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Ch 14 Property Investment Analysis

Capital Budgeting Techniques Applied to Investments In Land

And Buildings

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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

1. 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.

2. 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.

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Types of Property DecisionsSlide 4 showed two types of property analysis: there are also three distinct types of property decisions:-

1. Acquisition of an income-producing property (or an industrial property).

2. Evaluation of premises to be used by business.

3. Property development-- purchase and development of sites.

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Acquisition Of An Income-Producing Property

There are three methods of evaluating the cash flow streams in such an investment:-

1. Property cash flows before, and after, tax:

example 14.1, and workbook 14.1.

2. Equity cash flows before tax:

example 14.2, and workbook 14.1

3. Equity cash flows after tax:

example 14.3 and workbook 14.1

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Evaluation of Premises to Be Used By A Business

There are three distinct types of decisions in this evaluation:-

1.To purchase an industrial property for operations: Example 14.4 and Workbook 14.2

2.To lease or buy industrial property for operations: Example 14.5 and Workbook 14.2

3.Whether to sell and lease back a property for operations: Workbook 14.2.

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Property Development- Purchase and Development of Sites

There are three phases to this decision:-1. The initial screening of the project:

example 14.6, and workbook 14.3.2. Defining and forecasting the project

cash flows: example 14.7 and workbook 14.3.

3. Defining and forecasting the equity cash flows: example 14.8 and workbook 14.3.

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Property Investment- SummaryProperty 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:

1. acquisition of income producing property2. evaluation of owner occupied business premises3. development of real estate.

The NPV is used for sound managerial decision making.