rec re analysis 3 6.

2021

Capital Asset Pricing Model (CAPM)

The Capital Asset Pricing Model (CAPM) refers to a model that delineates the relationship between risk
and expected return and what is used in the pricing of risky securities.

Read full text →

Capital Budgeting

Capital budgeting refers to a process that involves a business to determine whether the projects, like
investing in a long-term venture or building a new plant, are worth following. Many times, an eventual
project’s lifetime cash inflows and outflows are evaluated so as to determine whether the generated
returns congregate to a satisfactory target benchmark. Capital budgeting is also referred as “investment
appraisal”.

Read full text →

Capital Employed

Generally, capital employed is presented as deducting the current liabilities from the current assets. It
can be defined as equity plus loans which are subject to interest. To define it properly, capital employed
can be expressed as the total amount of capital that has been utilized for acquisition of profits. It also
refers to the value of all assets (fixed as well as working capital) employed in a business.

Read full text →

Capital Output Ratio

A capital output ratio which is abbreviated as COR is related to be availability of natural resources in a
country. It is used to measure the capital ratio that would be used for the production of some output
over a certain period of time. The capital output ratio tends to increase if the capital available in a
country is cheaper than the other inputs.

Read full text →

Cash Burn Rate

The rate at which a company utilizes its cash supply over a specific period of time is known as the cash
burn rate. From its name, it is clear that it is used to measure the speed at which cash ends or is burnt in
consumption. It is specially used in such situations where the cash flow of the business activities is
negative rather than positive. It is meant for such businesses that have been started newly and because
of this they have not managed to make much of the sales that could cover up the expenses.
Read full text →

Coefficient of Variation

The coefficient of variation (CV) refers to a statistical measure of the distribution of data points in a data
series around the mean. It represents the ratio of the standard deviation to the mean. The coefficient of
variation is a helpful statistic in comparing the degree of variation from one data series to the other,
although the means are considerably different from each other.

Read full text →

Company Analysis

Company analysis is a process carried out by investors to evaluate securities, collecting info related to
the company’s profile, products and services as well as profitability. It is also referred as ‘fundamental
analysis.’ A company analysis incorporates basic info about the company, like the mission statement and
apparition and the goals and values. During the process of company analysis, an investor also considers
the company’s history, focusing on events which have contributed in shaping the company.

Read full text →

Compound Annual Growth Rate

The compound annual growth rate (CAGR) of a company refers to the growth rate of an investment,
year after year, for a particular time period.

Read full text →

Compound Interest

Compound interest is the form of simple interest where interest is added to the principle. When this
happens, the interest that is added to the principle also earns interest. This method of addition of
interest to the principle is known as compounding.

Read full text →

Contribution Margin

Contribution Margin (CM) is the difference between sales revenue and variable costs. It is the measure
of the profit margin that focuses on the proportion of sales revenue which is left after the deduction of
variable costs associated with the product.

Read full text →

Cost of Debt

Cost of debt generally refers to the effective paid by a company on its debts. The cost of debt can be
calculated in either before or after tax returns. However, the interest expense being deductible, the
after tax cost is considered very often. Moreover, the cost of debt is one part of capital structure of the
company and also includes the cost of equity.

Read full text →

Country Risk

Country risk is a collection of risks that are associated with investing in a foreign country instead of
investing in the domestic market. The risks included are exchange rate risk, economic risk, political risk,
and sovereign risk or transfer risk and by which there is a risk of capital being frozen for Government
action. Each country has different type of country risk, some having higher risks would not encourage
any type of foreign investments.

Read full text →

Credit Risk

Credit risk refers to the risk of loss of principal or loss of a pecuniary reward stemming from a
borrower’s failure in repaying a loan or else wise meet a contractual debt. Credit risk arises every time a
borrower is looking ahead to use future cash flows through the payment of a current obligation. The
investors are rewarded for presuming credit risk through the way of interest payments from the issuer
or borrower of a debt contract.

Read full text →

Credit Score

A credit score refers to a statistically derived numeric expression which implicates the creditworthiness
of a person. This credit score, as an indicator of the creditworthiness, is used by the lenders to access
the chances of a person repaying his/her debts.

Read full text →

Currency Risk

Currency risk refers to a risk form arising from the changes price of one currency as compared to
another currency. Whenever companies or investors possess assets or business operations across
national boundaries, they experience currency risk if their positions are not prevaricated. Currency risk is
also referred as exchange rate risk. Putting it simple, currency risk can be defined as the possibility that
currency depreciation will show negative effect on the value of assets, investments, and their related
interest and dividend payment streams, specifically those securities denominated in foreign currency.

Read full text →

Data Analysis Techniques for Fraud Detection

Data analysis techniques for fraud detection refer to the techniques that make use of statistical
techniques and artificial intelligence to detect fraud in any company. Fraud is defined as an intentional
act of an individual or more persons to deny another person or organization of something that is of
value for their own gain. Every year, the number of fraud cases is increasing and the reason for this may
be attributed to technological development.

Read full text →

Deferred Payment Annuity

An annuity is essentially a finance related contract, which permits the person who is buying it to pay on
a lump-sum basis or make payments in series, in return for acquiring disbursements at regular intervals
in future. Deferred Payment Annuity is a type of an annuity in which the payments that are received
start somewhere in the future instead of starting at the time it is initiated.

Read full text →

Degree of Combined Leverage (DCL)

The Degree of Combined Leverage (DCL) is the leverage ratio that sums up the combined effect of the
Degree of Operating Leverage (DOL) and the Degree of Financial Leverage (DFL) has on the Earning per
share or EPS given a particular change in shares. This ratio helps in ascertaining the best possible
financial and operational leverage that is to be used in any firm or business.

Read full text →

Degree of Financial Leverage (DFL)

The degree of financial leverage (DFL) is the leverage ratio that sums up the effect of an amount of
financial leverage on the earning per share of a company. The degree of financial leverage or DFL makes
use of fixed cost to provide finance to the firm and also includes the expenses before interest and taxes.
If the Degree of Financial Leverage is high, the Earnings Per Share or EPS would be more unpredictable
while all other factors would remain the same.

Read full text →

Degree of Operating Leverage (DOL)

The Degree of Operating Leverage (DOL) is the leverage ratio that sums up the effect of an amount of
operating leverage on the company’s earnings before interests and taxes (EBIT). Operating Leverage
takes into account the proportion of fixed costs to variable costs in the operations of a business. If the
degree of operating leverage is high, it means that the earnings before interest and taxes would be
unpredictable for the company, even if all the other factors remain the same.

Read full text →

Discount Rate
In finance, the discount rate has different meanings, some important ones mentioned below...

Read full text →

Discounted Cash Flow

The discounted cash flow is a quantification method used to evaluate the attractiveness of an
investment opportunity. The Discounted Cash Flow analysis involves the use of future free cash flow
protrusions and discounts them so as to reach the present value, which is then used to calculate the
potential for investment.

Read full text →

Discounted dividend model (DDM)

The discounted dividend model (DDM) is a procedure for valuing a stock’s price by using expected
dividends and discounting them back to present value. The underlying idea is that if the value obtained
from the dividend discount model is greater than the value at which shares are being already traded, the
stock is considered to be undervalued. Putting it simple, the discounted dividend model is one of the
methods of evaluating a company based on the theory that a stock holds the value equal to the
discounted sum of all the prospective dividend payments.

Read full text →

Diversification

Diversification strategies are made use of to expand the operations of the firm by adding different
strategies to a business. The main aim of diversification in a company is to allow the company to
establish itself apart from its current operations. There are two types of diversification strategies.
Concentric diversification is when a new venture is strategically related to the existing lines of business,
and Conglomerate diversification is when there is nothing common between old and new business
strategies, that is both the businesses are not related in anyway.

Read full text →

Due Diligence

The term “due diligence” is, generally used for various concepts involving investigation of either a
person or business before signing a contract, or an act involving certain standards of care.

Read full text →

Economic Order Quantity Model (EOQ)

As the name suggests, Economic order quantity (EOQ) model is the method that provides the company
with an order quantity. This order quantity figure is where the record holding costs and ordering costs
are minimized. By using this model, the companies can minimize the costs associated with the ordering
and inventory holding. In 1913, Ford W. Harris developed this formula whereas R. H. Wilson is given
credit for the application and in-depth analysis on this model.

Read full text →

Economic Risk

Generally speaking, economic risk can be described as the likelihood that an investment will be affected
by macroeconomic conditions such as government regulation, exchange rates, or political stability, most
commonly one in a foreign country. In other words, while financing a project, the risk that the output of
the project will not produce adequate revenues for covering operating costs and repaying the debt
obligations.

Read full text →

Elasticity of Demand

Elasticity of demand refers to the degree of responsiveness to change in the demand of a product or
services and its price.

Read full text →

Explicit Cost

Explicit cost is defined as the direct payment which is supposed to be made to others during the due
course of running business. This includes the wages, rents or materials which are due in the contract.

------

Factor Analysis

Factor analysis is to reduce a set of variables to a set of new variables. It can be done through many
methods and the variables are reduced to a set of lesser variables. In other words the process of making
a reduced set of new and useful variables from a set of many variables is factor analysis

Read full text →

Financial Analysis Report

Comprehensive financial analysis reports accentuate the strengths and weaknesses of a company.
Communicating the company’s strengths and weaknesses in an accurate and honest manner is helpful in
convincing the investors to invest in your business. A financial analysis report is, basically, a document
that attracts high interest of investors as it contains a detailed appraisal of a company’s financial health.
Read full text →

Financial Modeling

Financial modeling refers to the process through which a company builds up a financial representation
of some, or even all aspects of the company or the given security. The financial model is generally
featured by performing calculations, and making recommendations on the basis of that information.
Moreover, the model might also précis specific events for the end user in addition to providing direction
regarding possible alternatives or actions.

Read full text →

Financial Planning

Financial planning can be delineated as long-term profit planning intended at generating higher return
on assets, growth in market share, and at solving foreseeable problems. Putting it simple, it is the
process of estimating the amount of required capital and determining its competition. It is a process that
frames financial policies in relation to investment, procurement, and administration of an enterprise’s
funds.

Read full text →

Financial Ratio

A financial ratio can be well defined as a comparative magnitude of two selected statistical values taken
from the financial statements of a business enterprise.

Read full text →

Financial Responsibility

Financial responsibility refers to the process of managing money and other similar assets in a way that is
considered productive and is also in the best interest of the individual, or the family, or the business
company. Being adept at financial tasks and money management involves cultivation of a mindset which
makes it possible to look beyond the needs of the present so as to provide for the needs of future.
Besides, it is essentially important to understand the various basic principles so as to achieve a high level
of financial responsibility.

Read full text →

Financial Statement Analysis

Financial statement analysis can be referred as a process of understanding the risk and profitability of a
company by analyzing reported financial info, especially annual and quarterly reports. Putting another
way, financial statement analysis is a study about accounting ratios among various items included in the
balance sheet. These ratios include asset utilization ratios, profitability ratios, leverage ratios, liquidity
ratios, and valuation ratios. Moreover, financial statement analysis is a quantifying method for
determining the past, current, and prospective performance of a company.

Read full text →

Fixed Costs

Fixed costs, in economics, are explained as business expenses which do not depend on the level of
goods and services proffered by a business.

Read full text →

Fundamental Analysis

Fundamental analysis can be explained as a method of estimating a security which involves attempting
to evaluate its basic value by assessing allied financial, economic, and other quantitative and qualitative
factors. Fundamental analysis aims at studying everything which affects the value of the security,
including macro-economic factors (such as the overall economy and industry conditions) and company-
specific factors (including financial condition and management).

Read full text →

Future Value

The future value (FV) refers to the value of an asset or cash at a particular date in the future which is
equivalent to the value of a specified sum at present. The future value can also be explained as the
amount of money which will be reached by a present investment as a result of its growth in the future.

Read full text →

Gearing Ratio

Quite closely related to solvency ratio, gearing ratio is a general term recounting a financial ratio
comparing some form of owner’s capital (equity) to borrowed funds. Moreover, gearing is a
quantification of financial leverage, indicative of the extent to which a firm’s activities are financed by
owner’s finances vs. creditor’s finances. Putting another way, gearing ratio is used mainly for analyzing a
company’s capital structure and thus assessing the company’s financial position in the long run.

Read full text →

Horizontal Analysis of Financial Statements

Horizontal analysis of financial statements involves comparison of a financial ratio, a benchmark, or a

line item over a number of accounting periods. This method of analysis is also known as trend analysis.
Horizontal analysis allows the assessment of relative changes in different items over time.

Read full text →

Idiosyncratic Risk

The idiosyncratic risk can be defined as the risk which affects a very diminutive number of assets, and
can be almost eradicated through diversification. It is quite similar to unsystematic risk.

Read full text →

Implicit Costs

Implicit cost in economics, means the opportunity cost that is equal to what that has to be given up by a
firm for using factors that it neither hires nor purchases. Implicit cost is actually the cost that is the
consequence of using the assets, instead of lending, selling or renting them. It also means the income
that is forgone from making a choice of not to work. Implicit cost is also known as implied cost, notional
cost or imputed cost.

Read full text →

Industry Analysis

Industry analysis can be delineated as a market assessment tool which is designed to provide a business
with ideas of complexity in a specific industry. Putting it simple, the industry analysis is a report that
guides companies on their business strategy.

Read full text →

Industry Benchmark

A benchmark, basically, refers to a standard used to measure the performance of a mutual fund,
security, or investment manager. Generally speaking, broad market and market-segment stock and bond
indexes are used for this objective. As explained by Investopedia, while evaluating the performance of
any investment, it is essential to compare it with an apt benchmark. In the financial field, there are
numerous indexes used by analysts to determine the performance of a particular investment.

Read full text →

Internal Rate of Return (IRR)

The internal rate of return (IRR) is defined as the return rate that makes the present value of cash flows
in addition to the final market value of any investment thus bringing it to the level of current market
price of the same. Used frequently in determining the worth of an investment, the internal rate of
return is an important calculation.

Read full text →

Investment Analysis
The study to analyze the performance of a particular investment for a given investor is known as
investment analysis. It is also known as the study of the past decisions made for a particular investment
made.

Read full text →

Investment Banking

Investment banking can be explained as a form of banking which provides funds to meet the capital
requirements of companies. Moreover, investment banking supports as it carries out IPOs, bond
offerings, and private placement in addition to acting as a broker and helping out in accomplishment of
mergers and possessions. Putting it other way, investment banking is a field of banking that helps
businesses in acquiring funds. Also, besides acquiring fresh working capital, investment banking also
proffers advice for wide ranging transactions a business might engage in.

Read full text →

Investment Management

Investment management refers to the professional management of different securities and assets so as
to meet specified investment goals for the investors’ benefits. Investors may include private investors as
well as institutions. Investment management is, moreover, a huge and essential global industry in its
own right accountable for caretaking of trillions of dollars, yuans, pounds, euro, and yen.

Read full text →

Jarrow Turnbull Model

Jarrow Turnbull Model is the first models for pricing credit risk. It was developed by two people, Robert
Jarrow and Stuart Turnbull. This model makes use of multiple factor and complete analysis of interest
rates to calculate the probability of default. It is one of the best reduced-forms of model that helps in
ascertaining credit risk. The other type of model to ascertain credit risk is structural model.

