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Investment and Financial Analysis for International Real Estate

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Title: Investment and Financial Analysis for International Real Estate


1
Investment and Financial Analysis for
International Real Estate
2
Course Overview
  • Case 1 Mr. Chen
  • Case 2 Dr. Garcia
  • Case 3 EuroVest
  • HP-10BII Calculator
  • Exam

3
Chapter 1
  • Preparing
  • for an
  • International Transaction

4
Objectives
  • Recall fundamental terminology
  • Discuss strengthening and weakening currencies
  • Review globalization, capital flow and currency
    conversions
  • Identify six steps in preparing for an
    international transaction

5
Globalization
  • Globalization is the movement by countries,
    companies, organizations and people toward a
    single market environment.

6
Real Estate
  • Investors examine and invest in markets that best
    match the risk and return objectives of their
    portfolios.

7
Capital Flow
  • Capital flow is a complex interplay of foreign
    exchange instruments that move currency, assets,
    credits and debt around the world almost
    instantaneously.

8
Currency
  • Investors will buy real estate because of the
    favorable trend of the investors currency
    against a foreign currency.

9
Country Assessment Model
  • Cultural Influences
  • Relationships
  • Historical influences
  • Negotiating behavior
  • Religion
  • Conducting business
  • Banks and financial institutions with
    international experience
  • International transactions similar to domestic
    ones

10
Preparing for an International Transaction
  • Six Steps
  • Develop client profile
  • Make necessary conversions
  • Determine investment objectives
  • Determine purchasing motivations
  • Assemble a team
  • What does your market have to offer?

11
Chapter 2
  • Legal Issues

12
Objectives
  • Discuss types of residency status
  • Discuss ownership options
  • Review basic income tax laws for non-resident
    aliens

13
Residency Status
14
Residency Definitions
15
Ownership Entities
  • Direct
  • Indirect
  • Through USA entity
  • Through foreign entity

These decisions should be made by the client
after consultation with a legal professional.
16
Location of Income Source
  • Competent tax counsel is needed to determine how
    the latest tax laws will treat the investor.

17
Tax Liabilities
  • Income Tax
  • USA-sourced income subject to USA tax
  • Nonresident alien and USA taxpayer treated the
    same
  • Passive Income
  • Rents, dividends and interest
  • Subject to 30 withholding tax
  • Based on gross income
  • No deductions allowed

18
Gains Tax Liability
  • FIRPTA
  • Applies to nonresident alien individuals and
    corporations that buy or sell USA real estate
  • Designed to equalize the treatment of domestic
    and foreign investors

19
DEFRA
  • Requires withholding/reporting/transmitting
  • 10 of amount realized to IRS
  • within 10 days of transfer.
  • Real estate agents may be liable

Residential, non-business property, with a value
up to 300,000 is exempt IF property has been
used as a primary residence by seller and will be
used as a primary residence by buyer.
20
Transfer Tax Liability
  • USA imposes tax on gifts and bequests
  • TAMRA established tax rate on foreign-owned
    estates
  • Apply only to USA-located assets of
    USA-domiciled, nonresident, aliens
  • No USA gift tax on share transfer of USA
    companies
  • Company assets must not exceed a certain percent
    of real estate
  • Joint ownership may lower estate tax liability

21
Chapter 3
  • HP
  • 10B II
  • Calculator

22
HP 10BII
23
Row 1 Primary Keys Enter data left to right
24
All keys have 2 functions
Primary function on top of key in WHITE
Secondary function on bottom of key in GOLD
GOLD KEY Shift key activates second function
25
POWER Turn ON--Press
0.00
ON OFF
Turn OFF Press
ON OFF
ON OFF
26
Display
0.000000
  • Change numerals to right of decimal
  • Can go out 9 places
  • Internal calculations continue to 12
  • Change places by
  • GK, DISP, desired number of places
  • 6

