9.00 9.50 8.50 9.00 9.50 9.25 8.00 8.50 7.00 8.25 8.75 DISCOUNT RATES (%) RATES DISCOUNT Neighborhood Retail 9.25 8.25 7.00 8.50 9.75 7.50 8.40 8.50 8.00 8.50 10.00 10.00 8.50 9.00 8.25 9.25 7.50 9.50 8.00 9.00 8.50 9.50 8.50 9.50 10.00 8.75 8.50 8.75 7.00 8.50 8.50 Lodging - Full Service 9.75 10.00 9.50 11.25 8.25 9.75 10.50 8.25 10.00 10.50 10.75 10.00 10.50 10.00 9.75 9.75 10.50 11.00 11.00 9.50 9.00 10.75 11.00 10.75 11.50 11.00 8.00 8.25 12.00 Lodging - Limited 10.25 10.25 10.25 10.25 9.25 10.00 10.75 9.25 10.50 10.50 10.75 10.50 10.50 10.50 10.75 10.75 10.50 11.25 11.75 10.50 10.00 10.75 12.00 10.75 11.00 10.75 8.50 9.50 10.50

CBD Ofﬁce 8.75 8.50 9.75 9.75 9.75 7.50 9.10 9.25 8.50 8.25 10.50 10.00 9.00 10.00 8.50 12.75 8.00 10.25 8.50 12.00 9.00 9.75 8.50 10.25 11.25 10.00 9.25 9.50 8.25 7.50 9.75 Suburban Ofﬁce 9.50 8.75 9.25 10.00 10.25 8.75 8.60 10.25 9.75 9.00 10.75 9.75 9.25 9.75 8.50 10.25 8.25 10.25 8.50 12.00 9.25 9.50 9.00 9.75 10.00 10.25 9.00 9.75 8.25 8.50 9.75 Urban Multifamily 7.25 8.50 7.00 8.75 9.75 6.25 7.35 7.80 7.50 6.75 9.00 9.00 8.25 8.50 8.25 9.50 8.00 8.75 8.25 8.50 8.25 9.25 6.50 7.75 8.00 7.25 7.50 9.00 7.50 7.25 9.50 CLASS B CLASS RATES (%) RATES DISCOUNT Suburban Multifamily 8.25 8.50 7.25 8.50 10.00 7.25 7.60 8.50 6.75 7.00 9.00 9.00 8.25 8.50 8.75 8.75 8.25 8.25 8.75 8.50 8.75 9.00 7.00 8.50 8.00 8.00 7.50 9.00 7.50 7.25 9.50

CBD Ofﬁce 7.25 6.75 7.25 8.50 7.25 5.25 6.50 8.00 7.00 6.75 8.75 9.00 8.25 8.75 6.50 11.00 6.50 9.25 7.00 9.00 8.75 8.75 8.00 9.00 8.50 8.50 8.50 8.00 7.00 6.00 7.75 Suburban Ofﬁce 8.00 7.25 7.50 8.75 8.00 6.75 7.20 9.00 8.25 8.50 9.00 9.00 8.75 8.50 7.25 9.00 7.25 9.25 7.25 9.50 8.75 8.75 8.50 8.50 8.00 8.50 8.25 8.50 7.00 7.00 7.50 Industrial 6.75 7.50 5.75 8.75 7.75 7.25 7.50 8.00 8.00 7.25 9.00 8.75 7.50 8.25 6.75 9.50 7.00 9.50 6.75 9.00 8.00 9.25 8.00 7.25 10.00 8.00 7.75 8.50 6.00 6.50 8.00 Flex Industrial 8.25 8.00 7.50 9.25 8.00 8.00 8.00 9.25 8.50 8.50 9.00 9.50 8.25 8.75 7.75 9.75 7.50 8.75 7.75 9.00 8.50 8.75 8.25 8.75 9.50 9.00 9.50 8.50 6.50 7.00 8.50 Urban Multifamily 5.50 6.00 6.00 6.50 6.25 4.50 5.80 6.25 5.00 6.00 7.00 7.75 7.00 6.75 5.75 8.50 5.50 8.25 6.00 7.50 6.75 6.25 6.00 6.00 7.00 6.15 6.00 6.00 5.50 4.50 7.50 Suburban Multifam 6.00 6.25 6.00 6.25 6.50 5.50 6.40 7.00 5.75 6.50 7.50 7.75 7.00 7.75 6.00 7.25 5.75 7.00 6.25 7.00 6.75 6.75 6.50 6.75 7.00 6.75 6.25 6.00 5.50 4.75 7.00