Read full text →

Key Performance Indicators (KPI)

The KPI can be expressed as a set of irrefutable measures used by an industry or a company to estimate
or determine performance in terms of congregating their strategic as well as operational goals. The KPIs
differ between companies and industries, depending upon the performance criteria or the priorities. KPI
is also, sometimes, referred as ‘Key Success Indicators (KSI).’

Read full text →

Labor Efficiency Variance

In order to understand the labor efficiency variance properly, you will have to understand the concept
and workings of standard costing first. Variance is simply a method that is used in the bigger picture of
the standard costing.

Read full text →

Leverage Ratios

The ratios used to determine about the companies’ financing methods, or the ability to meet the
obligations. There are many ratios to calculate leverage but the important factors include debt, interest
expenses, equity and assets.

Read full text →

Leveraged Buyout

A leveraged buyout (LBO) refers to the possession of a company which is funded mostly with debt
obligations. Industries and companies of all sizes have been aimed by leveraged buyout transactions.
Generally, leveraged buyout involves the use of a combination of different debt instruments from banks
and debt capital markets.

Read full text →

Liquid Asset

Liquid assets can be referred as an asset that can be converted into cash quickly and with minimal
impact to the price received. Generally, liquid assets are considered similar to cash for their prices being
relatively stable on being sold in the open market. As per Investopedia, to be a liquid asset, it is essential
for the asset to have an established market with sufficient participants to absorb the selling without
significantly i8nfluencing the price of the asset.

Read full text →

Marginal Analysis

Marginal analysis refers to an evaluation of the additional benefits of an activity contrasted to the
additional costs of that activity. Marginal analysis is used by companies as a decision making tool to
provide help in increasing the profits. Moreover, marginal analysis is used instinctively to make a host of
everyday decisions. Also, marginal analysis is generally used in microeconomics while analyzing the
complexity of a system being affected by marginal manipulation of its comprising variables.

Read full text →

Marginal Revenue

Marginal revenue refers to the increase in revenue resulting from the sale of one extra unit of output.
Many of the competitive firms continue to produce output until marginal revenue equals marginal cost.
However, although marginal revenue can remain constant over a particular level of output quantity, it
follows the law of diminishing returns and eventually slows down, with an increase in the output level.

Read full text →

Market Capitalization

Market capitalization can be delineated as the total dollar market value of all the outstanding shares of a
company. This figure is used by the investment community to determine the size of a company as
contrasted to sales or total assets figures. Market capitalization is also generally referred as “market
cap.”

Read full text →

Market Risk

Market risk also known by some as systematic risk is when there is potential for an investor to lose the
value of its factors or experience a decline in them due to the volatility of the market that is for example
by the structural changes that occur in the market or the economy as whole.

Read full text →

Market Risk Premium

Market risk premium is the variance between the predictable return on a market portfolio and the risk-
free rate. Market Risk Premium is equivalent to the incline of the security market line (SML), a capital
asset pricing model.

Read full text →

Microeconomic Pricing Model

The Microeconomic Pricing Model is essentially a model wherein prices for a concerned good or service
are determined within a given market. As per this model, the prices are determined based on the
balance of demand and supply in a market.

Read full text →

Mixed Expenses (Semi-variable Expenses)

Overheads that are fixed in the total volume of activity but variable when calculated as per unit are
called fixed overheads.

Read full text →

Monte Carlo Simulation

Monte Carlo Simulation implies a problem solving technique which is used to estimate the possibility of
certain outcomes by running several trial runs, known as simulations, through the use of random
variables.

Read full text →

Most Important Financial Ratios

The most cost commonly and top five ratios used in the financial field include...

Read full text →

Moving Average

Moving Average is basically an indicator that is required for the purpose of conducting a technical
analysis that further displays the security’s price average value over a definite period. Moving Average is
often utilized for measuring momentum and also for defining areas of resistance and support. Moving
averages are utilized for emphasizing a trend’s direction and for smoothing out volume and price
fluctuations, which can result in misinterpretation.

Read full text →

Negative Equity

Negative equity is basically the name of a phenomenon. This is found to be observed the values of an
asset change during different situations. For example, at the time of securing a loan, this value is less
while the outstanding balance in the amount of loan is higher than its value.

Read full text →

Net Debt

Net debt can be expressed as a metric that indicates the overall debt situation of a company by netting
the value of the liabilities and debts of a company along with its cash and other similar liquid assets. To
put it simple, net debt refers to the total debt of a company minus cash on hand. As expressed by
Investopedia, one of the most important factors that require consideration while investing in a company
is the amount of debt carried by the company.

Read full text →

Net Present Value

As explained by financial authors, the Net Present Value or Net Present Worth is defined as the present
values of the individual cash flows, both incoming and outgoing, of a business entity.

Read full text →

Net Present Value of Growth

In order for a company to calculate what the new addition or expansion project will add to the worth of
the existing firm, it needs to calculate thepresent value of growth opportunities. Furthermore, an
appropriate purchase price can be calculated by utilizing the present value model. The net present value
of growth opportunities can be determined by deducting purchase price from the present value of
growth opportunities.

Read full text →

Non-diversifiable Risk

Non-diversifiable risk can be referred to a risk which is common to a whole class of assets or liabilities.
The investment value might decline over a specific period of time only due to economic changes or
other events which affect large sections of the market. However, diversification and asset allocation can
provide protection against non-diversifiable risk as different sections of the market have a tendency to
underperform at different times. Non-diversifiable risk can also be referred as market risk or systematic
risk.

Read full text →

Non-systematic Risk

Also referred as “specific risk”, “residual risk” or “specific risk”, non-systematic risk is the industry or
company specific risk which is inherent in every investment. Putting it simple, unlike systematic risk
affecting the entire market, it applies only to certain investments. Moreover, it is the element of price
risk which can be eliminated largely through adequate diversification within a specific asset class. It is,
therefore, the individual business risk related to underlying stock, if the company goes bankrupt, it can
be stated as a non-systematic risk event and usually has little to do with the general recede and flow of
the entire market.

Read full text →

Normal Deviate (Standardized Value)

The division of distance of one data point from its mean to the standard deviation of the distribution is
known as normal deviate or the standardized value. A unit deviation with zero mean is standard normal
deviation and it shows the variation from the average mean or the expected value.

-----

Opportunity Cost
Opportunity cost can be defined as the cost of an alternative which must be abstained from so as to
pursue a specific action. In other words, opportunity cost refers to the benefits that could have been
received through an alternative action.

Read full text →

Optimal Capital Structure

The optimal capital structure indicates the best debt-to-equity ratio for a firm that maximizes its value.
Putting it simple, the optimal capital structure for a company is the one which proffers a balance
between the idyllic debt-to-equity ranges thus minimizing the firm’s cost of capital. Theoretically, debt
financing usually proffers the lowest cost of capital because of its tax deductibility. However, it is seldom
the optimal structure for as debt increases, it increases the company’s risk.

Read full text →

Pareto Principle (80–20 Rule)

Pareto principle which is also known as the 80 to 20 rule was created by Vilfredo Pareto who was an
Italian economist in the year 1906. This formula was created to explain the unequal distribution of
wealth assuming that 20 percent of the people of the country hold 80 percent of the total wealth. At the
end of the year 1940, DR. Joseph M. Juran attributed this rule to Pareto calling it the Pareto Principle.

Read full text →

Passive Management

Passive management refers to a style of management related to mutual and exchange traded funds
wherein a fund’s portfolio reflects the market index. Passive management is the converse of active
management which includes attempt by a fund’s manager to beat the market with different investing
strategies and selling/buying decisions of securities of a portfolio. Passive management is also referred
as ‘passive strategy’, ‘index investing’, and ‘passive investing.’

Read full text →

Payback Period

In simple terms, payback period can be defined as a tool of capital budgeting which calculates the length
of time required to recover the original invested amount. This period is usually expressed in years and
can be calculated using simple dividing total investment on a project and annual cash inflow.

Read full text →

Performance Indicator

A performance indicator refers to an industry jargon term for a type of performance measure. The
performance indicators are, generally, used by an organization for evaluating its achievements or the
achievements of a specific activity it is engaged in. Many a times, success is defined in terms of
progressing towards strategic goals, but very often, success is simply referred as the repeated
achievement of some level of operational goals.

Read full text →

Perpetuity

Perpetuity can be well defined as an annuity without any end, or it can be said that perpetuity features a
stream of cash payments continuing forever. To describe in detail, perpetuity is an annuity wherein the
periodic payments commence on a specific date and continue to an indefinite time.

Read full text →

Present Value

The Present Value of an entity can be defined as the present worth of a prospective amount of money or
a stream of cash flows with a specified return rate. The Present Value is conversely related to the
discount rate.

Read full text →

Price Sensitivity

Price sensitivity is also known as price elasticity of demand and this means the extent to which sale of a
particular product or service is affected. Another way of explaining price sensitivity is, “the consumer
demand for a product is changed by the cost of the product. It basically helps the manufacturers study
the consumer behavior and assists them in making good decisions about the products.

Read full text →

Production Possibility Frontier

In economics, the term production possibility frontier refers to a graph that is used for comparing the
rates of production of two commodities that make use of the same fixed total of factors of production.
Production possibility frontier is also known as production possibility curve, production transformation
curve and production possibility boundary.

Read full text →

Qualitative Analysis

A qualitative analysis is a technique which uses complex mathematical and statistical modeling,
measurement and research to evaluate things. There could be a number of reasons behind conducting
this analysis and may include: measurement of progress; performance evaluation; prediction of related
global events and valuation of financial instrument. For a business individual or company it is very
important to keep a check on all these factors in order to smoothen progress his business.

Read full text →

Quantitative Analysis

Quantitative analysis is a business or financial analysis technique that aims at understanding behavior
through the use of complex mathematical and statistical modeling, measurement, and research.
Read full text →

R-Squared

R-squared is a statistical measure that provides with data in percentage of a fund from the standard
index or by definition the value of fraction of variance. The value of R-squared can vary from 0 to 100. If
the R-squared of a security is 100, it denotes that all the movements of security are completely
ascertained by the standard movement of market index.

Read full text →

Ratio

Ratio can be defined as one value divided by another. The resultant value is an indicator of the value of
one quantity in other quantity’s terms.

Read full text →

Ratio Analysis

Ratio analysis is a tool brought into play by individuals to carry out an evaluative analysis of information
in the financial statements of a company. These ratios are calculated from current year figures and then
compared to past years, other companies, the industry, and also the company to assess the
performance of the company. Besides, ratio analysis is used predominantly by proponents of financial
analysis.

Read full text →

Regression Analysis
Regression analysis is the process of determining how the value of a dependent variable changes when
any one of independent variable changes. The values of other independent variables do not change in
this process.

Read full text →

Residual Income (RI)

Residual income is the net operating income that is earned by the investment center. This income is the
earning that is above the minimum target return. This means that a residual income is the excess
income earned on the return on investment.

Read full text →

Risk-Adjusted Discount Rate

An estimation of the present value of cash for high risk investments is known as risk-adjusted discount
rate. A very common example of risky investment is the real estate. Risk adjusted discount rate is
representing required periodical returns by investors for pulling funds to the specific property. It is
generally calculated as a sum of risk free rate and risk premium. The variation of risk premium is
depending on the risk aversion of investor and the perception of investor about the size of property’s
investment risk.

Read full text →

Riskless Rate of Return

Risk free rate of return refers to the theoretical rate of return of an investment involving zero risk. The
riskless rate represents the interest expected by an investor from a completely riskless investment over
a certain time period.

Read full text →

Seasonally Adjusted Annual Rate (SAAR)

SAAS is a rate adjustment used for economic or business data that attempts to remove the data’s
seasonal variations.

Read full text →

Sensitivity Analysis

By keeping track of the changes in the external factors, necessary actions can be taken to prevent the
losses. In order to keep track of the external changes, the entity needs to implement a method that will
help it determine the sensitivity of its sales, costs and changes in its income patterns. This method is
known as sensitivity analysis. The sensitivity analysis determines the changes in the quantifiable
variables of the project to determine it viability.

Read full text →

Sharpe Ratio

Nobel Laureate William F. Sharpe has derived a formula that helps to measure the risk adjusted
performance. As per definition, Sharpe Ratio helps in arriving at an answer which helps us analyse the
risk that can be, and allowing you to make decisions on investments and also helps analyse the
performance of a group.

Read full text →

Solvency

In finance, solvency refers to the extent to which the current assets of a business entity exceed its
current liabilities. Solvency can also be defined as the ability of a business to congregate its long term
fixed expenses in addition to accomplishment of long term growth and expansion.

Read full text →

Solvency Ratio

Solvency ratio is one of the various ratios used to measure the ability of a company to meet its long term
debts. Moreover, the solvency ratio quantifies the size of a company’s after tax income, not counting
non-cash depreciation expenses, as contrasted to the total debt obligations of the firm. Also, it provides
an assessment of the likelihood of a company to continue congregating its debt obligations.

Read full text →

Standard Deviation

The general definition of standard deviation can be given as a measure of the dispersion of a set data
from its mean.

Read full text →

Standard Error

The deviation from the actual mean of a population is known as the standard error. In statistics the
standard deviation of the sampling distribution is known as the standard error.

Read full text →

SWOT Analysis

SWOT analysis refers to a tool that recognizes the Strengths, Weaknesses, Opportunities, and Threats of
an organization. Generally, SWOT is a basic, simple model that evaluates the capabilities of an
organization as well as its potential opportunities and threats. The method of SWOT analysis is to obtain
info from an environmental analysis and separate it into internal and external issues. Once this is
accomplished, SWOT analysis determines what may help the firm in accomplishment of its aims and
objectives, and also in overcoming or mitigating the obstacles to achieve desired results.

Read full text →

Systematic Risk

Systematic risk refers to the risk intrinsic to the complete market or the complete market segment.
Systematic risk is also sometimes referred as “market risk” or “un-diversifiable risk”.

Read full text →

Terminal Value

Terminal value is the worth of your investment after a certain period of time. It is calculated by keeping
factors like the current worth of asset, the rate of interests etc. In consideration yet assuming a stable
rate of growth. Terminal value is sometimes also known as horizon value or continuing value. It is also
used with the discounted cash flow (which calculates the firms worth for up to 3 to 5 years) to calculate
the current worth of the firm or business. The terminal value of assets or of a company can be calculated
beyond the time period of the discounted cash flow projection.

Read full text →

Time Value of Money

The time value of money refers to the value of money existing in a given amount of interest which is
earned during a specific time period. The time value of money can be explained as the central concept in
finance theory. Moreover, the concept of time value of money also helps in evaluating a likely stream of
income in the future in a manner that the annual incomes are discounted and added thereafter, thereby
providing a lump-sum present value of the complete income stream.

Read full text →

Trend Analysis

Trend analysis is one of the tools for the analysis of the company’s monetary statements for the
investment purposes. Investors use this analysis tool a lot in order to determine the financial position of
the business. In a trend analysis, the financial statements of the company are compared with each other
for the several years after converting them in the percentage. In the trend analysis, the sales of each
year from the 2008 to 2011 will be converted into percentage form in order to compare them with each
other.

