Real Estate Association Interview Guide

2016-2017

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Table of Contents

Top 10...........................................…………………………………………………………………………………3

Personal Questions ...................................................................................................................................................3

Investment Ideas / Strategy ......................................................................................................................................5

Real Estate Experience.............................................................................................................................................6

Due Diligence...........................................................................................................................................................7

Macro / Market Level...............................................................................................................................................8

Technical / Quantitative ...........................................................................................................................................9

Various Industry Topics .........................................................................................................................................10

Financial Reference ................................................................................................................................................12

Resources................................................................................................................................................................13

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Top 10 Questions

1) Why do you want to work in real estate?2) Why do you think real estate is a good asset class to invest in?3) Walk me through a deal…4) If I gave you $100 million today, where would you invest and why?5) Explain the difference between levered and unlevered returns?6) Capitalization Rates: Explain?7) Which asset class do you prefer and why?8) If you were acquiring a building, what are the key pieces on information you would want to know?9) Where do you see the market in 18 months?10) How will your previous experience allow you to add value to our organization?

Personal Questions

General Why did you go to business school? Why now? Why Columbia? Tell me about your experience at Columbia thus far. Talk about balancing academics, recruiting, social life. How have you enjoyed the core? What parts do you think are applicable to a summer working in real

estate? Tell me about the most interesting non-real estate concept that you learned in business school?

o Ex. Utilization equation from Operations, Anchoring from Leadership… Describe 1-2 strengths about yourself. What initially drew you to real estate? What do you hope to get out of this role? What types of firms are you interested in and why?

o REIT, PE, Development, Family, Institutional Investment Manager, Brokerage, etc. What other types of firms are you interviewing with? Why are you interested in this firm? What do you expect out of your [summer / full-time] position? What would your prior co-workers say about you? What adjectives would they use to describe you? Do you see yourself as more of a numbers person or an operating/development person? On a deal that went sideways, what went wrong? How would you underwrite it differently today? What did you learn from the downturn? Where do you see the market today? Where is the market one year from now? Describe your leadership style. Strengths/Weaknesses Tell me about a deal you studied in school. How comfortable are you with Argus / Excel? Do you invest in real estate yourself? What do you do when you are not focusing on real estate? Walk me through your resume:

o For each job describe: The company and your role, with proper context (especially for less well-known firms) Skill development and what you learned from the experience

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Motives for the decision to make a career move [If a change in industry or function] Steps taken to acquire new role New experience [repeat…] Decision to get MBA; why and what have you gained?

o Close with a summary of your experience and skills, and why you are valuable for this particular firm

What questions do you have for me? Team structures, risk strategy, capital sources and allocations, asset preferences, company culture.

Career Switchers Why are you interested in real estate?

o Emphasize passion for real estateo Don’t repeat “because it’s tangible” – have a more detailed viewpointo Discuss past projects / articles / classes / mentors that have helped steer you to RE

Do you have any prior real estate experience?o Possible family companies, side consulting, etc.

What in your background will enable a successful transition into real estate? What transferable skills do you possess?

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Investment Ideas / Strategy

Most firms will ask some variation of the “If you had $X million to invest in real estate, what would you invest in?” question. You should have a few investment ideas (relevant to the particular firm) and be prepared to defend them. Ideas should be well thought out in terms of:

Geography Asset Type and current cap rates Risk profile Portion of the capital stack Estimated yields (both levered and unlevered) Fundraising / active firms

Some solutions here.

The same basic question can be asked in a variety of ways. There is no single correct answer to these types of questions, but there are wrong answers. Responses are highly dependent on prevailing market conditions and trends. Ultimately, they want to get a better understanding of how you think about real estate. You should attend real estate conferences/panels, take good notes, and borrow panelists’ ideas.

Where would you invest $X million today? Where / How would you deploy capital today? What is a real estate investment opportunity you like right now? Where do you see opportunity in the current market? What segment or geographic location?

o When picking geographies, be cognizant of not only the strength of the market, but also whether it is currently over/under supplied and what recent transactions have occurred.

