Real Estate Financial Analysis Workbook: Revised June 21, 2010

Revised June 21, 2010
Real Estate
Financial Analysis
Workbook
Reproduced with Permission of
The Tuck School of Business at Dartmouth
©2003 Trustees of Dartmouth College. All rights reserved. For permission to reprint, contact the
Tuck School of Business at 6036463176
2
Contents
A. Introduction .......................................................................................3
B. The Characteristics of Real Estate....................................................4
C. Forms of Profit in Real Estate...........................................................5
D. The Setup...........................................................................................6
E. Real Estate Versus Business Profit & Loss.....................................8
Exercise 1 …………………………………………………………… 9
F. Debt and Equity.................................................................................10
Exercise 2 ……………………………………………………………12
G. Concepts of Leverage........................................................................13
H. Types of Mortgages...........................................................................14
I. Measurements of Risk and Return..................................................15
Exercise 3 …………………………………………………………….18
J. Valuation and Cap Rates..................................................................19
Exercise 4 …………………………………………………………….20
K. Discounted Cash Flow Analysis …………………………………. 21
Exercise 5 …………………………………………………………… 22
L. Partnership Allocations …………………………………………… 23
Exercise 6 …………………………………………………………….24
M. Solutions (To Exercises 13) ............................................................. 26
3
A. Introduction
The financial analysis of real estate is a complex process. This is due to the
unique characteristics of real estate as compared to other types of
investments. These characteristics include:
1. The long time horizon associated with real estate transactions;
2. The lack of liquidity of real estate assets;
3. The impact of a changing environment on real estate values.
The financial analysis of real estate investments can be divided into
three components:
1. Cash Flow: The amount of cash received annually.
2. Tax Effects: The impact of a real estate investment on an investor’s
tax liability.
3. Future Benefits: The impact of the sale or refinancing of the
property at a future date.
The following workbook contains a brief overview of the concepts of real estate
financial analysis and a series of exercises designed to illustrate these concepts.
For more in depth review of these concepts, refer to other sources.
4
B. The Characteristics of Real Estate
Real estate investments have a number of unique and critically important
characteristics. The six key characteristics of real estate are:
1. Fixed Location
2. NonStandard Pricing
3. Capital Intensive and Often Highly Leveraged
4. Highly Cyclical
5. Locally as well as Nationally Regulated
6. Long Lived and Durable
Consider the financial implications of each of these characteristics and how they
impact the value of a real estate investment over the long term.
5
C. Forms of Profit in Real Estate
There are a variety of forms of profit that result from the development and
ownership of real estate investments. Listed below are five key forms of
profit.
Cash Flow Before Taxes: The cash flow generated periodically by the property.
Cash flow before taxes consists of the excess of
revenues over expenses including the payment of
debt service but before the impact of federal income
taxes.
Tax Shelter Benefits: The potential benefits unique to real estate from
depreciation allowances and interest deductibility.
Residuals: The proceeds from the sale or refinancing of a
property after all debts and other expenses have been
paid off.
Equity BuildUp: The growth in an owner’s equity over time as the
principal of a mortgage is repaid.
Fees: The expenses associated with a real estate transaction.
6
D. The Setup
The setup is a real estate term for the combined income and cash flow statement. The
setup provides the basis for analyzing a potential real estate investment. By adjusting
the assumptions used in a setup, an investor is able to test their impact on the cash flow.
Gross Revenues
(Vacancy Allowance)
Effective Gross Income
(Operating Expenses)
(Property Taxes)
(Structural Reserve)
Net Operating Income
(Debt Service)
Cash Flow Before Taxes
Components of the Setup
• Gross Revenues – the analysis begins with the projected rental and other revenues
assuming 100% occupancy.
• Vacancy Allowances – The appropriate percentage is a function of market
conditions. It also includes an amount for bad debt and concessions.
• Effective Gross Income (EGI) – The Gross Revenues minus the vacancy allowance.
• Operating Expenses – This includes administrative, maintenance, repairs,
insurance, utilities.
• Property Taxes The current taxes assessed on the subject property. (This line
item is sometimes included in the operating expense figure.)
• Structural Reserve – Some amount should be set aside for predictable expenses
required to maintain the property, like a reserve for roof repairs. Some investors
deduct this after net operating income.
7
• Net Operating Income (NOI)or Cash Flow from Operations (CFO) – The Effective
Gross Income less operating expenses and property taxes. For our purposes it
also includes a structural reserve.
• Debt Service – The annual “constant payment” of principal and interest required
to finance the property.
• Cash Flow Before Taxes – The Net Operating Income less Debt Service.
8
E. Real Estate Versus Business Profit & Loss
It is useful to compare a standard form of profit and loss statement used for
business with real estate cash flow analysis. An example of each is presented
below:
Real Estate Profit & Loss Business Profit & Loss
Gross revenue Sales
(Vacancy Allowance) (Cost of Goods Sold)
Effective Gross Income Gross Profit
(Operating Expenses) (Sales, General Admin. Exp.)
(Propery Taxes) Operating Profit
(Structural Reserve) (Depreciation)
Net Operating Income (Interest)
(Debt Service) (Rent)
Cash Flow Before Taxes (Officer Compensation)
Earnings Before Income Taxes

