Foundations of Real Estate Management TM BOMA International ® Module 1: Real Estate Administration Valuation and Asset Management

Foundations of Real Estate Management Module 1: Real Estate Administration TM 2 Objectives  Describe how value is created on an income- producing property, and identify at least five ways a property manager can add value to a real estate investment  Describe the concept of equity as it relates to owning a piece of investment real estate, and explain how an owner can use leverage to increase the value of his real estate holdings  Describe what happens to the value of a real estate investment when the capitalization rate is increased or decreased

Foundations of Real Estate Management Module 1: Real Estate Administration TM 3 Income Producing Properties

Foundations of Real Estate Management Module 1: Real Estate Administration TM 4 Non-Income Producing Properties CorporateGovernmentSchools/Religious Buildings/Non-Profits

Foundations of Real Estate Management Module 1: Real Estate Administration TM 5 Cash Flow Equation Net Operating Income (NOI) - Operating Expenses Income

Foundations of Real Estate Management Module 1: Real Estate Administration TM 6 Cash Flow Equation Net Cash Flow (NCF) - Non-Operating Expenses - Debt Service - Capital Expenses Net Operating Income (NOI) - Operating Expenses Income

Foundations of Real Estate Management Module 1: Real Estate Administration TM 7 Increasing Cash Flow Income Expenses

Foundations of Real Estate Management Module 1: Real Estate Administration TM 8 Putting It Into Practice What can be done to increase income at a property?

Foundations of Real Estate Management Module 1: Real Estate Administration TM 9 Putting It Into Practice What can be done to decrease expenses at a property?

Foundations of Real Estate Management Module 1: Real Estate Administration TM 10 Be Careful… It is OK to cut expenses “to the bone” if that is your owner’s strategy Just don’t cut the bone!

Foundations of Real Estate Management Module 1: Real Estate Administration TM 11 Deferred Maintenance Deferred maintenance is not avoided maintenance… The work still needs to be done at some point in the future

Foundations of Real Estate Management Module 1: Real Estate Administration TM 12 Deferred Maintenance Remember: With almost anything in life (and in real estate), it is far cheaper to maintain something instead of replacing it prematurely

Foundations of Real Estate Management Module 1: Real Estate Administration TM 13 Value  Appraisal  Estimate of market value of a real estate asset at a given time  Goal of the real estate manager: 1.Improve the asset value 2.Preserve the asset value 3.Reduce the loss of asset value

Foundations of Real Estate Management Module 1: Real Estate Administration TM 14 Appreciation Usually, real estate values increase over time

Foundations of Real Estate Management Module 1: Real Estate Administration TM 15 Adding Value to Purchase Sale

Foundations of Real Estate Management Module 1: Real Estate Administration TM 16 Value To maximize asset value, consider:  What can I do with the asset?  How can I increase income/decrease expenses?  Can I redevelop the asset?  Can I overcome functional obsolescence?  Do I know something others do not?

Foundations of Real Estate Management Module 1: Real Estate Administration TM 17 Asset Management Cycle

Foundations of Real Estate Management Module 1: Real Estate Administration TM 18 Asset Management Strategies  Add value  Hold  Long-, intermediate-, short-term  Sell and “reload”  Sell and not “reload”  Maximize cash flow  Provide for an annual return

Foundations of Real Estate Management Module 1: Real Estate Administration TM 19 Risk/Return  Core:  Low risk/return  Core+:  Low to moderate risk/return  Value add:  Moderate/aggressive risk/return  Opportunistic:  Aggressive risk/return

Foundations of Real Estate Management Module 1: Real Estate Administration TM 20 Putting It Into Practice Work with your instructor to complete the exercise in your textbook

Foundations of Real Estate Management Module 1: Real Estate Administration TM 21 Care and Feeding of Asset Manager

Foundations of Real Estate Management Module 1: Real Estate Administration TM 22 Value Market Value (based upon appraisal) v. Market Price (based upon arms-length sale)

Foundations of Real Estate Management Module 1: Real Estate Administration TM 23 Determining Market Value  Sales Comparable Approach  Recent sales of similar buildings  Cost Approach  Replacement cost  Income Approach  How much is the cash flow worth?

Foundations of Real Estate Management Module 1: Real Estate Administration TM 24 Value Depends Upon the Cap Rate Effective Gross Income $600,000 Less: Operating Expenses ($270,000) Net Operating Income (NOI) $330,000

Foundations of Real Estate Management Module 1: Real Estate Administration TM 25 Cap Rate v. Property Value

Foundations of Real Estate Management Module 1: Real Estate Administration TM 26 Equity and Leverage  Mortgage (Leverage)  Principal  Interest  Interest only loans  Loan-to-Value (LTV) ratio  Equity  Debt