CLASS A CLASS Regional Mall Retail 7.25 7.50 7.75 7.50 6.50 6.00 7.50 7.75 7.25 9.00 8.50 8.00 8.00 7.00 8.75 6.50 8.00 7.25 8.20 7.75 7.75 8.50 7.50 10.00 8.00 7.00 6.25 5.50 7.00 7.25 Community Retail 7.50 7.25 6.25 7.50 7.75 7.25 7.25 7.75 8.00 7.75 8.75 9.00 8.50 8.50 7.25 9.00 7.00 9.00 7.25 8.50 8.25 9.00 8.00 8.50 9.00 8.75 7.75 7.50 6.25 7.25 7.75

REVERSION RATES (%) RATES REVERSION Neighborhood Retail 7.75 7.25 6.50 7.50 8.00 7.00 7.80 8.25 7.50 8.50 9.25 9.00 8.25 8.50 7.50 9.25 6.75 9.00 7.25 8.00 7.75 9.00 8.00 9.00 9.50 8.50 8.00 8.00 6.75 7.50 7.75 Lodging - Full Service 8.25 8.50 8.75 9.75 7.25 8.50 9.25 8.00 9.00 9.50 9.25 9.00 8.25 9.00 8.50 8.50 8.50 9.75 9.00 9.00 8.50 9.00 10.50 8.75 10.00 9.25 8.00 7.25 10.50 Lodging - Limited 9.25 8.75 9.50 8.75 8.25 8.75 9.75 9.75 9.50 9.50 10.00 9.50 9.25 9.50 9.00 9.00 9.25 10.25 10.25 10.00 9.50 10.00 11.50 9.75 9.75 9.00 8.25 8.25 9.00

CBD Ofﬁce 8.25 7.25 9.00 9.25 7.50 6.00 7.75 9.00 8.50 7.00 9.75 9.50 8.25 9.25 7.00 11.75 7.25 9.50 8.00 11.00 8.75 9.25 8.00 9.50 10.75 9.50 9.00 8.25 8.00 6.50 8.75 Suburban Ofﬁce 9.00 8.00 8.50 9.50 8.50 7.72 8.20 9.50 9.75 9.00 10.00 9.25 8.25 9.00 7.75 9.75 8.00 9.50 7.75 11.00 9.00 9.00 8.50 9.00 9.50 9.75 8.75 9.00 8.00 7.50 8.50 Urban Multifamily 6.50 6.50 6.50 8.00 7.25 5.50 6.65 7.50 6.00 6.50 8.00 8.50 7.50 6.75 6.50 9.00 6.00 8.75 6.50 7.00 9.25 6.00 7.25 7.50 6.50 7.00 7.00 6.50 5.75 8.50 CLASS B CLASS RATES (%) RATES REVERSION Suburban Multifamily 7.00 6.50 6.75 7.75 7.50 6.50 6.70 7.00 6.75 7.25 8.00 8.50 7.50 7.75 6.50 8.00 6.50 8.00 6.75 7.50 7.50 7.25 6.50 8.00 7.50 7.25 7.00 7.00 6.50 5.75 7.50

4 SINGLE-PERIOD RETURN MEASURES

INCOME Potential Gross Income (PGI) (Vacancy & Credit Loss) Additional Income Effective Gross Income (EGI) AFTER-TAX RETURN ON EXPENSES (Operating Expenses) EQUITY (ROE) = (Real Estate Taxes) (Replacement Reserve) Year 1 CFAT Net Operating Income (NOI) Equity Invested