DISP
27
Clearing Data
  • Clears last digit

Clears entire number
Clears all memory
Clears all memory resets calculator
28
Sign Convention
  • Income ()
  • Expenses, losses, payments (-)
  • Must remain constant
  • PV, PMT and FV adhere to sign convention
  • To change signs, Press

29
Begin and End Functions
  • Calculates from beginning or end of month/year
  • Rent payments at beginning of month
  • Mortgage interest paid at end of month
  • GK, BEG/END

30
European Mode Function
  • In Europe, the comma used in place of period
  • 1.000.000,00
  • 1,000,000.00
  • To change, press

31
Constant Key
874.18
900.40
848.72
824
  • Saves entering same numbers
  • Example Rent of 800 increases 3/year.
  • Enter
  • 800, , 3, , K, Yr. 2 rent,
  • Yr. 3 rent, Yr. 4
    rent, Yr. 5 rent

K
32
Chapter 4
  • Case Study Mr. Chen
  • An Inbound Residential Transaction

33
Objectives
  • Review 6-Step International Transaction
    Preparation Process
  • Apply 6-Step process to Mr. Chen
  • Complete necessary calculations

34
Step 1 Develop Client Profile
35
What We Know
  • Name Mr. Chen
  • Nationality Taiwanese
  • Occupation Securities Trader
  • Employer Tiger Securities Company
  • Home Phone
  • Cell Phone
  • Fax

36
What We Know
  • Mailing address
  • Residency Status
  • Family Married with 3 children 6, 9, 15
  • Requirements
  • 4-bdrm, den, study on one floor
  • 90-95 pings of living space
  • 30 minutes to work
  • Price range Up to NT20,000,000
  • Knowledge of market
  • Location and type of funds

37
What We Know
  • Financing Yes at no more than 7.5 interest
  • Client cash involvement 20 down
  • Objectives and Motivations To be discussed
  • Cultural Considerations Other requirements

38
Step 2 Make Conversions
39
Convert Area Pings to SF
  • 1 ping 36 square feet conversion factor
  • Multiply pings to be converted X conversion
    factor 36
  • 90 pings X 36 _______ square feet
  • 95 pings X 36 _______ square feet

3240
3420
40
Convert Square Feet to Pings
  • 1 sq.ft. 0.02778 pings 1 36
  • Multiply sq.ft. to be converted X conversion
    factor 0.02778
  • 3240 sq.ft. X 0.02778 _______ pings
  • 3420 sq.ft. X 0.02778 _______ pings

90
95
41
Convert Currency
  • Convert NT20,000,000 to US
  • Formula NT X US Conversion Factor
  • Todays exchange rate US1 NT25 NT1 US1
    25 or US0.04 (4 cents)
  • Exchange rate conversion factor
  • Multiply NT by exchange rate
  • NT20,000,000 X US0.04 US800,000
  • Mr. Chen will spend up to US800,000.

42
Ideal Property
  • Price US750,000
  • Using same exchange rate, what will the price be
    in NT?
  • US1 NT1 X 25
  • Formula
  • Base currency X conversion factor
  • US750,000 X 25 NT18,750,000

43
Step 3 Client Objectives
44
Client Objectives
  • May not be revealed
  • Client may be knowledgeable about investment
    analysis
  • Do your homework
  • Be sure the client does not know more about the
    market than you!

45
Step 4 Client Motivations
46
Motivations
  • Vary greatly
  • Some may never be revealed
  • Cultural aspects play large role
  • More family coming?
  • Common language with neighbors?
  • Solitary or group decision to buy?
  • What are their agent expectations?

47
Step 5 Assemble Your Team
48
Who Do You Need and Why?
49
Step 6 What Does Your Market Have to Offer?
50
Your Market
  • Prepare market information
  • Include local newspapers
  • Whats happening?
  • Chamber of Commerce
  • Is property appreciating?
  • Are businesses coming to your area?

