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Investment and Financial Analysis for International Real Estate.

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Presentation on theme: "Investment and Financial Analysis for International Real Estate."— Presentation transcript:

1 Investment and Financial Analysis for International Real Estate

2 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 Preparing for an International Transaction

4 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 5 Globalization Globalization is the movement by countries, companies, organizations and people toward a single market environment.

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

7 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 8 Currency Investors will buy real estate because of the favorable trend of the investor’s currency against a foreign currency.

9 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 10 Preparing for an International Transaction Six Steps 1.Develop client profile 2.Make necessary conversions 3.Determine investment objectives 4.Determine purchasing motivations 5.Assemble a team 6.What does your market have to offer?

11 Chapter 2: Legal Issues

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

13 13 Residency Status USA Citizen Taxed on worldwide income; credits allowed for foreign taxes paid Resident Alien Taxed on worldwide income; credits allowed for foreign taxes paid Non-Resident Alien Taxed ONLY on USA- sourced income

14 14 Residency Definitions Types Green Card Holder Physical Presence Test Substantial Presence Test

15 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 16 Location of Income Source Competent tax counsel is needed to determine how the latest tax laws will treat the investor.

17 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 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 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 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 22 Row 1 Row 5 Row 6 Row 7 Row 8 Row 2 Row 3 Row ALL CLEAR HP 10BII

23 23 Row 1 Row 5 Row 6 Row 7 Row 8 Row 2 Row 3 Row ALL CLEAR Row 1 Primary Keys Enter data left to right

24 24 Row 1 Row 5 Row 6 Row 7 Row 8 Row 2 Row 3 Row ALL CLEAR Secondary function on bottom of key in GOLD All keys have 2 functions GOLD KEY [Shift key] activates second function Primary function on top of key in WHITE GK

25 25 Row 1 Row 5 Row 6 Row 7 Row 8 Row 2 Row 3 Row POWER Turn ON--Press Turn OFF Press 0.00 GK ON OFFON ON ON GK ON OFFON

26 26 GK Display 1.Change numerals to right of decimal 2.Can go out 9 places 3.Internal calculations continue to 12 4.Change places by: 5.GK, DISP, desired number of places GK DISP

27 27 Clearing Data Clears last digit Clears entire number GK C ALL Clears all memory Clears all memory & resets calculator GK C ALL

28 28 Sign Convention 1.Income (+) 2.Expenses, losses, payments (-) 3.Must remain constant 4.PV, PMT and FV adhere to sign convention 5.To change signs, Press:

29 29 Begin and End Functions 1.Calculates from beginning or end of month/year 2.Rent payments at beginning of month 3.Mortgage interest paid at end of month 4.GK, BEG/END GK

30 30 European Mode Function 1.In Europe, the comma used in place of period 2.£ ,00 3.$ 1,000, To change, press GK./,

31 31 Constant Key 1.Saves entering same numbers 2.Example: Rent of $800 increases 3%/year. 3.Enter: 4.800, +, 3, %, K, = Yr. 2 rent, = Yr. 3 rent, = Yr. 4 rent, = Yr. 5 rent

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

33 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 35 What We Know Name: Mr. Chen Nationality: Taiwanese Occupation: Securities Trader Employer: Tiger Securities Company Home Phone: Cell Phone: Fax:

36 36 What We Know Mailing address: Residency Status Family: Married with 3 children 6, 9, 15 Requirements:  4-bdrm, den, study on one floor  pings of living space  30 minutes to work Price range: Up to NT$20,000,000 Knowledge of market: Location and type of funds:

37 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 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

40 40 Convert Square Feet to Pings 1 sq.ft. = pings [1 ÷ 36] Multiply sq.ft. to be converted X conversion factor [ ] 3240 sq.ft. X = _______ pings 3420 sq.ft. X = _______ pings 90 95

41 41 Convert Currency Convert NT$20,000,000 to US$ Formula: NT$ X US$ Conversion Factor Today’s exchange rate: US$1= NT$25 NT$1 = US$ 1 ÷ 25 or US$0.04 (4 cents)  Exchange rate ÷ conversion factor Multiply NT$ by exchange rate NT$20,000,000 X US$0.04 = US$800,000 Mr. Chen will spend up to US$800,000.