DEBT (Annual Debt Service) (Ground Lease Payments)

Cash Flow After Financing (CFAF)

TAXES (Tax Payment) Cash Flow After Taxes (CFAT)

SINGLE-PERIOD RETURN MEASURES

DEBT (Annual Debt Service) (Ground Lease Payments) ROE is Often Calculated on a Before-Tax Basis, But Class Cash Flow After Financing (CFAF) Will Use After-Tax Calculation

TAXES (Tax Payment)

Cash Flow After Taxes (CFAT)

SINGLE-PERIOD RETURN MEASURES

DEBT (Annual Debt Service) (Ground Lease Payments) $25,000 = 11.67% $300,000 Cash Flow After Financing (CFAF)

TAXES (Tax Payment) Cash Flow After Taxes (CFAT)

SINGLE-PERIOD RETURN MEASURES

COMPARING RETURN MEASURES

ROTA ROE Unlev. BT IRR AT IRR IRR Single-Period Returns Multi-Period Returns

USING THE SETUP TO COMPARE OPPORTUNITIES

INCOME Potential Gross Income (PGI) (Vacancy & Credit Loss) Additional Income Effective Gross Income (EGI)

EXPENSES (Operating Expenses) (Real Estate Taxes) (Replacement Reserve) Net Operating Income (NOI)

Net Operating Income Can Be Used to Estimate Property Value & Compare Alternative Uses

CAPITALIZED VALUE

USING THE SETUP TO COMPARE OPPORTUNITIES

INCOME Potential Gross Income (PGI) (Vacancy & Credit Loss) Additional Income Effective Gross Income (EGI) Capitalized Value = EXPENSES (Operating Expenses)

(Real Estate Taxes) Year 1 NOI (Replacement Reserve) Market Cap Rate % Net Operating Income (NOI)

Net Operating Income Can Be Used to Estimate Property Value & Compare Alternative Uses

CAPITALIZED VALUE

CAPITALIZATION RATES & VALUATION:

Cap Rate ê Value é Cap Rate é Value ê “Cap Rate Compression” “Cap Rate Expansion”

What Influences Cap Rates? • Investor Perceptions of Risk • Inflation Rates (Rate Increase è Cap Rate ê Value é) • Returns on Competing Investments • Market Competitiveness • Location Preferences • Property Age/Obsolescence

CAPITALIZED VALUE

CAPITALIZATION RATES & VALUATION: CAP RATES & REAL ESTATE MARKET CYCLES

CAPITALIZED VALUE

CAPITALIZATION RATES & VALUATION: IMPACT OF CHANGING CAP RATES ON VALUE

Net Operating Income (NOI) = $100,000

Cap Rate NOI Multiplier Value 5% = 20 x $100,000 $2,000,000 7.5% = 13.3 x $100,000 $1,333,333 10% = 10 x $100,000 $1,000,000 15% = 6.67 x $100,000 $666,667 20% = 5 x $100,000 $500,000

A Change in the Cap Rate Can Have a Big Impact on Value

CAPITALIZED VALUE

CAPITALIZATION RATES & VALUATION: IMPACT OF CHANGING CAP RATES ON VALUE

Net Operating Income (NOI) = $100,000

Cap Rate NOI Multiplier Value 5% = 20 x $100,000 $2,000,000 7.5% = 13.3 x $100,000 $1,333,333 10% = 10 x $100,000 $1,000,000 15% = 6.67 x $100,000 $666,667 20% = 5 x $100,000 $500,000

The Cap Rate = Investor’s Perceived Risk. If the Investment is Risky, They Will Pay Less for the Same Set of Cash Flows.