If you could invest anywhere in the US right now and anywhere in the capital stack, where would it be and why? Equity, Senior debt, Mezz, Secondaries…

If you could invest anywhere in the world, where would you and why? o More common in a global firm like Tishman, Morgan Stanley, Hines

Compare opportunities in primary and secondary markets?o When investing in secondary markets, it is essential to have strong cash flowo Comparing risk/reward opportunities in lower cap rates markets vs. higher risk markets

Describe the four categories of risk/reward in real estate.o Core, Core-Plus, Value-Add, Opportunistic. See more detail here.

Is Core overvalued? Thoughts on Core, Core Plus, Value Add, and Opportunistic investing strategieso How has the recent increased influx of pension fund capital into the real estate market moved

return profiles of each investment strategy? Where would you prefer to be positioned in the capital stack? Preferred equity, equity, senior debt,

mezz… What industries are driving job growth in particular markets?

o Technology, health-care, education, energy Be sure to be able to talk about the change in how offices are laid out today. Open, clear floor plates,

less sf per worker, working remotely, WeWork.

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Real Estate Experience

Walk me through a recent transaction you closed or worked on:

What was the acquisition rationale (lease-up, reposition, renovation, recapitalization, etc)? What were the key issues? How did you resolve them? Highlight your direct involvement. What was your role? What did you do to move the process along? How did you value the asset (cap rate, IRR, DCF, comps, etc)?

Click here and here for solutions

What was the going-in (and stabilized) cap rate? Targeted exit cap? What was the value PSF? What drove value? Rising rents in market, fundamentally good real estate, capital flows into market What was occupancy? Rents PSF? What were the market rents and occupancy and how they compare to asset? What was the submarket leasing velocity, new inventory, absorption? How did you think about the exit cap rate, rent growth, etc and how did you sensitize for it?

o Most underwriting more than 3-4 years out is a guessing game. Explain why at the time of acquisition you underwrote for growth and CF. “Why is this good real estate to own?”

What kind of returns were you underwriting (IRR, yield, multiple) and how did you view it in terms of risk / reward?

What was the capital structure (debt and equity)? Was income largely derived from project level ROE or from the promote? Looking back at the transaction, what would you have done differently?

Framework for discussing transactions

Brief explanation of asset/portfolio with key metrics (“$40M acquisition of a 150 key hotel in San Francisco, CA”)

Background on transaction (“It was an off-market deal sourced by a reputable local operator”) Discuss the story:

o Strategy / thesis: isolate the 1 or 2 critical drivers that the deal depended on (e.g. “retaining tenant X and leasing vacant retail space”, or “increasing rooms rates to level of competitive set while maintaining steady occupancy”)

o Keys risks and actions to mitigate themo Negotiation points

Describe outcome of the deal Close with what your role was throughout and what you gained from the experience

Recent Deal Questions

Tell me about a recent (real estate) deal in the press that caught your attention. Have you seen a transaction lately that you found noteworthy, and why? What is your opinion of XYZ transaction (that has been in the news recently)? Who do you think was

on the right side of that deal? What was the rational for both sides in the transaction? What would you have done differently with this project? Walk me through a property’s cash flow from top to bottom, assuming the property has debt on it and is

in the process of renewing/attracting tenants.

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Due Diligence If I asked you go to underwrite a building in a location or for a property type you knew nothing about,

how would you go about doing it? If you were acquiring a building, what are the key pieces on information you would want to know?

o Rent Roll, Expenses, Market Comps…. How do you think about creating value? Repositioning, Lease up, Effective management (expense

reduction) Pick a sector and tell me how you would underwrite a debt/equity investment within it. How much is up

to you and how much is prevailing market conditions? What metrics would you look at and what levels would make for an attractive investment today? How do you research a new market?

