Chapter 47Asset Portfolios, Progress Payments, and Lease Rolls in Real Estate Models

Real estate analysis and modeling encompass a combination of aspects from both corporate finance and project finance. The financial model of a hotel project or a commercial building has many similar characteristics to project finance analysis. These investments move through different stages, revenue contracts are important in risk analysis, and the financial analysis is driven by cash flows and internal rates of return (IRRs) rather than reported profits on the income statement. However, hotels and commercial buildings do not have a precise defined life, prospective cash flow analysis relies on rental market history, and the projects are often valued using a flexible terminal date driven by market multiples—characteristics that resemble corporate analysis. Other real estate investments such as residential and commercial mixed development projects have more elements in common with corporate analysis. These mixed developments consist of portfolios that contain several individual projects with different cash flow patterns and different risks. Financing is driven by loan-to-value leverage ratios rather than cash flow coverage ratios such as the debt service coverage ratio and the residual values at some terminal date are central to the valuation. Yet the individual developments that comprise these mixed-use investments do have similarities to project finance analysis. Their value is defined by stages, ...

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