ANALYZING PROPERTIES FOR PURCHASE

1
ANALYZING PROPERTIES FOR PURCHASE

• WHAT PURCHASERS WANT TO KNOW

2
INVESTMENT ALTERNATIVES

• THE FOLLOWING DISCUSSION ASSUMES THE BUYER HAS
  ANALIZED THE MYRIAD INVESTMENT CHOICES AVAILABLE
  AND MADE THE CALCULATED, INFORMED AND RESPONSIBLE
  DECISION TO PLACE SOME OF THEIR FUNDS AVAILABLE
  FOR INVESTMENT INTO REAL ESTATE.

3
TYPES OF BUYERSNEEDS VARY BY TYPE

• REAL ESTATE INVESTMENT TRUSTS
• INSTITUTIONAL
• LARGE BUSINESSES, WEALTHY INDIVIDUALS
• SMALL BUSINESSES, INDIVIDUALS
• OTHERS

4
REAL ESTATE INVESTMENT TRUSTS

• PUBLIC
• PUBLIC STOCK OFFERINGS COST OF CAPITAL IS LOW
• FAIRLY LIQUID VEHICLE FOR INVESTORS
• SMALL FEDERAL TAX CONSEQUENCES
• AD VALOREM TAXES ARE A BIG CONCERN
• TRACK FFO, ASSEST APPRECIATION, ROI

5
REAL ESTATE INVESTMENT TRUSTS

• PRIVATE
• MIXTURE OF INVESTORS
• LESS LIQUID, LESS VOLATILE
• SMALL FEDERAL TAX, CAPITAL GAINS
• AD VALOREM TAXES ARE A BIG CONCERN
• TRACK FFO, MARKET CAPITALIZATION, ROI

6
INSTITUTIONAL INVESTORS

• INSURANCE COMPANIES, PENSION FUNDS, ETC.
• MOUNTAINS OF CASH
• FEDERAL TAXES, CAPITAL GAINS
• AD VALOREM TAXES ARE A BIG CONCERN
• TRACK NOI, ASSET APPRECIATION, ROI

7
LARGE BUSINESSES, WEALTHY INDIVIDUALS

• LARGE BUSINESSES, WEALTHY INDIVIDUALS
• LOTS OF CASH OR CREDIT
• FEDERAL TAXES, CAPITAL GAINS
• AD VALOREM TAXES ARE A BIG CONCERN
• TRACK NOI, ASSET APPRECIATION, ROI

8
SMALL BUSINESSES

• OWNER OCCUPIERS, SMALL MULTI-FAMILY, RETAIL,
  INDUSTRIAL
• SOME CASH, CREDIT
• FEDERAL TAXES, CAPITAL GAINS
• AD VALOREM TAXES ARE A BIG CONCERN
• TRACK NOI, ASSET APPRECIATION, ROI

9
OTHERS

• HEIRS, WANNABES, CAD EMPLOYEES
• NO CASH, IFFY CREDIT
• FEDERAL TAXES, CAPITAL GAINS
• AD VALOREM TAXES ARE A BIG CONCERN
• TRACK NOI, ASSET APPRTECIATION, ROI

10
WHAT DO THEY ALL HAVE IN COMMON ?

• THEY WANT TO KNOW HOW MUCH THE PROPERTY NETS,
  WHAT THE ASSET IS WORTH, AND THE POTENTIAL RETURN
  ON THEIR INVESTMENT.
• THEY WANT TO KNOW THE FEDERAL TAX AND CAPITAL
  GAINS CONSEQUENCES.
• THEY WANT TO MINIMIZE THEIR AD VALOREM TAXES.

11
HOW DO BUYERS ANSWER THEIR QUESTIONS AND ADDRESS
THEIR CONCERNS ?

• DUE DILIGENCE
• REVIEW OF PERFORMANCE

12
DUE DILIGENCE

• PHYSICAL, ENVIRONMENTAL AND LEGAL STATUS OF
  PROPERTY
• PAST AND CURRENT FINANCIAL RECORDS
• ASSESS IMPACT OF FUTURE ACTIONS OF GOVERNMENT AND
  NEIGHBORS
• CURRENT AND FUTURE TAXES
• EVERYTHING ELSE

13
PERFORMANCE REVIEW

• FFO FUNDS FROM OPERATIONS
• NOI NET OPERATING INCOME
• ROI RETURN ON INVESTMENT
• ASSET VALUE

14
PERFORMANCE REVIEW

• FFO FUNDS FROM OPERATIONS
• DEFINITIONA financial measure used by REITs to
  define their operating performance. FFO is
  calculated by adding depreciation and
  amortization expenses to earnings. This gives an
  idea of the REIT's cash performance, which is a
  better measure of the REIT's performance than
  earnings, which include (often large) non-cash
  items.

15
PERFORMANCE REVIEW

• NOI NET OPERTATING INCOME
• DEFINITION
• Income after deducting for operating expenses
  but before deducting for income taxes and
  interest.

16
A NOTE ON AD VALOREM TAXES

• OWNERS MUST STAY COMPETITVE WITH OTHER PROPERTIES
  TO ATTRACT TENANTS. SINCE TAXES ARE ALMOST ALWAYS
  PASSED THROUGH TO THE TENANTS, AN OWNER MUST KEEP
  THIS EXPENSE TO A MINIMUM.

17
PERFORMANCE REVIEW

• ROI RETURN ON INVESTMENT
• DEFINITION
• ROI measures the effectiveness of the investment
  by calculating the number of times the net
  benefits recover the original investment.
• ROI NET X 100
• INVESTMENT

18
PERFORMANCE REVIEW

• ASSET VALUE
• FEE APPRAISALS
• IN-HOUSE ESTIMATES DERIVED FROM FINANCIALS

19
CONCLUSION

• BUYERS WANT TO MAXIMIZE THE RETURN ON THEIR
  INVESTMENT. PERIOD.
• THE WAY THEY DO THIS IS TO REDUCE THOSE COSTS
  WITHIN THEIR CONTROL AND INCREASE REVENUE (AND
  THEREFORE MARKET VALUE) AS MUCH AS POSSIBLE.
• THEY BUY PROPERTIES THAT THEY CAN
  OPERATE/MANIPULATE MOST EASILY TO ACHIEVE THE
  ABOVE.

20
ANALYZING PROPERTIES FOR PURCHASE

• ADDENDA
• SEE HANDOUT