Investment and Financial Analysis for International Real Estate

Investment and Financial Analysis for International Real Estate

Course Overview n n n Case 1: Mr. Chen Case 2: Dr. Garcia Case 3: Euro. Vest HP-10 BII Calculator Exam 2

Chapter 1: Preparing for an International Transaction

Objectives n n Recall fundamental terminology Discuss strengthening and weakening currencies Review globalization, capital flow and currency conversions Identify six steps in preparing for an international transaction 4

Globalization is the movement by countries, companies, organizations and people toward a single market environment. 5

Real Estate Investors examine and invest in markets that best match the risk and return objectives of their portfolios. 6

Capital Flow Capital flow is a complex interplay of foreign exchange instruments that move currency, assets, credits and debt around the world almost instantaneously. 7

Currency Investors will buy real estate because of the favorable trend of the investor’s currency against a foreign currency. 8

Country Assessment Model n Cultural Influences q q n Relationships Historical influences Negotiating behavior Religion Conducting business q q Banks and financial institutions with international experience International transactions similar to domestic ones 9

Preparing for an International Transaction Six Steps 1. 2. 3. 4. 5. 6. Develop client profile Make necessary conversions Determine investment objectives Determine purchasing motivations Assemble a team What does your market have to offer? 10

Chapter 2: Legal Issues

Objectives n n n Discuss types of residency status Discuss ownership options Review basic income tax laws for non-resident aliens 12

Residency Status USA Citizen Taxed on worldwide income; credits allowed foreign taxes paid Resident Alien Taxed on worldwide income; credits allowed foreign taxes paid Taxed ONLY on USANon-Resident Alien sourced income 13

Residency Definitions Types Green Card Holder Physical Presence Test Substantial Presence Test 14

Ownership Entities n n Direct Indirect q q Through USA entity Through foreign entity These decisions should be made by the client after consultation with a legal professional. 15

Location of Income Source Competent tax counsel is needed to determine how the latest tax laws will treat the investor. 16

Tax Liabilities n Income Tax q q n USA-sourced income subject to USA tax Nonresident alien and USA taxpayer treated the same Passive Income q q Rents, dividends and interest Subject to 30% withholding tax Based on gross income No deductions allowed 17

Gains Tax Liability n FIRPTA q q Applies to nonresident alien individuals and corporations that buy or sell USA real estate Designed to equalize the treatment of domestic and foreign investors 18

DEFRA n Requires withholding/reporting/transmitting q q n 10% of amount realized to IRS within 10 days of transfer. Real estate agents may be liable Residential, non-business property, with a value up to $300, 000 is exempt IF property has been used as a primary residence by seller and will be used as a primary residence by buyer. 19

Transfer Tax Liability n n USA imposes tax on gifts and bequests TAMRA established tax rate on foreign-owned estates Apply only to USA-located assets of USAdomiciled, nonresident, aliens No USA gift tax on share transfer of USA companies q n Company assets must not exceed a certain percent of real estate Joint ownership may lower estate tax liability 20

Chapter 3 HP 10 B II Calculator

ALL CLEAR HP Row 1 Row 2 10 BII Row 3 Row 4 Row 5 Row 6 Row 7 Row 8 1 2 3 4 5 22

ALL CLEAR Row 1 Row 2 Primary Keys Row 3 Enter data left to right Row 4 Row 5 Row 6 Row 7 Row 8 1 2 3 4 5 23

All keys have 2 functions ALL CLEAR Primary function on top of key in WHITE Row 1 Row 2 Row 3 Secondary function on bottom of key in GOLD KEY [Shift key] activates second function Row 4 Row 5 Row 6 GK Row 7 Row 8 1 2 3 4 5 24

POWER 0. 00 Turn ON--Press Row 1 Row 2 OFF Turn OFF Press GK ON ON OFF Row 3 Row 4 Row 5 Row 6 GK Row 7 Row 8 ON OFF 1 2 3 4 5 25

0. 000000 Display 1. 2. 3. GK 4. 5. 6. Change numerals to right of decimal Can go out 9 places Internal calculations continue to 12 Change places by: GK, DISP, desired number of places GK DISP 6 26

Clearing Data Clears last digit Clears entire number GK GK C ALL Clears all memory & resets calculator 27

Sign Convention 1. 2. 3. 4. 5. Income (+) Expenses, losses, payments (-) Must remain constant PV, PMT and FV adhere to sign convention To change signs, Press: 28