Considerationso Size (SF) of market, barriers to entryo Current & planned supplyo Demographics, local economy

Per capita GDP, growth trends, population trends o Who are the major employers? Major industries? o State and local government history toward real estateo Corporate/property/recording/transfer taxes, zoning policies, utilities, approval boardso ACCESS TO TRANSPORTATION

Sourceso Costar, Real Capital Analytics, Reis, Loopnet, Property Sharko Local brokers, leasing and investment sales

Vacancy and rent trends, major sales, tenants, industries, landlords

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Macro / Market Level

Macro Trends

Impending interest rate hikes Credit underwriting approaching pre-recession levels Return of subprime and higher levels of leverage Capital markets driven recovery, not fundamentals With weak economic growth and limited leverage, opportunistic returns are difficult to achieve Extremely low interest rates and weak alternative yields are driving down cap rates

o RE yield relatively attractive vs. other asset classes Hope rents outpace inflation RE is generally considered a good inflation hedge Also an attractive long duration asset

Institutional investors moving away from hedge funds and allocating more capital to real estate What type of effects do do you think the value of oil is having on real estate? Answer: a reduction in

funds available to oil-dependent sovereign wealth funds, potential increase in value in suburban assets if people can drive cheaper, and a downturn in areas that are oil dependent (Texas) or that have significant operations (Oklahoma / Louisiana).

Policy Issues

Rising interest rate environment in the future? How will it affect a deal you are currently underwriting or an asset you already own?

New York Cityo Affordable housing incentives and tax creditso Development and De Blasio: Where is there opportunity for developers in a changed political

climate?

Demographics

Gen Y (Millenials) (15-34) is the largest generation in US history ~ 80 million people.o Homeownership remains a core aspiration, but people are now renting for longer.o This generation needs strong employment, but seeks shorter term employment.o Trend towards large metro areas with mass transit

Invest where intellectual capital wants to be.o Only asset larger than real estate is human capital.o Most scare resource is top-flight intellectual capital.o Strong markets get stronger.

Increased urbanization via the boomerang effect

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Technical/Quantitative What effect does inflation have on real estate as an owner/operator? In today’s market, what is a reasonable cap rate or valuation PSF for a [industrial / residential / office /

hotel / etc] property? Explain the difference between a buyer who thinks about acquisitions on an IRR basis vs. a cap rate

basis On one block there is a hotel, an office building and a residential rental building all with the same NOI.

Which would you prefer to own and why? o Multifamily residential generally considered least risky, but feel free to get creative if you can

back it up. Ask what cap rates these asset types are trading at in this market. Where are current rents for XYZ property type in NYC (or location where firm invests)? How do you project exit caps given inflation expectations? How is a cap rate calculated? What are the implications in terms of required returns and growth?

See solution here.

If you have a 10% unlevered IRR and obtain a 50% LTV loan at 5%, what is your levered IRR?o Unlevered IRR + (Unlevered IRR – Loan Interest Rate)* D/E ratio o 10% + (10%-5%)*(50%/50%) = 15%

How do you calculate the annual loan payment for an amortizing loan?o Loan Value = (Payment / r) * (1 / (1 + r) ^ n)o Payment = Loan Value / [(1/r)*(1/(1+r)^n)] (Simply an Annuity formula)

Talk me through a deal where I buy an asset at a 4% cap and financed it with debt at 6%? This is negative leverage. Technically the deal not profitable. However, this is done all the time in value add plays.

If you wanted to value a property and could ask for two pieces of information, what information would you request?

o Ask for the NOI and the capitalization rate for comparable properties What is the difference in IRR between a 12% bond maturing in 6 years and one that matures in 5 years? If you buy a bond with a 5% coupon for $0.90 on the dollar, what is your app. IRR/yield after 2 years?

o Partial credit for stating upfront that the yield is obviously greater than the 5% coupon given the bond is trading at a discount. As a rough approximation, 10% is a solid answer, as the 10% upfront discount (bought $1.00 par for $0.90) is distributed over the two year investment (same rough approx. applies over 3, 4, 5, etc years)

o If you were to do the IRR in Excel with Y0 = -90, Y1 = 5, Y2 = 105, you get 10.78%, higher than 10% because the discount is upfront.

