Instructions for Four Assignments FIN 6242-4242

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Stony Brook University *

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4003

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Finance

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Feb 20, 2024

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Real Estate Valuation and Investment FIN 6242/4242 Assignments Introduction: There are four assignments in this class and they will build upon each other. The first assignment is especially important since you will need to choose a property that you will continue to work on and analyze in the subsequent assignments. You will not be allowed to switch properties after submitting the first assignment. Hence choose carefully and spend time doing “due diligence” in terms of data availability. It cannot be a vacant plot of land. Each assignment should consist of 3-4 typed pages, which might include maps and a photo (Assignment One), graphs (Assignment Two) and excel spreadsheet data analysis (Assignments 3 and 4). Make sure that you provide detailed explanations for any analysis and conclusions you draw. You will be evaluated upon the soundness of the explanations and analysis, hence making statements without explanation will get no credit. Clearly not answering a question will not get you credit so double check that you answered all questions listed below. Also, if you choose an “easy” property, for example your own home, I expect a much more detailed analysis and you will be held to a higher standard. All analysis should include multiple years of cash flow and at least 3 valuation approaches. Assignment One: Choose a piece of property, henceforth indicated as “subject property”. It can be an existing building, but not a vacant plot of land. It can be a primary residence but must be analyzed as an income producing property. You can already own it or are interested in owning it. It can be located anywhere in the world. In the first assignment you need to provide the legal description of the subject property and determine the various limitations on the property rights associated with the subject property. Make sure that you discuss all current and future aspects of police power, like property taxes and zoning, as well as the threat of eminent domain. What (potential) - 1 -

private conflicts of property rights exist, such as easements, and how are they resolved? Assignment Two: Determine where the subject property is in 1) its life cycle and 2) the relevant economic cycle, and where the geographical area, in which it is located, is in its life cycle. This should include a discussion of the transportation network opportunities. You first need to discuss what kind of investor you represent, thus risk/return profile. Make sure that you discuss supply and demand as well as vacancy rates, both current and expected in the short, medium and long run. For the demand side of the property make sure that you analyze the relevant drivers of the demand. Assignment Three: Determine the Highest and Best Use of the subject property and create an associated pro-forma. The model in this assignment should determine the proper acquisition price using at least 3 valuation approaches (DCF, DC, EGIM, Sales Comparison, Cost, NIM) and perform a reconciliation exercise to determine the value. Make sure that you find appropriate estimates for the various operating expenses and associated yearly growth rates. Here are some instructions for the spreadsheet: 1) Put all Input Variables on the first sheet. I am not going to "hunt" for Input Variables elsewhere. 2) Clearly indicate which ones can be changed, for example by making their cells green. 3) You need to have growth rates for PGI, Vacancy &Bad Debt, and OE. 4) Clearly indicate $ (without pennies, just whole dollars), % (one decimal), and plain numbers (like the LTV and DSCR, one decimal) 5) On the Output Worksheet for Assignment Four you need to have: Levered and unlevered IRR, and MIRR, PV property, NPV equity, LTV year 1, and DSCR year 1 . Each of these outputs need to be discussed and analyzed. In this part of the assignment you are essentially justifying why it is a good idea to buy or develop the real estate you are analyzing. Assignment Four: Using the pro-forma created in the previous assignment perform sensitivity analysis that questions key metrics relevant to your project and from that - 2 -

create a best, moderate and worst case scenario. Calculate the NPV, XNPV, IRR, MIRR, and XIRR of the property after taking into account the purchase price and/or remodeling costs. Make sure that you include a sensitivity analysis of the optimal amount of leverage when it comes to the financing of the purchase and/or remodeling. Finally, draw a conclusion as to whether you would buy (or continue to hold) it and how you would finance (or refinance) the subject property. This final analysis should determine your hold period and clearly define the key metrics like IRR, Equity dividend ratio etc. that justify why this will be a wise or unwise investment considering the risk etc. - 3 -

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