51
Mr. Chen Arrives Today
  • Mr. Chen selects 1 of 3 homes shown
  • Price US750,000
  • Size 3350 square feet
  • Reason selected
  • Proximity to work and schools
  • Potential rental income
  • Appreciation potential

52
Before Making an Offer…
  • Mr. Chen would like an estimate of his proceeds
    if he sells the house in three years.

53
What You Know
  • House reasonably priced at US750,000.
  • Comparable sales 3 years ago were US634,300.
  • First calculation is for annual rate of
    appreciation

54
Calculations
  • 1, , P/YR
  • Press 3, N
  • Enter 634,300, Press /-, Press PV
  • Enter 750,000
  • Press FV
  • Press I/YR key
  • Annual appreciation rate is _________

5.74
55
Projected Sales Price
  • Enter 3, N (Holding period)
  • Enter 5.74, I/YR
  • Enter 750,000 (present value)
  • Press /- (Amount paid out)
  • Press PV for Present value
  • Solve for future value by pressing FV
  • Answer 886,700 (rounded)

56
Future Net Sales Proceeds After Taxes
  • Enter projected sales price 886,700
  • Calculate costs of sale at 7.5
  • 886,700 X 7.5 66,502
  • Calculate original loan amount
  • 750,000 X 80 600,000
  • Calculate Remaining Loan Balance
  • Interest Reduction Method
  • Traditional Method

57
Interest Reduction Method
  • 1, 2, , P/YR
  • Enter 3, 0, xP/YR (Term of loan)
  • Enter 7.5, I/YR (Annual interest)
  • Enter 600,000 (loan amount)
  • Press PV (Present value)
  • Press 0, FV (Full amortization)
  • Press PMT (Monthly payment)
  • Press 3 to reset loan term, , xP/YR
  • Press FV for remaining loan balance after 3 years

582,085.49
58
Tax Liability
  • Mr. Chen tells us he will be living in the home
    for at least 2 years.
  • Budget Act of 1997 relieves him of gains tax.

59
Final Calculations
  • Projected Sales Price 886,700
  • (-) Costs of Sale 66,502
  • (-) Loan balance 582,085
  • (-) Tax Liability -0-
  • () Net proceeds after taxes 238,113

60
Effect of Exchange Rates
  • When the exchange rate decreases, the currency
    has __________________
  • When the exchange rate increases, the currency
    has __________________

strengthened
weakened
61
Key Point Review
  • Team of experts critical to success of
    international transactions.
  • Present information in terms client can
    understand
  • Always advise legal counsel for client
  • Investment return depends on decisions before
    acquisition
  • Residency status extremely important

62
Chapter 5
  • Finance and Capital Markets

63
Objectives
  • Calculate investing financial concepts
  • Apply concepts to case study
  • Identify effects of exchange rate fluctuations on
    a transaction
  • Obtain skills needed for basic financial analysis

64
Investment Elements
YIELD
SAFETY
CONTROL
LEVERAGE
65
Time Value of Money
  • Risk
  • Purchasing power
  • Opportunity costs
  • Compounding
  • Discounting

66
Key Components
  • Compounding--Determining the future value of an
    investment made today
  • Single or series of payments
  • Interest earned is reinvested
  • Discountingdetermining the present value of
    money received in the future
  • Single or series of payments
  • Increased time to maturity gives greater
    discounting

67
Measuring Investment Performance
68
IRV Formula
  • Stands for Income, Rate, Value
  • Measures most forms of Yield
  • If you have two numbers, solve for the 3rd
  • Divide bottom numbers into the top
  • Multiply two bottom numbers

I
R
V
69
Capitalization Rate
NOI
Total Value
Cap Rate
70
Cash-on-Cash (ConC)
Cash Received
Rate of Return
Invested Cash
71
Key Point Review
  • Four elements of investment income property are
  • Yield
  • Safety
  • Leverage
  • Control
  • Time Value of Money
  • Compounding
  • Discounting

72
Key Point Review
  • IRV Formula
  • Capitalization rate
  • Cash-on-cash return

73
Dr. Garcia Inbound Commercial Transaction
Chapter 6
74
Objectives
  • Apply 6-Step preparation process to Dr. Garcias
    case
  • Calculate 5-year rent projections
  • Calculate cap rate for each of the 5 years
  • Measure yield using the IRR