42 42 Ideal Property Price: US$750,000 Using same exchange rate, what will the price be in NT$? US$1 = NT$1 X 25  Formula: Base currency X conversion factor US$750,000 X 25 = NT$18,750,000

43 Step 3: Client Objectives

44 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 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 48 Who Do You Need and Why?

49 Step 6: What Does Your Market Have to Offer?

50 50 Your Market Prepare market information Include local newspapers What’s happening? Chamber of Commerce Is property appreciating? Are businesses coming to your area?

51 51 Mr. Chen Arrives Today Mr. Chen selects 1 of 3 homes shown Price: US$750,000 Size: 3350 square feet Reason selected:  Proximity to work and schools  Potential rental income  Appreciation potential

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

53 53 What You Know House reasonably priced at US$750,000. Comparable sales 3 years ago were US$634,300. First calculation is for annual rate of appreciation

54 54 Calculations 1.1,, P/YR 2.Press 3, N 3.Enter 634,300, Press +/-, Press PV 4.Enter 750,000 5.Press FV 6.Press I/YR key 7.Annual appreciation rate is _________ 5.74% GK

55 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 56 Future Net Sales Proceeds After Taxes 1.Enter projected sales price $886,700 2.Calculate costs of sale at 7.5% a)$886,700 X 7.5% = $66,502 3.Calculate original loan amount a)$750,000 X 80% = $600,000 4.Calculate Remaining Loan Balance a)Interest Reduction Method b)Traditional Method

57 57 Interest Reduction Method 1.1, 2,, P/YR 2.Enter 3, 0, xP/YR (Term of loan) 3.Enter 7.5, I/YR (Annual interest) 4.Enter 600,000 (loan amount) 5.Press PV (Present value) 6.Press 0, FV (Full amortization) 7.Press PMT (Monthly payment) 8.Press 3 to reset loan term,, xP/YR 9.Press FV for remaining loan balance after 3 years GK $582,085.49

58 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 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 60 Effect of Exchange Rates When the exchange rate decreases, the currency has __________________ When the exchange rate increases, the currency has __________________ strengthened weakened

61 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 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 64 Investment Elements

65 65 Time Value of Money Risk Purchasing power Opportunity costs Compounding Discounting

66 66 Key Components Compounding--Determining the future value of an investment made today  Single or series of payments  Interest earned is reinvested Discounting—determining 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 68 IRV Formula Stands for Income, Rate, Value Measures most forms of Yield If you have two numbers, solve for the 3 rd Divide bottom numbers into the top Multiply two bottom numbers

69 69 Capitalization Rate NOI Cap Rate Total Value

70 70 Cash-on-Cash (ConC) Cash Received Rate of Return Invested Cash

71 71 Key Point Review Four elements of investment income property are:  Yield  Safety  Leverage  Control Time Value of Money  Compounding  Discounting

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

73 Dr. Garcia: Inbound Commercial Transaction Chapter 6

74 74 Objectives Apply 6-Step preparation process to Dr. Garcia’s case Calculate 5-year rent projections Calculate cap rate for each of the 5 years Measure yield using the IRR

75 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  US$6-8 million

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

77 77 Step #3: Client Objectives Invest US$6-8 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 78 Step #4: Client Motivations Spread risk by diversifying Safe harbor for part of family capital Minimize risk Minimize management requirements

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

80 80 Step #6: Local Market Investment Opportunities 1.Group of 4 steak houses 2.Build-to-suit office building leased to a start-up software firm 3.Warehouse and distribution center  Dr. Garcia decides to investigate the warehouse

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

82 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 83 Determine Property NOI NOI = Rate x Purchase Price NOI Rate Purchase Price $7,900, $711,000 X The warehouse must generate $711,000/year rent to meet Dr. Garcia’s 9% cap rate requirement on his $7,900,000 investment

84 84 Annual Rent Increases Formula: Annual rent (+) % increase (=) Rent for year 2 Enter Annual Rental Income $711, Press +, 3, %, K, = (Yr. 2 rent) 732, = (Yr. 3 rent) 754, = (Yr. 4 rent) 776, = (Yr. 5 rent) 800, = (Yr. 6 rent) 824,243.87

85 85 Cap R ate ? V alue of property (original price) $7,900,000$7,900,000 I ncome Year 2 (Rent) $732,330$732, % Calculate Annual Cap Rate Cap rate = Annual rent  Original price

