UGBA 180 Lecture Notes - Lecture 23: Debt Service Coverage Ratio, Capitalization Rate, Dividend Yield
22 May 2018
School
Course
Professor
Final Reie April 6, 8
• Final
o Cumulative, weighted towards 2nd half of the course
o Same format as the midterm, but longer
o No cheat sheets, only your HP-12C
• Investment analysis
o Market analysis
▪ Supply and demand analysis
▪ Cyclicality of real estate market to forecast what the future may look like
o Monument Office Building
▪ Step 1: project cash flows
• Rental income
• Expense reimbursements that you may receive from tenants
• NOI = revenue – expenses
▪ Step 2: estimate sales price
• Property value appreciation
• Terminal cap rate the first year you sell the building
▪ Step 3:
• Calculate IRR on initial equity investment
• NPV – tells you if the building is worth buying or not
▪ Step 4: debt financing
• BTCF = NOI – DS
• Equity dividend yield = BTCF/equity
• Det overage ratio = NOI1/det servie (easure of riskiess of your loa fro the leder’s
perspective)
• BTIRR
▪ Step 5: taxes
• Mortgage interest deduction
• Depreciation allowance
• Capital gains tax
• You can now estimate ATIRR
o Financial leverage
▪ Debt magnifies investment returns
▪ Positive leverage: higher debt means higher returns
▪ Unleveraged return > interest rate on debt
▪ Before tax and after tax
o Practical limits to increasing debt
▪ Increase risk for the lender (DCR tends to go down; lender will increase your interest rate if DCR is
too low)
▪ Increase your own risk
o Break even interest rate
o Alternative loan structures
• Risk analysis
o Types of risk:
▪ Sensitivity analysis
▪ Partitioning the IRR
o Risk-return tradeoff – higher returns come at the expense of higher risk
o Westgate Shopping Center
o Risk and leverage relationship: emphasized that debt magnifies your gain and your losses
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