75
Dr. Garcia Referral
  • Step 1 Client Profile
  • Dr. Garcia
  • Mexican national
  • Investor/businessman
  • Non-resident status
  • Various family members manage some of his
    businesses
  • Safe real estate in Southwestern USA
  • US6-8 million

76
Step 2 Conversions
  • Does not require any area or currency conversions
    at this time

77
Step 3 Client Objectives
  • Invest US6-8 million
  • Achieve 12 before-tax cash-on-cash yield on 100
    equity investment
  • Obtain 12 before-tax cash-on-cash yield with
    financing
  • Realize 10 after-tax yield if sold after 5 years
  • Title through single-asset domestic corporation
  • Finance 50 of purchase price

78
Step 4 Client Motivations
  • Spread risk by diversifying
  • Safe harbor for part of family capital
  • Minimize risk
  • Minimize management requirements

79
Step 5 Assemble a Team
  • What team members might you need for Dr. Garcia?

80
Step 6 Local Market Investment Opportunities
  • Group of 4 steak houses
  • Build-to-suit office building leased to a
    start-up software firm
  • Warehouse and distribution center
  • Dr. Garcia decides to investigate the warehouse

81
Question 1
  • Dr. Garcia asks for a five-year projection of
    rents and the cap rate for each year.
  • What you know
  • 1st year rent is 59,250 per month
  • Property is net leased
  • Where to begin
  • Organize data to calculate NOI

82
Net Operating Income
Gross potential rental income
(-) vacancy and credit losses
() Effective gross income
() other income
() Gross operating income
(-) operating expenses
() Net operating income (NOI)
83
Determine Property NOI NOI Rate x Purchase Price
NOI
711,000
Purchase Price
Rate
7,900,000
.09
X
The warehouse must generate 711,000/year rent to
meet Dr. Garcias 9 cap rate requirement on his
7,900,000 investment
84
Annual Rent Increases Formula Annual rent ()
increase () Rent for year 2
  • Enter Annual Rental Income 711,000.00
  • Press , 3 , , K , (Yr. 2 rent)
    732,330.00
  • (Yr.
    3 rent) 754,299.90
  • (Yr.
    4 rent) 776,928.90
  • (Yr.
    5 rent) 800,236.76
  • (Yr.
    6 rent) 824,243.87

85
Calculate Annual Cap Rate Cap rate Annual rent
? Original price
Income Year 2 (Rent)
732,330
?
7,900,000
9.27
Value of property (original price)
Cap Rate
86
5 Year Cap Rate History
Year Rent ? Property Value () Cap Rate
1 711,000 7,900,000 9.00
2 732,330 7,900,000 9.27
3 754,300 7,900,000
9.54
4 776,929 7,900,000
9.83
5 800,237 7,900,000
10.13
87
Question 2
  • Dr. Garcia wants to know
  • Can he finance 50 of purchase price
  • What will his payments be
  • What an analysis of his yield will be with
    financing

88
What You Find
  • 50 mortgage
  • 7.5 interest
  • 1.5 points
  • 15-year, fixed-rate loan
  • Loan amount of 3,950,000

89
Analyzing the Financing
Mortgage calculations involve top row keys
Number of payments or term in years
Annual interest rate
Present value or initial cash flow
Periodic payment
Future value
90
Calculate Monthly Payments
36,617
  • Press , C ALL
  • Enter 1, 2, , p/yr
  • Enter 1, 5, , xP/YR
  • Enter 7.5, I/YR
  • Enter 3,950,000, /- PV
  • Enter 0, FV
  • Press PMT
  • Answer

91
Annual Debt Service (ADS)
  • Formula Monthly payment X 12 ADS
  • 36.617 X 12 () _____________

439,404
92
Cash Flow Before Taxes Cash-on-Cash Yield
(CFBT-ADS)
  • Formula CFBT Original investment (including
    points) ConC Yield
  • Calculate Dollar Cost of Points
  • Formula Loan Amount X Cost of Points Dollar
    cost of points
  • 3,950,000 X .015 ___________

