Land Development – Financial Institutions and Analysis

Real Estate Development
  • What Are Capital Markets and How do They Work?

Real Estate competes with other investments on a risk/return basis.

Debt ranges from 0-100%, and normally 50-80%; equity ranges from 20-50%.

Debt is repaid from project proceeds before equity.

  • Four Types of Real Estate Investments

Public Private
Equity Equity REIT Individuals
Debt Mortgage REIT Banks

  • Financial Productivity (NOI)

Gross Leasable Area (GLA) = Gross Floor Area for tenant occupancy and exclusive use

Potential Gross Income = GLA x annual Rent

Effective Gross Income (EGI) = Potential Gross Income x Occupancy Rate (or minus Vacancy Allowance)

Typical Operating Expenses:

Utilities, Janitorial, Maintenance, Security, Professional fees, Taxes, Insurance, Management, Leasing, Cost of new tenants.

Net Operating Income (NOI) = EGI – Operating Expenses

  • Capitalization Rate

Cap Rate = NOI / Price

Cap rates are set by the market

  • Investment Quality

Rate of Return on Total Capital = (Annual NOI / Property Cost) X 100

Return on Equity or Cash on Cash Return = (Before Tax Cash Flow / Equity) X 100

*BTCF = NOI – Debt Service

  • How to Improve the Value or Investment Returns of a Property Investment?

1. Reduce cost to develop

2. Get lower interest rate

3. Increase NOI

4. Lower risk to future income, thus discount rate

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