You have an 8% cap rate, 50% LTV, and 5% IO debt. What is your cash on cash return? o On a $100 property, NOI = $8, Debt Service = $2.5, Equity = $50o Cash on Cash = ($8 - $2.5) / $50 = 11%o Be able to do this calculation in your heado Variations include asking for DSCR

What are some issues with using IRR as an investment criterion?o IRR annualizes returns so short time frames produce high IRR but may not be worth the effort.

This is why many investors also calculate Equity Multipleso IRR should not be used to rate mutually exclusive projects, but only to decide whether a single

project is worth investing in. A project could have a lower IRR but higher NPV. Use NPV to rank mutually exclusive projects

o IRR assumes a constant reinvestment rate, potentially an unrealistic assumption, particularly for a high IRR project with no comparable replacement projects in the near future

o In the case of positive -> negative -> positive cash flows etc. the IRR may have multiple values

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o Since IRR does not consider cost of capital, it should not be used to compare projects of different duration.

Describe the difference between levered and unlevered cash flows and provide appropriate discount rates for each.

Most real estate investments professionals put little to no value in NPV? Why?o Cap Rates and IRR’s drive real estate returns. NPV means relatively little to a purchaser

because the baseline price of an asset is often determined by the seller based on current NOI and market comps. Discount rates hold little value since a group can spend all day arguing over appropriate discount rates.

What would you do with a business that had high revenue but low profit?o Look at fixed vs. variable costs. Is profit erosion from cost of production or overhead?

How does a ground lease affect the attractiveness of an investment? Similar to a bond, value changes depending on the point in time of the ground lease which the acquisition occurs.

We are looking to price an office building with 40% occupancy and 18% rollover next year. It also sits on a ground lease coming due in five years. What else do you want to know?

Various Industry Topics

Private Equity

Walk me through the waterfall returns to both a GP and a LP in a typical PE-structured transaction. Walk me through a promote waterfall.

o General partners: Earn management fee and portion of profits called carried interest LPs entitled to hurdle rate annual return (preferred return) before GPs get a cut GPs will often get a catch-up, whereby they receive all distributions until distributions

are split 80/20 between the LP/GP If the hurdle is “hard”, then there is no catch up

How do you see the REPE industry changing over the next five years?o Talk about how firms need to adjust fee structures as investors are no longer willing to pay fees

and promotes that were once industry standards. o As the market continues to improve it is increasingly harder for PE shops to make alphao Too much capital in the system, prices are being driven up because of capital flows and not

underlying real estate fundamentals.

Development

What current projects are you following? What type of financing could you secure (for a given property type) in the current construction lending

environment? o Be specific, give a range of: XX% LTC X.X% Interest, non-recourse….

What has a higher interest rate, an Acquisition & Development loan or a stabilized loan?o A & D loan since the downside risk of an incomplete asset is in default greatero A & D loans are harder to come by and often have variable rates

Walk me through the cash flows for a typical development projecto Large upfront costs, soft costs (20% of hard costs is good estimate), infrastructure, construction,

interest reserve. Revenue takes time to realize. Talk about return projections: Blended sell out rates, base case vs. downside/upside What drivers would you look at for a residential development?

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o Focus on market, absorption, availability, pipeline o Low Income Tax Creditso Study comparable product and figure out how to differentiate with unit mix, finishes, amenitieso Condo towers drop a lot of supply on the market at once, makes them a challenge.

What criteria would you use to select an architect?o Want to get an architect who is creative, but also focused on realizing the broader vision of the

developer versus his own conceptual interests.o Also make sure architect can bring the ideas into the built environment efficiently and not just

on paper. If you were managing a project that was over budget, where would you focus value engineering?

o Focus on finishes and amenities that are further down the construction timeline to avoid programmatic changes that have multiple repercussions and therefore create additional costs in making the changes.

Gross Maximum Price (GMP): What developers seek but don’t always get from contractors. It locks in the price construction will cost.