Read full text →

Treynor Ratio

Jack Treynor found the formula for the Treynor Ratio. It is the ratio that measures returns earned in
surplus of which could have been earned on a risk free speculation per each unit of market risk. The
excess return is the difference between a group’s return and the risk-free rate of return of the same
period of time.

Read full text →

Variable Costs

Variable costs can be defined as expenses which keep changing in proportion to the activities of a
business. Variable costs can be calculated as the sum of marginal costs over all units produced.

Read full text →

Vertical Analysis of Financial Statements

Vertical analysis of financial statements is a technique in which the relationship between items in the
same financial statement is identified by expressing all amounts as a percentage a total amount. This
method compares different items to a single item in the same accounting period.

Read full text →

Weighted Average Cost of Capital (WACC)

The Weighted Average Cost of Capital (WACC) can be explained as the rate expected to be provided by a
company on average to all the security holders for financing its assets.

Read full text →

Weighted-Average Cost Flow Assumption

In this method of weighted average cost flow assumptions, the periodic inventory method is used, which
is employed to compute the value of the inventory in addition to the costs of the goods sold. This cost
that is the average of the total cost is based on the costs of goods available for sale in the inventory for
the entire year. This average cost is then applied to the units that have been sold and the units that are
still in the inventory.

----

How to Create an Effective Commercial Real Estate Marketing Plan

by Rod Santomassimo | Nov 19, 2018 | Commercial Real Estate Prospecting, CRE Marketing, Strategies |
0 comments

Creating an effective real estate marketing plan is important to acquire leads, advertise property listings
and generate more sales.

In this article:

Situation Analysis

Define Your Target Audience

Define Your Goals and Objectives

Design Marketing Strategies to Achieve Your Goals

Monitor and Measure Results

Build to Success: How to Create the Best CRE Marketing Plan

1. Situation Analysis

The first step in creating a commercial real estate marketing plan is to do an analysis of your business.
Having a breakdown of your strengths and weaknesses will help identify your USP.

Unique Selling Proposition (USP) is a factor that sets you apart from your competitors. To find your USP,
assess your strengths, weaknesses, opportunities, and threats first.

SWOT Analysis

SWOT analysis is a powerful tool that helps identify opportunities using your strengths. It can also help
companies minimize, if not eliminate, threats in the industry.

Internal Factors: Strengths and Weaknesses

Strengths

What advantage does your company have against a competitor?

What do you do well?

Are you a pioneer in the market?

What internal sources, like a well-trained staff, do you have?

How fast can you respond to clients?

Do you have the most competitive product listing in the market?

What makes your customers keep coming back to you?

Weaknesses
What things or characteristics do you lack?

What does your competitor have that you don’t?

Are there limitations to your resources?

Do you lack proper training?

Which aspects can your company improve on?

Do you spend most of your time outside or inside the office?

How often does your pipeline eventually result in a sale?

External Factors: Opportunities and Threats

Opportunities

What customer need can you address further?

What factors, political or economic, can positively influence your growth?

Are there emerging trends in the market that you can take advantage of?

What is the latest technology you can use for your business?

Threats

What factors hinder your success?

What factors, political or economic, can negatively influence your growth?

Is there a new regulation in the market?

TOWS Analysis
SWOT Analysis gives insight on your USP and how you can use it to your advantage. Then, you can use
TOWS analysis to develop a real estate marketing plan.

Strength-Opportunity Strategies. You can use your strengths to maximize the opportunities available in
the market. If you have competitive CRE agents, you can use this to support the growing demand for
CRE agents.

Weakness-Opportunity Strategies. On the other hand, these are strategies that minimize your
weaknesses using the opportunities you identified.

Strength-Threat Strategies. You can also use your strengths to minimize threats you previously
identified. For example, you can minimize the threat of the growing number of competitors if you train
more.

Weakness-Threat Strategies. These marketing strategies minimize weaknesses to avoid identified

threats. If your weakness is following up clients, you can create a plan of action to eliminate this. For
instance, you can hire an assistant who will follow up clients in your stead.

2. Define Your Target Audience

Your real estate marketing plan should target a specific audience. Do you want to target young
entrepreneurs or seasoned executives? Is there a specific industry you specialize in?

Remember, you are spending your budget on your ideal clients. Furthermore, you will still need to
entertain clients outside of your target customers.

3. Define Your Goals and Objectives

What are your specific goals in mind that lead you to develop a marketing plan? Do you want a 20%
increase in sales? Is your objective a 10% increase in prospect clients? Your goals and objectives in mind
should be SMART.
SMART Goals

Specific. Your marketing goals should be clear and specific. This will help you focus your effort to reach
these goals. To write a specific goal, answer the following to help you clarify the specific goal.

What do you want to accomplish?

Why is it important to achieve?

Who are the people involved in the plan?

Where is it located?

Which resources will be used for the plan?

Measurable. Measurable goals keep real estate agents motivated. They can clearly see and track their
progress and even improve on gaps in the marketing plan.

Achievable. At the same time, your goals should be realistic and achievable to be effective. You will need
to assess your resources and up to what extent these can help you in reaching your goals. Listing down
an unachievable goal will also lead to loss of motivation for your agents.

Relevant. Similarly, your goals should be significant to your business such as generating leads,
prospecting clients, and closing deals.

Time-based. Lastly, your real estate marketing plan should have a specific time frame.

4. Design Marketing Strategies to Achieve Your Goals

The next step in creating your real estate marketing plan is designing effective marketing strategies.
Your marketing strategy is critical in achieving your goals while keeping within budget.
Online Marketing Strategies

Website development. Create a website that will allow potential customers to find key information.
Make sure that your website is informative, visual, and user-friendly for any device.

Individual property websites. Individual property websites engage visitors in the specific property. This
can help convert visitors to buyers effectively.

Targeted email campaigns. Your email content should be relevant to the target customer. Include
important information about the property or about the industry as well. Do not forget to link your
content to your website and social media pages.

Create useful content. Create relevant, useful or entertaining content for your website, blog post or
video. You can also share industry insights that help customers make better decisions for their next
purchase.

Use social media. Social media is a powerful tool in real estate marketing. In particular, you can use
social media to connect and interact with potential customers. Furthermore, you can hire a social media
manager who can post, update, and answer inquiries on your account.

Outreach influencers. Bloggers, journalists, and influencers can affect how potential clients will perceive
you. Their comment or review on your service can positively influence growth.

Paid advertisements. You can advertise on commercial real estate portals, social media pages, and
search engines. This will generate visibility to target customers who are looking for their next
commercial property.

Digital brochures and listings. Sending regular digital brochures and property listing will keep your
audience informed. Additionally, it will constantly remind the client of your presence, creating a strong
brand awareness in the long term.

On Ground Marketing Strategies

Print collaterals. This includes brochures, flyers, signage, and the like. Your print collaterals should
capture customer attention within three (3) seconds. It should also observe your branding.

Events. There are broker events you can attend to connect with prospective clients.

Direct mail. Mail content should be creative and relevant to be effective. You should also create a
targeted list for your direct mail.

However, keep in mind that you need to identify the ideal mix of strategies to reach your goals. Identify
first which of these strategies are effective for your target clients. Do they often go to Facebook or
LinkedIn? Do they often go abroad or not? Knowing the behavior of your customers will help you
streamline the best strategies to connect with them.

5. Monitor and Measure Results

Lastly, you should measure and track the results of your real estate marketing plan. Identify key metrics
to determine if your marketing plan is effective or not.

Here are some examples of key metrics.

Number of website views and visits

Number of leads generated

Have a monthly or quarterly report regarding these key metrics to track progress. Aside from this, key
metrics will help you make relevant decisions on your real estate marketing plan.

Having a marketing plan which highlights your strength will help you build a more sustainable strategy
as a CRE agent. It will help you define your goals, track your progress, and achieve overall success.

-----

Five things to consider when determining investment property objectives

Determining objectives is no simple task. To help you work through this process, we developed a simple
framework called “T.R.R.I.P.” that can be reviewed at the beginning of every year to see whether your
objectives have shifted over the past 12 months. While not exhaustive, asking yourself the following
questions and discussing these “thought points” with your spouse, family and business partners (if
applicable) will help you determine if your current properties are best positioning you and your family
for long-term success.

Taxes

How much of the income from our properties is sheltered by depreciation?

What would our tax liability be if we were to sell?

Regulation

What direction do we anticipate landlord laws to go in the coming year?

Are there proposed state and local regulations outside of landlord laws we are concerned about?

Risk

Has our tolerance for risk changed from last year?

How do we view investment risk? Are we feeling overly concentrated in one property type and/or in one
market?

How do we view liability risk (e.g. tenant risk, lawsuit risk, etc.) associated with our current properties?

Income

How much income do we currently earn and how much would we like to earn annually?

Do we anticipate our income needs changing in the coming years?

How do we view the tradeoff between income and free time?

Personal Time
Do our properties afford us sufficient personal time to travel, spend time with family, and enjoy life?

Are there certain parts of property ownership we enjoy (e.g. acquisitions and/or value-add) and others
we do not (e.g. routine management and / or maintenance)?

----

5 Real Estate Goals You Should Set for 2020 (and How to Achieve Them)

by Mays KuhailDec 1, 2019

With the new year approaching, people are starting to list their resolutions and goals for 2020. And real
estate investors are no different. Setting real estate goals early on is one of the most important things
you can do in your planning process. Successful real estate investors are able to set goals in a real estate
business plan and achieve them.

What Are SMART Real Estate Goals?

Yes, intelligent, but that’s not the smart we’re talking about. If you want to know how to set real estate
goals for 2020, then you should know all about SMART goals.

SMART goals refer to goals which are:

Specific

Measurable

Attainable

Relevant
Time-Bound

Say one of your goals is to increase profits. A SMART goal would be to “increase profits by $10,000 by
October 2020, using cost-cutting methods and improving real estate marketing”, as opposed to just
“increase profits”. The SMARTer the goal, the easier it is for you to evaluate your success.

So what are some real estate goals you should pursue in 2020? Consider the following:

Continuing to Learn

One of the first things you should do when you start your real estate career is to research and learn
about all things real estate. You begin by understanding general housing market trends, and then move
on to more detailed real estate analytics. This doesn’t stop, even if you become an expert in real estate.
Real estate trends are constantly changing, and so are economic factors, and real estate laws and
regulations. If you don’t stay up to date, you can risk missing out on important information that could
risk your investment. So always continue to research and stay up to date. Check out our knowledge
center for the latest real estate news and resources available for beginner and expert real estate
investors.

Increasing Profits and Building Wealth

This is quite an obvious one. You should plan to increase rental income in order to increase positive cash
flow. You can do this by buying multiple rental properties in a single year, by cutting down on costs and
expenses, and by increasing rental income (within reason) from your current investment properties.
Let’s explore these options a bit further.

A simple profit formula will tell you that profit = revenue – expenses. So the two obvious ways to
increase profit in real estate are increasing revenue or decreasing expenses. You can increase your
revenue by increasing rental income – and yes, that is something you can do. If you’re worried about
pissing off or losing tenants, then read this guide: Raising Rent Without Losing Tenants: 6 Tips for New
Landlords.
The other way to increase your real estate profit is by cutting down on your expenses. You know there
are things you could spare doing, we all do. And sometimes, one needs to boot-strap in order to achieve
the highest profit possible and to build wealth. List all your expenses, and cut down the unnecessary
ones. Your savings account will thank you later.

The final option is to buy more rental properties. Investing in more than one rental property is definitely
a challenge, but it is one that will yield revenue. So once you’ve secured your first investment property,
start looking into the next one. Check out this guide on How to Buy Multiple Rental Properties in 2020 to
learn how to do this. This will, in turn, help you achieve the next real estate goal on our list…

Related: 8 Simple Steps to Building Wealth with Real Estate

Diversifying Your Investment Portfolio

one of your real estate goals should be diversification

This should be another one of your 2020 real estate goals. One of the first things I learned in Finance is
that it’s very important to diversify your investment portfolio. And things are no different in real estate.
Diversifying your real estate portfolio means that, as an investor, you should attempt to invest in
different types of investment properties and in different real estate markets. If you’re investing in an
Airbnb rental property in Seattle, diversifying would mean exploring the wider Washington State market
(or further), and looking into different real estate investing strategies, such as traditional investments.

Does this bear more risk? Quite the opposite. Ever heard “don’t put all of your resources in one place”?
Diversifying your real estate investing portfolio means that your risk is divided upon different “projects”.
And if something was to negatively affect the Seattle Airbnb market, you wouldn’t be jeopardizing your
entire portfolio.

Investing in New Tools for Your Real Estate Business

In order to achieve the last two goals on our list (making more money and diversification), you’ll
probably need to buy another investment property. Not just any property will do. You’ll need one with a
high return on investment (ROI). And if you want to ensure that you can look back at the end of the
year, satisfied that you reached your goals for 2020, you’re going to need the right real estate
investment tools!

Try using Mashvisor to buy your next investment property. Plug in the city or neighborhood of choice
into our search bar, and gain access to a wide range of real estate data such as cash on cash (CoC)
return, cap rate, expected rental income for traditional and Airbnb properties, and real estate comps
through our rental property calculator.

Click here to sign up for Mashvisor now and subscribe to our services with a 40% discount.

Related: How to Find a Good Rental Property for Investment

Growing Your Real Estate Network

You need to be well connected regardless of the industry or business you’re in. And when it comes to
real estate, your network is crucial to your success as an investor. After all, real estate is a people
business. Whatever real estate strategy you follow, you’ll end up dealing with and handling other
people.

Your real estate network includes anyone from investors, lawyers, real estate agents, accountants,
buyers, and sellers. It’s also smart to grow your network beyond the real estate industry. One of your
real estate goals should be to include researchers, demographic analysts, economists, and tourism
experts in your network – all of whom should know about other industries and areas which affect real
estate. Again, following our above example, assume you own an Airbnb investment property in Seattle.
Your tourism contact can inform you that tourist numbers are expected to fall in the first quarter of
2020. You can plan ahead, and act accordingly.

Your network can thus help you gain more experience in real estate (among other industries), and aid
you in finding investment property, tenants, buyers, among other opportunities. There’s always
someone to learn from and to benefit from.
------

7 TYPES OF ALTERNATIVE INVESTMENTS

1. Private Equity

Private equity is a broad category that refers to capital investment made into private companies, or
those not listed on a public exchange, such as the New York Stock Exchange. There are several subsets
of private equity, including:

Venture capital, which focuses on startup and early-stage ventures

Growth capital, which helps more mature companies expand or restructure

Buyouts, when a company or one of its divisions is purchased outright

An important part of private equity is the relationship between the investing firm and the company
receiving capital. Private equity companies often provide more than capital to the firms they invest in;
they also provide benefits like industry expertise, talent sourcing assistance, and mentorship to
founders.

2. Private Debt

Private debt refers to investments that are not financed by banks (i.e., a bank loan) or traded on an open
market. The “private” part of the term is important—it refers to the investment instrument itself, rather
than the borrower of the debt, as both public and private companies can borrow via private debt.

