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By AZ Advisory Team, November 23, 2009 2:59 pm

Add Amenities

Finally, you can also consider adding amenities to the property to make it more appealing and valuable. Value enhancing amenities can include something simple like creating a playground in a multifamily property or adding free wireless Internet for your retail tenants. Or you can add more extravagant amenities like a daycare center in your office building or an outdoor courtyard in a hotel property.

In summary, when scouting for commercial properties, look beyond the historical data and see what things you can employ to make the property more valuable. All other important factors considered, choose the one that gives you a lot of room to utilize value-generating strategies that is non-existent or yet untapped by the present owner and therefore not part of the price.

Know your property’s potential before you close the deal to realize maximum gains — after you have modified its usage to a more profitable one, after you have made improvements and added amenities, after increasing rents accordingly, and after decreasing expenses. The best deals are made when you buy a property, not when you sell a property!

Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

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By Alex Zylberglait, September 17, 2009 8:00 am

Calculating Modified Internal Rate of Return

MIRR is an alternative to the traditional calculation of the IRR in that it computes an IRR with an explicit reinvestment rate assumption.

The discount rate that equates the present value of all negative cash flows (including the down payment) to the future or terminal value of all the positive cash flows is the MIRR.

While the internal rate of return (IRR) assumes the cash flows from a project are reinvested at the IRR, the modified IRR assumes that all cash flows are reinvested at the firm’s cost of capital. Therefore, MIRR more accurately reflects the profitability of a project.

For example, say a two-year project with an initial outlay of $195 and a cost of capital of 12%, will return $121 in the first year and $131 in the second year. To find the IRR of the project so that the net present value (NPV) = 0:

Thus, using the IRR could result in a positive NPV (good project), but it could turn out to be a bad project (NPV is negative) if the MIRR were used. As a result, using MIRR versus IRR better reflects the value of a project.

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Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

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By Alex Zylberglait, September 10, 2009 10:30 pm

We have discussed Discounted Cash Flow, now let us go to Net Present Value.

NPV is the sum of the present values of a commercial real estate investment’s positive cash flows and the present values of its negative cash flows. This calculation results in a single sum that can be positive or negative. Investors generally specify a required or target rate of return for investing capital; it is an “opportunity cost” concept.

The general rule for considering an investment is if the NPV is greater than or equal to zero, the investment should be accepted; if the NPV is greater than or equal to zero, an investor must be earning at least the required rate of return. In fact, if the NPV is equal to zero, the rate of return being earned on the investment is exactly equal to the specified required rate of return. If the NPV is negative or less than zero, the investment should be rejected because the investor is not earning the required rate of return.

The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project.

NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield.

Formula:

Up next on Tuesday, we’ll talk about Internal Rate of Return.  Thanks.

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Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.