The business profit and loss statement focuses on matching expenses to
revenues. In contrast, real estate profit and loss is represented by a pure cash
flow statement. Business profit and loss recognizes depreciation expense while
the real estate profit and loss ignores it. The business statement recognizes only
interest expenses while the real estate statement deducts total debt service
including principal as well as interest. Finally, in business there is a focus on
earnings and profit while in real estate cash flow is the primary focus.
9
Exercise 1: The Gilbert Building
The Gilbert Building is a two story, 55,000 square foot office building with 50,000
sq. ft. of rentable space. It was recently completed in Madison, Missouri for a
total development cost of $5 million. The building is 50% vacant. The building
has a $3.5 million, 30 year, fully amortizing mortgage at an 8% interest rate. The
debt service payments are approximately $25,682 per month or $308,184 per year.
The gross revenues for the building are estimated at $20 per square foot per year.
Operating expenses like heat, electric and insurance are estimated at $5.50 per sq.
ft. of rentable space. Property taxes are $190,000 per year and the owner needs to
fund a $10,000 structural reserve.
1. What does the setup on this project look like at current occupancy rates?
2. How will the setup for this building look when the building achieves
95% occupancy?
10
F. Debt and Equity
Each real estate investment is financed either with debt or equity, or a
combination of the two.
Cost = Debt + Equity
Lenders or owners expect to receive a risk adjusted, rate of return on their
investment. The primary source of that return is the project’s cash flow and
residual proceeds. The Net Operating Income (NOI) is the cash flow which is
available to both the lenders and owners. The lender takes its share of cash flow
first in the form of debt service. The owners (or investors) have a right to the
cash flow that is left after payment of debt service.
Real Estate Cash Flow and Return on Equity
The most commonly used measure of rate of return by real estate investors is the
“CashonCash” rate of return. It represents the cash return on the investor’s
cash investment, that is, the return on their equity contribution.
CFBT
CashOnCash = Equity
As the setup indicates, the cash flow before tax (CFBT) is the net cash available to
the investor after all expenses and debt service have been paid. The equity is the
actual cash equity invested into a project.
The CashonCash rate of return is not an earnings rate of return. The cash flow
does not equal the project’s profit. It understates some expenses by ignoring
depreciation and income taxes, while overstating other expenses by deducting
the principal portion of the debt service, which actually represents equity
accumulation.
11
The Return on Assets or Free and Clear Return

If a property were not subject to financing, the net operating income (NOI)
would represent the project’s cash flow. Here, the measure of return is the
Return on Assets or the Free and Clear return, which equals NOI divided by the
total cost of the project.
NOI
Return on Assets =
C
OST
In this situation, the investor’s equity is the entire cost of the project and the Free
and Clear Return measures the return on equity as if the project was “free and
clear” of all debt.
The Debt Constant
Because real estate investors focus on cash flow, they are concerned about the
full cost of their debt and not just the interest rate. The debt service component of
the setup represents the annual principal and interest payments on the loan
secured. The debt “constant” is a measure of the relative annual debt service
burden visàvis the original loan amount. It is the annual debt service, principal
and interest, divided by the original amount of the mortgage.
Annual Debt Service (DS)