Private debt is leveraged when companies need additional capital to grow their businesses. The
companies that issue the capital are called private debt funds, and they typically make money in two
ways: through interest payments and the repayment of the initial loan.
3. Hedge Funds

Hedge funds are investment funds that trade relatively liquid assets and employ various investing
strategies with the goal of earning a high return on their investment. Hedge fund managers can
specialize in a variety of skills to execute their strategies, such as long-short equity, market neutral,
volatility arbitrage, and quantitative strategies.

Hedge funds are exclusive, available only to institutional investors, such as endowments, pension funds,
and mutual funds, and high-net-worth individuals.

Learn more about HBS Online's Alternative Investments course.

4. Real Estate

There are many types of real assets. For example, land, timberland, and farmland are all real assets, as is
intellectual property like artwork. But real estate is the most common type and the world’s biggest asset
class.

In addition to its size, real estate is an interesting category because it has characteristics similar to bonds
—because property owners receive current cash flow from tenants paying rent—and equity, because
the goal is to increase the long-term value of the asset, which is called capital appreciation.

Like with other real assets, valuation is a challenge in real estate investing. Real estate valuation
methods include income capitalization, discounted cash flow, and sales comparable, with each having
both benefits and shortcomings. To become a successful real estate investor, it’s crucial to develop
strong valuation skills and understand when and how to use various methods.

5. Commodities
Commodities are also real assets and mostly natural resources, such as agricultural products, oil, natural
gas, and precious and industrial metals. Commodities are considered a hedge against inflation, as
they're not sensitive to public equity markets. Additionally, the value of commodities rises and falls with
supply and demand—higher demand for commodities results in higher prices and, therefore, investor
profit.

Commodities are hardly new to the investing scene and have been traded for thousands of years.
Amsterdam, Netherlands, and Osaka, Japan may lay claim to the title of the earliest formal commodities
exchange, in the 16th and 17th centuries, respectively. In the mid-19th century, the Chicago Board of
Trade started commodity futures trading.

6. Collectibles

Collectibles include a wide range of items, from rare wines to vintage cars to baseball cards. Investing in
collectibles means purchasing and maintaining physical items with the hope the value of the assets will
appreciate over time.

These investments may sound more fun and interesting than other types, but can be risky due to the
high costs of acquisition, a lack of dividends or other income until they're sold, and potential destruction
of the assets if not stored or cared for properly. The key skill required in collectibles investment is
experience; you have to be a true expert to expect any return on your investment.

Related: Financial Terminology: 20 Financial Terms to Know

7. Structured Products

Structured products usually involve fixed income markets—those that pay investors dividend payments
like government or corporate bonds—and derivatives, or securities whose value comes from an
underlying asset or group of assets like stocks, bonds, or market indices. Examples of structured
products include credit default swaps (CDS) and collateralized debt obligations (CDO).
Structured products can be complex and sometimes risky investment products, but offer investors a
customized product mix to meet their individual needs. They're most commonly created by investment
banks and offered to hedge funds, organizations, or retail investors.

Structured products are relatively new to the investing landscape, but you’ve probably heard of them
due to the 2007-2008 financial crisis. Structured products like CDO and mortgage-backed securities
(MBS) became popular as the housing market boomed before the crisis. When housing prices declined,
those who had invested in these products suffered extreme losses.

New call-to-action

THE BENEFITS OF ALTERNATIVE INVESTMENTS

Alternative investments offer greater portfolio diversification and lower overall risk with the potential
for higher returns. As alternative investments become a larger part of the investing landscape and more
available to different types of investors, they're increasingly important to know about for both investors
and current or aspiring investment professionals hoping to accelerate their careers.

-----

Zoning Analysis and Commercial Real Estate Transactions

Zoning analysis is an integral part of commercial real estate transactions. The zoning of a property
determines:

a) What type of structures may be built on the land

b) Reconstruction and remodeling restrictions

c) Land use and property use

d) Compliance status of parking spaces

e) Compliance status of the property's existing use

It is important to know that local and county jurisdictions may change or amend their zoning ordinances
often which may trigger a compliant property to become non-compliant if the sale takes place after
updated zoning rules. Moreover, a property may have multiple zoning districts governing it and each
may have separate zoning and land use rules.

An example of zoning importance would include a future owner who may wish to demolish the existing
structure and build a hospital or other structure. Zoning due diligence provides the owner specific
details as to what may be built on his or her property. The zoning information will identify if the planned
construction is allowed plus provides height, size, location rules, parking rules, and other restrictions
which will apply when developing.

Zoning analysis for commercial properties is done by zoning firms like the Planning and Zoning Resource
Corporation. PZR® will make sure the property is compliant from a zoning and land use perspective.
Zoning analysis becomes even more arduous for multi-site and multi-location real estate transactions. A
complete and expert zoning analysis and zoning due diligence is required supported by municipal
documentation.

In most cases buyers, lenders or insurance companies do not have the expertise or resources to conduct
an in-house zoning analysis and zoning due diligence. They hire PZR® for zoning analysis, zoning reports,
zoning letters, zoning investigation, advice and service needs. After completing current research on a
property, PZR® inputs the data into a PZR® Zoning Report and includes all relevant municipal
documentation. In many cases, zoning analysis is not limited to municipal document review and
research, but it is backed by meetings with municipal/state/local officials.

PZR® Zoning report is extensive and includes:

The specific zoning designation of the site, as established by the current municipal code.

The uses allowed under the zoning designation established by the zoning ordinance and whether the
present use of the subject site is legally permitted.

The minimum yard or setback requirements and a review of the survey for compliance.
The building height requirement, whether by number of stories or actual height above ground level, and
a review of the survey for compliance.

The bulk or density restrictions of the property, and a determination of compliance.

The formula for determining the minimum parking requirements, and a comparison of the required
parking count to the actual site count.

Special circumstances to be considered could include legal non-compliance of any of the above factors,
the issuance of zoning compliance letters from the municipalities, the existence of variances, council
minutes, certificate of occupancy, building inspections and the effect of site plan approval.

The Planning and Zoning Resource Corporation (PZR®) provides zoning analysis, due diligence and
provides several services as well.

Zoning Verification Letters

Building and Zoning Code Violation Letters

Certificates of Occupancy

Building Permits

Variances, Special Use Permits or Conditional Use Permits

Planned Unit Developments

Site Plans

Zoning Codes

ALTA Land Title Survey Coordination through SRN

----

The Impact of Zoning on Property Values

Shannon Slater
Feb 26,

How important is the zoning of a property? When an appraisal is performed on a property whether the
property is residential or commercial, a part of the appraisal process is to determine the zoning of a
property. Then an appraiser determines if the zoning is considered to be a legal use, an illegal use, a
legal nonconforming use (grandfathered use), or if there is no zoning at all.

What is Zoning?

Zoning is defined as: (The Dictionary of Real Estate Appraisal, 4th Edition)

There are various types of zoning:

Single- Family Residential

Multifamily Residential

Planned Unit Development

Commercial

Industrial
Mixed-Use

Public Building Facility

Airport

Some cities have zoning maps located on their websites however the city can always be contacted to
provide the zoning for a property located within their city limits. By appraising in various cities in our
markets, I can confidently state that each city has its own unique zoning. Some are simple and some are
very complex. Some very small cities do not have zoning at all. When an appraisal is performed on your
home, the appraiser is to determine the zoning for the property if any. Most of the rural areas that we
appraise in North Texas that are located outside city limits do not have zoning. However, some
properties or developments located outside the city limits will have deed restrictions.

What is the Highest and Best Use Analysis?

Determining the zoning of a property is a part of the Highest and Best Use Analysis that is performed for
an appraisal, this would include vacant land, residential properties and commercial properties. A
Highest and Best Use analysis of a property is performed both "as if vacant" and "as improved".

When performing a Highest and Best Use Analysis an appraiser will make four determinations:
1. What is physically possible? - If the property is zoned for residential use with minimum lot size of
10,000 sq ft and the property is only 7,500 sq ft then it would not be physically possible for residential
use.

2. What is legally permissible? - This is where the zoning comes in. Is the property a legal use based on
the zoning? What are all the permitted uses under the zoning?

3. What is Financially Feasible? - This takes into consideration the financial aspects of the property.
Would the use produce a positive return?

4. What is Maximally Productive?- This analysis will decide which of the uses produces the highest value.

This is just a brief summary of Highest and Best Use analysis. A more in-depth description of the aspects
of Highest and Best Use might be for another post.

How would zoning impact the value of a property?

Residential :

Most of the residential properties that we appraise are typically zoned single family residential and are
a legal permitted use.. There are some occasions where a property may have a legal non-conforming
use (grandfathered use) such as a single family residence that is now zoned Multi-Family but it is
grandfathered. The issues that come up with a grandfathered use are that you must check with the city
to see if the grandfathered use would be allowed if the property was completely destroyed, if it was
vacant for a certain length of time, or if it sold. Each city is different. We recently appraised a property
that was a single family residence but it was located in a Commercial Zoning District. We inquired with
the city and confirmed that the Residential use was a grandfathered use and would be continued even if
the home was completely destroyed. The area consisted of older residential homes. There were no
commercial properties in the neighborhood. In this situation the city had wanted this to become a
commercial district but currently it was still residential homes in hopes of transitioning into a
commercial district.

The zoning of a property may have restrictions such as set backs from the front, sides and rear. There
may be limits to number of garages allowed or a minimum garage requirement. There may be
limitations on any additions that you may be able to make to your home. It is important to find out the
zoning restrictions and requirements for your property.

Value is market dependent and each market is different. If a residential property is located in an area
that is transitioning to commercial or mixed-use it could add to the value if the zoning is changed to
commercial but in some cases it may detract from the value.
Zoning variances can be allowed in some cities and could be requested but they may or may not be
granted. Please research the city in which your property is located for further clarification on zoning
variances.

The zoning of a property becomes extremely important when appraising commercial real estate as it will
impact what type of commercial property can be constructed or what type of use a building can have.
Here is an example of zoning how impacted the value of a commercial property. A building that at one
time had been used for light industrial/light manufacturing but the manufacturing business was not
longer using the building. The building became vacant for an extended amount of time. The building is
located near a downtown district. The city zoning created a Historic District which included the vacant
building which was formally used for manufacturing. The new Historic District us does not allow for light
manufacturing thus this building which was designed for manufacturing can no longer be sold to anyone
that would need to use it for light industrial use. Since the building had been vacant for a certain
amount of time it could not have a legal non-conforming use as light manufacturing. Because of the
zoning, the value of the property is diminished as the number of buyers that would have a use for the
building has now been greatly reduced which, based on supply and demand , would lessen the value of
the building.

Another example might be the density requirement of zoning. If there are two different large tracks of
land, one zoned for SFR - minimum lot size 7,500 sf and the other track of land is zoned SFR- minimum
lot size 1 acre. A developer is wanting to put in a residential development. Which track of land would
be more valuable? A feasibility analysis would need to be performed to see if the smaller lots would
produce a higher return or if developing on the larger lots would produce a higher return. You would be
surprised as sometimes the larger lots bring a greater return based on the value and cost of
construction. Sometimes the smaller lots would produce a greater return. It would depend on the
market that the land was located on and the cost of construction.

These are just a few examples of how zoning can impact the value of a property or how important it is to
know the zoning and what is allowed. There are definitely more examples of zoning impacting
commercial properties but there are a few occasions where zoning might be of concern to residential
properties as well.

-----

ANALYSIS OF THE MANAGEMENT OF COMMERCIAL PROPERTIES IN NIGERIA

ANALYSIS OF THE MANAGEMENT OF COMMERCIAL PROPERTIES IN NIGERIA

CHAPTER ONE

INTRODUCTION

The dramatic reduction in number of commercial properties in Nigeria is a reflection of the level of
decline which the nation has one through. The demise of same commercial properties in Nigeria did not
discourage further investment in the development of commercial properties in Nigerian. Obviously the
“big” names served the need of the whole of Awka metropolis when few investors considered the
development of commercial properties (shopping complexes) as a worthwhile problem and the idea of a
Central Business District was accorded a high respect. Recently the management is not an easy idea to
conceive for real estate especially with such development are in use by the owners. The lack of trained
professional in handle the management of commercial properties constitutes the first major obstacle to
management of commercial properties with in general. Basically maintenance is a vital aspects of
property management this aspect guarantees the physical life span of a property in order that a
property may last for ages ad does not become economically obsolete, it must be maintained.

1.1 STATEMENT OF THE PROBLEMS

Lack of proper maintenance has gone way to effect the image of some commercial properties many
commercial properties failed due to ineffective handing of the properties which manifests in the physical
deterioration. When non-professional are entrusted with the task of property management, failure is
easily result. In many instance policy or decision makers, have neglected the role of professional
property manager. In the management of commercial properties. What is the correct solution? Who can
provide the answer?

1.2 AIM AND OBJECTIVES

This study aims at achieving or deriving a satisfactory way of management of commercial properties and
party contributes to the management of the economic resources in Nigerian. The objectives of the
project are:

(i) To determine ways and means of enhancing to economic returns of a commercial properties?

(ii) To measure performance with benefit and thus guide future design, development and decision.

(iii) To review the problems normally associated with the management of commercial properties, review
design methodology and suggest ways and means of improving the existing method of management.

(iv) To develop an efficient means in management of commercial properties so as to ensure maximum

utilization and long life at minimum cost.
1.3 RESEARCH QUESTIONS

To throw more light on the topic at state, the researcher took the pains to arrange so me questions
based on the assumptions earlier on put forward about the problem this is hoped, will help the
researcher to get the solution to the problems, which is the failure of the existing method of
management.

The following research questions will accommodate that:

(i) Is there any benefits derived from the management of commercial properties?

(ii) Is commercial properties effectively managed?

(iii) Does performance and benefits, guide, future decision making in the management of commercial
properties?

(iv) What are the ways and means of ensuring undisrupted flow of economic returns from a commercial
properties?

(v) Does the involvement of the management in place effect the productivity of the commercial
properties?

1.4 SIGNIFICANCE OF THE STUDY

This section of chapter one of a research project states those whom the study will have impacts on and
those that will benefit from the study. It will be significant to the researchers and those associated with
the project such as the occupant of the area the customers the entire public etc. Finally the research
work will serve as on additional to the existing literature in the area to managing and maintaining
commercial properties, besides serving as reference for future researchers on the field.

1.5 DELIMITATION OF STUDY

The study is on the management of commercial properties in Nigeria, with particular emphasis on
BUSNIKE shop, Akwa this shows that the project will be restricted to the area, to enable the researcher
has enough time for the project.

1.7 DEFINITION OF TERMS

1.7.1 MANAGEMENT

The science of organization and operation or at practical, level the art of directing and controlling affairs.

1.7.2 COMMERCIAL

These occurs mainly inform of market shop office building, supermarket bank building, hotel, trade
centre and petrol, filling station in commercial cities.

