Financial analysis consists of using the cash flow model to perform calculations with estimations from forecasted conditions in the real estate market and their impact on the subject property. This process involves judgment, knowledge of the real estate market, and research using various source documents.

The real estate cash flow model reflects the time value of money (TVM) concept in quantifying not only the amount of the cash flows, both positive and negative, but also the timing of the cash flows. This process involves determining revenues, expenses, financing, construction costs, capitalization rates, and other financial information that affects the profitability and the rate of return to an investment in the subject property.

Two Major Decision Makers

There are two major decision makers:

• Users, those who make decisions regarding space that they need to use for their business
• Investors, those who make decisions regarding investment in properties that are or could be leased to users

User Decisions

Users want space that meets the needs of their business in terms of the location, size and layout of the space, quality of the building, and perhaps proximity to other business that might be suppliers or customers. Users are concerned about the occupancy costs of the space which will depend (to a large extent) on the terms of the lease. Deciding to use the space is a user decision and deciding to own the space they use is an investment decision which must provide an adequate return as any investment. The company could be using the capital for other purposes.

Users are confronted with many decisions while acquiring the space, holding the space, and disposing of the space. The following is a partial list of the major decisions with which users are confronted:

Acquisition Decisions

• Should space be acquired?
• What type and how much space should be acquired?
• Where should space be acquired?
• Which space should be acquired?
• What should the space acquisition entity be?
• Should the space be leased or purchased?
• What should the space acquisition process be?

Holding Period Decisions

• Leased space
  • Should discretionary capital expenditures be made?
  • Should the capital structure of occupancy be changed?
  • Should the space utilization be changed?
  • Should the user continue to occupy the space?
  • Should any lease options be exercised?
  • Should the lease be renegotiated?
  • Should the space be disposed of?
• Owned Space
  • Should discretionary capital expenditures be made?
  • Should the capital structure be changed?
  • Should the space utilization be changed?
  • Should the user continue to occupy the space?
  • Should the property be sold or exchanged?

Disposition Decisions

• What should the disposition price be?
• What should the disposition method be?
• What should the disposition process be?

Investor Decisions

Investors are primarily interested in receiving a return on investment (ROI or yield)) that is commensurate with the risk that they will incur by making an investment. The rate of return is the percentage return on each dollar invested for each period it is invested. Investors can compare investment alternatives using the rate of return.

The more risk that the investment entails, the higher the return the investor should expect. Of course the actual return may differ from the expected return. Investors are ultimately interested in maximizing their wealth, but they have different tolerances for risk that they are willing to accept in achieving this goal so they may be willing to strive for a lower wealth target if that means they will not incur as much risk. Thus, investors usually decide on the level of risk they are willing to accept and try to maximize their return while keeping the risk at that level.

As was the case for users, investors are confronted with many decisions about acquiring the investment real estate, owning the investment real estate, and disposing of the investment real estate. The following is a partial list of major decisions with which investors are confronted:

Acquisition Decisions

• Should investment real estate be acquired?
• What type of investment real estate should be acquired?
• When should investment real estate be acquired?
• Where should investment real estate be acquired?
• Which of the available investment real estate alternatives should be acquired?
• How should the investment real estate be acquired?
• What should be the sources of debt and equity capital?
• What should the investment real estate acquisition entity be?
• What should the acquisition price and terms of the investment real estate be?

Holding Period Decisions

• Should discretionary capital expenditures be made?
• Should the financing structure be changed?
• Should the property use be changed?
• Should the ownership entity be changed?
• Should the property be held or sold?
• Should the operating strategy be changed?

Disposition Decisions

• What should the disposition price be?
• What should the disposition method be?
• What should the marketing process be?

I have the skills and knowledge needed, to help a user and investor, to make many types of real estate decisions.

Some of these skills are as follows:

• Identify, compare, and contrast various types of investments.
• Determine the role of real estate in the overall portfolio.
• Factor investor objectives and capabilities into the real estate decision making process.
• Analyze various property types.
• Apply and interpret the real estate and business cycle models to real estate decision making.
• Conduct and/or analyze a feasibility analysis including a strategic analysis, a market and competitive analysis, a political and legal analysis, a physical and design analysis, and a financial analysis. Describe the property acquisition process.
• Analyze the historic performance of properties.
• Identify the various types of due diligence and interpret the results.
• Determine the impact of leverage on risk and return.
• Conduct a lease buyout analysis for an owner and tenant.
• Compare and contrast the advantages and disadvantages of various real estate acquisition entities.
• Analyze hold and disposition options.
• Conduct a user needs analysis.
• Analyze continue to lease alternatives.
• Complete a comparative lease qualitative analysis for a user.
• Quantify various measures of occupancy cost for a user/tenant and a user/owner.
• Compare and contrast real estate investment value and real estate market value.
• Determine user acquisition value.
• Describe the marketing process and identify the key components of a marketing plan.
• Determine the appropriate discount rate for corporate and non-corporate entities to conduct various discounted cash flow analyses.
• Develop strategies for managing the various types of risk.
• Evaluate cost, structure, amount, and sources of debt and equity capital.

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