HIGEST & BEST USE ANALYSIS

USING THE SETUP TO COMPARE OPPORTUNITIES

Capitalized Value = RESIDUAL Capitalized Value VALUE Year 1 NOI

Market Cap Rate %

USING THE SETUP TO COMPARE OPPORTUNITIES

Capitalized Value = RESIDUAL Capitalized Value VALUE (Construction Cost) Year 1 NOI Market Cap Rate %

USING THE SETUP TO COMPARE OPPORTUNITIES

Capitalized Value = RESIDUAL Capitalized Value VALUE (Construction Cost) Year 1 NOI Residual Land Value Market Cap Rate %

The Use that Produces the Highest Residual Land Value = Highest & Best Use

USING THE SETUP TO COMPARE OPPORTUNITIES

Residential Office Retail

SIZE 10,000 SF 10,000 SF 10,000 SF

RENT $2.50/SF/Month $21.50/SF/Year $24.50/SF/Year

VACANCY 6.5% 10% 10%

EXP RATIO 30% of EGI 30% of EGI N/A

CAP RATE 7% 8% 9.5%

COST $200/SF $150/SF $150/SF

HIGEST & BEST USE ANALYSIS

USING THE SETUP TO COMPARE OPPORTUNITIES

Residential Office Retail

PGI $300,000 $215,000 $245,000 (Vacancy) ($19,500) ($21,500) ($24,500) EGI $280,500 $193,500 $220,500

USING THE SETUP TO COMPARE OPPORTUNITIES

Residential Office Retail

PGI $300,000 $215,000 $245,000 (Vacancy) ($19,500) ($21,500) ($24,500) EGI $280,500 $193,500 $220,500

(Expenses) ($84,150) ($58,050) ($0) NOI $196,350 $135,450 $220,500

USING THE SETUP TO COMPARE OPPORTUNITIES

Residential Office Retail

PGI $300,000 $215,000 $245,000 (Vacancy) ($19,500) ($21,500) ($24,500) EGI $280,500 $193,500 $220,500

(Expenses) ($84,150) ($58,050) ($0) NOI $196,350 $135,450 $220,500

VALUE $2,805,000 $1,693,125 $2,321,053

USING THE SETUP TO COMPARE OPPORTUNITIES

Residential Office Retail

PGI $300,000 $215,000 $245,000 (Vacancy) ($19,500) ($21,500) ($24,500) EGI $280,500 $193,500 $220,500

(Expenses) ($84,150) ($58,050) ($0) NOI $196,350 $135,450 $220,500

VALUE $2,805,000 $1,693,125 $2,321,053 (Cost) ($2,000,000) ($1,500,000) ($1,500,000) LAND $805,000 $193,125 $821,053

USING THE SETUP TO COMPARE OPPORTUNITIES

Residential Office Retail

PGI $300,000 $215,000 $245,000 (Vacancy) ($19,500) ($21,500) ($24,500) EGI $280,500 $193,500 $220,500

(Expenses) ($84,150) ($58,050) ($0) NOI $196,350 $135,450 $220,500

VALUE $2,805,000 $1,693,125 $2,321,053 (Cost) ($2,000,000) ($1,500,000) ($1,500,000) LAND $805,000 $193,125 $821,053

What Use, or Uses, Would You Recommend and Why?

VERDE LOFTS SETUP Q & A

VERDE LOFTS SETUP (STABILIZED YEAR 1)

INCOME

Gross Income Market-Rate Apartments Affordable Apartments Retail Space Subtotal

(Vacancy) Residential Vacancy Retail Vacancy

Additional Income Parking Fees

Effective Gross Income

EXPENSES

(Operating Expenses) (Real Estate Taxes) (Replacement Reserve) Subtotal

NET OPERATING INCOME

(Debt Service)

CASH FLOW AFTER FINANCING

(Tax Payment)

CASH FLOW AFTER TAXES

OFF-SHEET CALCULATIONS

Tax Payment Cash Flow After Financing Replacement Reserve Amortization (Depreciation) Taxable Income Tax Payment

RETURN MEASURES & CAPITALIZED VALUE

Return on Total Assets