Begin and End Functions 1. 2. GK 3. 4. Calculates from beginning or end of month/year Rent payments at beginning of month Mortgage interest paid at end of month GK, BEG/END 29

European Mode Function 1. 2. 3. GK 4. In Europe, the comma used in place of period £ 1. 000, 00 $ 1, 000. 00 To change, GK press. /, 30

874. 18 900. 40 848. 72 824 Constant Key 1. 2. 3. 4. Saves entering same numbers Example: Rent of $800 increases 3%/year. Enter: 800, +, 3, %, K, = Yr. 2 rent, = Yr. 3 rent, Yr. 4 rent, Yr. 5 rent = 31 =

Chapter 4 Case Study: Mr. Chen An Inbound Residential Transaction

Objectives n n n Review 6 -Step International Transaction Preparation Process Apply 6 -Step process to Mr. Chen Complete necessary calculations 33

Step 1: Develop Client Profile

What We Know n n n n Name: Mr. Chen Nationality: Taiwanese Occupation: Securities Trader Employer: Tiger Securities Company Home Phone: Cell Phone: Fax: 35

What We Know n n Mailing address: Residency Status Family: Married with 3 children 6, 9, 15 Requirements: q q q n n n 4 -bdrm, den, study on one floor 90 -95 pings of living space 30 minutes to work Price range: Up to NT$20, 000 Knowledge of market: Location and type of funds: 36

What We Know n n Financing: Yes at no more than 7. 5% interest Client cash involvement: 20% down Objectives and Motivations: To be discussed Cultural Considerations: “Other requirements” 37

Step 2: Make Conversions

Convert Area n n [Pings to SF] 1 ping = 36 square feet [conversion factor] Multiply pings to be converted X conversion factor [36] 90 pings X 36 = _______ square feet 3240 95 pings X 36 = _______ square feet 3420 39

Convert Square Feet to Pings n n 1 sq. ft. = 0. 02778 pings [1 ÷ 36] Multiply sq. ft. to be converted X conversion factor [0. 02778] 3240 sq. ft. X 0. 02778 = _______ pings 90 3420 sq. ft. X 0. 02778 = _______ pings 95 40

Convert Currency n n n Convert NT$20, 000 to US$ Formula: NT$ X US$ Conversion Factor Today’s exchange rate: US$1= NT$25 NT$1 = US$1 ÷ 25 or US$0. 04 (4 cents) q n n n Exchange rate ÷ conversion factor Multiply NT$ by exchange rate NT$20, 000 X US$0. 04 = US$800, 000 Mr. Chen will spend up to US$800, 000. 41

Ideal Property n n n Price: US$750, 000 Using same exchange rate, what will the price be in NT$? US$1 = NT$1 X 25 Formula: Base currency X conversion factor q n US$750, 000 X 25 = NT$18, 750, 000 42

Step 3: Client Objectives

Client Objectives n n May not be revealed Client may be knowledgeable about investment analysis Do your homework Be sure the client does not know more about the market than you! 44

Step 4: Client Motivations

Motivations n n n Vary greatly Some may never be revealed Cultural aspects play large role q q q n More family coming? Common language with neighbors? Solitary or group decision to buy? What are their agent expectations? 46

Step 5: Assemble Your Team

Who Do You Need and Why? 48

Step 6: What Does Your Market Have to Offer?

Your Market n n n Prepare market information Include local newspapers What’s happening? Chamber of Commerce Is property appreciating? Are businesses coming to your area? 50

Mr. Chen Arrives Today n n Mr. Chen selects 1 of 3 homes shown Price: US$750, 000 Size: 3350 square feet Reason selected: q q q Proximity to work and schools Potential rental income Appreciation potential 51

Before Making an Offer… Mr. Chen would like an estimate of his proceeds if he sells the house in three years. 52

What You Know n n n House reasonably priced at US$750, 000. Comparable sales 3 years ago were US$634, 300. First calculation is for annual rate of appreciation 53

Calculations 1. 2. 3. 4. 5. 6. 7. 1, GK , P/YR Press 3, N Enter 634, 300, Press +/-, Press PV Enter 750, 000 Press FV Press I/YR key Annual appreciation rate is _____ 5. 74% 54