1.7.3 PROPERTY

This defined as the highest right a man can have to any thing, property can be classified into two land
and immovable good which a man owns a re know as corporeal property while incorporeal are those
right which a man has over that property. This is arranged in five(5) chapters the first chapter generally
introduce the topic of the study while, the second chapter reviews into many other literature in the
area of study, which has been written in the past. These areas include definition of management
maintenance and management strategy. Third chapter introduces the data collection method
instruments, analysis and procedure while fourth chapter is the data presentation and analysis. Fifth
chapter includes conclusion and recommendation of the problem of strategies for management of
commercial properties.

----

JD Edwards World Real Estate Management Guide

1 Overview to Real Estate Management

This chapter contains the topic:

Section 1.1, "Features."

The JD Edwards World Real Estate Management (formally known as Property Management) system is
lease-based. A lease is a contract or agreement between a tenant and property owner for the rental of
real estate such as land, apartments, offices, retail stores, and parking spaces. It can also be for other
types of property such as machinery, equipment, appliances, kiosks, television and radio programs,
billboards, benches at bus stops, licenses, and so on.

You can assign a lease number to virtually any type of a contract that includes a recurring billing.
Recurring billings are transactions that are created automatically on a period-by- period basis.
Depending on the lease, either recurring A/R invoices or A/P vouchers can be created through the
system. This can be useful for franchise operations where rents payable to landlords and rents
receivable from franchisees need to be generated.

The system acts as a large "workfile" for the JD Edwards World General Accounting, Accounts
Receivable, and Accounts Payable systems. When you post the transactions from the Real Estate
Management system, the respective G/L, A/R, and A/P Account Ledger files are then updated. This
chapter is an overview of the important features of the Real Estate Management system.

Navigation
To access the Real Estate Management system, choose Real Estate Management from the Master
Directory (G).

From the Real Estate Management System menu (G15), you can access the menus, screens, and
processes that make up the system.

Note:

In the chapters of this guide, the navigation for the programs and facilities begins with the Real Estate
Management System menu.

1.1 Features

This section provides an overview of the features of the Real Estate Management system

1.1.1 Tenant (Lessee) Information

You can maintain information about the companies and people with whom you do business. This
information is stored in the Address Book system, and each entry is referred to as an address. You must
set up addresses before you can set up the information related to business units, facilities, tenants, and
leases. It is the first step in the process that makes up the Real Estate Management system.

1.1.2 Lease and Facility Information

You can maintain information and set up standards for leases, buildings, floors, and units. This user-
defined information includes unlimited lines for free-form text. The system can automatically supply
standards to a lease, building, floor, or unit when you add it to the system. The lease setup controls
whether you can create A/R invoices or A/P vouchers. Some of the billing processes, such as manual
billing, recurring billing, and sales overage, can produce either type of transaction. Numerous reports
are available that are based on the DREAM Writer facility, which gives you extensive choices related to
format and data selection.

1.1.3 Critical Dates

Critical (tickle) dates relate to lease and facility information that require some kind of action or decision
such as lease renewal, insurance expiration, and elevator inspection. The system lets you manage these
dates online and with printed reports.
1.1.4 Manual Billing

You use the manual billing process to bill tenants for one-time charges such as tenant build-outs,
supplies, postage, promotions, and repairs. It is a single cycle in which you use processing options to
specify such features as tax processing. The process also includes a text feature that lets you attach free-
form text to a manual billing record.

1.1.5 Recurring Billing

You use the recurring billing process to bill tenants automatically on a period-by-period basis for
receivable, payable, or accrual billings (general ledger only).

The system can create unlimited types of billings such as regular office rent, parking space rent,
apartment rent, estimated expense participation, and escalations.

These user-defined billings can be set up for monthly, bi-monthly, quarterly, semi-annual, annual, and
odd-period cycles.

The system can also create prorated billings and catch-up billings, and controls are built in to prevent
duplicate billings.

Multiple unit billings can be created for a single lease.

The billings can debit and credit the same or different account numbers in the general ledger.

1.1.6 Cash Receipts and Adjustments

The Real Estate Management system has its own cash application process. The screens are similar, but
not identical to the ones for the JD Edwards World Accounts Receivable system. The primary differences
for Real Estate Management are the use of lease numbers and bill codes. Some of the methods that you
use to apply payments are also different.
1.1.7 Collections

The Real Estate Management system has its own collections system. The collection process is guided by
activity rules established for each building (business unit). You can enter data for a given
lease/building/unit combination that has outstanding credit and collection issues. You can update,
display, summarize, replicate, or output this information on a report.

1.1.8 Sales Overage and Analysis

For retail tenants, leases are often set up that involve a low fixed rent or no fixed rent at all. In return,
the tenants are then billed for a percentage of their sales to their customers. Sales overage is the
process you use to automatically generate such billings. These rents can be calculated based on multiple
breakpoints and percentages, and the results can be adjusted for minimum and maximums rents and
recoveries. The system not only uses the sales history from retail tenants to calculate rent, but it also
can analyze the information and present it online and in reports.

1.1.9 Expense Participation

Common area maintenance (CAM) consists of operating expenses related to a property such as the cost
of utilities, taxes, insurance, maintenance, and advertising. Such expenses can be automatically passed
on to the tenants. Expense participation is the process that you use to bill tenants a proportion of the
expenses. It can be subject to limits, base exclusions, gross-ups, account exclusions, ceilings,
administration fees, occupancy adjustments, adjustment amounts and factors, and estimated billings.

The system can also automatically calculate estimated amounts for expense participation. The estimates
can be based on budget amounts, actual expense amounts, or a percentage increase of actual expense
amounts.

1.1.10 Rent Escalation

Many commercial leases (retail, office, and industrial) are set up so that the rent amounts increase
regularly based on an index such as the Consumer Price Index (CPI), Porters' Wage, or a user-defined
index. Escalation is the process you use to automatically generate these increases. The calculations for
the rent increase can also include catch-up billing.
1.1.11 Security Deposits

Security deposits are added to a tenant's ledger as an unapplied cash receipt. The system is designed to
track security deposits and automatically refund them when necessary. For both deposits that are
required and those that have been received, the information can be viewed online as well as printed on
reports. Interest can be simple or compound.

The refund process adjusts unapplied credit from the tenant's ledger and creates an A/P voucher. It can
also subtract any unpaid amounts on the tenant's account from the deposit refund.

1.1.12 Revenue (Management) Fees

The system uses fee type tables to calculate amounts for revenue fees such as management fees or
commissions. These amounts can be based on a variety of G/L accounts and leases. The amounts can
then be used to create A/R, A/P, and G/L transactions. For example, a fee management company could
use receivables to bill owners or could use payables to pay a leasing agent. Since this process is user-
defined, you can customize it to meet a specific business need.

1.1.13 Fees and Interest

The system can generate charges against late payments. You can set up many levels of late fees and
interest for virtually any situation. The fees can be general for all leases, tenants, billing types, and
buildings, or you can make them specific to any combination of those items. You can use the same
process to accrue interest on security deposits. Interest can be simple or compound.

1.1.14 FASB 13 Accrued Rent

In the standards set up by the Financial Accounting Standards Board (FASB), article 13 deals with the
proper accounting for rent concessions and rent steps. FASB 13 states that financial statements must
present revenue evenly in all accounting periods within the term of a lease. Therefore, the rent billed
should be the amount of rent for the life of a lease divided by the length of the lease in months, which
results in an average or straight-line rent. Straight-line rent is compared to actual rent and an
adjustment is made to accrue or defer revenue.

Changes in rent amounts and lease terms affect FASB 13 and result in changes to accrued and deferred
rent adjustments. You can make these adjustments at the time of the change or you can average them
into the remaining term of the lease, which affects accrual and deferral adjustments from that point
forward. The FASB 13 process in the Real Estate Management system automatically calculates and
produces FASB 13 accrual and deferral entries. When a change occurs for a lease term or rent amount, a
warning window can automatically appear on the Recurring Billing Entry screen to remind users to
regenerate FASB 13 calculations.

1.1.15 Projected Rent

Estimated revenues for occupied and vacant units can be projected into the future based on recurring
billing setups and market rent information. When you generate projected rent, the system prints a basic
report. With the JD Edwards World facility, Financial Analysis Spreadsheet Tool and Report Writer
(FASTR), you can create additional reports. FASTR lets you design your own reports based on the
projected information from the general ledger.

1.1.16 Updates and Purges

The system can change or correct unpaid invoices and log (detail) lines for leases. It can remove old or
obsolete information for leases, properties, and buildings. Both updates and purges can be specific or
for a group of leases, buildings, or properties within the same business unit. The system can also
perform global (large scale) updates on rent amounts. New rent amounts are created while old ones are
suspended for user-defined dates.

1.1.17 Tenant Work Orders

The work order process in the JD Edwards World Work Orders system lets property managers add, work
with, and report on work orders for tenants. This process lets you manage simple projects such as
maintenance, repairs, tenant improvements, and emergencies. The costs can then be charged to the
related lease, building (business unit), or both.

Tenant work orders are similar to other work orders, except they require some tenant-specific
information from the Real Estate Management system such as the lease, building, unit, and tenant. In
the Work Orders system, you can access the Tenant/Lease Search and Unit Search screens to locate and
return the information to the related fields on the Tenant Work Order Entry screen. This information
defines the setup, limits searches, and controls cost inquiries and status summaries for the work orders.

------
Chapter 12 | Real Estate Company Analysis

For real estate companies, the aggregate corporate pro forma will generally differ from the sum of
property-level cash flows. The value of a real estate company can be greater or less than the value of its
properties, as management can both add and destroy value beyond that of the properties.

Summary

The most significant differences between property- and company-level projections are: company-level
overhead (at the property level, there is no line item for corporate general and administrative expense);
corporate level debt (there may be debt not secured by real estate); income derived from non-real
estate assets (e.g., from stocks, bonds, etc.); license fees (e.g., licensing of your company name for
merchandising); and management fees, development fees, or leasing commissions from your properties
or third party properties you may service.

It is important to note that Wall Street analysts do not roll up property-level pro formas to determine
corporate values. This is because analysts are typically not privy to such detailed private property
information. As a result, Wall Street analysts provide workable but imprecise financial descriptions of
companies.

The following are key assumptions used in producing a company financial pro forma: acquisitions and
developments and their income rates of return, dispositions, and revenue growth on existing properties.
These assumptions allow for modeling of aggregate property NOI. Layering in corporate fees from
noncombined affiliates, interest income and deducting G&A, we can calculate corporate EBITDA
(earnings before interest expense, taxes, depreciation and amortization).

Funds from Operations (FFO) refer to funds available to equity. Specifically, FFO equals NOI plus other
income, minus overhead and interest payments but before depreciation, amortization and tax
considerations. FFO does not include cap ex, tenant improvements and leasing commissions. So while
two companies may have the same FFO, they may have very different free cash flows. Adjusted FFO
(AFFO) is FFO less estimated recurring cap ex, leasing commissions, and TIs. AFFO is also known as
Funds available for distribution (FAD).
A DCF valuation of a real estate company values the company’s ability to generate recurring cash
streams. This is no different from valuing any company. To obtain the equity value of the company, one
must deduct the value of liabilities. Another method used is the cap rate approach, wherein a single cap
rate is applied to the NOI roll-up of all properties.

Net Asset Value (NAV) is a common third approach to valuing a real estate company. The NAV method
assumes that corporate management adds no value. The total value of a real estate company should
include: the aggregate capitalized value of the properties, the property management business, the
development business, and the land held, plus the company’s cash position. To reach the NAV, subtract
the value of the company’s debt and other liabilities. It is important to note that NAV fails to reflect
hidden tax, debt, and environmental liabilities. For example, prepayment penalties associated with debt
are not deducted but are an important liability.

In the end, what makes a property company potentially more valuable than the value of its properties is
people. The people who work for real estate companies should be able to execute value-enhancing
transactions on a consistent going-forward basis.

Questions

These are the types of questions you’ll be able to answer after studying the full chapter.

1. Why can the value of a real estate company be greater or less than simply the value of its properties?

2. What are the primary ways management can add value beyond the properties?

3. What is FFO and what does it include and not include?

4. Why are management agreement cash flows usually ascribed lower multiples than property cash
flows?

5. Calculate the equity value for the following company. EBITDA in year 1 is expected to be $100M and is
expected to grow by 1% for each of the next 5 years. Cap Ex, TIs and LCs are expected to be $7M in year
1 and are expected to grow at 3% for each of the next 5 years. Currently the company has $500M in
debt and this is expected to remain constant going forward. Assuming an exit in year 6, what is the
equity value of the company today? Assume a 10% discount rate and an 8% cap rate.

------

A RISK-BENEFIT ANALYSIS OF THE HOTEL INVESTMENT LANDSCAPE

By Helen Catellier - May 6, 20151

Location, location, location — it’s not just key to landing good real estate, it’s also an important factor in
finance. By their very nature, hotel investments are risky to varying degrees, but these days they are
particularly precarious due to the volatility of several economic factors, including the low price of oil,
interest rate cuts and the strength of the U.S. dollar.

The price of oil, which declined from US$107 a barrel last June to US$42 this past March, is starting to
have a very severe impact on those regions reliant on oil revenue — Alberta, Saskatchewan,
Newfoundland and even some pockets of northeastern B.C. — says Himalaya Jain, director and portfolio
manager at ScotiaMcLeod in Toronto. “When the energy sector is booming, there is a lot of travel
associated with that, whether it’s workers coming in from out of town, contractors or consultants,” he
says. “So generally when the oil sector has been doing well the lodging industry in Alberta specifically
has been doing fairly well. I would bet occupancies and rental rates would have been benefiting for the
last few years, as oil prices have been very high. So a pull-back in activity, because of the magnitude of
reductions we’ve seen … would result in lower occupancies.”

Indeed, in the first quarter of 2015 overall occupancy, ADR and RevPAR rates for Alberta lagged well
behind Ontario due to a decline in business traffic and consumer confidence, plus work camps closing
down, according to the “Canadian Hotel Brief” by CBRE Hotels, based in Toronto. Hotel occupancy
dropped by 8.4 per cent in Alberta, compared to a 0.3-per-cent drop in Ontario; ADR was up an
incidental 0.6 per cent in Alberta, compared to a 3.0-per-cent increase in Ontario; and RevPAR was
down 7.9 per cent in Alberta but up 2.6 per cent in Ontario.

Oil prices have fluctuated for decades, so analysts don’t expect the price to remain this low indefinitely.
However, the recovery will be more gradual than we’ve seen in other commodity cycles, says Jain.
Strategic investors looking to put capital into Alberta speculate about the upsides as well as taking
calculated risks. “Alberta had robust rates and occupancy over the last couple of years but limited
additions to supply as far as new hotels,” notes Steve Giblin, president and CEO of Vancouver-based
SilverBirch Hotels & Resorts, which operates several hotels in the oil-rich province, among others.
“Here’s a very gutsy call for the strategic investor: is it a good time to build a hotel in downtown
Calgary?” Giblin would say, yes. “You’re going to open three years from now, and it could be a different
economic environment, [and] you could build that hotel for substantially less than it was priced just a
few months ago.”

In response to the drastic decline in oil prices, the Bank of Canada unexpectedly lowered interest rates
by 25 per cent, down to 75 basis points, in January. The move subsequently weakened the loonie, which
dropped 1.5 cents to close at 81.07 cents U.S.; at press time, it sat at 81.77 cents U.S.

