Leung Thesis
Leung Thesis
Leung Thesis
ABSTRACT
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ex ante
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formas.
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Table of Contents
ABSTRACT................................................................................................................................................... 2
Table of Contents ...................................................................................................................................... 3
Table of Figures ......................................................................................................................................... 5
Acknowledgements .................................................................................................................................. 6
CHAPTER 1: Introduction ........................................................................................................................ 7
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CHAPTER 2: SimpleCo Tower A Deterministic Example .............................................................. 14
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CHAPTER 3: ModerateCo Tower Incorporating Uncertainty into a Financial Model.............. 16
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... 20
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CHAPTER 4: ChallengeCo Tower Managing Uncertainty in Real Estate Projects ..................... 24
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CHAPTER 5: Quantifying Uncertainty in the Real World................................................................. 28
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CHAPTER 6: Managing Uncertainty in the Real World .................................................................... 37
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CHAPTER 7: Two World Trade Center Case Study............................................................................ 44
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Pro Forma ................................................................................................................................. 51
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CHAPTER 8: Conclusion ......................................................................................................................... 55
BIBLIOGRAPHY ........................................................................................................................................ 57
Appendix A Incorporating Uncertainty into a Financial Model ........................................... 60
Appendix B Performing Monte Carlo Simulations.................................................................. 62
Appendix C Creating Cumulative Distribution Functions (CDFs) in Excel......................... 64
Appendix D Using IF Statements to Model Real Options for Real Estate Ventures .......... 66
Table of Figures
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Acknowledgements
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pro formas
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formas.
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CHAPTER 2: SimpleCo Tower A Deterministic Example
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pro forma:
pro
forma
(in 000's) Year 1 2 3 4 5 6 7 8 9 10 11
Potential Gross Income $4,590 $4,728 $4,870 $5,016 $5,166 $5,321 $5,481 $5,645 $5,814 $5,989 $6,169
Vacancy $230 $236 $243 $251 $258 $266 $274 $282 $291 $299 $308
Effective Gross Income $4,361 $4,491 $4,626 $4,765 $4,908 $5,055 $5,207 $5,363 $5,524 $5,689 $5,860
Operating Expenses $2,550 $2,627 $2,705 $2,786 $2,870 $2,956 $3,045 $3,136 $3,230 $3,327 $3,427
Net Operating Income $1,811 $1,865 $1,921 $1,978 $2,038 $2,099 $2,162 $2,227 $2,293 $2,362 $2,433
Capital Expenditures $181 $186 $192 $198 $204 $210 $216 $223 $229 $236
CF From Operations $1,629 $1,678 $1,729 $1,781 $1,834 $1,889 $1,946 $2,004 $2,064 $2,126
Reversion (Purchase and Sale) $17,000 $22,120
PBTCF $17,000 $1,629 $1,678 $1,729 $1,781 $1,834 $1,889 $1,946 $2,004 $2,064 $24,246
pro forma
determined
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CHAPTER 3: ModerateCo Tower Incorporating Uncertainty into a Financial Model
pro forma
pro forma
pro forma.
does
not
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Figure 7: Non linearity in the Rent Growth Rate
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pro formas
ex ante
likelihood
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Random Walk Illustration for Rent Growth Rate Starting at 3%
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
6%
5% up 2% x
4% x up 1%
3% x dn 1% x
2% x dn 2%
1% dn 2%
0% x
Figure 9: Random Walk Illustration
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Figure 11: Three ChallengeCo Tower Options
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Figure 12: ChallengeCo Tower Expected NPVs
CHAPTER 5: Quantifying Uncertainty in the Real World
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Long run Market Trend:
Long run Market Cycle:
Market Volatility:
Black Swans:
Pro Forma
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forma
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Uniform Distributions:
derived
purchase
sell
ex ante
CHAPTER 7: Two World Trade Center Case Study
We developed a short case study to connect and apply the concepts presented in this thesis to
a realistic situation. The scenario created for this thesis is inspired by an actual case study
done on the World Trade Center site in New York City (Queenan, 2013). While the story is
fictitious, the assumptions are made to be as realistic as possible with basis from legitimate
sources.
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Pro Forma
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Initial Rent
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Long Run Trend
Market Volatility
Inertia
Market Cyclicality
Figure 15: Real Estate Cycle Length
Black Swan
Cap Rate
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BIBLIOGRAPHY
Journal of
Political Economy 81
RSMeans
Journal
of Financial Economics 7
Commercial real estate analysis & investments / David M. Geltner ... [et
al.].
Bloomberg.com
Investment Science
panynj.gov
Nature 72
New York
Times
Operating Expenses $2,550 $2,627 $2,705 $2,786 $2,870 $2,956 $3,045 $3,136 $3,230 $3,327 $3,427
Net Operating Income $1,811 $1,918 $2,031 $2,149 $2,273 $2,404 $2,541 $2,686 $2,837 $2,996 $3,162
Capital Expenditures $181 $192 $203 $215 $227 $240 $254 $269 $284 $300
CF From Operations $1,629 $1,726 $1,828 $1,934 $2,046 $2,164 $2,287 $2,417 $2,553 $2,696
Reversion (Purchase and Sale) $17,000 $28,749
PBTCF $17,000 $1,629 $1,726 $1,828 $1,934 $2,046 $2,164 $2,287 $2,417 $2,553 $31,445
NPV $3,019
Appendix B Performing Monte Carlo Simulations
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Appendix C Creating Cumulative Distribution Functions (CDFs) in Excel
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Appendix D Using IF Statements to Model Real Options for Real Estate Ventures
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not
value if true
logical test
value if false
Build 170k sf
If Rent > Trigger
Dont build
value if true
logical test #1
value if true #2
logical test #2
(value if false)
value if false #2
Dont build
Has construction Dont build
already begun?
Dont build
Dont build
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ChallengeCo Parameters Year 0 1 2 3 4 5 6
Total Development Cost $100 /gsf
Efficiency 90%
Gross Floor Area (Addition Incl) 170,000 sf 0.00 0.00 0.00 0.00 170,000 sf 0.00
Option Exercise Trigger: Rent $35 /sf
Option Exercise Trigger: Vacancy 5.00%
Flex Development Cost $105 /gsf $ 108.15 $ 111.67 $ 117.06 $ 119.86 $ 128.57 $ 139.67
Office Rent $30 /sf $ 30.90 $ 31.91 $ 33.45 $ 34.24 $ 36.73 $ 39.91
Rent Growth Rate 3% 3.26% 4.82% 2.39% 7.27% 8.64% 6.85%
Expenses $15 /sf $ 15.45 $ 15.71 $ 15.41 $ 15.29 $ 14.74 $ 14.91
Expense Growth Rate 3% 1.69% 1.92% 0.76% 3.59% 1.12% 0.74%
Vacancy 10% 1.61% 4.01% 4.74% 0.00% 0.00% 1.13%
Capital Expenditures 10% of NOI 10.18% 10.23% 10.32% 10.40% 9.53% 8.20%
Terminal Cap Rate 11.00% 10.96% 11.27% 11.85% 12.06% 12.12% 11.56%
OCC/Discount Rate 12.50%
ChallengeCo Flexibility
(in 000's) Year 1 2 3 4 5 6
Potential Gross Income $4,728 $4,882 $5,117 $5,239 $5,620 $12,212
Vacancy $76 $196 $243 $ $ $138
Effective Gross Income $4,652 $4,686 $4,874 $5,239 $5,620 $12,073