FINC 349 LECTURE 12

Question-and-answer flashcards covering key concepts from the lecture notes on real estate investment finance, including revenue calculations, CapEx vs OpEx, leverage and capital structure, default risk, valuation (FCFF/FCFE, enterprise value), forecasting, and project financing strategies.

What is the primary purpose of this real estate investment finance class?

To understand how real estate deals translate into financial statements, valuation, and the ability to generate income.

What two variables determine revenue for a rental property in this model?

Price per unit and volume (days of use × utilization).

In this model, how is price typically applied to a rental property unit?

Price is charged per unit (the entire house), not per bedroom.

What are the two main returns investors seek from real estate investments?

Income (rental revenue) and capital appreciation.

What marketing concept describes how demand responds to price changes, used to forecast demand?

Price elasticity.

Why is leverage used in real estate finance, and what is its caveat?

Debt lowers cost of capital and provides tax shields, but increases cash flow risk if overextended.

What is a 'capital cushion' in this context?

Extra equity set aside to absorb losses and protect against debt default.

What is a 'technical default'?

Missing a scheduled payment; not bankruptcy, but it can trigger penalties and credit impact.

Differentiate CapEx and OpEx.

CapEx (leasehold improvements) adds to the balance sheet as an asset; OpEx includes ongoing maintenance/operating costs on the income statement.

Where does interest expense appear in financial statements?

Income statement as interest expense.

Where does a down payment appear in financial statements?

On the balance sheet as common equity; cash outflow recorded in investing activities.

What fundamental equation must balance on the balance sheet?

Assets = Liabilities + Equity.

What does CapEx in this model mainly consist of?

Leasehold improvements financed by debt and equity; recorded as an asset.

What is the difference between level debt service and level principal loans?

Level debt service: constant total payment each period; level principal: constant principal repayments with decreasing interest.

What is a 'bullet loan'?

Principal is paid at the end of the term in a single lump sum.

What are 'points' on a loan?

Upfront loan fees; 1 point = 1% of the loan amount (e.g., 3 points on $1,000,000 = $30,000).

What revenue growth assumptions are used in the forecast for the first five years and thereafter?

7% annual revenue growth for the first five years, then 2.5% thereafter.

What is enterprise value and how is it computed in this model?

Enterprise value is the present value of all cash flows to the firm, computed by discounting FCFF with the WACC.

What is free cash flow to equity (FCFE)?

Cash flow available to common shareholders after debt payments.

What is capital appreciation in real estate returns, and what is its assumed rate in the notes?

Increase in property value due to market conditions; assumed at 3% per year.

What is 'stack financing' in project evaluation?

Ranking and prioritizing capital deployment across projects, typically funding the highest-return opportunities.

Why is there a breakeven concept discussed for projects like this?

Many projects are negative in early years; a capital cushion and staged financing help sustain them until they break even.