Discounted Cash Flow Analysis.Pptx

HARVARD UNIVERSITY GRADUATE SCHOOL OF DESIGN

GSD 5103: PUBLIC AND PRIVATE DEVELOPMENT

Discounted Cash Flow Analysis

• Review of the Setup • Income & Expense Escalation • Sale Price and Net Proceeds • Multi-Period Return Measures • Using Real Estate Financial Analysis Responsibly

PRO FORMA ARCHITECTURE

1 OPERATING CASH FLOWS

ASSUMPTIONS

3 RETURN MEASURES

NET PROCEEDS OFF-SHEET CALCULATIONS FROM SALE 2

The Setup = 1st Stabilized Year of Operations

PRO FORMA ARCHITECTURE

1 OPERATING CASH FLOWS

ASSUMPTIONS

RETURN MEASURES

NET PROCEEDS OFF-SHEET CALCULATIONS FROM SALE

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)

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

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

THE SETUP

PRO FORMA ARCHITECTURE

OPERATING CASH FLOWS

ASSUMPTIONS

RETURN MEASURES

NET PROCEEDS OFF-SHEET CALCULATIONS FROM SALE 2

AMORTIZATION Beginning of Year Outstanding Balance Interest (Amortization) End of Year Outstanding Balance

TAXABLE INCOME Cash Flow After Financing (CFAF) Amortization Replacement Reserve (Depreciation) Taxable Income

AMORTIZATION Beginning of Year Outstanding Balance Interest (Amortization) End of Year Outstanding Balance

TAXABLE INCOME Cash Flow After Financing (CFAF) Amortization Replacement Reserve (Depreciation) Taxable Income

When Depreciating Mixed-Use Buildings, Apportion Building Cost by Use Depreciate Residential & Commercial Building Costs on Separate Recovery Schedules

AMORTIZATION Beginning of Year Outstanding Balance Interest (Amortization) End of Year Outstanding Balance

TAXABLE INCOME Cash Flow After Financing (CFAF) Amortization Replacement Reserve (Depreciation) Taxable Income

Residential SF * $/SF Commercial SF * $/SF = Annual Depreciation 27.5 Years 39 Years

AMORTIZATION Beginning of Year Outstanding Balance Interest (Amortization) End of Year Outstanding Balance

TAXABLE INCOME Cash Flow After Financing (CFAF) Amortization Replacement Reserve (Depreciation) Taxable Income

Taxable Income May Be Positive or Negative. Negative Taxable Income is Considered a Passive Loss.

AMORTIZATION Beginning of Year Outstanding Balance Interest (Amortization) End of Year Outstanding Balance

TAXABLE INCOME Cash Flow After Financing (CFAF) Amortization Replacement Reserve (Depreciation) Taxable Income

Sole Purpose of Off-Sheet Calculation is to Determine Taxable Income

AMORTIZATION Beginning of Year Outstanding Balance Interest (Amortization) End of Year Outstanding Balance

TAXABLE INCOME Cash Flow After Financing (CFAF) Amortization Replacement Reserve (Depreciation) Taxable Income

Sole Purpose of Off-Sheet Calculation is to Determine Taxable Income The Last Step to Completing the Setup is to Calculate the Tax Payment

PRO FORMA ARCHITECTURE

OPERATING CASH FLOWS

ASSUMPTIONS

RETURN MEASURES

NET PROCEEDS OFF-SHEET CALCULATIONS FROM SALE 2

PRO FORMA ARCHITECTURE

1 OPERATING CASH FLOWS

ASSUMPTIONS

RETURN MEASURES

NET PROCEEDS OFF-SHEET CALCULATIONS FROM SALE

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)

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

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

THE SETUP

PRO FORMA ARCHITECTURE

OPERATING CASH FLOWS

ASSUMPTIONS

3 RETURN MEASURES

NET PROCEEDS OFF-SHEET CALCULATIONS FROM SALE

SINGLE-PERIOD VS. MULTI-PERIOD RETURNS

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

SINGLE-PERIOD VS. MULTI-PERIOD RETURNS

Year 1 NOI TDC or Asset Price

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

ROTA

SINGLE-PERIOD VS. MULTI-PERIOD RETURNS

Year 1 CFAT Equity Invested

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

After-Tax ROE

PRO FORMA ARCHITECTURE

1 OPERATING CASH FLOWS

ASSUMPTIONS

3 RETURN MEASURES

NET PROCEEDS OFF-SHEET CALCULATIONS FROM SALE 2

DCF = Setup for Each Operating Year + Proceeds from Sale in Final Year

INCOME Potential Gross Income (PGI) * (1 + Escalation Rate %) (Vacancy & Credit Loss) Additional Income * (1 + Escalation Rate %) Effective Gross Income (EGI)

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

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

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

DISCOUNTED CASH FLOW ANALYSIS

INCOME Potential Gross Income (PGI) * (1 + Escalation Rate %) (Vacancy & Credit Loss) Additional Income * (1 + Escalation Rate %) Effective Gross Income (EGI)

PRO FORMA 0 1 2 3 4 5 6

GROSS INCOME Market-Rate Apartments $2,112,000 $2,175,360 $2,240,621 $2,307,839 $2,377,075 $2,448,387 Affordable Apartments $287,910 $296,547 $305,444 $314,607 $324,045 $333,767 Retail Space $250,000 $257,500 $265,225 $273,182 $281,377 $289,819 Subtotal $2,649,910 $2,729,407 $2,811,290 $2,895,628 $2,982,497 $3,071,972