Debt Constant = Original Loan Amount
Because of amortization, the constant is higher than the interest rate. If the loan
was interest only, that is, no principal payment is included in the debt service,
the interest rate equals the constant.
CFBT
CashonCash Return = Equity The return to equity
NOI
Return on Assets = The return without debt
Cost
DS
Debt Constant = The return to debt
Debt
12
Exercise 2: The Gilbert Building II
1. What is the debt constant for the Gilbert Building?
2. At 50% occupancy, what is the Return on Assets for the Gilbert Building?
3. At 50% occupancy, what is the CashonCash Return for the Gilbert
Building?
4. If a major tenant were to lease 22,500 square feet of space in the Gilbert
Building, at $20 per square foot bringing the occupancy rate up to 95%,
what would be the Return on Assets?
5. At 95% occupancy, what would be the CashonCash Return for the
Gilbert Building?
13
G. Concepts of Leverage
There are two kinds of financial leverage, positive and negative.
1. Positive leverage increases the annual return on the equity invested.
It occurs when the cost of debt is lower than the free and clear
return (or the return on total assets).
2. Negative leverage decreases the cash on cash return. It occurs when
the cost of debt is higher than the return on total assets.
A review of financial leverage serves as a good first step in determining the most
appropriate financial structure for a property.
The amount of the mortgage, the term and the interest rate all affect the cost of
debt and subsequently the cash on cash return or first year return on equity.
Utilizing the ratios we have defined:
a. If the Constant is less than the FreeandClear return, this
represents positive leverage.
b. If the Constant is greater than the Free andClear return, this
represents negative leverage.
14
H. Types of Mortgages
A key distinction between real estate and other forms of investment is the ability
to finance real estate on a longterm basis using outside capital. Long term or
permanent debt financing includes the use of several types of mortgage
instruments. Depending on the lender’s or investor’s objectives, mortgages vary
with regard to their payment patterns of interest and principal. The following
are examples of different types of mortgages used in financing real estate.
Level Payment/Self Liquidating – Equal payments consisting of both interest
and principal. Initially, the payment is almost entirely interest. Over time, the
principal portion of payment increases due to amortization. Payments near
maturity consist mostly of principal. This is the most typical mortgage for single
family homes.
Balloon A partially amortized loan, which calls for repayment of principal
before it is fully amortized. For example, a loan might have a twentyfive year
amortization and a tenyear term, in which case, all of the remaining principal
would be due at the end of ten years.
Interest Only Loan – This is the kind of loan that banks sometimes offer to
developers who are constructing a new building. The payments are lower
because there is no amortization, but at the end of the term (usually 35 years) the
full amount of the loan is due.
Graduated Payment Mortgage (GPM) – Here, payments begin at a lower level
than under a level payment mortgage and step up in a series of fixed raises over
the first few years of the loan. After a certain point, the loan will selfamortize.
Adjustable Rate Mortgage (ARM) with Floor/Ceiling – ARM or variable–rate
mortgages allow the lenders to vary interest rates over the loan term. These loan
are usually subject to a floor and ceiling, that is, a minimum and maximum rate
level set forth in the original mortgage agreement.
Zero – Here all payments of interest and principal are paid at maturity. Interest
is accrued and added to principal during the loan term.
Amortization
15
Amortization is the repayment of the loan principal during the term of a loan.
Level payment, selfamortizing loans are those in which the debt service
payment is comprised of a shifting combination of interest and principal.
16
I. Measurements of Risk and Return
So far, we have defined three key ratios in measuring the rate of return in real
estate financial analysis from the investor’s standpoint:
N
e
t
O
p
er
a
t
i
ng
I
n
c
om
e
FreeandClear Return =
C
os
t
A
n
n
u
a
l
De
b
t
S
er
v
i
c
e
Constant =
D
e
b
t
CFBT
CashonCash Return = Equity
From the lender’s point of view, four additional ratios should be considered:
LoantoValue Ratio
This is a measure of the lender’s collateral cushion. It is defined as the ratio of
the loan to the value. To determine the value, lenders generally hire an appraiser
who uses standard appraisal techniques to calculate the value of the property.
L
oan
LTV =
Value
The ratio, as a percentage, measures the proximity to 100% of value, that is being
financed. Other things being equal, the lower the ratio, the higher the cushion
and the more secure the lender’s interest in the deal. The higher the ratio, that is,
the less collateral cushion (or less equity), in the capital stack, the greater the risk
to the lender. Lenders rarely finance more than 80% of the value.
LoantoCost Ratio
For properties under development, lenders often calculate the loan to cost ratio.
In a wellconceived development project, the value upon completion will be
17
greater than the cost to build it. Thus, if the lender simply used the loantovalue
ratio, it might end up lending the developer all the money required to build the
project. Since lenders usually want the developer to invest real cash equity in the
project they do this second calculation of the loantocost to ensure that the
developer has cash in the deal.