86 86 5 Year Cap Rate History Year Rent Property Value (=) Cap Rate Year Rent  Property Value (=) Cap Rate 1$711,000 7,900, % 1$711,000 7,900, % 2$732,330 7,900, % 2$732,330 7,900, % 3 $754,300 7,900, % 3 $754,300 7,900, % 4 $776,929 7,900, % 4 $776,929 7,900, % 5 $800,237 7,900, % 5 $800,237 7,900, %

87 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 88 What You Find: 50% mortgage 7.5% interest 1.5 points 15-year, fixed-rate loan Loan amount of $3,950,000

89 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 90 Calculate Monthly Payments 36,617 GK 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 91 Annual Debt Service (ADS) Formula: Monthly payment X 12 = ADS $ X 12 (=) $ _____________ $439,404

92 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 93 Calculate Original Amount Invested Formula: Initial investment + Cost of Points = Total initial investment $3,950,000 + $59,250 = _____________ $4,009,250

94 94 Using IRV to Calculate ConC Divide CFBT by Value of original investment V alue of Investment R ate of return ConC I ncome before taxes (CFBT)

95 95 Cash-on-Cash (ConC) Yield NOI(-) ADS(=) CFBT(÷) DP with Points (=) ConC Yield Year 1$711,000439,404271,5964,009,250 Year 2$732,330439,404292,9264,009,250 Year 3$754,300439,404314,8964,009,250 Year 4$776,929439,404337,5254,009,250 Year 5$800,237439,404360,8334,009, % 7.31% 7.85% 8.42% 9.0%

96 96 Dr. Garcia’s 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 97 Question #3 Dr. Garcia requests:  5-year projection of rents  Projected sales price Selling after 5 th year

98 98 What You Know Use 6 th 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 99 Net Sales Proceeds Before Tax Cash Flow Before Tax Net Sales Proceeds Before Tax Before Tax After Sale Proceeds

100 100 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

101 101 Remaining Loan Balance 1., C ALL 2.1, 2,, P/YR 3.1, 5,, xP/YR 4.7.5, I/YR 5.3,950,000 PV 6.0, FV 7.PMT 8.Answer: 36,617 GK C ALL PMT P/YR xP/YR I/YR PV FV

102 102 Interest, Principal, Balance 1., AMORT 2.Display: Per = displays principal 4.= displays interest 5.= displays balance 6., AMORT 7.Display: Per Continue thru Yr. 6 9.Final balance: 3,084,789 GK AMORT = GK

103 103 Dr. Garcia’s Principal, Interest & Loan Balance EOY123456Principal $148,179 $159,682 $172,079 $185,438 $199,834 $215,347 Remaining Loan Balance 3,801,821 3,642,139 3,470,060 3,284,622 3,084,789 2,869,441 Interest 291, , , , , ,057

104 104 Costs of Sale 641,079 % 1.Sales price of $9,158,267 2.X 7 % selling costs 3.=

105 105 Net Sales Proceeds Before Tax 1.Sales price 2.(-) Mortgage balance EOY 5 3.(-) Costs of sale 4.(=) Net sales proceeds before taxes 5,432,399

106 106 Dr. Garcia’s Annual IRR n $ 0 (4,009,250) Down Payment + Points 1 271,596 Cash flow EOY ,926 EOY ,896 EOY ,525 EOY ,833 EOY 5 + 5,432,399 (sales proceeds)

107 107 Calculate Annual IRR 1., C ALL 2.4,009,250, +/-, CFj 3.271,596, CFj 4.292,926, CFj 5.314,896, CFj 6.337,525, CFj 7.360,833, + 5,432,399= CFj 8., IRR/YR 9.Answer: GK C ALL CFj IRR/YR +/- +

108 108 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

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

111 111 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

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

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

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

115 115 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. Garcia’s annual depreciation: $6,320,000 X = $162,044.80

116 116 Mid-Month Convention Formula: Divide months of partial year by full year. Multiply answer by (depreciation factor) 11.5 ÷ 12 X = _______________ (partial year depreciation factor) $6,320,000 X = ________________ (Dr. Garcia’s 1 st year depreciation) 2.457% $155,282.40

117 117 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

118 118 Calculating Taxable Income Yr.NOI (-) Cost Recovery (-)Interest (-) Points (=) Taxable Income 1$711, , ,2253,950260,543 2$732, , ,7223,950 3$754, , ,3253,950 4$776, , ,9663,950 5$800, , ,5703, , , , ,672