VACANCY (Residential Vacancy) ($143,995) ($148,314) ($152,764) ($157,347) ($162,067) ($166,929) (Retail Vacancy) ($25,000) ($25,750) ($26,523) ($27,318) ($28,138) ($28,982) Effective Gross Income $2,480,915 $2,555,343 $2,632,003 $2,710,963 $2,792,292 $2,876,061

Income Increases Each Year Vacancy & Credit Loss as well as Effective Gross Income (EGI) Do Not Require Adjustments, Automatically Account for Income Increases

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

EXPENSES (Operating Expenses) (Real Estate Taxes) * (1 + Escalation Rate %) (Replacement Reserve) Net Operating Income (NOI)

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

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

DISCOUNTED CASH FLOW ANALYSIS

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

EXPENSES (Operating Expenses) (Real Estate Taxes) * (1 + Escalation Rate %) (Replacement Reserve) Net Operating Income (NOI)

PRO FORMA 0 1 2 3 4 5 6 EXPENSES (Operating Expenses) ($528,000) ($543,840) ($560,155) ($576,960) ($594,269) ($612,097) (Real Estate Taxes) ($176,000) ($181,280) ($186,718) ($192,320) ($198,090) ($204,032) (Replacement Reserve) ($100,000) ($103,000) ($106,090) ($109,273) ($112,551) ($115,927) (Total Expenses) ($804,000) ($828,120) ($852,964) ($878,553) ($904,909) ($932,056) Expenses Increase Each Year

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)

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

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

DISCOUNTED CASH FLOW ANALYSIS

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)

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

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

DISCOUNTED CASH FLOW ANALYSIS

AMORTIZATION Beginning of Year Outstanding Balance Interest Decreases (Amortization) End of Year Outstanding Balance

TAXABLE INCOME Cash Flow After Financing (CFAF) Amortization Replacement Reserve (Depreciation) Taxable Income

AMORTIZATION Beginning of Year Outstanding Balance Interest (Amortization) Increases End of Year Outstanding Balance

TAXABLE INCOME Cash Flow After Financing (CFAF) Amortization Increases Replacement Reserve (Depreciation) Taxable Income

AMORTIZATION Beginning of Year Outstanding Balance Interest (Amortization) Increases End of Year Outstanding Balance

TAXABLE INCOME Cash Flow After Financing (CFAF) Amortization Increases Replacement Reserve Increases (Depreciation) Taxable Income

AMORTIZATION Beginning of Year Outstanding Balance Interest (Amortization) Increases End of Year Outstanding Balance

TAXABLE INCOME Cash Flow After Financing (CFAF) Amortization Increases Replacement Reserve Increases (Depreciation) Constant Taxable Income

AMORTIZATION Beginning of Year Outstanding Balance Interest (Amortization) Increases End of Year Outstanding Balance

TAXABLE INCOME Cash Flow After Financing (CFAF) Amortization Increases Replacement Reserve Increases (Depreciation) Constant Taxable Income TAXABLE INCOME Cash Flow After Financing $839,474 $889,781 $941,598 $994,969 $1,049,941 Amortization $191,797 $201,610 $211,925 $222,767 $234,165 Replacement Reserve $100,000 $103,000 $106,090 $109,273 $112,551 Depreciation ($527,584) ($527,584) ($527,584) ($527,584) ($527,584) Taxable Income $603,688 $666,808 $732,029 $799,426 $869,073

AMORTIZATION Beginning of Year Outstanding Balance Interest (Amortization) Increases End of Year Outstanding Balance

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)

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

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

DISCOUNTED CASH FLOW ANALYSIS

PRO FORMA ARCHITECTURE

OPERATING CASH FLOWS

ASSUMPTIONS

RETURN MEASURES

NET PROCEEDS OFF-SHEET CALCULATIONS FROM SALE

NET PROCEEDS FROM SALE

NET BOOK VALUE CAPITAL GAIN ON SALE

Total Development Cost $20,000,000 Sale Price $27,771,494

Replacement Reserve $530,914 (Sale Expenses) ($1,388,575)

(Accumulated Depreciation) ($2,637,918) (Net Book Value) ($17,892,996)

Net Book Value $17,892,996 Capital Gain on Sale $8,489,923

TAX PAYMENT NET PROCEEDS FROM SALE

Accumulated Depreciation $2,637,918 Sale Price $27,771,494

Depreciation Recapture Tax ($659,479) (Sale Expenses) ($1,388,575)

(Mortgage Loan Payoff) ($11,937,735)

Capital Gain in Excess of Dep. $5,852,005 (Tax Payment) ($1,537,280)

Capital Gains Tax ($877,801) Net Proceeds from Sale $12,907,903

NET PROCEEDS FROM SALE

NET BOOK VALUE CAPITAL GAIN ON SALE

Total Development Cost $20,000,000 Sale Price $27,771,494

Replacement Reserve $530,914 (Sale Expenses) ($1,388,575)

(Accumulated Depreciation) 1 ($2,637,918) (Net Book Value) ($17,892,996)

Net Book Value $17,892,996 Capital Gain on Sale $8,489,923

TAX PAYMENT NET PROCEEDS FROM SALE

Accumulated Depreciation $2,637,918 Sale Price $27,771,494

Depreciation Recapture Tax ($659,479) (Sale Expenses) ($1,388,575)

(Mortgage Loan Payoff) ($11,937,735)

