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Zach,
Happy to report that we’ve finalized the ‘Ground Leases, Valuation, and Impact on Cash Flow’ Advanced Concepts lesson. You can find it here:
Hope that helps!
Spencer
Hey Zach,
Thanks for the question! We release new content as time permits and based on demand; the squeeky wheels tends to get the grease when it comes to adding new content!
Is there a topic in particular you were hoping for that is in the coming soon roadmap?
Spencer
Samuel,
Thanks for the question! I believe you’re referring to a sheet that contains all of the keyboard shortcuts included with the WST Macros add-in. If that’s the case, you can find that reference sheet in PDF here:
https://wallst.training/about/resources.html
Once at the above link, click ‘WST Macros v6.0 (ZIP)’ and a zip file containing both the WST Macros add-in file as well as a file entitled ‘WST Macros Add-In Features.PDF’. That latter file contains a reference to all of the keyboard shortcuts included in the WST Macros add-in.
Hope that helps!
Spencer
Jasmine – I’m glad you got this one figured out! Let us know if you have any other questions.
Spencer
On the Industrial-Summary Income Statement, we are given Reimbursable Operating Expenses and Non-Reimbursable Operating Expenses. When going through the labeling process, do we separate the two? Is it up to our judgement to decide what is reimbursable vs non-reimbursable?
Yes, it is helpful to separate the two, although not always necessary (or even possible). Every detailed statement you see in the industry will differ. Some firms will be more thorough in detailing what is a reimbursable expense, and what is not.
In the case of the Gully Logistics Annual Statement, you’ll note that a line item called ‘Non-Recoverable – Utilities’. I would assume that that is the only non-reimbursable operating expense line item, and that all other line items are reimbursable.
Note that reimbursable does not necessarily mean the amount was actually reimbursed. When a reimbursable operating expense is not actually reimbursed, we call that slippage. Slippage can occur on account of vacancy, poor management, timing of the expense vs reimbursable, and others.
On the Gully Logistics Annual Statement, there is also no vacancy
It’s not atypical for a detailed income statement to not show actual vacancy. We can make an educated guess, based on the detailed income statement, that occupancy increased from 2017 to 2019. We can also make an educated guess that the property was nearly fully occupied.
But both are simply educated guesses, and we would thus need to request a record of actual occupancy by month over those years.
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Who included this statement in my question? I didn’t type that.
That’s odd. The text comes from our Glossary of CRE Terms, and a feature of the website automatically adds a link on Glossary terms to each term’s respective glossary page. It seems that feature automatically added the definition of the word to your post – first time I’ve seen that happen in two years!
Why is he/she not determining their price based off the desired discount rate?
Oftentimes, you already know the “price”. Either that price has already been paid (i.e. analysis post-purchase), or the seller/broker has set a price and you want to understand the return of the investment based on that price.
In this case, you would not determine the price based off the desired discount rate. You already have the price. Instead, you will be calculating what discount rate (i.e. Internal Rate of Return) would have been used to arrive at that price. Or in other words, you would be calculating the return of that investment, given the price.
Where are they getting this $5M number from?
Per the text of the lesson:
“Let’s continue with the example from the previous lectures. Only this time, our investor has heard that to remain competitive he will need to submit an offer of around $5MM. So, he goes to his DCF model and plugs in the $5MM purchase price.”
The investor now is not determining his own price using his desired discount rate, so he needs to figure what the project’s internal rate of return is based on a $5MM purchase price and the projected cash flow.”
Or in other words, the $5 million is the asking (or whisper) price that the seller/broker has set for the property.
What metric is making them comfortable at that price?
They don’t know if they’re comfortable with that price, yet. In order to discover if they’re comfortable with that price, they would calculate the internal rate of return of the investment, at that price, to see if the resulting IRR matches their return expectations.
Again, think of this exercise as the inverse of the Present Value calculation. We use the Present Value formula to calculate the price that we must pay in order to hit some target return (i.e. Discount Rate).
But if the price is pre-defined for us, we use the internal rate of return calculation to calculate the return we would get from an investment, based on paying that pre-defined price. And then we ask ourselves, is that return sufficient (i.e. does it exceed our target return) to offset the risk we’re taking to make that return?
What exactly is the difference between NPV and PV?
Present Value is the lump-sum value today of a string of future cash flows discounted back to today at a specified discount rate. In real estate, the Present Value of a real estate investment is the price that an investor would be willing to pay today for a string of future real estate cash flows so as to achieve a given target return (discount rate).
Net Present Value is the Present Value of investment inflows (i.e. positive cash flows) less the present value of investment outflows (i.e. negative cash flows). In most cases, this means calculating the present value of all future cash flows, and subtracting the amount paid for the investment in time zero.
So, if the Present Value of an investment is $1,000,000 and the investor must pay $750,000 to acquire that investment, the Net Present Value would equal $250,000 ($1,000,000 – $750,000).
What is the difference between discount rate and IRR?
Discount Rate is the rate at which future cash flows are discounted and then added together to create a present value in a discounted cash flow (DCF) model.
IRR is the discount rate at which the Net Present Value of an investment is equal to zero. The Internal Rate of Return is a time value of money metric, representing the true annual rate of earnings on an investment.
In other words, IRR and Discount Rate are actually the same thing. The difference is how they’re used to either calculate the returns of some pre-defined string of cash flows (IRR), or to calculate the value one must pay (i.e. Present Value) to hit some target return (i.e. Discount Rate).
You might check out the Forum Post video in the Library of Supplementary Tools that was created in response to a a discussion on this topic with another user:
Grant – Looks like you’re referencing the wrong row when calculating present value using the NPV() function. You’re referencing row 17 (i.e. the present values by period), rather than row 14.