Projected Sales Price n n n n Enter 3, N (Holding period) Enter 5. 74%, I/YR Enter 750, 000 (present value) Press +/- (Amount paid out) Press PV for Present value Solve for future value by pressing FV Answer: 886, 700 (rounded) 55

Future Net Sales Proceeds After Taxes 1. 2. Enter projected sales price $886, 700 Calculate costs of sale at 7. 5% a) 3. Calculate original loan amount a) 4. $886, 700 X 7. 5% = $66, 502 $750, 000 X 80% = $600, 000 Calculate Remaining Loan Balance a) b) Interest Reduction Method Traditional Method 56

Interest Reduction Method 1. 2. 3. 4. 5. 6. 7. 8. 9. 1, 2, GK , P/YR Enter 3, 0, GK x. P/YR (Term of loan) Enter 7. 5, I/YR (Annual interest) Enter 600, 000 (loan amount) Press PV (Present value) Press 0, FV (Full amortization) Press PMT (Monthly payment) Press 3 to reset loan term, GK , x. P/YR Press FV for remaining loan balance after 3 years $582, 085. 49 57

Tax Liability n n Mr. Chen tells us he will be living in the home for at least 2 years. Budget Act of 1997 relieves him of gains tax. 58

Final Calculations n n n Projected Sales Price $886, 700 (-) Costs of Sale 66, 502 (-) Loan balance 582, 085 (-) Tax Liability -0(=) Net proceeds after taxes $238, 113 59

Effect of Exchange Rates n n When the exchange rate decreases, the currency has _________ strengthened When the exchange rate increases, the currency has _________ weakened 60

Key Point Review n n n Team of experts critical to success of international transactions. Present information in terms client can understand Always advise legal counsel for client Investment return depends on decisions before acquisition Residency status extremely important 61

Chapter 5 Finance and Capital Markets

Objectives n n Calculate investing financial concepts Apply concepts to case study Identify effects of exchange rate fluctuations on a transaction Obtain skills needed for basic financial analysis 63

Investment Elements 64

Time Value of Money n n n Risk Purchasing power Opportunity costs Compounding Discounting 65

Key Components n Compounding--Determining the future value of an investment made today q q n Single or series of payments Interest earned is reinvested Discounting—determining the present value of money received in the future q q Single or series of payments Increased time to maturity gives greater discounting 66

Measuring Investment Performance

IRV Formula n n n Stands for Income, Rate, Value Measures most forms of Yield If you have two numbers, solve for the 3 rd Divide bottom numbers into the top Multiply two bottom numbers 68

Capitalization Rate NOI Cap Total Rate Value 69

Cash-on-Cash (Con. C) Cash Received Rate of Invested Return Cash 70

Key Point Review n Four elements of investment income property are: q q n Yield Safety Leverage Control Time Value of Money q q Compounding Discounting 71

Key Point Review n IRV Formula q q Capitalization rate Cash-on-cash return 72

Chapter 6 Dr. Garcia: Inbound Commercial Transaction

Objectives n n Apply 6 -Step preparation process to Dr. Garcia’s case Calculate 5 -year rent projections Calculate cap rate for each of the 5 years Measure yield using the IRR 74

Dr. Garcia Referral n Step 1: Client Profile q q q q Dr. Garcia Mexican national Investor/businessman Non-resident status Various family members manage some of his businesses Safe real estate in Southwestern USA US$6 -8 million 75

Step #2: Conversions n Does not require any area or currency conversions at this time 76

Step #3: Client Objectives n n n Invest US$6 -8 million Achieve 12% before-tax cash-on-cash yield on 100% equity investment Obtain 12% before-tax cash-on-cash yield with financing Realize 10% after-tax yield if sold after 5 years Title through single-asset domestic corporation Finance 50% of purchase price 77

Step #4: Client Motivations n n Spread risk by diversifying Safe harbor for part of family capital Minimize risk Minimize management requirements 78

Step #5: Assemble a Team n What team members might you need for Dr. Garcia? 79

Step #6: Local Market Investment Opportunities 1. 2. 3. § Group of 4 steak houses Build-to-suit office building leased to a start-up software firm Warehouse and distribution center Dr. Garcia decides to investigate the warehouse 80

Question #1: n n Dr. Garcia asks for a five-year projection of rents and the cap rate for each year. What you know q q n 1 st year rent is $59, 250 per month Property is net leased Where to begin q Organize data to calculate NOI 81