Capital Gain in Excess of Dep. $5,852,005 (Tax Payment) ($1,537,280)

Capital Gains Tax ($877,801) Net Proceeds from Sale $12,907,903

NET PROCEEDS FROM SALE

NET BOOK VALUE CAPITAL GAIN ON SALE

Total Development Cost $20,000,000 Sale Price $27,771,494

Replacement Reserve $530,914 (Sale Expenses) ($1,388,575) (Accumulated Depreciation) 1 ($2,637,918) (Net Book Value) 2 ($17,892,996) Net Book Value $17,892,996 Capital Gain on Sale $8,489,923

TAX PAYMENT NET PROCEEDS FROM SALE

Accumulated Depreciation $2,637,918 Sale Price $27,771,494

Depreciation Recapture Tax ($659,479) (Sale Expenses) ($1,388,575)

(Mortgage Loan Payoff) ($11,937,735)

Capital Gain in Excess of Dep. $5,852,005 (Tax Payment) ($1,537,280)

Capital Gains Tax ($877,801) Net Proceeds from Sale $12,907,903

NET PROCEEDS FROM SALE

NET BOOK VALUE CAPITAL GAIN ON SALE

Total Development Cost $20,000,000 Sale Price $27,771,494

Replacement Reserve $530,914 (Sale Expenses) ($1,388,575) (Accumulated Depreciation) 1 ($2,637,918) (Net Book Value) 2 ($17,892,996) Net Book Value $17,892,996 Capital Gain on Sale $8,489,923

TAX PAYMENT NET PROCEEDS FROM SALE

Accumulated Depreciation $2,637,918 Sale Price $27,771,494

Depreciation Recapture Tax ($659,479) (Sale Expenses) ($1,388,575) 3 (Mortgage Loan Payoff) ($11,937,735) Capital Gain in Excess of Dep. $5,852,005 (Tax Payment) ($1,537,280)

Capital Gains Tax ($877,801) Net Proceeds from Sale $12,907,903

NET PROCEEDS FROM SALE

NET BOOK VALUE CAPITAL GAIN ON SALE

Total Development Cost $20,000,000 Sale Price $27,771,494

Replacement Reserve $530,914 (Sale Expenses) ($1,388,575) (Accumulated Depreciation) 1 ($2,637,918) (Net Book Value) 2 ($17,892,996) Net Book Value $17,892,996 Capital Gain on Sale $8,489,923

TAX PAYMENT NET PROCEEDS FROM SALE

Accumulated Depreciation $2,637,918 Sale Price $27,771,494

Depreciation Recapture Tax ($659,479) (Sale Expenses) ($1,388,575) 3 (Mortgage Loan Payoff) 4 ($11,937,735) Capital Gain in Excess of Dep. $5,852,005 (Tax Payment) ($1,537,280)

Capital Gains Tax ($877,801) Net Proceeds from Sale $12,907,903

NET PROCEEDS FROM SALE

NET BOOK VALUE CAPITAL GAIN ON SALE

Total Development Cost $20,000,000 Sale Price $27,771,494

Replacement Reserve $530,914 (Sale Expenses) ($1,388,575)

(Accumulated Depreciation) 1 ($2,637,918) (Net Book Value) ($17,892,996)

Net Book Value $17,892,996 Capital Gain on Sale $8,489,923

TAX PAYMENT NET PROCEEDS FROM SALE

Accumulated Depreciation $2,637,918 Sale Price $27,771,494

Depreciation Recapture Tax ($659,479) (Sale Expenses) ($1,388,575)

(Mortgage Loan Payoff) ($11,937,735)

Capital Gain in Excess of Dep. $5,852,005 (Tax Payment) ($1,537,280)

Capital Gains Tax ($877,801) Net Proceeds from Sale $12,907,903

NET PROCEEDS FROM SALE: NET BOOK VALUE

NET PROCEEDS FROM SALE NET BOOK VALUE Total Development Cost $20,000,000 = Replacement Reserve YR 1 - 5 Replacement Reserve $530,914 (Accumulated Depreciation) ($2,637,918) Net Book Value $17,892,996

TAXABLE INCOME Cash Flow After Financing $839,474 $889,781 $941,598 $994,969 $1,049,941 Amortization $191,797 $201,610 $211,925 $222,767 $234,165 Replacement Reserve $100,000 $103,000 $106,090 $109,273 $112,551 Depreciation ($527,584) ($527,584) ($527,584) ($527,584) ($527,584) Taxable Income $603,688 $666,808 $732,029 $799,426 $869,073

NET PROCEEDS FROM SALE: NET BOOK VALUE

NET PROCEEDS FROM SALE NET BOOK VALUE Total Development Cost $20,000,000 = Depreciation YR 1 - 5 Replacement Reserve $530,914 (Accumulated Depreciation) ($2,637,918) Net Book Value $17,892,996

NET PROCEEDS FROM SALE

NET BOOK VALUE CAPITAL GAIN ON SALE

Total Development Cost $20,000,000 Sale Price $27,771,494

Replacement Reserve $530,914 (Sale Expenses) ($1,388,575) (Accumulated Depreciation) ($2,637,918) (Net Book Value) 2 ($17,892,996) Net Book Value $17,892,996 Capital Gain on Sale $8,489,923

TAX PAYMENT NET PROCEEDS FROM SALE

Accumulated Depreciation $2,637,918 Sale Price $27,771,494

Depreciation Recapture Tax ($659,479) (Sale Expenses) ($1,388,575)