59,250
93
Calculate Original Amount Invested
  • Formula Initial investment Cost of Points
    Total initial investment
  • 3,950,000 59,250 _____________

4,009,250
94
Using IRV to Calculate ConC
Divide CFBT by Value of original investment
Income before taxes (CFBT)
Rate of return ConC
Value of Investment
95
Cash-on-Cash (ConC) Yield
6.77
7.31
7.85
8.42
9.0
96
Dr. Garcias Response
  • One objective was to obtain a 12 before-tax
    cash-on-cash yield with financing.
  • Does this investment meet that objective?
  • What off-setting points can you present?

97
Question 3
  • Dr. Garcia requests
  • 5-year projection of rents
  • Projected sales price
  • Selling after 5th year

98
What You Know
  • Use 6th year income figures
  • Determine sales price using 9 cap rate
  • First 50,000 of income taxed at 15
  • Balance taxed at 25
  • Depreciated over 39 years
  • Land is worth 20 of total purchase price

99
Net Sales Proceeds Before Tax
Before Tax After Sale Proceeds
Net Sales Proceeds Before Tax
Cash Flow Before Tax


100
Net Sales Proceeds Before Tax
  • Formula
  • Sales price
  • (Yr. 6 NOI 9 Cap rate projected price)
  • (-) Mortgage balance
  • (-) Costs of sale
  • () Net sales proceeds before taxes

101
Remaining Loan Balance
36,617
  • , C ALL
  • 1, 2, , P/YR
  • 1, 5, , xP/YR
  • 7.5, I/YR
  • 3,950,000 PV
  • 0, FV
  • PMT
  • Answer

PMT P/YR
PV
I/YR
FV
xP/YR
GK
C ALL
102
Interest, Principal, Balance
3,084,789
  • , AMORT
  • Display Per 1-12
  • displays principal
  • displays interest
  • displays balance
  • , AMORT
  • Display Per 13-24
  • Continue thru Yr. 6
  • Final balance

AMORT
GK

103
Dr. Garcias Principal, Interest Loan Balance
EOY 1 2 3 4 5 6
Principal 148,179 159,682 172,079 185,438 19
9,834 215,347
Interest 291,225 279,722 267,325 253,966 239,570
224,057
Remaining Loan Balance 3,801,821 3,642,139 3,470,
060 3,284,622 3,084,789 2,869,441
104
Costs of Sale
641,079
  • Sales price of 9,158,267
  • X 7 selling costs


105
Net Sales Proceeds Before Tax
5,432,399
  • Sales price
  • (-) Mortgage balance EOY 5
  • (-) Costs of sale
  • () Net sales proceeds before taxes

106
Dr. Garcias Annual IRR
  • n
  • 0 (4,009,250) Down Payment
    Points
  • 1 271,596 Cash flow EOY
    1
  • 2 292,926 EOY 2
  • 3 314,896 EOY 3
  • 4 337,525 EOY 4
  • 5 360,833 EOY 5
    5,432,399

  • (sales proceeds)

107
Calculate Annual IRR
13.19
  • , C ALL
  • 4,009,250, /- , CFj
  • 271,596, CFj
  • 292,926, CFj
  • 314,896, CFj
  • 337,525, CFj
  • 360,833, 5,432,399 CFj
  • , IRR/YR
  • Answer

IRR/YR
CFj
/-
C ALL

108
Key Point Review
  • 6-Step Preparation Process helps organize client
    data
  • Purchasing decisions are based on a variety of
    financial calculations
  • The international real estate agent must be
    prepared to
  • Apply necessary calculations
  • Satisfactorily explain the meaning of each
  • The IRR is a tool for measuring yield

109
Chapter 7
  • The Impact of Taxes on Investments

110
Objectives
  • Calculate the potential effect taxes have on a
    real estate investors return.
  • Recognize the need to develop a team of legal and
    tax experts.