Distress

What are special considerations you need to know when looking at a broken condo deal?o TCO, CO, Liens…

Are you comfortable with the foreclosure process?o Deed In Lieu, short sale..

What is a red flag co-tenancy clause you should look out for? At what level of retail occupancy cost should you be concerned?

o High teens. Especially relevant for in-line mall tenants. Why would you make a debt investment over an equity investment?

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Financial Reference

Property Valuation Techniques

Income Approach: Use Net Operating Income (NOI) and Discounted Cash Flow (DCF) analysis to value property (discounted cash flows + residual value)

o Direct Capitalization: Take next year’s projected NOI and divide it by cap rate Only applicable for stabilized properties

o DCF Analysis: Project all cash flows for 7-10 year period and calculate NPV using current market discount rates

Sales Approach: Compare other recent property sales to the subject, making various adjustments to account for different locations, sizes, quality, etc.

Cost Approach: Values existing real estate based on replacement cost

Return Metrics

Leverageo IRRE = IRRP + (IRRP – IRRD)*(D/E)o For 80% LTV at 10% interest rate and 12% unlevered return:

12% + (12% - 10%) * (80/20) = 20% levered return Cash-on-cash return = annual pre-tax cash flow / total cash (equity) invested Equity Multiple = (Cumulative Distributions + Residual Equity Value) / Total invested capital

o This does not account for Time Value of Money IRR: Discount rate that sets NPV of series of CFs equal to zero What is the IRR for an investment that yields a 2.0x/ 3.0x equity multiple in 5 years?

o Approx 15% / 25% Rule of 7 Takes approx. 7 years for a project with 10% IRR to achieve a 2.0x multiple Calculating a mortgage constant

o Basic annuity calculationo Mortgage Amount = (Monthly Payment/Monthly Rate)*(1 – (1 / (1 + Monthly Rate) ^ #

Periods))o Ex: $1m mortgage, 6% annual rate, 10 year amortization

$1,000,000 = (PMT / .005) * (1 – (1 / (1+.005) ^ 120 o PMT x Annuity Factor = Outstanding Loan Balance

Accounting

Depreciationo Only improvements are depreciable, NOT LANDo Straight line, 39.5yr for office, 27.5yrs for residentialo Basis = Acquisition Price (of improvements) + Cap Exo Adjusted Basis = Cost of Land and Improvements + Acquisition and Installation Fees +

CapEx – Accumulated Depreciation Capital Gains = Net Sales Proceeds – Adjusted Basis

o Net Sales Proceeds = Gross Selling Price – Selling Expense Funds From Operations (FFO) for REITS

o Measure resulting from the argument that real estate does not depreciate and therefore traditional GAAP net income is not a good measure of performance.

o FFO adds back depreciation and excludes gains or losses on the sale of assets.o Also know CAD (Cash Available for Distribution) and AFFO (Adjusted FFO) terminology for

REIT interviews

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Resources

TrendsBe sure to check for updates on these reports earlier in the calendar year (January – February), as that is generally when they are published

ULI/PWC Emerging Trends in Real Estate Cushman & Wakefield International Investment Atlas

o Need to create free login Jones Lang LaSalle Research Newmark Knight Frank CBRE PwC Real Estate Investor Survey

o On reserve in the library

NYC-centric transaction news The Real Deal Curbed Crain’s NY Observer NY Times

National / Global News Wall Street Journal Globe St Real Estate Alert & Commercial Mortgage Alert

o On reserve in the library PERE

o Only 5 articles free per month, but you can read the headlines then usually find the story elsewhere if you’re interested in learning more.

Commercial Property Executive Investment & Pensions Europe

Industry Trade Groups Urban Land Institute (ULI)

o $95 / year for a student membership International Council of Shopping Centers (ICSC)

o $50 / year for a student membership National Association for Industrial and Office Parks (NAIOP)

o $69 / year for a student membership

Questions?

Ask your REA Careers team: Alex Cemaj, Morgan Mann, Elliott Fry, or Isabella Lin