(Mortgage Loan Payoff) ($11,937,735)

Capital Gain in Excess of Dep. $5,852,005 (Tax Payment) ($1,537,280)

Capital Gains Tax ($877,801) Net Proceeds from Sale $12,907,903

ESTIMATING THE FUTURE SALE PRICE

PRO FORMA 0 1 2 3 4 5 6

EXPENSES (Operating Expenses) ($528,000) ($543,840) ($560,155) ($576,960) ($594,269) ($612,097) (Real Estate Taxes) ($176,000) ($181,280) ($186,718) ($192,320) ($198,090) ($204,032) (Replacement Reserve) ($100,000) ($103,000) ($106,090) ($109,273) ($112,551) ($115,927) (Total Expenses) ($804,000) ($828,120) ($852,964) ($878,553) ($904,909) ($932,056)

NET OPERATING INCOME $1,676,915 $1,727,223 $1,779,040 $1,832,411 $1,887,383 $1,944,005

Debt Service ($837,442) ($837,442) ($837,442) ($837,442) ($837,442)

CASH FLOW AFTER FINANCING $839,474 $889,781 $941,598 $994,969 $1,049,941

Tax Payment ($211,291) ($233,383) ($256,210) ($279,799) ($304,176)

CASH FLOW AFTER TAXES $628,183 $656,398 $685,388 $715,170 $745,766

Project NOI Until 1 Year Past Operating Period Year N + 1 = Future Buyer’s Year 1 © Kristen Hunter 2016 DISCOUNTED CASH FLOW ANALYSIS

ESTIMATING THE FUTURE SALE PRICE: CAPITALIZATION RATES

NOI = Debt Service + BTCF

÷ ÷ ÷

Value = Mortgage + Equity

= = =

Cap Rate Mortgage Return Constant

ESTIMATING THE FUTURE SALE PRICE: CAPITALIZATION RATES

NOI = Debt Service + BTCF

÷ Value x Cap÷ Rate = NOI ÷

Value = Mortgage + Equity

= = =

Cap Rate Mortgage Return Constant

ESTIMATING THE FUTURE SALE PRICE: CAPITALIZATION RATES

NOI = Debt Service + BTCF

÷ Value x Cap÷ Rate = NOI ÷

Value = Mortgage + Equity = NOI ÷ Cap= Rate = Value ✓=

Cap Rate Mortgage Return Constant

SALE PRICE = YEAR 6 NOI ÷ CAP RATE

PRO FORMA 1 6

GROSS INCOME Market-Rate Apartments $2,112,000 $2,448,387 SALE PRICE = $27,771,494 Affordable Apartments $287,910 $333,767 Retail Space $250,000 $289,819 Subtotal $2,649,910 $3,071,972 $1,944,005 0.07 VACANCY (Residential Vacancy) ($143,995) ($166,929) (Retail Vacancy) ($25,000) ($28,982) Effective Gross Income $2,480,915 $2,876,061

EXPENSES (Operating Expenses) ($528,000) ($612,097) (Real Estate Taxes) ($176,000) ($204,032) (Replacement Reserve) ($100,000) ($115,927) (Total Expenses) ($804,000) ($932,056)

NET OPERATING INCOME $1,676,915 $1,944,005

NET PROCEEDS FROM SALE: CAPITAL GAIN ON SALE

NET PROCEEDS FROM SALE NET BOOK VALUE CAPITAL GAIN ON SALE Total Development Cost $20,000,000 Sale Price $27,771,494 Replacement Reserve $530,914 (Sale Expenses) ($1,388,575)

(Accumulated Depreciation) ($2,637,918) (Net Book Value) ($17,892,996)

Net Book Value $17,892,996 Capital Gain on Sale $8,489,923

SALE PRICE = $27,771,494

$1,944,005 0.07

NET PROCEEDS FROM SALE: CAPITAL GAIN ON SALE

NET PROCEEDS FROM SALE NET BOOK VALUE CAPITAL GAIN ON SALE Total Development Cost $20,000,000 Sale Price $27,771,494 Replacement Reserve $530,914 (Sale Expenses) ($1,388,575)

(Accumulated Depreciation) ($2,637,918) (Net Book Value) ($17,892,996)

Net Book Value $17,892,996 Capital Gain on Sale $8,489,923

NET PROCEEDS FROM SALE: CAPITAL GAIN ON SALE

NET PROCEEDS FROM SALE NET BOOK VALUE CAPITAL GAIN ON SALE Total Development Cost $20,000,000 Sale Price $27,771,494 Replacement Reserve $530,914 (Sale Expenses) ($1,388,575)

(Accumulated Depreciation) ($2,637,918) (Net Book Value) ($17,892,996)

Net Book Value $17,892,996 Capital Gain on Sale $8,489,923

GAIN ON SALE HAS 2 COMPONENTS: Capital Gain in Excess of 15% Gain Attributable to Accumulated Depreciation Depreciation, Taxed @ 25%

Gain on Sale on Gain Accumulated Gain in Excess of Accumulated Depreciation 25% Depreciation, Taxed @ 15%

NET PROCEEDS FROM SALE

NET BOOK VALUE CAPITAL GAIN ON SALE

Total Development Cost $20,000,000 Sale Price $27,771,494

Replacement Reserve $530,914 (Sale Expenses) ($1,388,575)

(Accumulated Depreciation) ($2,637,918) (Net Book Value) ($17,892,996)