The low cost of credit also makes real-estate investment appealing right now, notes Jain. “We’re sitting
at very low financing rates that should be encouraging investment, because the yields you can get … are
fairly attractive. So, generally investment in particular regions would be looking quite interesting.”

The low dollar, low-interest rates and financing rates may just be the catalyst needed to spur
investments in commodity-based regions such as Alberta. “One of the issues with Alberta up until
recently was that even though the economy is strong and the lodging industry has been doing fairly well,
new development has been tough, because the cost of labour has been so high,” Jain explains. “You’re
competing with the oil industry when you think about construction, so investors that have a longer term
view may take advantage of this down trend to get projects started.”

Demand for real estate hasn’t waned over the last 12 to 36 months, according to reports from CBRE
Hotels. Total hotel investment volume for 2014 was $1.3 billion — with 56 per cent of total volume in
Central Canada, 39 per cent in Western Canada and five per cent in the Atlantic region. Notable
transactions include the Fairmont Royal York (a joint venture) and Hyatt Regency Vancouver, which were
purchased by Mississauga, Ont.-based InnVest REIT.

In any given year, transaction volume has ranged between $1 billion and $1.3 billion, but the
commercial real-estate firm is forecasting total volume ranging between $1.5 billion and $2 billion in
2015. There are many drivers, says Bill Stone, EVP and broker, at CBRE Hotels in Toronto. “We’re seeing
non-Canadian entities disposing of hotel real estate. We’re seeing some of the major institutions
restructuring and culling their portfolios. You’ve got product, you’ve got a strong operating environment
on a national basis, so it’s making underwriting a lot easier. And then you have plentiful and inexpensive
debt, so people finance these acquisitions a lot more easily today than they would have three or four
years ago.” Key transactions in early 2015 include the Hotel Bonaventure in Montreal, which was
purchased by Montreal-based Kejja Group in February; the Best Western Primrose Hotel in downtown
Toronto, which was purchased by Toronto-based Knightstone Capital Management in February; and
Bethesda, Md.-based Marriott International, which completed the acquisition of Toronto’s Delta Hotels
& Resorts in April.

Major urban markets, such as Vancouver, Toronto and Montreal, are tempting to would-be investors
because of their diverse economic base, long-term depth and appeal to international travellers. Toronto
and Vancouver are particularly attractive to SilverBirch’s Giblin. He’s seen Americans travelling to
Vancouver and Victoria in a big way and thinks this will trickle into the rest of the country. “We
anticipate this summer to be one of the best summers ever in Vancouver,” he says. “It’s always been
attractive because of the weather, and the U.S. traveller and international traveller see it as great
value.” Conversely, places such as New York City are substantially down in the first quarter of this year
compared to last year, because the U.S. dollar is so strong, he adds. International travellers can’t afford
to go there anymore, so Canada provides a good alternative.

Giblin also believes the absorption of Toronto’s condo supply is an indicator of the city’s strength and
viability. “Everybody thought there was a bubble developing within Toronto with all the building of
condos, yet [the city seems] to absorb them,” he notes. “That tells me the market is really hot and
experiencing tremendous growth. Also … it’s not so much like the Vancouver story — where there’s a lot
of offshore investment from Asia — where people are parking money in the condos. People are living in
them, so job creation has to be strong. Generally, when that happens there’s a need for more hotels.”

Secondary markets can also make a lot of sense for investors wanting to buy more efficiently. CBRE’s
Stone says when the shipbuilding contract kicks into high gear, it will be a boon for the Halifax market.
However, all investments hold inherent risk, particularly those relying on fewer business sectors to drive
demand. “If you’re in a logging community, and that company closes down, that has a direct impact, and
there’s nothing else to support it,” explains Stone. “That’s where these [markets] are susceptible, but
the buyers today are very diligent; they do lots of research before they acquire.”
Regardless of location, investors should do their due diligence before submitting any bids. Stone says
this includes examining environmental assessments, operating performance, rebranding opportunities,
ability to finance and a host of other factors.

At the end of the day, investing can be more of an art than a science. “My advice would be review your
assumptions, your risks and your risk appetite,” Giblin cautions. “And, if you’re comfortable with those
risks, and you can afford [them], it’s a good time to invest.”

-----

Don’t Forget To Do a Risk-Benefit Analysis When Investing

Whether or not you’re conscious of it, every decision you make in life involves a risk-benefit analysis.

Whenever you decide to get in a car and drive to work, you’re taking a risk. However, the benefit of
getting to work far outweighs whatever risk you perceive is involved with driving.

If someone asked you to climb Yosemite’s El Capitan without safety ropes, any benefit probably seems
less worth it considering the amount of risk you’d have to take (unless you’re Alex Honnold).

As physicians, we perform a risk-benefit analysis when making clinical decisions. You might decide to
perform a certain surgery for the benefit of a patient. There are surgical and anesthetic risks, but the
benefit outweighs the risk, so you decide that’s the best choice.

Even when deciding to do nothing and stay put, there’s a risk that you’re taking—the risk of inaction.

Risk-Benefit Analysis and Risk-Adjusted Returns

Unfortunately, some physicians do not perform the same type of risk-benefit analysis when it comes to
making investments. I know I've been guilty of this many times throughout my life. I've gotten lucky on
occasion, but I've also gotten quite hurt at other times.

Quick question: You have two places to invest your money; one predicted to make a 10% return and
another predicted to return 20%. Where are you going to invest your money?

Well if you asked me a few years ago, without asking too many more questions I would've pushed for
the 20% returns and you would have had to seriously convince me to choose otherwise. Chasing high
returns is both fun and exciting, but let’s not forget about adjusting for risk. This concept is known in the
investing world as understanding risk-adjusted returns.

What Is Risk?

Risk is simply the possibility of loss or injury. In an investment, risk is typically the chance of loss of
capital or value. In general, as the amount of risk in an investment increases, investors expect higher
returns to compensate for taking on those risks.

“In its simplest definition, risk-adjusted return is how much return your investment has made relative to
the amount of risk the investment has taken over a given period of time.” – Investopedia

This basically means that if you take two investments that have similar returns and look at them over
the same amount of time, the one that has the lower risk has the better risk-adjusted returns.

Measuring Risk

Is there a way to quantify the level of risk and therefore the risk-adjusted returns?

In the investing world, people have come up with all sorts of metrics and defined different risks,
particularly when it comes to the stock market. When looking this up, I discovered such metrics as the
Sharpe and Treynor ratios. There’s also a ratio, Beta, which tracks how volatile that investment is
compared to the overall market. This is an indicator for overall systematic risk.

Other factors to think about include the amount of time before you receive your returns, your ability to
access your money (liquidity), and whether there is collateral involved.

However, in reality, how many people are calculating these ratios especially when looking at different
investments like real estate, angel investing, etc. Is that even possible to quantify in most scenarios?

In reality, we have to do the best job on our own to figure out all the risk factors and understand where
this particular investment sits on the risk-reward pendulum.

So when we consider the current environment—interest rates on the rise, volatility in the stock and
labor markets, trade and tariff wars heating up, global instability—how are we supposed to know what
risks are worth taking?

Well, the truth is that no one can make predictions with complete accuracy, but there are things that
you can do to minimize the chances of making a single poor decision that will completely hurt you in the
end. These include:

Understand the multitude of different investments you can make both across and within investment
classes.

Understanding the investment in front of you as best as possible and learn how to do the proper due
diligence. If you’re investing in syndications, understand how to vet a sponsor and the deal itself.

Diversify, diversify, diversify.

My Next Investment and the Capital Stack

So what am I doing in this current market environment? I can tell you one thing I'm not doing – sitting on
the sidelines. To me, money that is sitting with no purpose is dying money. It is getting eroded by
inflation. So, I'm still investing, but I'm being more careful about looking at risk and thinking about risk-
adjusted returns.
One of the best tools to understand risk in real estate is understanding the concept of the “Capital
Stack.”

In general, financing for a real estate investment opportunity is structured like the pictured example.
Debt is the largest component and is always paid back first. As returns are generated, the bottom of the
stack is paid back and it increases to the top.

So, holding the debt note (like a bank) is considered the safest place to be in an investment. They
receive the first returns as well as hold the first position in terms of the collateral. However, the returns
are also the lowest on the stack and there isn't any upside potential as opposed to the equity positions.

So in summary, returns increase as your position is higher on the stack, but so do the risks.

In my portfolio, I hold plenty of equity positions in many crowdfunding and syndication deals. With these
investments in the current environment, I'm typically looking for returns from 14-18%.

However, in looking at my portfolio I realized that I have very little in debt positions. Again, the goal is to
diversify my investments, even within real estate.

So I've been looking around for such an opportunity and have decided to invest in a debt fund found
through the crowdfunding platform Alpha Investing. Because of regulatory issues, I can only share basic
details.

The fund is managed by a highly established real estate company that has originated billions of dollars of
these loans since the 1970s with great success (never suffering principal loss). Without Alpha Investing, I
would normally not have access to this investment.

The returns projected are in the double digits annually with an annual liquidity option, meaning I have
an option to remove my money each year. To me, that's a huge benefit, and one not always a part of
investing in a real estate fund. Adjusting for risk, this is the type of risk-adjusted return I'm looking to
add to my portfolio… so I will.

Investing Is a Marathon

Again, we have to remember that getting to our goal is not a sprint, it’s a marathon. Sure, we’d love to
strike lightning by angel investing or by picking a huge stock winner, but without balancing for risk and
diversifying our portfolio of investments, we could find ourselves in trouble.

So, whenever we look at returns, we have to remember to simultaneously look at risk to figure out
where to best invest our capital.

-----

Hotel Demand Segmentation 101: Identifying Demand Segments and Understanding How They Relate to
Property Performance

December 17, 2009 By Brian F. Bisema

As the developer behind a new hotel build or conversion, you first need to establish what kind of
patrons you seek to court and what demand base you need to target: Corporate and government
representatives on long-term business? Leisure travelers? Families? Larger groups?

Identifying the market segmentation, or the percentage breakdown of traveler “types” for your area, is
vital in answering these questions. Hotel demand in most markets can be described by three primary
demand segments: commercial, meeting and group, and leisure. Subdivisions under each (in some cases
under all) of these categories include extended-stay patrons, government travelers, airline crews, sports
teams, military personnel, truck drivers, and cruise ship passengers, among others.
Individual market segments exhibit unique characteristics relating to future growth potential, seasonal
aspects of demand, average length of stay, rates of double occupancy, facility requirements, price
sensitivity, and other factors. Thus, knowledge of market segmentation gives consultants and
developers a means of gauging the profit potential for a hotel, as well as avoiding costly mistakes by
building a property aimed at capturing demand that the market does not supply.

Once you know the concentration levels of primary demand segments in your market, the decision as to
what type of hotel is best suited to capturing that demand becomes much clearer. Moreover, once
room-night demand has been quantified by market segment, and the individual characteristics of each
segment have been defined, you can more accurately forecast future demand by making separate
projections for each segment. The positive impact on planning, sales, and profitability at your hotel is
substantial.

Some unique characteristics of the three primary demand segments are described below.

The Commercial Segment

The commercial segment consists of individuals who travel to a market to conduct business. Not
surprisingly, commercial demand tends to be heavy from Monday through Thursday, congruent with the
business hours of local firms, and fall sharply through the weekend. The typical length of stay for
commercial guests ranges from one to three days, and the rate of double occupancy is a low 1.2 to 1.3
people per room. In other words, commercial travelers typically do not share rooms, a trend that can
result in a higher contracted rate for commercial accounts. Commercial demand is relatively constant
throughout the year, although some declines are noticeable in late December and other holiday periods.

The cornerstones of the commercial segment are individual business travelers and high-volume
corporate accounts. Lodging choices are heavily influenced by brand loyalty, and frequent traveler
programs in particular. Loyalty rewards programs are popular with commercial travelers, who often
collect the “points/rewards” for personal use. A location convenient to businesses and amenities also
greatly increases the appeal of a hotel to commercial travelers. High-volume corporate accounts are
generated by local companies; demand in this sub-segment may include employees of the firm or its
affiliates, often consisting of training groups. These companies typically designate certain hotels as
“preferred” in return for discounts from the hotels’ published rates. The more room nights a corporate
account or individual traveler commits to, the deeper the discount.
The stability of commercial demand generators is key to gauging commercial demand in the market. Are
any company mergers taking place? Are there new developments in the market that could add or
reduce a significant number of employees? Are any corporations entering or leaving the market?
Answers to these questions will help you determine the potential for future levels of commercial
demand. Economic and demographic trends also have an influence on commercial lodging demand;
changes in FIRE (financial, insurance, and real estate), service, wholesale trade, and total employment;
occupied office space; and air passenger counts provide the most direct correlations.

The Meeting and Group Segment

Corporate groups and those described as SMERFE (social, military, ethnic, religious, fraternal, and
educational) make up the bulk of meeting and group demand, which consists of seminars, conventions,
trade association shows, and similar gatherings of ten or more people. Demand in this segment is
highest in the spring and fall, with activity slowing in the summer months. Travelers in this segment
typically prefer hotels with extensive meeting space, business technology, food and beverage outlets,
and the miscellaneous components required to host meetings and banquets.

Corporate groups can boost a hotel’s profit in two ways. First, during times of national economic
prosperity, corporate accounts tend to exhibit limited price sensitivity and book in large blocks, leading
to higher margins. Though the current economic crisis has resulted in fewer corporate bookings and
lower negotiated rates, corporate group demand continues to be higher-rated than SMERFE groups.
Second, corporate groups often sponsor banquets and other events that generate revenue for the host
hotel. As with individual commercial travelers, demand from corporate groups is strongest on Monday
through Thursday nights. By contrast, budget-conscious SMERFE travelers show a strong preference for
weekend and summer meeting times, when rates are generally lowest.

Meetings and events are booked months or even years in advance. Hence, it’s possible for meeting and
group demand to remain strong at the outset of a negative economic event such as the current
recession, even as commercial and leisure demand show an almost immediate decline, because funds
had already been committed prior to the downturn. The other side of this coin shows a decline in the
number of meetings and events being booked during the recession itself, leaving us likely to see slower
meeting and group activity even as the economy—and commercial and leisure demand—begin to
strengthen in 2010/11.
Many decision makers have accepted a cancellation penalty as more cost-effective than following
through with large planned events during the recession. With the souring of political and public
sentiment toward recipients of federal bailout money, many high-profile businesses have cancelled
events for fear of suffering scrutiny or even legal repercussions. These businesses comprise one of the
meeting and group segment’s most powerful drivers, and prohibitions on special events, meetings, and
conferences that they would otherwise host have impaired demand levels significantly. This is
particularly true in markets such as Las Vegas, Orlando, and other convention-dependent cities. Lower-
profile and local meetings, social events, and conferences, however, have been less negatively impacted,
and demand within the entire segment is expected to gain momentum as the economy begins to
recover in 2010 and beyond.

