CFA Level II - Real Estate Formula Sheet

CFA Level II - Real Estate Formula Sheet 1. Income-Producing Property Gross Rent: Lease Rate × Rentable Area Effective Gross Income (EGI): Gross Rent ? Vacancy Loss NOI: EGI ? Operating Expenses ? Property Maintenance Allowance • Exclude interest, debt service, depreciation and capital expenditures. Pre-tax Cash Flow: NOI ? Debt Service After-tax Cash Flow: Pre-tax Cash Flow ? Taxes Taxes: Tax Rate × (NOI ? Interest Expense ? Depreciation) 2. Three Valuation Approaches A. Income Approach Capitalization Rate: Cap Rate = NOI / Value Property Value (Direct Cap): Value = NOI / Cap Rate DCF Value: Value = PV(Future Cash Flows + Sale Proceeds) B. Sales Comparison Approach Adjusted Comparable Value: Comparable Sale Price ± Adjustments C. Cost Approach Replacement Cost Method: Land Value + Replacement Cost New ? Depreciation 3. Leverage & Credit LTV: Mortgage Debt Outstanding / Current Property Value • Lower is safer. Debt Service Coverage (DSC): NOI / Debt Service • Higher is safer. Equity Dividend Rate: Pre-tax Cash Flow / (Purchase Price ? Mortgage Loan) 4. Appraisal vs Transaction Indexes Appraisal-Based Transaction-Based Lagged Timely Smooth returns Noisy returns Lower volatility Higher volatility Understates risk Reflects true risk Overstates diversification More realistic diversification Based on appraisals Based on actual sales 5. High-Yield Exam Relationships ? Vacancy ? ? EGI ? ? NOI ? ? Property Value ? NOI ? ? Property Value ? Cap Rate ? ? Property Value ? Cap Rate ? ? Property Value Interest expense is NOT part of NOI. Maintenance allowance IS included in NOI; capital improvements are not. Risk ladder: Senior Debt ? Core ? Core+ ? Value Add ? Opportunistic.