Net Book Value $17,892,996 Capital Gain on Sale $8,489,923

TAX PAYMENT NET PROCEEDS FROM SALE

Accumulated Depreciation $2,637,918 Sale Price $27,771,494

Depreciation Recapture Tax ($659,479) (Sale Expenses) ($1,388,575) 3 (Mortgage Loan Payoff) ($11,937,735) Capital Gain in Excess of Dep. $5,852,005 (Tax Payment) ($1,537,280)

Capital Gains Tax ($877,801) Net Proceeds from Sale $12,907,903

NET PROCEEDS FROM SALE

NET BOOK VALUE CAPITAL GAIN ON SALE

Total Development Cost $20,000,000 Sale Price $27,771,494

Replacement Reserve $530,914 (Sale Expenses) ($1,388,575)

(Accumulated Depreciation) ($2,637,918) (Net Book Value) ($17,892,996)

Net Book Value $17,892,996 Capital Gain on Sale $8,489,923

TAX PAYMENT Capital Gain in Excess of Accumulated Depreciation $2,637,918 15% Depreciation Depreciation Recapture Tax ($659,479)

Capital Gain in Excess of Dep. $5,852,005 Sale on Gain Accumulated Depreciation 25% Capital Gains Tax ($877,801)

NET PROCEEDS FROM SALE

NET BOOK VALUE CAPITAL GAIN ON SALE

Total Development Cost $20,000,000 Sale Price $27,771,494

Replacement Reserve $530,914 (Sale Expenses) ($1,388,575)

(Accumulated Depreciation) ($2,637,918) (Net Book Value) ($17,892,996)

Net Book Value $17,892,996 Capital Gain on Sale $8,489,923

TAX PAYMENT Capital Gain in Excess of Accumulated Depreciation $2,637,918 15% Depreciation Depreciation Recapture Tax ($659,479)

Capital Gain in Excess of Dep. $5,852,005 Sale on Gain Accumulated Depreciation 25% Capital Gains Tax ($877,801)

NET PROCEEDS FROM SALE

NET BOOK VALUE CAPITAL GAIN ON SALE

Total Development Cost $20,000,000 Sale Price $27,771,494

Replacement Reserve $530,914 (Sale Expenses) ($1,388,575)

(Accumulated Depreciation) ($2,637,918) (Net Book Value) ($17,892,996)

Net Book Value $17,892,996 Capital Gain on Sale $8,489,923

TAX PAYMENT Capital Gain in Excess of Accumulated Depreciation $2,637,918 15% Depreciation Depreciation Recapture Tax ($659,479)

Capital Gain in Excess of Dep. $5,852,005 Sale on Gain Accumulated Depreciation 25% Capital Gains Tax ($877,801)

CAPITAL GAIN = GAIN ON SALE — ACCUMULATED DEPRECIATION

NET PROCEEDS FROM SALE

NET BOOK VALUE CAPITAL GAIN ON SALE

Total Development Cost $20,000,000 Sale Price $27,771,494

Replacement Reserve $530,914 (Sale Expenses) ($1,388,575)

(Accumulated Depreciation) ($2,637,918) (Net Book Value) ($17,892,996)

Net Book Value $17,892,996 Capital Gain on Sale $8,489,923

TAX PAYMENT Capital Gain in Excess of Accumulated Depreciation $2,637,918 15% Depreciation Depreciation Recapture Tax ($659,479)

Capital Gain in Excess of Dep. $5,852,005 Sale on Gain Accumulated Depreciation 25% Capital Gains Tax ($877,801)

TAX PAYMENT = DEP. RECAPTURE TAX + CAPITAL GAINS TAX

NET PROCEEDS FROM SALE

NET BOOK VALUE CAPITAL GAIN ON SALE

Total Development Cost $20,000,000 Sale Price $27,771,494

Replacement Reserve $530,914 (Sale Expenses) ($1,388,575)

(Accumulated Depreciation) ($2,637,918) (Net Book Value) ($17,892,996)

Net Book Value $17,892,996 Capital Gain on Sale $8,489,923

TAX PAYMENT NET PROCEEDS FROM SALE

Accumulated Depreciation $2,637,918 Sale Price $27,771,494

Depreciation Recapture Tax ($659,479) (Sale Expenses) ($1,388,575) (Mortgage Loan Payoff) 4 ($11,937,735) Capital Gain in Excess of Dep. $5,852,005 (Tax Payment) ($1,537,280)

Capital Gains Tax ($877,801) Net Proceeds from Sale $12,907,903

NET PROCEEDS FROM SALE

NET BOOK VALUE CAPITAL GAIN ON SALE

Total Development Cost $20,000,000 Sale Price $27,771,494

Replacement Reserve $530,914 (Sale Expenses) ($1,388,575)

(Accumulated Depreciation) ($2,637,918) (Net Book Value) ($17,892,996)

Net Book Value $17,892,996 Capital Gain on Sale $8,489,923

TAX PAYMENT NET PROCEEDS FROM SALE

Accumulated Depreciation $2,637,918 Sale Price $27,771,494

Depreciation Recapture Tax ($659,479) (Sale Expenses) ($1,388,575)

(Mortgage Loan Payoff) ($11,937,735)

Capital Gain in Excess of Dep. $5,852,005 (Tax Payment) ($1,537,280)