111
Effect of Taxes
  • Profound effect on investment return
  • Tax depends on several variables
  • Tax laws change frequently
  • Every investment is unique
  • Tax treaties may influence return
  • Consult tax and legal experts

112
Holding Period Information
  • Estimated profit after five years is 5,432,399
  • Pre-tax cash flow IRR would be 13.19

113
Depreciable Basis
  • Land is not depreciable
  • Land assumed to be 20 of total property value
  • Deduct land cost from purchase price
  • Improvements are depreciable

114
Calculating Depreciable Basis
  • 7,900,000 X 20 1,580,000 (land)
  • 7,900,000 X 80 6,320,000 (improvements)

115
Straight-line Depreciation Cost Recovery
  • Formula Divide 100 by number of depreciable
    years
  • Assume a 39-year straight-line depreciation
  • 100 39 2.564 (depreciation/year)
  • Dr. Garcias annual depreciation
  • 6,320,000 X .02564

162,044.80
116
Mid-Month Convention
  • Formula
  • Divide months of partial year by full year.
  • Multiply answer by 2.564 (depreciation factor)
  • 11.5 12 X 2.564 _______________
  • (partial year
    depreciation factor)
  • 6,320,000 X .02457 ________________

  • (Dr. Garcias 1st year depreciation)

2.457
155,282.40
117
Deduction of Mortgage Points
  • Pro-rata annual portion is deductible
  • Points amortized over life of loan
  • Unamortized points expensed at time of sale
  • Formula Loan amount X cost of points Total
    cost of points
  • 3,950,000 X .015 ________________
  • 59,250 15 _____________/year

59,250
3,950
118
Calculating Taxable Income
286,613
320,980
356,968
394,672
119
Calculating Total Tax
59,153
66,653
67,745
75,245
76,742
84,242
86,168
93,668
120
Cash-on-Cash Yield after Taxes
121
Calculating Capital Gains
122
Calculating Adjusted Basis
  • Formula Purchase Price () Capital Improvements
    (-) Cost Recovery Taken () Adjusted Basis
  • Purchase Price 7,900,000
  • () Capital Improvements 0
  • (-) Cost Recovery Taken 803,462 ()
    Adjusted Basis ___________

7,096,538
123
Adjusted Basis
  • You can now calculate
  • Capital gains
  • Tax liability
  • Sales proceeds after taxes
  • Yield on CFAT

124
Calculating Capital Gains
7,096,538
1,420,651
355,163
125
Sales Proceeds After Taxes
5,077,237
126
IRR Annual Yield of ATCF
  • n
  • 0 (4,009,250) /- CFj
  • 1 211,460 CFj
  • 2 226,273 CFj
  • 3 239,651 CFj
  • 4 253,283 CFj
  • 5 267,163 5,077,237 CFj, GK,
    IRR

10.25
127
IRR Annual Yields
  • Before Tax IRR 13.19
  • After Tax IRR 10.25

128
Key Point Review
  • Pre-Tax and After-Tax investment yield
    calculations influence purchasing decisions.
  • Know steps in setting up and completing necessary
    calculations
  • Capital gains, tax liability, sales proceeds
    after taxes and yield on CFAT calculated from
    adjusted basis.
  • T-Bar is useful tool for calculating yield.