Net Operating Income Gross potential rental income (-) vacancy and credit losses (=) Effective gross income (+) other income (=) Gross operating income (-) operating expenses (=) Net operating income (NOI) 82

Determine Property NOI = Rate x Purchase Price NOI $711, 000 Rate. 09 Purchase $7, 900, 000 Price X The warehouse must generate $711, 000/year rent to meet Dr. Garcia’s 9% cap rate requirement on his $7, 900, 000 investment 83

Annual Rent Increases Formula: Annual rent (+) % increase (=) Rent for year 2 Enter Annual Rental Income Press + , 3 , % , K , = (Yr. 2 rent) = (Yr. 3 rent) = (Yr. 4 rent) = (Yr. 5 rent) = (Yr. 6 rent) $711, 000. 00 732, 330. 00 754, 299. 90 776, 928. 90 800, 236. 76 824, 243. 87 84

Calculate Annual Cap Rate Cap rate = Annual rent Original price $732, 330 Cap Rate ? 9. 27% $7, 900, 000 Income Year 2 (Rent) Value of property (original price) 85

5 Year Cap Rate History Year Rent Property Value (=) Cap Rate 1 $711, 000 7, 900, 000 9. 00% 2 $732, 330 7, 900, 000 9. 27% 3 $754, 300 4 $776, 929 5 $800, 237 7, 900, 000 9. 54% 9. 83% 10. 13% 86

Question #2 n Dr. Garcia wants to know: q q q Can he finance 50% of purchase price What will his payments be What an analysis of his yield will be with financing 87

What You Find: n n n 50% mortgage 7. 5% interest 1. 5 points 15 -year, fixed-rate loan Loan amount of $3, 950, 000 88

Analyzing the Financing Mortgage calculations involve top row keys Number of payments or term in years Annual interest rate Present value or initial cash flow Periodic payment Future value 89

36, 617 Calculate Monthly Payments Press: GK , C ALL` Enter: 1, 2, GK , p/yr Enter: 1, 5, GK , x. P/YR Enter: 7. 5, I/YR Enter: 3, 950, 000, +/- PV Enter: 0, FV Press: PMT Answer: 90

Annual Debt Service (ADS) Formula: Monthly payment X 12 = ADS $439, 404 $36. 617 X 12 (=) $ _______ 91

Cash Flow Before Taxes Cash-on-Cash Yield (CFBT-ADS) Formula: CFBT ÷ Original investment (including points) = Con. C Yield Calculate Dollar Cost of Points Formula: Loan Amount X Cost of Points = Dollar cost of points $3, 950, 000 X. 015 = ______ $59, 250 92

Calculate Original Amount Invested Formula: Initial investment + Cost of Points = Total initial investment $4, 009, 250 $3, 950, 000 + $59, 250 = _______ 93

Using IRV to Calculate Con. C Divide CFBT by Value of original investment Income before taxes (CFBT) Rate of Value of return Con. C Investment 94

Cash-on-Cash (Con. C) Yield NOI (-) ADS (=) CFBT (÷) DPwith (=) Con. C Points Yield Year 1 $711, 000 439, 404 271, 596 4, 009, 250 6. 77% Year 2 $732, 330 439, 404 292, 926 4, 009, 250 7. 31% Year 3 $754, 300 439, 404 314, 896 4, 009, 250 Year 4 $776, 929 439, 404 337, 525 4, 009, 250 8. 42% Year 5 $800, 237 439, 404 360, 833 4, 009, 250 9. 0% 7. 85% 95

Dr. Garcia’s Response n n n One objective was to obtain a 12% before-tax cash-on-cash yield with financing. Does this investment meet that objective? What off-setting points can you present? 96

Question #3 n Dr. Garcia requests: q q 5 -year projection of rents Projected sales price • Selling after 5 th year 97

What You Know n n n Use 6 th year income figures Determine sales price using 9% cap rate First $50, 000 of income taxed at 15% Balance taxed at 25% Depreciated over 39 years Land is worth 20% of total purchase price 98

Net Sales Proceeds Before Tax Cash Flow Before Tax Net Sales Proceeds Before Tax After Sale Proceeds 99

Net Sales Proceeds Before Tax n Formula: Sales price (Yr. 6 NOI ÷ 9% Cap rate = projected price) (-) Mortgage balance (-) Costs of sale (=) Net sales proceeds before taxes 100

