Exam 3 ReviewFinancing

Time Value of MoneyLeverage

Rates and RatiosIRR

Finance

AdvantagesDisadvantages

Finance

TimeRisk

What would you rather have?

1,000 in 5 yearsor

2,000 in 10 years?

What would you rather have?

Depends on the discount rate

Years FV 10% 20%

5 1,000 620.92 401.88

10 2,000 771.09 323.01

Financing

MurabahahMortgages

Murabahah

bank buys propertysells with payments

deed transferred at end

Mortgageowner buys property

bank loansdeed at beginning

lien - recover in default

Two Documents

NoteMortgage

Note

details termsborrower and lender

Mortgage

pledges property as security

Noterate of interest

early payoffpersonal liabilitylate paymentsdue on sale

call due option

Notedefault

foreclosure

Ratesfixed

adjustable - ARMindexedLIBORmargincaps

teaser

Paymentsmonthly

amortizinginterest-only

termballoon

Interest Onlypay only interest

pay principal balance at maturity

“bullet loan”

Balloon Mortgageamortize over 25-30 years

maturity 5-15 years

must be prepared to payoff loan at maturity

Pre-Paymentsright

penalty

Personal Liabilityrecourse

non-recourse

Demand Clausemust pay now

Defaultfailure to meet a

requirement

foreclosure

Foreclosurecourt-orderedorder of liens

Possessionoccupy property

Titlelegal ownership

The Effects of Time and Risk

on Value

Time Value

(1 + r)n

compounding

multiplying

Time Value

discounting

(1 + r)n

1

dividing

what is r?

includes all risk factors

Commercial Mortgages

Commercial vs. Residential in the U.S.

more riskshorter terms

higher down LTVnon-recourse

Commercial vs. Residential in Saudi

less riskrecovering property

Commercial Loans

Construction LoanPermanent Loan

Yield AnalysisHow can you improve yield?

Leverage

Leverage

Using other people’s money to make more money on my money.

Two Elements

Equity - ownerDebt - lender

Yield AnalysisPurchase Price 1,000,000

NOI 100,000

Overall Rate 10.0%

Loan 750,000

Years 30

Rate 8.0%

Payment 66,621

Yield Analysis

Debt 750,000 66,621 8.9%

Equity 250,000 33,379 13.4%

Total 1,000,000 100,000 10.0%

Value NOI Rate

Chapter 18

Investment Decision Ratios

Why Ratios?

Allows us to make comparisons

Ratios

Physical FinancialLeverage

Physical RatiosPrice per Square MeterLand to Building Ratio

Building Efficiency RatioOperating Expense Per Square Meter

NOI Per Square Meter

PPSMPrice Per SM

Price÷

Size

LBRLand to Building Ratio

Land Size÷

Building Size

BERBuilding Efficiency Ratio

Net Leasable Area÷

Gross Building Area

OEPSMOperating Expense Per

SMOperating Expense

÷Gross Building Area

NOIPSMNOI Per SM

NOI÷

Gross Building Area

Financial RatiosCapitalization Rate

Net Income MultiplierEffective Gross Income Multiplier

Operating Expense Ratio

RoCapitalization Rate

NOI÷

Price or Value

NIMNet Income Multiplier

Price or Value÷

NOI

inverse of Ro, years to payoff

EGIMEffective Gross Income

MultiplierPrice or Value

÷Effective Gross Income

OEROperating Expense Ratio

Operating Expenses÷

Effective Gross Income

OEROperating Expense Ratio

Operating Expenses÷

Effective Gross Income

Leverage RatiosLoan to Value Ratio

Debt Coverage RatioEquity Dividend Rate

Debt Yield RatioMortgage Constant Rate

LTVRLoan to Value Ratio

Loan Amount÷

Price or Value

DCRDebt Coverage Ratio

NOI÷

Loan Payment

ReEquity Dividend Rate

NOI after Debt Payment÷

Down Payment

DYRDebt Yield Ratio

NOI÷

Loan Amount

RmMortgage Constant Rate

Loan Payment÷

Loan Amount

Internal Rate of ReturnIRR

The rate at which all cash flows

(negative and positive) balance

Internal Rate of ReturnIRR

rate that will make the net present value

equal to zero

=IRR(values)

Excel

Excel Workbook

PVRatesIRR

Multiple Analysis

1. If my target rate of return is ____,what should I pay ?

2. If I pay______,what is my rate of return ?

PV

IRR