Capital Gains Tax ($877,801) Net Proceeds from Sale $12,907,903

NET PROCEEDS FROM SALE

NET BOOK VALUE CAPITAL GAIN ON SALE

Total Development Cost $20,000,000 Sale Price $27,771,494

Replacement Reserve $530,914 (Sale Expenses) ($1,388,575)

(Accumulated Depreciation) ($2,637,918) (Net Book Value) ($17,892,996)

Net Book Value $17,892,996 Capital Gain on Sale $8,489,923

TAX PAYMENT NET PROCEEDS FROM SALE

Accumulated Depreciation $2,637,918 Sale Price $27,771,494

Depreciation Recapture Tax ($659,479) (Sale Expenses) ($1,388,575)

(Mortgage Loan Payoff) ($11,937,735)

Capital Gain in Excess of Dep. $5,852,005 (Tax Payment) ($1,537,280)

Capital Gains Tax ($877,801) Net Proceeds from Sale $12,907,903

NET PROCEEDS FROM SALE

NET BOOK VALUE CAPITAL GAIN ON SALE

Total Development Cost $20,000,000 Sale Price $27,771,494

Replacement Reserve $530,914 (Sale Expenses) ($1,388,575)

(Accumulated Depreciation) ($2,637,918) (Net Book Value) ($17,892,996)

Net Book Value $17,892,996 Capital Gain on Sale $8,489,923

TAX PAYMENT NET PROCEEDS FROM SALE

Accumulated Depreciation $2,637,918 Sale Price $27,771,494

Depreciation Recapture Tax ($659,479) (Sale Expenses) ($1,388,575)

(Mortgage Loan Payoff) ($11,937,735)

Capital Gain in Excess of Dep. $5,852,005 (Tax Payment) ($1,537,280)

Capital Gains Tax ($877,801) Net Proceeds from Sale $12,907,903

AMORTIZATION 1 5 Beginning of Year Outstanding Principal $13,000,000 $12,171,900 © Kristen Hunter 2016 End of Year Outstanding Principal ($12,808,203) ($11,937,735) DISCOUNTED CASH FLOW ANALYSIS

NET PROCEEDS FROM SALE

NET BOOK VALUE CAPITAL GAIN ON SALE

Total Development Cost $20,000,000 Sale Price $27,771,494

Replacement Reserve $530,914 (Sale Expenses) ($1,388,575)

(Accumulated Depreciation) ($2,637,918) (Net Book Value) ($17,892,996)

Net Book Value $17,892,996 Capital Gain on Sale $8,489,923

TAX PAYMENT NET PROCEEDS FROM SALE

Accumulated Depreciation $2,637,918 Sale Price $27,771,494

Depreciation Recapture Tax ($659,479) (Sale Expenses) ($1,388,575)

(Mortgage Loan Payoff) ($11,937,735)

Capital Gain in Excess of Dep. $5,852,005 (Tax Payment) ($1,537,280)

Capital Gains Tax ($877,801) Net Proceeds from Sale $12,907,903

NET PROCEEDS FROM SALE

NET BOOK VALUE CAPITAL GAIN ON SALE

Total Development Cost $20,000,000 Sale Price $27,771,494

Replacement Reserve $530,914 (Sale Expenses) ($1,388,575) (Accumulated Depreciation) 1 ($2,637,918) (Net Book Value) 2 ($17,892,996) Net Book Value $17,892,996 Capital Gain on Sale $8,489,923

TAX PAYMENT NET PROCEEDS FROM SALE

Accumulated Depreciation $2,637,918 Sale Price $27,771,494

Depreciation Recapture Tax ($659,479) (Sale Expenses) ($1,388,575) 3 (Mortgage Loan Payoff) 4 ($11,937,735) Capital Gain in Excess of Dep. $5,852,005 (Tax Payment) ($1,537,280)

Capital Gains Tax ($877,801) Net Proceeds from Sale $12,907,903

NET PROCEEDS FROM SALE: PUTTING IT ALL TOGETHER

RETURN MEASURES 0 1 2 3 4 5

RETURN ON TOTAL ASSETS (ROTA) 8.4% Year 1 NOI / TDC

RETURN ON EQUITY (ROE) 9.0% Year 1 CFAT / Equity Invested

CASH FLOW AFTER TAXES $628,183 $656,398 $685,388 $715,170 $745,766 Net Proceeds From Sale $12,907,903 ($7,000,000) $628,183 $656,398 $685,388 $715,170 $13,653,669

NET PROCEEDS FROM SALE Sale Price $27,771,494 (Sale Expenses) ($1,388,575) (Mortgage Loan Payoff) ($11,937,735) (Tax Payment) ($1,537,280) Net Proceeds from Sale $12,907,903

RETURN MEASURES: NET PRESENT VALUE

FV 5 $ $ $ $ $ $

PV $

NET PRESENT VALUE

Comparing Amount Invested with PV of Future Cash Flows

Investment PV FCF Investment PV FCF Investment PV FCF

Net Present Value = Present Value of Future Cash Flows — Investment

RETURN MEASURES: NET PRESENT VALUE

Present Value Interest Rate Future Value Future Value Interest Rate Present Value @ 5 Years @ 5 Years $100,000 2% $110,408 $100,000 12% $56,743 $100,000 4% $121,665 $100,000 10% $62,092 $100,000 6% $133,823 $100,000 8% $68,058

$100,000 8% $146,933 $100,000 6% $74,726 $100,000 10% $161,051 $100,000 4% $82,193

$100,000 12% $176,234 $100,000 2% $90,573

Increasing Interest Rate Increasing Interest Rate = Increasing Future Value = Decreasing Present Value