36, 617 x. P/YR I/YR PV PMT P/YR FV Remaining Loan Balance 1. 2. 3. 4. 5. GK 6. C ALL 7. 8. , C ALL 1, 2, GK , P/YR 1, 5, GK , x. P/YR 7. 5, I/YR 3, 950, 000 PV 0, FV PMT Answer: GK 101

3, 084, 789 Interest, Principal, Balance 1. AMORT 2. 3. 4. 5. GK 6. 7. = 8. 9. , AMORT Display: Per 1 -12 = displays principal = displays interest = displays balance GK , AMORT Display: Per 13 -24 Continue thru Yr. 6 Final balance: GK 102

Dr. Garcia’s Principal, Interest & Loan Balance EOY 1 2 3 4 5 6 Principal $148, 179 $159, 682 $172, 079 $185, 438 $199, 834 $215, 347 Interest 291, 225 279, 722 267, 325 253, 966 239, 570 224, 057 Remaining Loan Balance 3, 801, 821 3, 642, 139 3, 470, 060 3, 284, 622 3, 084, 789 2, 869, 441 103

641, 079 % Costs of Sale 1. 2. 3. Sales price of $9, 158, 267 X 7 % selling costs = 104

5, 432, 399 Net Sales Proceeds Before Tax 1. 2. 3. 4. Sales price (-) Mortgage balance EOY 5 (-) Costs of sale (=) Net sales proceeds before taxes 105

Dr. Garcia’s Annual IRR n 0 1 2 3 4 5 $ (4, 009, 250) Down Payment + Points 271, 596 Cash flow EOY 1 292, 926 EOY 2 314, 896 EOY 3 337, 525 EOY 4 360, 833 EOY 5 + 5, 432, 399 (sales proceeds) 106

13. 19 Calculate Annual IRR 1. 2. IRR/YR 3. CFj 4. +/- 5. GK 6. C ALL 7. + 8. 9. , C ALL 4, 009, 250, +/- , CFj 271, 596, CFj 292, 926, CFj 314, 896, CFj 337, 525, CFj 360, 833, + 5, 432, 399= CFj GK , IRR/YR Answer: GK 107

Key Point Review n n n 6 -Step Preparation Process helps organize client data Purchasing decisions are based on a variety of financial calculations The international real estate agent must be prepared to: q q n Apply necessary calculations Satisfactorily explain the meaning of each The IRR is a tool for measuring yield 108

Chapter 7: The Impact of Taxes on Investments

Objectives n n Calculate the potential effect taxes have on a real estate investor’s return. Recognize the need to develop a team of legal and tax experts. 110

Effect of Taxes n n n Profound effect on investment return Tax depends on several variables Tax laws change frequently Every investment is unique Tax treaties may influence return Consult tax and legal experts 111

Holding Period Information n n Estimated profit after five years is $5, 432, 399 Pre-tax cash flow IRR would be 13. 19% 112

Depreciable Basis n n Land is not depreciable Land assumed to be 20% of total property value Deduct land cost from purchase price Improvements are depreciable 113

Calculating Depreciable Basis $7, 900, 000 X 20% = $1, 580, 000 (land) $7, 900, 000 X 80% = $6, 320, 000 (improvements) 114

Straight-line Depreciation Cost Recovery Formula: Divide 100 by number of depreciable years Assume a 39 -year straight-line depreciation 100 ÷ 39 = 2. 564% (depreciation/year) Dr. Garcia’s annual depreciation: $6, 320, 000 X. 02564 =$162, 044. 80 115

Mid-Month Convention Formula: Divide months of partial year by full year. Multiply answer by 2. 564 (depreciation factor) 2. 457% 11. 5 ÷ 12 X 2. 564 = ________ (partial year depreciation factor) $6, 320, 000 X. 02457 = ________ $155, 282. 40 (Dr. Garcia’s 1 st year depreciation) 116

Deduction of Mortgage Points n n n Pro-rata annual portion is deductible Points amortized over life of loan Unamortized points expensed at time of sale Formula: Loan amount X % cost of points = Total cost of points $59, 250 $3, 950, 000 X. 015 = ________ $59, 250 ÷ 15 = _______/year $3, 950 117

Calculating Taxable Income Yr. NOI (-) Cost Recovery (-) Points Taxable Interest (-) (=) Income 1 $711, 000 155, 282 291, 225 3, 950 260, 543 2 $732, 330 162, 045 279, 722 3, 950 286, 613 3 $754, 300 162, 045 267, 325 3, 950 320, 980 4 $776, 929 162, 045 253, 966 3, 950 356, 968 5 $800, 237 162, 045 239, 570 3, 950 394, 672 118