So rather than =NPV(C22, D17:M17), you would have =NPV(C22, D14:M14).
I’m also confused as to why it’s referred to as PV but the function is NPV.
In terms of why Excel calls the function NPV. The function was created to calculate the Net Present Value of an investment, which is the Present Value of all future cash flows, less the amount paid for the investment in time zero.
Net Present Value = Present Value of Cash Flows – Initial Investment
But the NPV() function also serves to calculate Present Value. This can be done by simply not including the time zero cash flow (i.e. initial investment) in the range.
How much time should I allocate to learn all of the excel information that you guys say is important to know for modeling purposes?
It really depends on your current Excel proficiency. If you’re comfortable in Excel, it won’t be necessary to expend additional energy on purely Excel. As that will come through the case tasks.
But if you’re a novice to Excel, I’d highly recommend taking our Definitive Guide to Excel for Real Estate. That will provide a baseline, and shouldn’t take longer than 4-5 hours to complete.
Do you think that the Agent Candidate program would be sufficient?
If you have the time, I’d recommend completing the entire program. Learning this skill is like learning to play an instrument – the more iteration and practice you put in, the better you become. So while the Agent Candidate program is a nice start, completing the entire program will provide greater depth.
Additionally, you’re lucky that as an M&M employee you have lifetime access (so longer as you’re with M&M) to all of the training material here. There is as much content outside outside of the formal programs as there is in the programs. So for instance, to continue to learn and improve you can also complete the Advanced Concept modules, the various exercises in the Library of Supplementary Tools, all of the cases in the Case Study Library, etc.
My suggestion is to just commit a certain number of hours every week to developing this skill, and over time you’ll become the expert in the room.
I also was wondering if you guys have assumptions on expenses. I know 30-40% of gross income is standard but I wanted to see if you guys had any assumptions. Example: Utilities at X/Unit, R&M at X/Unit etc. I know there are many nuances that will impact assumptions but just wanted to see if you guys had any information regarding expenses assumptions.
This all depends on the property type, market, vintage of the building, etc. While we can offer our two cents on the subject, and are happy to do so, you’ll also do well to ask the experienced folks in your office for rule of thumb underwriting assumptions.
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Splitting this question into its own topic
Hi Sherry – happy to help clarify here.
To calculate loan payment and loan payoff, I’ll first refer you for review to this lesson.
Loan Payoff
Assuming the loan uses a 30/360 interest calculation method and has a fixed interest rate, which is common with commercial mortgages, calculating the loan payoff in Excel is quite easy:
1. Find the fixed annual interest rate
2. Find the monthly amortizing payment (i.e. principal + interest payment)
3. Determine how many months of amortization are remaining
So for instance, imagine a loan was originated exactly ten years ago. The loan has a fixed interest rate of 5.0%, has a principal and interest (i.e. amortizing) payment of 53,682.16, and the original loan assumed 360 month amortization.
To calculate the payoff of this loan today, we would use the following formula:
Remaining Loan Balance (e.g. Loan Payoff) = PV([Annual Interest Rate]/12,[Amortization Remaining],-[Principal + Interest Payment])
Or in other words:
1. Annual interest rate = 5.0%
2. Monthly amortizing payment = 53,682.16
3. Months of amortization remaining = 360 months minus 120 months (i.e. 10 years have passed) = 240 months
Remaining Loan Balance (e.g. Loan Payoff) = PV(5.0%/12, 360-120, -53,682.16)
Let me know if I can answer any other questions for you.
Spencer
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Grant – thanks for the question.
Most Accelerator members spend 3-5 hours per course. So if you were to commit 5 hours per week, you could expect to complete the ‘Agent Candidate’ program in approximately 6 weeks, the MMCC Candidate program in 8 weeks, and the entire Accelerator program in 12 weeks.
Spencer
Charles – really glad you figured it out! And don’t feel bad, this is what the forum is for. Oftentimes, the issue is right in front of us and it’s helpful to have another set of eyes to take a look.
Let me know if I can answer anything else.
Spencer
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Hi Sherry – thanks for the inquiry!
I believe you’re referring to question #4: “In the Investment Cash Flow section of your analysis, what is the net market value?”
The correct answer is ~$29 million.
You’re correct that the Net Reversion Value (what you’d expect to receive upon selling the property 10 years from now) is ~$33 million. But the question refers to the Net Market Value in the Investment Cash Flow section, which is the time zero cash flow in your analysis.
Hope that helps!
Spencer
Hey Brian – great question on a concept that often trips people up. Let me first quote a portion of lecture 2.4 of this course that addresses this concept:
“For purposes of performing hold/sell analysis of an owned asset, the asset’s current market value less selling costs is entered as a sole Investment Cash Flow in time zero of the analysis.
“Now why use market value rather than actual cost basis you might ask? In the case of Lakefront Industrial I, we’re assessing two possible scenarios. Scenario one, we hold the asset for an additional 10 years. Scenario two, we sell the asset and use the proceeds to acquire a different property.
“So what’s the cost of choosing scenario one over scenario two? The cost is not our current basis, but rather is what we miss out on (i.e. the opportunity cost) by not going with scenario two. Or in other words, the net proceeds we would have taken in from selling the property had we gone with scenario two.”
Now to your question: why do you have the Purchase Price as a positive value, and Closing Costs as a negative value?
In hold/sell analysis, choosing the ‘hold’ scenario is making an investment. The investment we make is that we forego the net proceeds we’d earn from selling the property (i.e. the opportunity cost), and trade that for some period of operating cash flows plus a reversion cash flow at the end of the analysis. Thus the investment we make (i.e. opportunity cost) is represented by the market value of the property (less selling costs) in time zero of the hold asset’s DCF.
Happy to answer follow-up questions!
Spencer