NET PRESENT VALUE

RETURN MEASURES 0 1 2 3 4 5

RETURN ON TOTAL ASSETS (ROTA) 8.4% Year 1 NOI / TDC

RETURN ON EQUITY (ROE) 9.0% Year 1 CFAT / Equity Invested

CASH FLOW AFTER TAXES $628,183 $656,398 $685,388 $715,170 $745,766 Net Proceeds From Sale $12,907,903 ($7,000,000) $628,183 $656,398 $685,388 $715,170 $13,653,669

MULTI-PERIOD RETURN MEASURES

NET PRESENT VALUE

RETURN MEASURES 0 1 2 3 4 5

RETURN ON TOTAL ASSETS (ROTA) 8.4% Year 1 NOI / TDC

RETURN ON EQUITY (ROE) 9.0% Year 1 CFAT / Equity Invested

CASH FLOW AFTER TAXES $628,183 $656,398 $685,388 $715,170 $745,766 Net Proceeds From Sale $12,907,903 ($7,000,000) $628,183 $656,398 $685,388 $715,170 $13,653,669

MULTI-PERIOD RETURN MEASURES

NET PRESENT VALUE

RETURN MEASURES 0 1 2 3 4 5

RETURN ON TOTAL ASSETS (ROTA) 8.4% Year 1 NOI / TDC

RETURN ON EQUITY (ROE) 9.0% Year 1 CFAT / Equity Invested

CASH FLOW AFTER TAXES $628,183 $656,398 $685,388 $715,170 $745,766 Net Proceeds From Sale $12,907,903 ($7,000,000) $628,183 $656,398 $685,388 $715,170 $13,653,669

MULTI-PERIOD RETURN MEASURES

NET PRESENT VALUE

RETURN MEASURES 0 1 2 3 4 5

RETURN ON TOTAL ASSETS (ROTA) 8.4% Year 1 NOI / TDC

RETURN ON EQUITY (ROE) 9.0% Year 1 CFAT / Equity Invested

CASH FLOW AFTER TAXES $628,183 $656,398 $685,388 $715,170 $745,766 Net Proceeds From Sale $12,907,903 ($7,000,000) $628,183 $656,398 $685,388 $715,170 $13,653,669

MULTI-PERIOD RETURN MEASURES

NPV: DISCOUNTING AFTER-TAX CASH FLOWS

5 PV $ $ $ $ @ 10% Discount Rate $ ? $ CASH FLOW AFTER TAXES $628,183 $656,398 $685,388 $715,170 $13,653,669 YEAR 0 Present Value $628,183 1 ($571,075) (1 + .10)

($ ?)

NPV: DISCOUNTING AFTER-TAX CASH FLOWS

5 PV $ $ $ $ @ 10% Discount Rate $ ? $ CASH FLOW AFTER TAXES $628,183 $656,398 $685,388 $715,170 $13,653,669 YEAR 0 Present Value ($571,075) $656,398 2 ($542,478) (1 + .10)

($ ?)

NPV: DISCOUNTING AFTER-TAX CASH FLOWS

5 PV $ $ $ $ @ 10% Discount Rate $ ? $ CASH FLOW AFTER TAXES $628,183 $656,398 $685,388 $715,170 $13,653,669 YEAR 0 Present Value ($571,075)

($542,478) $685,388 (1 + .10)3 ($514,942)

($ ?)

NPV: DISCOUNTING AFTER-TAX CASH FLOWS

5 PV $ $ $ $ @ 10% Discount Rate $ ? $ CASH FLOW AFTER TAXES $628,183 $656,398 $685,388 $715,170 $13,653,669 YEAR 0 Present Value ($571,075)

($542,478)

($514,942) $715,170 4 ($488,471) (1 + .10)

NPV: DISCOUNTING AFTER-TAX CASH FLOWS

5 PV $ $ $ $ $ @ 10% Discount Rate $ ? CASH FLOW AFTER TAXES $628,183 $656,398 $685,388 $715,170 $13,653,669 YEAR 0 Present Value ($571,075)

($542,478)

($514,942)

($488,471) $13,653,669 5 ($8,477,854) (1 + .10)

NPV: DISCOUNTING AFTER-TAX CASH FLOWS

5 PV $ $ $ $ @ 10% Discount Rate $ ? $ CASH FLOW AFTER TAXES $628,183 $656,398 $685,388 $715,170 $13,653,669

Present Value $571,075

$542,478

$514,942

$488,471

NPV: DISCOUNTING AFTER-TAX CASH FLOWS

5 PV $ $ $ $ @ 10% Discount Rate $ ? $ CASH FLOW AFTER TAXES $628,183 $656,398 $685,388 $715,170 $13,653,669 YEAR 0 Net Present Value: $10,594,820 PV — $7,000,000 Equity $3,594,820 NPV

NET PRESENT VALUE

RETURN MEASURES 0 1 2 3 4 5

RETURN ON TOTAL ASSETS (ROTA) 8.4% Year 1 NOI / TDC

RETURN ON EQUITY (ROE) 9.0% Year 1 CFAT / Equity Invested

CASH FLOW AFTER TAXES $628,183 $656,398 $685,388 $715,170 $745,766 Net Proceeds From Sale $12,907,903 ($7,000,000) $628,183 $656,398 $685,388 $715,170 $13,653,669

AFTER-TAX IRR 20.8%

NET PRESENT VALUE (NPV) $3,594,820 CFAT 10% DISCOUNT RATE

MULTI-PERIOD RETURN MEASURES

NET PRESENT VALUE & IRR

Comparing Amount Invested with PV of Future Cash Flows

Investment PV FCF Investment PV FCF Investment PV FCF

IRR = Discount Rate % at Which NPV = 0 PV of Future Cash Flows is the Same as the Amount Invested

NET PRESENT VALUE & IRR

Comparing Amount Invested with PV of Future Cash Flows

Investment PV FCF Investment PV FCF Investment PV FCF

Compared to the NPV Discount Rate, is the IRR <, =, or >?