Calculating Total Taxable Yr. Income 1 st 50 K taxed @ 15% Taxable Balance Taxed Total at 25% Tax 1 260, 543 7, 500 210, 543 52, 636 60, 136 2 286, 613 7, 500 236, 613 59, 153 66, 653 3 320, 980 7, 500 270, 980 67, 745 75, 245 4 356, 968 7, 500 306, 968 76, 742 84, 242 5 394, 672 7, 500 344, 672 86, 168 93, 668 119

Cash-on-Cash Yield after Taxes Yr. CFBT (-) Tax (=) CFAT (÷) Down Payment (=) Con. C 1 271, 596 60, 136 211, 460 $4, 009, 250 5. 27% 2 292, 926 66, 653 226, 273 $4, 009, 250 5. 64% 3 314, 896 75, 245 239, 651 $4, 009, 250 5. 98% 4 337, 525 84, 242 253, 283 $4, 009, 250 6. 32% 5 360, 833 93, 668 267, 165 $4, 009, 250 6. 66% 120

Calculating Capital Gains Formula: Sales Price (-) Selling Costs $9, 158, 267 641, 079 (-) Adjusted basis (=) Gain (X) Tax Rate (25%) (=) Capital Gains Tax Liability 121

Calculating Adjusted Basis Formula: Purchase Price (+) Capital Improvements (-) Cost Recovery Taken (=) Adjusted Basis $7, 900, 000 0 803, 462 $7, 096, 538 ______ 122

Adjusted Basis n You can now calculate q q Capital gains Tax liability Sales proceeds after taxes Yield on CFAT 123

Calculating Capital Gains Formula: Sales Price $9, 158, 267 (-) Selling Costs (-) Adjusted basis (=) Gain 641, 079 7, 096, 538 1, 420, 651 (X) Tax Rate (25%) (=) Capital Gains Tax Liability $ 355, 163 124

Sales Proceeds After Taxes Sales Price (-) Mortgage Balance (-) Costs of Sale $9, 158, 267 3, 084, 789 641, 079 (=) Net Sales Proceeds BEFORE Taxes (-) Tax Liability 5, 432, 399 (=) Net Sales Proceeds AFTER Taxes $5, 077, 237 355, 163 125

IRR Annual Yield of ATCF n 0 1 2 3 4 5 $ (4, 009, 250) +/- CFj 211, 460 CFj 226, 273 CFj 239, 651 CFj 253, 283 CFj 267, 163 + 5, 077, 237 = CFj, GK, IRR 10. 25 126

IRR Annual Yields n n Before Tax IRR After Tax IRR 13. 19% 10. 25% 127

Key Point Review n n Pre-Tax and After-Tax investment yield calculations influence purchasing decisions. Know steps in setting up and completing necessary calculations Capital gains, tax liability, sales proceeds after taxes and yield on CFAT calculated from adjusted basis. T-Bar is useful tool for calculating yield. 128

Chapter 8 Euro. Vest Case Study An Outbound Commercial Transaction

Objectives n n n Analyze potential before-tax and cashon-cash return Project sales proceeds Estimate the internal rate of return (IRR) Evaluate currency fluctuations on IRR Utilize APOD and international cash flow analysis worksheet to organize data 130

Client Profile Name: Euro. Vest Nationality: Brazilian Business: Pension fund investing in netleased European real estate Objectives: Provide capital and financing expertise to creditworthy USA firms Price: 30, 000 BRL (minimum) 131

Client Objectives n Investment decisions based on q q q Economic feasibility of individual real estate project Confidence in the business Creditworthiness of the tenant Stability of the target market Suitability of the target location to the tenant’s business 132

Property Profile Name: Dos Cantos Type: High tech office/warehouse Location: Carretera de Burgos, 98 Seville, Andalucia Spain Bldg. Size: 10, 000 square meters Site Size: 2 hectares (20, 000 m²) 133

Tenant Data Name: Opti. Gro Location: Chicago, IL, USA Requirements: 100, 000+ square feet Budget: $16 per sq. ft. per year net 134

Revised Client Objectives • 1 st year minimum Con. C yield of 11% • 18% minimum IRR on 5 -year-hold • An option to sell at end of 5 th year 135