129
Chapter 8
  • EuroVest Case Study
  • An Outbound Commercial Transaction

130
Objectives
  • Analyze potential before-tax and cash-on-cash
    return
  • Project sales proceeds
  • Estimate the internal rate of return (IRR)
  • Evaluate currency fluctuations on IRR
  • Utilize APOD and international cash flow analysis
    worksheet to organize data

131
Client Profile
  • Name EuroVest
  • Nationality Brazilian
  • Business Pension fund investing in net-leased
    European real estate
  • Objectives Provide capital and financing
    expertise to creditworthy USA firms
  • Price 30,000,000 BRL (minimum)

132
Client Objectives
  • Investment decisions based on
  • Economic feasibility of individual real estate
    project
  • Confidence in the business
  • Creditworthiness of the tenant
  • Stability of the target market
  • Suitability of the target location to the
    tenants business

133
Property Profile
  • Name Dos Cantos
  • Type High tech office/warehouse
  • Location Carretera de Burgos, 98 Seville,
    Andalucia Spain
  • Bldg. Size 10,000 square meters
  • Site Size 2 hectares (20,000 m²)

134
Tenant Data
  • Name OptiGro
  • Location Chicago, IL, USA
  • Requirements 100,000 square feet
  • Budget 16 per sq. ft. per year net

135
Revised Client Objectives
  • 1st year minimum ConC yield of 11
  • 18 minimum IRR on 5-year-hold
  • An option to sell at end of 5th year

136
Estimating Return
  • Determine how much EuroVest will pay for Dos
    Cantos based on 11 ConC first year return
  • Calculate yearly yield of 5 year holding period
  • Determine IRR if Dos Cantos sold after 5 years
  • See if numbers meet clients target return

137
Convert m² to Square Feet
  • Conversion Factor 1m² 10.7639 sq. ft.
  • Formula m² X 10.7639
  • 10,000 m² X 10.7639 _____________ sf.

107,639
138
Calculating Rent
  • Formula
  • Sq. Ft. X Rent/sq. ft. Total rent
  • _________ sq.ft. X 16 __________
    Total Rent

1,722,224
107,639
139
Convert US to Euros
  • Formula USD X Conversion Factor
  • Assume US1 1.25
  • ___________ USD (rent) X 1.25
  • _____________ (rent in euros)

1,722,224
2,152,780
140
Assumptions
  • Five year holding period
  • 2 rent escalation
  • 11 cap rate at sale
  • No vacancy
  • Initial investment total acquisition costs
  • 0 expenses

141
Currency Assumptions
Which currency is strongest?
142
Five-Year Cash-on-Cash Returns
In EUR
YR1 YR2 YR3
YR4 YR5 YR6
Gross Rental Income
2,239,752
2,284,547
2,195,836
2,376,843
2,152,780
2,330,238
X 1.02
X 1.02
X 1.02
X 1.02
X 1.02
Net Operating Expenses
0
Net Operating Income
2,152,780
Annual Debt Service
0
Cash Flow Before Taxes
2,239,752
2,284,547
2,330,238
2,376,843
2,152,780
2,195,836
143
Five-Year Cash-on-Cash Returns
In EUR
YR1 YR2 YR3
YR4 YR5 YR6
Net Operating Income
2,376,843
2,239,752
2,284,547
2,330,238
2,152,780
2,195,836
Interest
0
Cost Recovery
0
Taxable Income
0
X Tax Rate Liability
0
144
Five-Year Cash-on-Cash Returns
In EUR
YR1 YR2 YR3
YR4 YR5 YR6
Cash Flow Before Taxes
2,376,843
2,152,780
2,239,752
2,284,547
2,330,238
2,195,836
Minus (-) Tax Liability
0
0
0
0
0
0
Cash Flow After Taxes
2,152,780
2,195,836
2,239,752
2,284,547
2,330,238
2,376,843
Divided by Investment Amount
19,570,727
19,570,727
19,570,727
19,570,727
19,570,727
19,570,727
Cash-on-cash Return
11.67
11.00
11.22
11.91
12.14
11.44
145
Five Year Cash-on-Cash Returns
In BRL
YR1 YR2 YR3
YR4 YR5 YR6
Gross Rental Income
5,877,089
5,994,631
6,114,523
6,236,814
6,361,550
6,488,781
X 1.02
X 1.02
X 1.02
X 1.02
X 1.02
Net Operating Expenses
0
Net Operating Income
5,877,089
Annual Debt Service
0
Cash Flow Before Taxes
5,877,089
5,994,631
6,114,523
6,236,814
6,361,550
6,488,781
146
Five-Year Cash-on-Cash Returns
In BRL
YR1 YR2 YR3
YR4 YR5 YR6
Net Operating Income
5,877,089
5,994,631
6,114,523
6,236,814
6,361,550
6,488,781
Interest
0
Cost Recovery
0
Taxable Income
0
X Tax Rate Liability
0
147
Five-Year Cash-on-Cash Returns
In BRL
YR1 YR2 YR3
YR4 YR5 YR6
Cash flow before taxes
5,994,631
6,114,523
6,236,814
6,488,781
5,877,089
6,361,255
Minus (-) tax liability
0
0
0
0
0
0
Cash flow after taxes
5,877,089
6,361,255
5,994,631
6,114,523
6,236,814
6,488,781
Divided by investment amount
53,428,085
53,428,085
53,428,085
53,428,085
53,428,085
53,428,085
Cash-on-cash return
11.00
11.22
11.44
11.67
11.91
12.14
148
Projected Sales Price
Yr. 6 NOI
2,376,843 (euros)
21,607,664 (euros)
11
Sales Price
Cap Rate
149
B. Calculation of Gain and Tax
Sales price 21,607,664 (-) selling costs
(7) 1,512,536 (-) adjusted basis 19,570,727
() Taxable gain 524,400 (x) Rate
0 () Capital gains tax 0
150
Calculation of Sales Proceeds After Tax
Sales price 21,607,664 (-) selling costs
1,512,536 (-) loan balance
0 () Sales proceeds before tax
20,095,128 (-) Capital gains tax
0 () Net sales proceeds
after tax 20,095,128
151
IRR Annual Yield CalculationBefore Tax
n