RETURN MEASURES: NET PRESENT VALUE & IRR

: Net Present Value Calculation vs. Internal Rate of Return:

Comparing Amount Invested with PV of Future Cash Flows

$ NPV ($ NPV) IRR > 10% IRR = 10% NPV = 0 IRR < 10%

Investment PV FCF Investment PV FCF Investment PV FCF

NPV: discounts future cash flows at a specified interest rate (hurdle). If the PV of those cash flows > Investment, NPV is positive. PV < Investment, NPV is negative.

MULTI-PERIOD RETURN MEASURES

RETURN MEASURES: NET PRESENT VALUE & IRR

: Net Present Value Calculation vs. Internal Rate of Return:

Comparing Amount Invested with PV of Future Cash Flows

$ NPV ($ NPV) IRR > 10% IRR = 10% NPV = 0 IRR < 10%

Investment PV FCF Investment PV FCF Investment PV FCF

NPV + è IRR é NPV 0 è IRR = NPV — è IRR ê

RETURN MEASURES: NET PRESENT VALUE & IRR

: Net Present Value Calculation vs. Internal Rate of Return:

Comparing Amount Invested with PV of Future Cash Flows

$ NPV ($ NPV) IRR > 10% IRR = 10% NPV = 0 IRR < 10%

Investment PV FCF Investment PV FCF Investment PV FCF

NPV + è IRR é NPV 0 è IRR = NPV — è IRR ê

NPV > 0 è IRR > % NPV < 0 è IRR < %

RETURN MEASURES: NET PRESENT VALUE & IRR

: Net Present Value Calculation vs. Internal Rate of Return:

Comparing Investment with PV of Future Cash Flows

$ NPV ($ NPV) IRR > 10% IRR = 10% NPV = 0 IRR < 10%

Investment PV FCF Investment PV FCF Investment PV FCF

IRR: Through trial and error calculates the discount rate at which the PV of the future cash flows is precisely the same as the amount invested. If NPV = 0, then the NPV discount rate is the same as the IRR.

MULTI-PERIOD RETURN MEASURES

RETURN MEASURES: NET PRESENT VALUE & IRR

RETURN MEASURES 0 1 2 3 4 5

RETURN ON TOTAL ASSETS (ROTA) 8.4% Year 1 NOI / TDC

RETURN ON EQUITY (ROE) 9.0% Year 1 CFAT / Equity Invested

CASH FLOW AFTER TAXES $628,183 $656,398 $685,388 $715,170 $745,766 Net Proceeds From Sale $12,907,903 ($7,000,000) $628,183 $656,398 $685,388 $715,170 $13,653,669

AFTER-TAX IRR 20.8%

NET PRESENT VALUE (NPV) $3,594,820 CFAT 10% DISCOUNT RATE

$3,594,820 10.0% 12.5% 15.0% 17.5% 20.0% 22.5% NPV $3,594,820 $2,581,684 $1,690,418 $903,963 $207,951 ($409,761)

SINGLE-PERIOD VS. MULTI-PERIOD RETURNS

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

PROFESSIONAL PRACTICE LESSONS

§ Financial Analysis Represents a Series of Project Decisions

PROFESSIONAL PRACTICE LESSONS

§ Financial Analysis Represents a Series of Project Decisions

§ Don’t Deceive Yourself or Others with Wishful Thinking: Be Realistic

PROFESSIONAL PRACTICE LESSONS

§ Financial Analysis Represents a Series of Project Decisions

§ Don’t Deceive Yourself or Others with Wishful Thinking: Be Realistic

§ Keep Your Eye on the Horizon: Know Where You Are in the Market Cycle

PROFESSIONAL PRACTICE LESSONS

§ Financial Analysis Represents a Series of Project Decisions

§ Don’t Deceive Yourself or Others with Wishful Thinking: Be Realistic

§ Keep Your Eye on the Horizon: Know Where You Are in the Market Cycle

§ Calculation Precision Cannot Substitute for Good Judgment

PROFESSIONAL PRACTICE LESSONS

§ Financial Analysis Represents a Series of Project Decisions

§ Don’t Deceive Yourself or Others with Wishful Thinking: Be Realistic

§ Keep Your Eye on the Horizon: Know Where You Are in the Market Cycle

§ Calculation Precision Cannot Substitute for Good Judgment

§ Balance Financial & Non-Financial Returns

PROFESSIONAL PRACTICE LESSONS

§ Financial Analysis Represents a Series of Project Decisions

§ Don’t Deceive Yourself or Others with Wishful Thinking: Be Realistic

§ Keep Your Eye on the Horizon: Know Where You Are in the Market Cycle

§ Calculation Precision Cannot Substitute for Good Judgment

§ Balance Financial & Non-Financial Returns

§ Finding a Solution is not Necessarily the Same as Calculating an Answer