Estimating Return • • Determine how much Euro. Vest will pay for Dos Cantos based on 11% Con. C first year return Calculate yearly yield of 5 year holding period Determine IRR if Dos Cantos sold after 5 years See if numbers meet client’s target return 136

Convert m² to Square Feet Conversion Factor: 1 m² = 10. 7639 sq. ft. Formula: # m² X 10. 7639 107, 639 10, 000 m² X 10. 7639 = _______ sf. 137

Calculating Rent Formula: # Sq. Ft. X Rent/sq. ft. = Total rent $1, 722, 224 _____ 107, 639 sq. ft. X $16 = _____ Total Rent 138

Convert US$ to Euro’s Formula: USD X Conversion Factor Assume US$1 = € 1. 25 1, 722, 224 ______ USD (rent) X € 1. 25 = 2, 152, 780 €_______ (rent in euros) 139

Assumptions • • • Five year holding period 2% rent escalation 11% cap rate at sale No vacancy Initial investment = total acquisition costs 0 expenses 140

Currency Assumptions Euro (EUR) = 2. 73 real (BRL) 1 BRL =. 365 EUR 1 US dollar (USD) = 1. 25 EUR 1 EUR =. 799 USD Which currency is strongest? 141

Five-Year Cash-on-Cash Returns In EUR YR 1 Gross 2, 152, 780 Rental X 1. 02 = Income Net Operating 0 Expenses YR 2 YR 3 YR 4 YR 5 2, 195, 836 2, 239, 752 2, 284, 547 2, 330, 238 X 1. 02 = 2, 239, 752 2, 284, 547 X 1. 02 = YR 6 2, 376, 843 X 1. 02 = Net Operating 2, 152, 780 Income Annual Debt 0 Service Cash Flow Before Taxes 2, 152, 780 2, 195, 836 2, 330, 238 2, 376, 843 142

Five-Year Cash-on-Cash Returns In EUR YR 1 Net Operating 2, 152, 780 Income Interest YR 5 2, 239, 752 2, 284, 547 2, 330, 238 YR 6 2, 376, 843 0 X Tax Rate = Liability YR 4 0 Taxable Income 2, 195, 836 YR 3 0 Cost Recovery YR 2 0 143

Five-Year Cash-on-Cash Returns In EUR YR 1 Cash Flow Before Taxes Minus (-) Tax Liability YR 2 2, 152, 780 0 Cash Flow 2, 152, 780 After Taxes Divided by 19, 570, 727 Investment Amount Cash-oncash Return YR 3 YR 4 YR 5 YR 6 2, 195, 836 2, 239, 752 2, 284, 547 2, 330, 238 2, 376, 843 0 0 0 2, 195, 836 2, 239, 752 2, 284, 547 2, 330, 238 2, 376, 843 19, 570, 727 19, 570, 727 11. 00% 11. 22% 11. 44% 11. 67% 11. 91% 12. 14% 144

Five Year Cash-on-Cash Returns In BRL YR 1 Gross Rental Income Net Operating Expenses Net Operating Income Annual Debt Service Cash Flow Before Taxes YR 2 YR 3 5, 877, 089 5, 994, 631 X 1. 02 = 5, 994, 631 6, 361, 550 6, 114, 523 YR 4 6, 236, 814 YR 5 YR 6 6, 361, 550 6, 488, 781 0 5, 877, 089 6, 114, 523 6, 236, 814 6, 488, 781 145

Five-Year Cash-on-Cash Returns In BRL YR 1 Net 5, 877, 089 Operating Income Interest Cost Recovery YR 2 5, 994, 631 YR 3 6, 114, 523 YR 4 6, 236, 814 YR 5 YR 6 6, 361, 550 6, 488, 781 0 0 Taxable Income 0 X Tax Rate = Liability 0 146

Five-Year Cash-on-Cash Returns In BRL YR 1 Cash flow before taxes Minus (-) tax liability Cash flow after taxes Divided by investment amount Cash-oncash return YR 2 YR 3 YR 4 5, 877, 089 5, 994, 631 6, 114, 523 6, 236, 814 6, 361, 255 6, 488, 781 0 0 5, 877, 089 5, 994, 631 YR 5 YR 6 53, 428, 085 53, 428, 085 11. 00% 11. 22% 11. 44% 11. 67% 11. 91% 12. 14% 147