The Leisure Segment

Unlike the weekday prominence of commercial and meeting and group demand, the leisure market
segment tends to fill rooms on Friday and Saturday nights. Leisure travelers also book weekday stays
during holiday periods, when commercial demand is traditionally down. Leisure demand in markets is
primarily generated by attractions such as amusement parks, shopping malls, outlet stores, and
museums. Events such as college graduation ceremonies or visits among families and friends also
provide incentive for leisure travel in a market.

Leisure travelers typically stay from one to four days, with the rate of double occupancy ranging from
1.8 to 2.5 people per room. This figure can be meaningful in the case of a full-service hotel, where
restaurants, spas, gift shops, and other revenue-generating facilities stand to profit from the extra traffic
that double occupancy brings through. Depending on the type of hotel, average rate can move up or
down the spectrum. If you run an all-suite property with inclusive food and beverage, for instance, you’ll
tend to attract less price-sensitive guests, while highway properties with limited amenities are often
obliged to offer discounted leisure room rates.

Leisure demand depends heavily on disposable income. Just like group meetings and business trips,
vacations can be canceled in a bad economy as a cost-cutting measure to try to salvage the bottom line.
Unemployment, which has reached alarming levels over the past twelve months, likewise negatively
impacts leisure demand. This is not to say that owning or developing a hotel that caters to leisure
demand is a bad idea, even in the current economic climate. You just need to be well-advised on where
your demand is coming from (demand from within a region, for example, usually proves more stable
than inter-regional or international demand) and, if necessary, how to diversify your demand base to
shore up occupancy until leisure travel rebounds.
Conclusion

Thorough knowledge of demand segments helps you establish your bearings as a hotelier. The factors
and trends that chart the past and help forecast future dynamics of these segments in specific markets
are complex, but essential in determining the suitability of the improvements and amenities for
proposed projects and in projecting future hotel usage. All in all, demand segment analysis always
proves worthwhile before you venture into a new hotel project.

-----

Gross Domestic Product (GDP)

By JASON FERNANDO Reviewed by MICHAEL J BOYLE Updated Apr 25, 2021

What Is Gross Domestic Product (GDP)?

Understanding Gross Domestic Product (GDP)

Types of Gross Domestic Product

Ways of Calculating GDP

GDP vs. GNP vs. GNI

Adjustments to GDP

How to Use GDP Data

GDP and Investing

History of GDP

Criticisms of GDP

Sources for GDP Data

The Bottom Line

Frequently Asked Questions

What Is Gross Domestic Product (GDP)?

Gross domestic product (GDP) is the total monetary or market value of all the finished goods and
services produced within a country’s borders in a specific time period. As a broad measure of overall
domestic production, it functions as a comprehensive scorecard of a given country’s economic health.

Though GDP is typically calculated on an annual basis, it is sometimes calculated on a quarterly basis as
well. In the U.S., for example, the government releases an annualized GDP estimate for each fiscal
quarter and also for the calendar year. The individual data sets included in this report are given in real
terms, so the data is adjusted for price changes and is, therefore, net of inflation. In the U.S., the Bureau
of Economic Analysis (BEA) calculates the GDP using data ascertained through surveys of retailers,
manufacturers, and builders, and by looking at trade flows.

KEY TAKEAWAYS

Gross domestic product (GDP) is the monetary value of all finished goods and services made within a
country during a specific period.

GDP provides an economic snapshot of a country, used to estimate the size of an economy and growth
rate.

GDP can be calculated in three ways, using expenditures, production, or incomes. It can be adjusted for
inflation and population to provide deeper insights.

Though it has limitations, GDP is a key tool to guide policy-makers, investors, and businesses in strategic
decision-making.

What Is GDP?

Understanding Gross Domestic Product (GDP)

The calculation of a country’s GDP encompasses all private and public consumption, government
outlays, investments, additions to private inventories, paid-in construction costs, and the foreign
balance of trade. (Exports are added to the value and imports are subtracted).

Of all the components that make up a country’s GDP, the foreign balance of trade is especially
important. The GDP of a country tends to increase when the total value of goods and services that
domestic producers sell to foreign countries exceeds the total value of foreign goods and services that
domestic consumers buy. When this situation occurs, a country is said to have a trade surplus. If the
opposite situation occurs—if the amount that domestic consumers spend on foreign products is greater
than the total sum of what domestic producers are able to sell to foreign consumers—it is called a trade
deficit. In this situation, the GDP of a country tends to decrease.

GDP can be computed on a nominal basis or a real basis, the latter accounting for inflation. Overall, real
GDP is a better method for expressing long-term national economic performance since it uses constant
dollars. For example, suppose there is a country that in the year 2009 had a nominal GDP of $100 billion.
By 2019, this country’s nominal GDP had grown to $150 billion. Over the same period of time, prices also
rose by 100%. In this example, if you were to look solely at the nominal GDP, the economy appears to be
performing well. However, the real GDP (expressed in 2009 dollars) would only be $75 billion, revealing
that, in actuality, an overall decline in real economic performance occurred during this time.

Types of Gross Domestic Product

GDP can be reported in several ways, each of which provides slightly different information.

Nominal GDP

Nominal GDP is an assessment of economic production in an economy that includes current prices in its
calculation. In other words, it doesn’t strip out inflation or the pace of rising prices, which can inflate the
growth figure. All goods and services counted in nominal GDP are valued at the prices that those goods
and services are actually sold for in that year. Nominal GDP is evaluated in either the local currency or
U.S. dollars at currency market exchange rates to compare countries’ GDPs in purely financial terms.
Nominal GDP is used when comparing different quarters of output within the same year. When
comparing the GDP of two or more years, real GDP is used. This is because, in effect, the removal of the
influence of inflation allows the comparison of the different years to focus solely on volume.

Real GDP

Real GDP is an inflation-adjusted measure that reflects the quantity of goods and services produced by
an economy in a given year, with prices held constant from year to year to separate out the impact of
inflation or deflation from the trend in output over time. Since GDP is based on the monetary value of
goods and services, it is subject to inflation. Rising prices will tend to increase a country’s GDP, but this
does not necessarily reflect any change in the quantity or quality of goods and services produced. Thus,
by looking just at an economy’s nominal GDP, it can be difficult to tell whether the figure has risen
because of a real expansion in production or simply because prices rose.

Economists use a process that adjusts for inflation to arrive at an economy’s real GDP. By adjusting the
output in any given year for the price levels that prevailed in a reference year, called the base year,
economists can adjust for inflation’s impact. This way, it is possible to compare a country’s GDP from
one year to another and see if there is any real growth.

Real GDP is calculated using a GDP price deflator, which is the difference in prices between the current
year and the base year. For example, if prices rose by 5% since the base year, then the deflator would be
1.05. Nominal GDP is divided by this deflator, yielding real GDP. Nominal GDP is usually higher than real
GDP because inflation is typically a positive number. Real GDP accounts for changes in market value and
thus narrows the difference between output figures from year to year. If there is a large discrepancy
between a nation’s real GDP and nominal GDP, this may be an indicator of significant inflation or
deflation in its economy.

GDP Per Capita

GDP per capita is a measurement of the GDP per person in a country’s population. It indicates that the
amount of output or income per person in an economy can indicate average productivity or average
living standards. GDP per capita can be stated in nominal, real (inflation-adjusted), or PPP (purchasing
power parity) terms. At a basic interpretation, per-capita GDP shows how much economic production
value can be attributed to each individual citizen. This also translates to a measure of overall national
wealth since GDP market value per person also readily serves as a prosperity measure.

Per-capita GDP is often analyzed alongside more traditional measures of GDP. Economists use this
metric for insight on their own country’s domestic productivity and the productivity of other countries.
Per-capita GDP considers both a country’s GDP and its population. Therefore, it can be important to
understand how each factor contributes to the overall result and is affecting per-capita GDP growth. If a
country’s per-capita GDP is growing with a stable population level, for example, it could be the result of
technological progressions that are producing more with the same population level. Some countries may
have a high per-capita GDP but a small population, which usually means they have built up a self-
sufficient economy based on an abundance of special resources.

GDP Growth Rate

The GDP growth rate compares the year-over-year (or quarterly) change in a country’s economic output
to measure how fast an economy is growing. Usually expressed as a percentage rate, this measure is
popular for economic policy-makers because GDP growth is thought to be closely connected to key
policy targets such as inflation and unemployment rates.

If GDP growth rates accelerate, it may be a signal that the economy is “overheating” and the central
bank may seek to raise interest rates. Conversely, central banks see a shrinking (or negative) GDP
growth rate (i.e., a recession) as a signal that rates should be lowered and that stimulus may be
necessary.

GDP Purchasing Power Parity (PPP)

While not directly a measure of GDP, economists look at purchasing power parity (PPP) to see how one
country’s GDP measures up in “international dollars” using a method that adjusts for differences in local
prices and costs of living to make cross-country comparisons of real output, real income, and living
standards.

Ways of Calculating GDP

GDP can be determined via three primary methods. All three methods should yield the same figure
when correctly calculated. These three approaches are often termed the expenditure approach, the
output (or production) approach, and the income approach.

The Expenditure Approach

The expenditure approach, also known as the spending approach, calculates spending by the different
groups that participate in the economy. The U.S. GDP is primarily measured based on the expenditure
approach. This approach can be calculated using the following formula:

GDP = C + G + I + NX

where

C=consumption;

G=government spending;

I=investment; and

NX=net exports

All of these activities contribute to the GDP of a country. Consumption refers to private consumption
expenditures or consumer spending. Consumers spend money to acquire goods and services, such as
groceries and haircuts. Consumer spending is the biggest component of GDP, accounting for more than
two-thirds of the U.S. GDP. Consumer confidence, therefore, has a very significant bearing on economic
growth. A high confidence level indicates that consumers are willing to spend, while a low confidence
level reflects uncertainty about the future and an unwillingness to spend.

Government spending represents government consumption expenditure and gross investment.

Governments spend money on equipment, infrastructure, and payroll. Government spending may
become more important relative to other components of a country’s GDP when consumer spending and
business investment both decline sharply. (This may occur in the wake of a recession, for example.)
Investment refers to private domestic investment or capital expenditures. Businesses spend money to
invest in their business activities. For example, a business may buy machinery. Business investment is a
critical component of GDP since it increases the productive capacity of an economy and boosts
employment levels.

The net exports formula subtracts total exports from total imports (NX = Exports − Imports). The goods
and services that an economy makes that are exported to other countries, less the imports that are
purchased by domestic consumers, represent a country’s net exports. All expenditures by companies
located in a given country, even if they are foreign companies, are included in this calculation.

The Production (Output) Approach

The production approach is essentially the reverse of the expenditure approach. Instead of measuring
the input costs that contribute to economic activity, the production approach estimates the total value
of economic output and deducts the cost of intermediate goods that are consumed in the process (like
those of materials and services). Whereas the expenditure approach projects forward from costs, the
production approach looks backward from the vantage point of a state of completed economic activity.

The Income Approach

The income approach represents a kind of middle ground between the two other approaches to
calculating GDP. The income approach calculates the income earned by all the factors of production in
an economy, including the wages paid to labor, the rent earned by land, the return on capital in the
form of interest, and corporate profits.

The income approach factors in some adjustments for those items that are not considered payments
made to factors of production. For one, there are some taxes—such as sales taxes and property taxes—
that are classified as indirect business taxes. In addition, depreciation—a reserve that businesses set
aside to account for the replacement of equipment that tends to wear down with use—is also added to
the national income. All of this together constitutes a nation’s income.
GDP vs. GNP vs. GNI

Although GDP is a widely used metric, there are other ways of measuring the economic growth of a
country. While GDP measures the economic activity within the physical borders of a country (whether
the producers are native to that country or foreign-owned entities), gross national product (GNP) is a
measurement of the overall production of people or corporations native to a country, including those
based abroad. GNP excludes domestic production by foreigners.

Gross national income (GNI) is another measure of economic growth. It is the sum of all income earned
by citizens or nationals of a country (regardless of whether the underlying economic activity takes place
domestically or abroad). The relationship between GNP and GNI is similar to the relationship between
the production (output) approach and the income approach used to calculate GDP. GNP uses the
production approach, while GNI uses the income approach. With GNI, the income of a country is
calculated as its domestic income, plus its indirect business taxes and depreciation (as well as its net
foreign factor income). The figure for net foreign factor income is calculated by subtracting all payments
made to foreign companies and individuals from all payments made to domestic businesses.

In an increasingly global economy, GNI has been put forward as a potentially better metric for overall
economic health than GDP. Because certain countries have most of their income withdrawn abroad by
foreign corporations and individuals, their GDP figure is much higher than the figure that represents
their GNI.

For example, in 2018, Luxembourg’s GDP was $70.9 billion while its GNI was $45.1 billion. The
discrepancy was due to large payments made to the rest of the world via foreign corporations that did
business in Luxembourg, attracted by the tiny nation’s favorable tax laws. On the contrary, in the U.S.,
GNI and GDP do not differ substantially. In 2018, U.S. GDP was $20.6 trillion while its GNI was $20.8
trillion.

Adjustments to GDP

A number of adjustments can be made to a country’s GDP to improve the usefulness of this figure. For
economists, a country’s GDP reveals the size of the economy but provides little information about the
standard of living in that country. Part of the reason for this is that population size and cost of living are
not consistent around the world. For example, comparing the nominal GDP of China to the nominal GDP
of Ireland would not provide much meaningful information about the realities of living in those
countries because China has approximately 300 times the population of Ireland.

To help solve this problem, statisticians sometimes compare GDP per capita between countries. GDP per
capita is calculated by dividing a country’s total GDP by its population, and this figure is frequently cited
to assess the nation’s standard of living. Even so, the measure is still imperfect. Suppose China has a
GDP per capita of $1,500, while Ireland has a GDP per capita of $15,000. This doesn’t necessarily mean
that the average Irish person is 10 times better off than the average Chinese person. GDP per capita
doesn’t account for how expensive it is to live in a country.

Purchasing power parity (PPP) attempts to solve this problem by comparing how many goods and
services an exchange-rate-adjusted unit of money can purchase in different countries—comparing the
price of an item, or basket of items, in two countries after adjusting for the exchange rate between the
two, in effect.

Real per-capita GDP, adjusted for purchasing power parity, is a heavily refined statistic to measure true
income, which is an important element of well-being. An individual in Ireland might make $100,000 a
year, while an individual in China might make $50,000 a year. In nominal terms, the worker in Ireland is
better off. But if a year’s worth of food, clothing, and other items costs three times as much in Ireland
than in China, however, then the worker in China has a higher real income.

How to Use GDP Data

Most nations release GDP data every month and quarter. In the U.S., the Bureau of Economic Analysis
(BEA) publishes an advance release of quarterly GDP four weeks after the quarter ends, and a final
release three months after the quarter ends. The BEA releases are exhaustive and contain a wealth of
detail, enabling economists and investors to obtain information and insights on various aspects of the
economy.

GDP’s market impact is generally limited, since it is “backward-looking,” and a substantial amount of
time has already elapsed between the quarter-end and GDP data release. However, GDP data can have
an impact on markets if the actual numbers differ considerably from expectations. For example, the S&P
500 had its biggest decline in two months on Nov. 7, 2013, on reports that U.S. GDP increased at a 2.8%
annualized rate in Q3, compared with economists’ estimate of 2%. The data fueled speculation that the
stronger economy could lead the U.S. Federal Reserve (the Fed) to scale back its massive stimulus
program that was in effect at the time.

