Ch 14 Property Investment Analysis

1. Ch 14 Property Investment Analysis Capital Budgeting Techniques Applied to Investments In Land And Buildings

2. Analytical Ideas in Property Investment • The standard concepts and techniques of capital budgeting analysis can be applied to property investment. • Private investors may find it desirable to evaluate the equity cash flows separately from the property cash flows within an investment analysis.

3. Cash Flow Concepts for Private Investors • Private investors may need to isolate their cash flows to debt , usually only a single mortgage, from the cash flows to equity, usually their savings. • Private investors may need this information to record any shortfall between rent received and loan interest, for personal income tax measurement.

4. Two Styles of Property Investment Analysis • Property cash flows - the standard concepts from previous chapters are applied- the property cash flows do not include financing flows. These flows are accounted for in the discount rate. • Equity cash flows – financing cash flows are explicitly included in the cash flows. These flows are not accounted for in the discount rate. Both styles can employ cash flows on either a before, or, after-tax basis.

5. Types of Property Decisions • Slide 4 showed two types of property analysis: there are also three distinct types of property decisions:- • Acquisition of an income-producing property (or an industrial property). • Evaluation of premises to be used by business. • Property development-- purchase and development of sites.

6. Acquisition Of An Income-Producing Property • There are three methods of evaluating the cash flow streams in such an investment:- • Property cash flows before, and after, tax: example 14.1, and workbook 14.1. • Equity cash flows before tax: example 14.2, and workbook 14.1 • Equity cash flows after tax: example 14.3 and workbook 14.1

7. Evaluation of Premises to Be Used By A Business There are three distinct types of decisions in this evaluation:- • To purchase an industrial property for operations: Example 14.4 and Workbook 14.2 • To lease or buy industrial property for operations: Example 14.5 and Workbook 14.2 • Whether to sell and lease back a property for operations: Workbook 14.2.

8. Property Development- Purchase and Development of Sites • There are three phases to this decision:- • The initial screening of the project: example 14.6, and workbook 14.3. • Defining and forecasting the project cash flows: example 14.7 and workbook 14.3. • Defining and forecasting the equity cash flows: example 14.8 and workbook 14.3.

9. Property Investment- Summary • Property investment analysis requires the standard set of techniques used for any capital budgeting decision. • Some analyses require a distinction between the project cash flows and the equity cash flows to measure the tax positions of private investors. • There are three types of commercial property decisions: • acquisition of income producing property • evaluation of owner occupied business premises • development of real estate. The NPV is used for sound managerial decision making.