LTC = Loan
Cost
Debt Coverage Ratio
This is a measure of a lender’s income cushion. It is defined as the ratio of Net
Operating Income to Debt Service:
N
e
t
O
p
er
a
t
i
ng
I
n
c
om
e
Debt Coverage Ratio =
D
eb
t
S
e
rv
i
c
e
Other things being equal, the higher the debt coverage ratio (i.e. the more income
cushion) the lower the risk of default from the lender’s standpoint. Typically
lenders require at least a 1.25 debt coverage ratio.
BreakEven Ratio
This ratio measures a project’s operating risk. It is defined as the ratio of
operating expenses (including property taxes and the structural reserve) plus
debt service divided by the gross revenue:
Operating Expenses + Debt Service

Break Even Point =
Gross Revenue
This calculation shows the percent of vacancy a project can withstand at the
requested rent levels while still meeting all expenses and debt service. If one
holds the vacancy constant then this ratio allows one to calculate how much rent
levels can be decreased while still meeting all expenses and debt service.
18
Summary:
In sum:
L
oan
LoantoValue Ratio =
Value
LoantoCost = Loan
Cost
N
e
t
O
p
er
a
t
i
ng
I
n
c
o
me
Debt Coverage Ratio =
De
b
t
S
er
v
i
c
e
Expenses + Debt Service

Break Even Point =
Gross Revenue
19
Exercise 3: The Gilbert Building III
Based on a 95% occupancy and a $3.5 million mortgage on the Gilbert Building,
solve for the following:
1. LoantoValue Ratio, assuming that the value of the building when it is
95% leased will be $5.5 million?
2. The Loan to Cost Ratio?

3. Debt Coverage Ratio?
4. The BreakEven Point?
20
J. Valuation and Cap Rates
Each real estate project throws off an income stream. This Net Operating Income
(NOI) or Cash Flow from Operations (CFO) can be divided among the lenders
and owners. Investing in incomeproducing real estate is essentially the
purchase and sale of this income stream. Real estate value can be determined by
capitalizing (dividing) an income stream by the overall market rate of return or
capitalization rate. The capitalization rate or cap rate is the rate demanded by
the market in a typical real estate transaction. It represents the return an investor
can expect the asset to generate the first year. The cap rate is often lower than the
overall rate of return the investor expects because it does not include
appreciation.
N
e
t
O
p
er
a
t
i
ng
I
n
c
o
me
Value =
Ca
p
R
a
t
e
The following are alternative approaches to deriving a cap rate:
a) Band of Investment Approach: In this approach, one looks at the
annual rate of return required by equity investors and the interest
rate on currently available debt. Each of the rates is weighted by the
proportion of total value they represent to determine the
capitalization rate. The return on equity should be adjusted for the
potential appreciation of the property.
b) Comparable Sales Approach: Here, a cap rate is derived by
calculating the capitalization rate on comparable properties that
have recently been sold and then making a judgment about the
appropriate cap rate for the subject property. This is the approach
we will use in the Real Estate course.
21
Exercise 4: The Gilbert Building (IV)
Assuming that the Gilbert Building is 95% leased at rents of $20 per square foot,
what is the value of the building under the following assumptions:
1. What is the value at a 10% cap rate?
2. What is the value at an 8.5% cap rate?
3. What is the value of the Gilbert Building at a 9% cap rate if the rent
increases to $22 per square foot, and the operating expenses, property
taxes, structural reserves, and occupancy remain the same?
Note: There is a template in the Real Estate course folder which may save you
some time in typing and formatting. You are not required to use it.