119 119 Calculating Total Tax Yr. Taxable Income 1 st 50K 15% Taxable Balance Taxed at 25% Total Tax 1 260,543 7, ,54352,63660, ,613 7, , ,980 7, , ,968 7, , ,672 7, ,672 59,153 66,653 67,745 75,245 76,742 84,242 86,168 93,668

120 120 Cash-on-Cash Yield after Taxes Yr. CFBT (-)Tax (=) CFAT ( ÷) Down Payment (=)ConC 1 271,59660,136211,460$4,009, % 2 292,92666,653226,273$4,009, % 3 314,89675,245239,651$4,009, % 4 337,52584,242253,283$4,009, % 5 360,83393,668267,165$4,009, %

121 121 Calculating Capital Gains Formula:Sales Price$9,158,267 (-) Selling Costs 641,079 (-) Adjusted basis (=) Gain (X) Tax Rate (25%) (=) Capital Gains Tax Liability

122 122 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

123 123 Adjusted Basis You can now calculate  Capital gains  Tax liability  Sales proceeds after taxes  Yield on CFAT

124 124 Calculating Capital Gains Formula:Sales Price$9,158,267 (-) Selling Costs 641,079 (-) Adjusted basis (=) Gain (X) Tax Rate (25%) (=) Capital Gains Tax Liability $ 7,096,538 1,420, ,163

125 125 Sales Proceeds After Taxes Sales Price$9,158,267 (-) Mortgage Balance 3,084,789 (-) Costs of Sale 641,079 (=) Net Sales Proceeds BEFORE Taxes 5,432,399 (-) Tax Liability 355,163 (=) Net Sales Proceeds AFTER Taxes $5,077,237

126 126 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, ,077,237 = CFj, GK, IRR n $ 0 (4,009,250) +/- CFj 1 211,460 CFj 2 226,273 CFj 3 239,651 CFj 4 253,283 CFj 5 267, ,077,237 = CFj, GK, IRR 10.25

127 127 IRR Annual Yields Before Tax IRR13.19% After Tax IRR10.25%

128 128 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

130 130 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

131 131 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)

132 132 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 tenant’s business

133 133 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)

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

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

136 136 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 client’s target return

137 137 Convert m² to Square Feet Conversion Factor: 1m² = sq. ft. Formula: # m² X ,000 m² X = _____________ sf. 107,639

138 138 Calculating Rent Formula: # Sq. Ft. X Rent/sq. ft. = Total rent _________ sq.ft. X $16 = __________ Total Rent 107,639 $1,722,224

139 139 Convert US$ to Euro’s Formula: USD X Conversion Factor Assume US$1 = €1.25 ___________ USD (rent) X €1.25 = €_____________ (rent in euros) 1,722,224 2,152,780

140 140 Assumptions Five year holding period 2% rent escalation 11% cap rate at sale No vacancy Initial investment = total acquisition costs 0 expenses

141 141 Currency Assumptions Euro (EUR) = 2.73 real (BRL)1 BRL =.365 EUR 1 US dollar (USD) = 1.25 EUR1 EUR =.799 USD Which currency is strongest?

142 142 Five-Year Cash-on-Cash Returns YR1 YR2 YR3 YR4 YR5 YR6 Gross Rental Income Net Operating Expenses Net Operating Income Annual Debt Service Cash Flow Before Taxes 2,152,780 2,195,836 2,239,752 2,284,547 2,330,238 2,376,843 In EUR 0 2,152,780 0 X= X 1.02 =

143 143 Five-Year Cash-on-Cash Returns YR1 YR2 YR3 YR4 YR5 YR6 Net Operating Income Interest Cost Recovery Taxable Income X Tax Rate = Liability 2,152,7802,195,836 2,239,7522,284,5472,330,238 2,376,843 In EUR

144 144 Five-Year Cash-on-Cash Returns YR1 YR2 YR3 YR4 YR5 YR6 Cash Flow Before Taxes Minus (-) Tax Liability Cash Flow After Taxes Divided by Investment Amount Cash-on- cash Return 2,152,780 19,570, % 11.22% 11.44% 11.67% 11.91% 12.14% 2,195,836 2,239,7522,284,5472,330,238 2,376,843 In EUR 0 2,152,7802,195,8362,239,7522,284,5472,330,2382,376,