0 1 2 3 4 5
(19,570,727) /- CFj
2,152,780 Cash flow EOY 1 CFj
2,195,836 Cash flow EOY 2 CFj
2,239,752 Cash flow EOY 3 CFj
2,284,547 Cash flow EOY 4 CFj
2,330,238 Cash flow EOY 5
20,095,128 (net sales proceeds after tax) CFj
152
IRR
153
Sales Proceeds Before Tax
  • Sale Price 21,607,664
  • (-) Cost of sale 1,512,536
  • (-) Loan Balance -0-
  • Sales proceeds before tax 20,095,128

154
Did Investment Meet Objectives?
  • EOY 1 minimum ConC yield of 11?
  • Minimum 11 IRR on 5 year hold?

155
IRR Annual Yield Calculation
IRR 11.82
IRR 11.82
EUR n 0 (19,570,727) /-, CFj 1
2,152,780 CFj 2 2,195,836 CFj 3
2,239,752 CFj 4 2,284,547 CFj 5
2,330,238 20,095,128

BRL (53,428,085) /-, CFj 5,877,089
CFj 5,994,631 CFj 6,114,523 CFj
6,236.814 CFj 6,361,550
54,859,695
156
Currency Values
157
Currency Values
158
Dealing with Two Currencies
IRR 17.37
IRR 11.82
EUR n 0 (19,570,727)(/-) 1
2,152,780 2 2,195,836 3
2,239.752 4 2,284,547 5
2,330,238 20,095,128
BRL (53,428,085)(/-) 6,156,951
6,587,508 7,077,616 7,561,850
8,109,228 69,931,045
159
Currency Value
160
Currency Values
161
Dealing with Two Currencies
IRR 6.20
IRR 11.82
EUR n 0 (19,570,727) /- 1
2,152,780 2 2,195,836 3
2,239.752 4 2,284,547 5
2,330,238 20,095,128
BRL (53,428,085) /- 5,575,700
5,401,754 5,241,019 5,071,694
4,916,802 42,400,720
162
Key Point Review
  • Exchange rates have a significant effect on
    investment objectives.
  • Real estate professionals must know how to
    organize and calculate certain financial
    projections so they may provide clients with
    accurate assessments of potential return.

163
Investment and Financial Analysis for
International Real Estate
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