Projected Sales Price Yr. 6 NOI 2, 376, 843 (euros) 11% 21, 607, 664 (euros) Cap Rate Sales Price 148

B. Calculation of Gain and Tax Sales price (-) selling costs (7%) (-) adjusted basis (=) Taxable gain (x) Rate (=) Capital gains tax 21, 607, 664 1, 512, 536 19, 570, 727 524, 400 0% 0 149

Calculation of Sales Proceeds After Tax Sales price (-) selling costs (-) loan balance (=) Sales proceeds before tax (-) Capital gains tax (=) Net sales proceeds after tax 21, 607, 664 1, 512, 536 0 20, 095, 128 150

IRR Annual Yield Calculation— Before Tax n € 0 (19, 570, 727) +/- CFj 1 2, 152, 780 Cash flow EOY 1 CFj 2 2, 195, 836 Cash flow EOY 2 CFj 3 2, 239, 752 Cash flow EOY 3 CFj 4 2, 284, 547 Cash flow EOY 4 CFj 5 2, 330, 238 + Cash flow EOY 5 20, 095, 128 = (net sales proceeds after tax) CFj 151

IRR 11. 82% 152

Sales Proceeds Before Tax Sale Price (-) Cost of sale (-) Loan Balance Sales proceeds before tax € 21, 607, 664 1, 512, 536 -0€ 20, 095, 128 153

Did Investment Meet Objectives? 1. 2. EOY 1 minimum Con. C yield of 11%? Minimum 11% IRR on 5 year hold? 154

IRR Annual Yield Calculation n 0 1 2 3 4 5 IRR = EUR BRL 11. 82% € (19, 570, 727) +/-, CFj (53, 428, 085) +/-, CFj 2, 152, 780 CFj 5, 877, 089 CFj 2, 195, 836 CFj 5, 994, 631 CFj 2, 239, 752 CFj 6, 114, 523 CFj 6, 236. 814 CFj 2, 284, 547 CFj 6, 361, 550 + 2, 330, 238 + 54, 859, 695 20, 095, 128 155

Currency Values EUR BRL Year 0 1 2. 73 Year 1 1 2. 86 (+), (5), (%), (K), (=) Year 2 1 3. 00 (=) Year 3 1 3. 16 (=) Year 4 1 3. 31 (=) Year 5 1 3. 48 (=) 156

Currency Values EUR BRL @ 2. 73 Weakens 5% Year 1 2, 152, 780 5, 877, 089 6, 156, 951 Year 2 2, 195, 836 5, 994, 631 6, 587, 508 Year 3 2, 239, 752 6, 114, 523 7, 077, 616 Year 4 2, 284, 547 6, 236, 814 7, 561, 850 Year 5 2, 330, 238 6, 361, 550 8, 109, 228 30, 584, 607 35, 493, 153 Total 157

Dealing with Two Currencies n 0 1 2 3 4 5 IRR = EUR 11. 82% € (19, 570, 727)(+/-) 2, 152, 780 2, 195, 836 2, 239. 752 2, 284, 547 2, 330, 238 + 20, 095, 128 BRL IRR = 17. 37% (53, 428, 085)(+/-) 6, 156, 951 6, 587, 508 7, 077, 616 7, 561, 850 8, 109, 228 + 69, 931, 045 158

Currency Value Effect on IRR Causation BRL weakens again EURO IRR in BRL currency will increase Caused by declining currency value not property operations BRL strengthens against the EURO IRR in BRL currency will decrease Caused by increase in currency value not property operations 159

Currency Values EUR BRL Year 0 1 2. 73 Year 1 1 2. 59 (-), (5), (%), (K), (=) Year 2 1 2. 46 (=) Year 3 1 2. 34 (=) Year 4 1 2. 22 (=) Year 5 1 2. 11 (=) 160

Dealing with Two Currencies n 0 1 2 3 4 5 IRR = EUR 11. 82% € (19, 570, 727) +/2, 152, 780 2, 195, 836 2, 239. 752 2, 284, 547 2, 330, 238 + 20, 095, 128 BRL IRR = 6. 20% (53, 428, 085) +/5, 575, 700 5, 401, 754 5, 241, 019 5, 071, 694 4, 916, 802 + 42, 400, 720 = 161

Key Point Review n n Exchange rates have a significant effect on investment objectives. Real estate professionals must know how to organize and calculate certain financial projections so they may provide clients with accurate assessments of potential return. 162

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