145 145 Five Year Cash-on-Cash Returns YR1 YR2 YR3 YR4 YR5 YR6 Gross Rental Income Net Operating Expenses Net Operating Income Annual Debt Service Cash Flow Before Taxes 5,877,089 5,994,631 6,114,523 6,236,814 6,361,550 6,488, ,877,089 0 In BRL X = X 1.02 =

146 146 Five-Year Cash-on-Cash Returns YR1 YR2 YR3 YR4 YR5 YR6 Net Operating Income Interest Cost Recovery Taxable Income X Tax Rate = Liability 5,877,089 5,994,6316,114,5236,236,8146,361,5506,488, In BRL

147 147 Five-Year Cash-on-Cash Returns YR1 YR2 YR3 YR4 YR5 YR6 Cash flow before taxes Minus (-) tax liability Cash flow after taxes Divided by investment amount Cash-on- cash return 5,877,089 53,428, %11.22%11.44%11.67%11.91%12.14% 5,994,6316,114,5236,236,814 6,361,255 6,488,781 0 In BRL 5,877,089 5,994,6316,114,5236,236,814 6,361,255 6,488,

148 148 Projected Sales Price Yr. 6 NOI 2,376,843 (euros) Cap Rate 11% Sales Price 21,607,664 (euros) 21,607,664 (euros)

149 149 B. Calculation of Gain and Tax 21,607,664 Sales price21,607,664 (-)1,512,536 (-) selling costs (7%) 1,512,536 (-)19,570,727 (-) adjusted basis19,570,727 (=)524,400 (=) Taxable gain 524,400 (x)0% (x) Rate 0% (=)0 (=) Capital gains tax 0 21,607,664 Sales price21,607,664 (-)1,512,536 (-) selling costs (7%) 1,512,536 (-)19,570,727 (-) adjusted basis19,570,727 (=)524,400 (=) Taxable gain 524,400 (x)0% (x) Rate 0% (=)0 (=) Capital gains tax 0

150 150 Calculation of Sales Proceeds After Tax 21,607,664 Sales price21,607,664 (-)1,512,536 (-) selling costs 1,512,536 (-)0 (-) loan balance 0 (=)20,095,128 (=) Sales proceeds before tax 20,095,128 (-) 0 (-) Capital gains tax 0 (=)Net sales proceeds after tax20,095,128 (=) Net sales proceeds after tax20,095,128

151 151 IRR Annual Yield Calculation— Before Tax n € (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) 20,095,128 = (net sales proceeds after tax) CFj

152 % IRR

153 153 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

154 154 Did Investment Meet Objectives? 1.EOY 1 minimum ConC yield of 11%? 2.Minimum 11% IRR on 5 year hold?

155 155 IRR Annual Yield Calculation 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, ,095,128 BRL (53,428,085) +/-, CFj 5,877,089 CFj 5,994,631 CFj 6,114,523 CFj 6, CFj 6,361, ,859,695 IRR = 11.82%

156 156 Currency Values EURBRL Year (+), (5), (%), (K), (=) Year (=) Year (=) Year (=) Year (=) Year (=)

157 157 Currency Values 2.73 Weakens 5% Year 12,152,7805,877,0896,156,951 Year 22,195,8365,994,6316,587,508 Year 32,239,7526,114,5237,077,616 Year 42,284,5476,236,8147,561,850 Year 52,330,2386,361,5508,109,228 Total30,584,60735,493,153

158 158 Dealing with Two Currencies EUR € n € 0 (19,570,727)(+/-) 1 2,152, ,195, , ,284, ,330, ,095,128 BRL (53,428,085)( +/- ) 6,156,951 6,587,508 7,077,616 7,561,850 8,109, ,931,045 IRR = 17.37% IRR = 11.82%

159 159 Currency Value Effect on IRRCausation BRL weakens again EURO IRR in BRL currency will increase Caused by declining currency value not property operations BRL strengthens against the EURO IRR in BRL currency will decrease Caused by increase in currency value not property operations

160 160 Currency Values EURBRL Year (-), (5), (%), (K), (=) Year (=) Year (=) Year (=) Year (=) Year (=)

161 161 Dealing with Two Currencies EUR € n € 0 (19,570,727) +/- 1 2,152, ,195, , ,284, ,330, ,095,128 BRL (53,428,085) +/- 5,575,700 5,401,754 5,241,019 5,071,694 4,916, ,400,720 = IRR = 6.20% IRR = 11.82%

162 162 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 Ready for the Test?


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