22
3. Discounted Cash Flow Analysis
In deciding whether or not to invest in a property, investors often look at
the potential cash flow from two perspectives. First, they analyze the
stabilized cash flow when the building is 90% or 95% occupied. This
snapshot which has been the subject of most of this workbook allows
them to estimate the initial return they will earn on their equity as well as
the value of the property.
The second way that investors analyze the cash flows from a property is to
build a model that projects cash flows into the future and then discount
them back to the present. The industry standard is a ten (10) year
projection with a terminal or sales value based on capitalizing the NOI in
the 11th year. For this exercise we will use a five (5) year projection and
estimate a sales price based on the NOI in year 6. The proceeds from the
sales should be added to the cash flow in year 5.
The discount rate is different and usually higher then the capitalization
rate. A capitalization rate represents the initial return on the projects cost
whereas the discount rate represents the total return, including
appreciation that investors require. It is sometimes called the ‘hurdle rate’.
23
Exercise 5: The Gilbert Building (V)
The investors in the Gilbert building have a 15% hurdle or discount rate
on their equity investments. If they buy the Gilbert Building for $5 million
and finance it with a $3.5 million mortgage for 30 years at 8% will the
investment exceed their hurdle rate? By how much? What is the internal
rate of return?
Please fill in the blank spaces in the model below and do a Net Present
Value calculation based on the following assumptions:
1. Gross Revenue will increase by 3% per year.
2. Operating expenses (including property taxes and the structural reserve) will
increase by 3% per year.
3. The vacancy rate will be 20% in year 1, 10% in year 2 and 5% thereafter.
4. The property is sold at the end of year 5 at a 9% cap rate based on the projected
NOI in year 6.
5. All projections and return calculations are done on a pretax basis. It is assumed
that cash flows and residual proceeds for each year are all received the last day
of the year.
($000)
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Gross Revenue $ 1,000 $1,030
Vacancy $ (200)
Effective Gross Income $ 800
Operating Expense (Including
Property Tax and Structural
Res.) $ (475)
Net Operating Income $ 5,000 $ 325
Debt Service (8%, 30 years,
annual payment) $ 3,500 $ (308)
Cash Flow Before Tax $ 1,500 $ 17
Net Sales Proceeds (calc.
below)
Net Present Value (15%
discount rate) $ (1,500) $ 17
Calculation of Net Sales

Proceeds
NOI in year 6/ 9% Cap Rate
Less Sales Expense (2%)
Less Repayment of Mortgage
at the End of Year Five* $ (3,327)
Net Sales Proceeds
The Net Present Value of this $1.5 million equity investment discounted at
15% is: $_____________________________.
The Internal Rate of Return is: __________%.
24
4. Partnership Allocations
Many real estate investments are structured as partnerships or limited
liability corporations. One partner (the general partner) puts together and
manages the investment. The other partners provide most of the equity
capital and may be involved in major decisions like when to sell the
property.
In most partnerships, the cash flow and sales proceeds are not allocated
proportionately or ‘pari passu’. Rather the cash flow is allocated so that
the general partners’ return incorporates a ‘promote’ or a reward for
superior performance. The structure of the partnership tries to both align
the interests of the different parties and also create incentives for the
person managing the deal.
In a typical partnership, the limited partners might invest most of the
equity and receive a preferred return on their equity. In most cases, it is a
cumulative, preferred return, meaning that if there is insufficient cash
flow to pay the full amount of the preferred return in the early years, there
is a catchup in later years or from the sales proceeds. Once the partners
have received their cumulative (noncompounded), preferred return, the
general partner receives a disproportionate share of the profits. These
structures can become extremely complex with multiple layers and claw
back provisions, but the basic concept that underlies most partnerships is
that the proceeds are distributed so that the investors receive a base return
on their investment as well as a return of their principal investment before
the general partner gets a disproportionate share of the profits.
25
Exercise 6: The Gilbert Building (VI)
The Gilbert Building will be purchased by a partnership. The limited partners (LPs) have
put up 90% of the $1.5 million to purchase the building (plus 90% of any additional
capital that is required.) As an inducement to make this investment, the General Partner
(GP) has offered them a cumulative, noncompounded 8% preferred return. (The general
partner will also receive an 8% return on his 10% equity investment on a paripasu basis.)
Once both partners receive this 8% return from the property’s cash flow, additional cash
flow will be split 7030, with 70% of the additional cash flow going to the limited
partners. Upon sale or refinancing of the Gilbert Building the net sales proceeds (after
payment of sales expenses and the mortgage) will be allocated in the following order:
1. Catch up to ensure that both parties received an 8% preferred return on their
investment,
2. Repayment of their original investment (and any additional capital calls),
3. Any remaining profits are then split 7030.
Using the same assumptions you did in Exercise 5, please answer the following
questions:
What is the pretax, internal rates of return for the limited partners?
What is the pretax, internal rate of return for the general partner?
To answer these questions we have created a model. Please fill in the blank spaces.
(A template is available in the real estate course folder. Please note that for simplicity you
need not worry about interest on interest. In other words, if they do not pay the 8%
interest in any year, they need to make up that exact amount in future years.)
($000)
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Net Operating Income $ 5,000 $ 325 $ 438
Debt Service $ 3,500 $ (308) $ (308) $ (308) $ (308) $ (308)
Cash Flow Before Tax $ 1,500 $ 17 $ 130
Required Return to LP $ 1,350 $ 108 $ 108
Required Return to GP $ 150 $ 12 $ 12
Cumulative (Deficit) or Surplus $ (103) $ (93)
Preferred Payment to LP $ 15 $ 117
Preferred Payment to GP $ 2 $ 13
Surplus to LP (70%) $ 0 $ 0
Surplus to GP (30%) $ 0 $ 0
Model Continued On The Next Page
26
Partnership Allocation Model (continued)
Allocation of Sale Proceeds: Year 5

NOI in year 6/ 9% Cap Rate $
Less Sales Expense (2%) $
Less Repayment of Mortgage
at the End of Year Five* $ (3,327)
Net Sales Proceeds
Required Catchup on 8%
Preference 0
Return of Initial LP Capital $ 1,350.0
Return of Initial GP Capital $ 150.0

Profit
Profit to LPs (70%)

Profit to GPs (30%)
Total LP Share of Sale
Total GP Share of Sale
LP IRR (1,350) 15 117 - - -
GP IRR (150.0) 2 13 - - -
27
M. Solutions (To Exercises 14)
Exercise 1: The Gilbert Building
1. Setup Based on 50% Occupancy:
Gross Scheduled Income $1,000,000
(Vacancy) (500,000)
Effective Gross Income 500,000
(Operating Expenses) (275,000)
(Property Taxes) (190,000)
(Structural Reserve) (10,000)
Net Operating Income 25,000
(Debt Service) (308,184)
Cash Flow Before Taxes (283,184)
2. Setup Based on 95% Occupancy:
(Vacancy) (50,000)
Net Operating Income $475,000
(Debt Service) (308,184)
Cash Flow Before Taxes $166,816
28
Exercise 2: The Gilbert Building Solution
DS 308 ,184
1. Debt Constant = = 3,500 ,000
= 8.81%
Debt
NOI 25,000
2. Free and Clear Return = = 5,000,000
= 0.5%
Cost
C
FB T ( 283 ,184 )
3. Cashon Cash Return =
E
qu
ity
=
1,500 ,000
= (18.88%)
NOI 475,000
4. Free and Clear Return = = $5,000,000
= 9.5%
Cost
C
FB T 166,816
5. CashonCash Return = = 1,500,000 = 11.12%
E
qu
ity
Loan
1. Loan to Value = = 3,500,000 = 63.6%
V
alue
5,500,000
3,500,000
2. Loan to Cost = Loan = 5,000,000
= 70%
Cost
NOI 475,000
3. Debt Coverage Ratio = = 308,184
= 1.54
D
e
b
tS
e
rv
i
c
e
Expenses + DS 783,184
4. Break Even Point = = = 78 .3%
Gross Revenue 1,000,000
29
Setup Based on 95% Occupancy (at $20 per square foot):
(Vacancy) (50,000)
Value at a 10% Cap Rate: $475,000/ 10% = $4,750,000 or $4.75 Million.
Value at an 8.5% Cap Rate: $475,000/ 8.5% = $5,588,235.
Setup Based on 95% Occupancy (at $22 per square foot):
(Vacancy) (55,000)
Effective Gross Income 1,045,000
Value at a 9% Cap Rate: $570,000/ 9% = $6,333,333.
Note: The value of a property is based on the cash flow from the property. Hence
the denominator is the Net Operating Income or Cash Flow from Operations.
The amount of debt does not affect the value. If debt did affect the value it
would be simple to increase its value by changing the amount of debt.
30
31

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Revised June 21, 2010

Annual Debt Service (DS)

Operating Expenses + Debt Service

Expenses + Debt Service

Calculation of Net Sales

Model Continued On The Next Page

Allocation of Sale Proceeds: Year 5

Return of Initial GP Capital $ 150.0

Profit to LPs (70%)

LP IRR (1,350) 15 117 - - -

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