Because GDP provides a direct indication of the health and growth of the economy, businesses can use
GDP as a guide to their business strategy. Government entities, such as the Fed in the U.S., use the
growth rate and other GDP stats as part of their decision process in determining what type of monetary
policies to implement. If the growth rate is slowing, they might implement an expansionary monetary
policy to try to boost the economy. If the growth rate is robust, they might use monetary policy to slow
things down to try to ward off inflation.

Real GDP is the indicator that says the most about the health of the economy. It is widely followed and
discussed by economists, analysts, investors, and policy-makers. The advance release of the latest data
will almost always move markets, although that impact can be limited, as noted above.

GDP and Investing

Investors watch GDP since it provides a framework for decision-making. The “corporate profits” and
“inventory” data in the GDP report are a great resource for equity investors, as both categories show
total growth during the period; corporate profits data also displays pretax profits, operating cash flows,
and breakdowns for all major sectors of the economy. Comparing the GDP growth rates of different
countries can play a part in asset allocation, aiding decisions about whether to invest in fast-growing
economies abroad—and if so, which ones.

One interesting metric that investors can use to get some sense of the valuation of an equity market is
the ratio of total market capitalization to GDP, expressed as a percentage. The closest equivalent to this
in terms of stock valuation is a company’s market cap to total sales (or revenues), which in per-share
terms is the well-known price-to-sales ratio.

Just as stocks in different sectors trade at widely divergent price-to-sales ratios, different nations trade
at market-cap-to-GDP ratios that are literally all over the map. For example, according to the World
Bank, the U.S. had a market-cap-to-GDP ratio of nearly 165% for 2017 (the latest year for available
figures), while China had a ratio of just over 71% and Hong Kong had a ratio of 1,274%.
However, the utility of this ratio lies in comparing it to historical norms for a particular nation. As an
example, the U.S. had a market-cap-to-GDP ratio of 130% at the end of 2006, which dropped to 75% by
the end of 2008. In retrospect, these represented zones of substantial overvaluation and
undervaluation, respectively, for U.S. equities.

The biggest downside of this data is its lack of timeliness; investors only get one update per quarter, and
revisions can be large enough to significantly alter the percentage change in GDP.

History of GDP

The concept of GDP was first proposed in 1937 in a report to the U.S. Congress in response to the Great
Depression, conceived of and presented by an economist at the National Bureau of Economic Research,
Simon Kuznets. At the time, the preeminent system of measurement was GNP. After the Bretton Woods
conference in 1944, GDP was widely adopted as the standard means for measuring national economies,
although ironically, the U.S. continued to use GNP as its official measure of economic welfare until 1991,
after which it switched to GDP.

Beginning in the 1950s, however, some economists and policy-makers began to question GDP. Some
observed, for example, a tendency to accept GDP as an absolute indicator of a nation’s failure or
success, despite its failure to account for health, happiness, (in)equality, and other constituent factors of
public welfare. In other words, these critics drew attention to a distinction between economic progress
and social progress. However, most authorities, like Arthur Okun, an economist for President John F.
Kennedy’s Council of Economic Advisers, held firm to the belief that GDP is an absolute indicator of
economic success, claiming that for every increase in GDP, there would be a corresponding drop in
unemployment.

Criticisms of GDP

There are, of course, drawbacks to using GDP as an indicator. In addition to the lack of timeliness, some
criticisms of GDP as a measure are:

It ignores the value of informal or unrecorded economic activity — GDP relies on recorded transactions
and official data, so it does not take into account the extent of informal economic activity. GDP fails to
account for the value of under-the-table employment, black market activity, or unremunerated
volunteer work, which can all be significant in some nations and cannot account for the value of leisure
time or household production, which are ubiquitous conditions of human life in all societies.
It is geographically limited in a globally open economy — GDP does not take into account profits earned
in a nation by overseas companies that are remitted back to foreign investors. This can overstate a
country’s actual economic output. For example, Ireland had a GDP of $210.3 billion and GNP of $164.6
billion in 2012, the difference of $45.7 billion (or 21.7% of GDP) largely being due to profit repatriation
by foreign companies based in Ireland.

It emphasizes material output without considering overall well-being — GDP growth alone cannot
measure a nation’s development or its citizens’ well-being, as noted above. For instance, a nation may
be experiencing rapid GDP growth, but this may impose a significant cost to society in terms of
environmental impact and an increase in income disparity.

It ignores business-to-business activity — GDP considers only final goods production and new capital
investment and deliberately nets out intermediate spending and transactions between businesses. By
doing so, GDP overstates the importance of consumption relative to production in the economy and is
less sensitive as an indicator of economic fluctuations compared to metrics that include business-to-
business activity.

It counts costs and waste as economic benefits — GDP counts all final private and government spending
as additions to income and output for society, regardless of whether they are actually productive or
profitable. This means that obviously unproductive or even destructive activities are routinely counted
as economic output and contribute to growth in GDP. For example, this includes spending directed
toward extracting or transferring wealth between members of society rather than producing wealth
(such as the administrative costs of taxation or money spent on lobbying and rent-seeking); spending on
investment projects for which the necessary complementary goods and labor are not available or for
which actual consumer demand does not exist (such as the construction of empty ghost cities or bridges
to nowhere, unconnected to any road network); and spending on goods and services that are either
themselves destructive or only necessary to offset other destructive activities, rather than to create new
wealth (such as the production of weapons of war or spending on policing and anti-crime measures).

Sources for GDP Data

The World Bank hosts one of the most reliable web-based databases. It has one of the best and most
comprehensive lists of countries for which it tracks GDP data. The International Money Fund (IMF) also
provides GDP data through its multiple databases, such as World Economic Outlook and International
Financial Statistics.

Another highly reliable source of GDP data is the Organization for Economic Cooperation and
Development (OECD). The OECD not only provides historical data but also forecasts GDP growth. The
disadvantage of using the OECD database is that it tracks only OECD member countries and a few
nonmember countries.
In the U.S., the Fed collects data from multiple sources, including a country’s statistical agencies and The
World Bank. The only drawback to using a Fed database is a lack of updating in GDP data and an absence
of data for certain countries.

The Bureau of Economic Analysis (BEA), a division of the U.S. Department of Commerce, issues its own
analysis document with each GDP release, which is a great investor tool for analyzing figures and trends
and reading highlights of the very lengthy full release.

The Bottom Line

In their seminal textbook “Economics,” Paul Samuelson and William Nordhaus neatly sum up the
importance of the national accounts and GDP. They liken the ability of GDP to give an overall picture of
the state of the economy to that of a satellite in space that can survey the weather across an entire
continent.

GDP enables policy-makers and central banks to judge whether the economy is contracting or
expanding, whether it needs a boost or restraint, and if a threat such as a recession or inflation looms on
the horizon. Like any measure, GDP has its imperfections. In recent decades, governments have created
various nuanced modifications in attempts to increase GDP accuracy and specificity. Means of
calculating GDP have also evolved continually since its conception to keep up with evolving
measurements of industry activity and the generation and consumption of new, emerging forms of
intangible assets.

Frequently Asked Questions

What is a simple definition of GDP?

Gross domestic product (GDP) is a measurement that seeks to capture a country’s economic output.
Countries with larger GDPs will have a greater amount of goods and services generated within them,
and will generally have a higher standard of living. For this reason, many citizens and political leaders
see GDP growth as an important measure of national success, often referring to “GDP growth” and
“economic growth” interchangeably. Due to various limitations, however, many economists have argued
that GDP should not be used as a proxy for overall economic success, much less the success of a society
more generally.

Which country has the highest GDP?

The countries with the two highest GDPs in the world are the United States and China. However, their
ranking differs depending on how you measure GDP. Using nominal GDP, the United States comes in
first with a GDP of $21.37 trillion as of 2019, compared to $14.3 trillion for China.1 Many economists,
however, argue that it is more accurate to use purchasing power parity (PPP) GDP as a measure for
national wealth. By this metric, China is actually the world leader with a 2019 PPP GDP of $23.5 trillion,
followed by $21.4 trillion for the United States.2

Is a high GDP good?

Most people perceive a higher GDP to be a good thing, because it is associated with greater economic
opportunities and an improved standard of material well-being. It is possible, however, for a country to
have a high GDP and still be an unattractive place to live, so it is important to also consider other
measurements. For example, a country could have a high GDP and a low per-capita GDP, suggesting that
significant wealth exists but is concentrated in the hands of very few people. One way to address this is
to look at GDP alongside another measure of economic development, such as the Human Development
Index (HDI).

ARTICLE SOURCES

Related Terms

Real Gross Domestic Product (Real GDP) Definition

Real gross domestic product is an inflation-adjusted measure of the value of all goods and services
produced in an economy. more

Real Economic Growth Rate Definition

The real economic growth rate is a measure of economic growth that adjusts for inflation and is
expressed as a percentage. more

Gross National Product (GNP) Deflator Definition

The gross national product (GNP) deflator is an economic metric that accounts for the effects of inflation
in the current year's GNP. more

Gross National Income (GNI) Definition

GNI, an alternative to GDP as a way to measure and track a nation's wealth, is the total amount of
money earned by a nation's people and businesses. more
Per Capita GDP Definition

Per capita GDP is a metric that breaks down a country's GDP per person and is calculated by dividing the
GDP of a country by its population. more

Real Value

The real value of an item, also called its relative price, is its nominal value adjusted for inflation. more

-------

Revenue Per Occupied Room (RevPOR)

By JAMES CHEN Updated Apr 11, 2021

What Does Revenue Per Occupied Room Mean?

Revenue per occupied room (RevPOR) is a performance metric in the hotel and lodging industry. RevPOR
is calculated by dividing total revenue by the number of rooms actually sold to guests. The calculation
takes into account services and other items a guest may buy, such as spa services and mini-bar sales.

KEY TAKEAWAYS

Revenue per occupied room is a performance metric that calculates a hotel's total revenue divided by
occupied rooms for a given time period.

The calculation includes all guest revenue, such as money spent on room service, dry cleaning, spa
services, etc.

Revenue per occupied room is useful for gauging how the management of a particular hotel property is
performing. This is because the metric strips out the impact of seasonally influenced occupancy rates.
Understanding Revenue Per Occupied Room (RevPOR)

The formula for calculating revenue per occupied room is:

RevPOR = Total Revenue / Occupied Rooms

The time period used can be daily, weekly, monthly, or annually depending on what type of insights the
company is looking for. Revenue per occupied room is meant to show how much profit a hotelier is
making from guests who stay at a specific property.

The metric can be very useful in evaluating a hotel's performance through seasonal downtrends.
Seasonal visiting trends will impact other hotel key performance indicators, but RevPOR ignores the
overall number of guests in favor of measuring how much an average guest spends on the hotel's
products and services. Some hoteliers feel this is a better measure of the management of a hotel than
seasonally influenced occupancy rates.

Revenue per occupied room takes into account items such as room service, dry cleaning, and spa sales
to show how successful a hotel is in selling more than just a room to guests. Other industry metrics rise
and fall with occupancy rates, which may say less about how the hotel is managed and more about
seasonal trends.

RevPOR vs. RevPAR

RevPOR often takes a backseat to revenue per available room (RevPAR), which takes unoccupied rooms
into consideration by multiplying the overall occupancy rate by the average daily rate (ADR). This is
simply because occupancy rates have a far bigger influence on the bottom line than guest spending on
the incidentals.

Often the room is the highest priced part of the transaction, so selling more rooms to more people
translates quickly into more profit. RevPOR will never displace RevPAR as the main profitability
performance measure. Improvements in RevPOR do translate into higher profits, but the effect is more
gradual than the immediate impact of increasing the occupancy rate.

That said, RevPOR is a better measurement of the direct management of a particular property than
RevPAR. Hoteliers operating networks across the country may handle marketing and promotions at a
level above the individual hotel, so it can be difficult for the direct managers of the hotel to personally
influence occupancy. What they often do control is how and when in-hotel purchases are marketed to
guests as well as the quality of those products and services.

By focusing on RevPOR, hotel management can capture more revenue from their guests and soften the
blow of regional or seasonal occupancy declines. More importantly, a good RevPOR in the down season
suggests that total profitability will be even higher when the peak season arrives.

-----

Average Daily Rate (ADR)

By MARSHALL HARGRAVE Reviewed by MICHAEL J BOYLE Updated Oct 27, 2020

What Is the Average Daily Rate (ADR)?

The average daily rate (ADR) is a metric widely used in the hospitality industry to indicate the average
revenue earned for an occupied room on a given day. The average daily rate is one of the key
performance indicators (KPI) of the industry.

Another KPI metric is the occupancy rate, which when combined with the ADR, comprises revenue per
available room (RevPAR), all of which are used to measure the operating performance of a lodging unit
such as a hotel or motel.
KEY TAKEAWAYS

The average daily rate (ADR) measures the average rental revenue earned for an occupied room per
day.

The operating performance of a hotel or other lodging business can be determined by using the ADR.

Multiplying the ADR by the occupancy rate equals the revenue per available room.

Hotels or motels can increase the ADR through price management and promotions.

Understanding the Average Daily Rate (ADR)

The average daily rate (ADR) shows how much revenue is made per room on average. The higher the
ADR, the better. A rising ADR suggests that a hotel is increasing the money it's making from renting out
rooms. To increase the ADR, hotels should look into ways to boost price per room.

Hotel operators seek to increase ADR by focusing on pricing strategies. This includes upselling, cross-sale
promotions, and complimentary offers such as free shuttle service to the local airport. The overall
economy is a big factor in setting prices, with hotels and motels seeking to adjust room rates to match
current demand.

To determine the operating performance of a lodging, the ADR can be measured against a hotel's
historical ADR to look for trends, such as seasonal impact or how certain promotions performed. It can
also be used as a measure of relative performance since the metric can be compared to other hotels
that have similar characteristics, such as size, clientele, and location. This helps to accurately price room
rentals.

Calculating the Average Daily Rate (ADR)

The average daily rate is calculated by taking the average revenue earned from rooms and dividing it by
the number of rooms sold. It excludes complimentary rooms and rooms occupied by staff.

Average Daily Rate=

Number of Rooms Sold /

Rooms Revenue Earned

Example of the Average Daily Rate (ADR)

If a hotel has $50,000 in room revenue and 500 rooms sold, the ADR would be $100 ($50,000/$100).
Rooms used for in-house use, such as those set aside for hotel employees and complimentary ones, are
excluded from the calculation.

Real World Example

Consider Marriott International (MAR), a major publicly traded hotelier that reports ADR along with
occupancy rate and RevPAR. For 2019, Marriott's ADR increased by 2.1% from 2018 to $202.75 in North
America. The occupancy rate was fairly static at 75.8%. Taking the ADR and multiplying it by the
occupancy rate yields the RevPAR. In Marriott's case, $202.75 times 75.8% equates to a RevPAR of
$153.68, which was up 2.19% from 2018.

The Difference Between the Average Daily Rate (ADR) and Revenue Per Available Room (RevPAR)

The average daily rate (ADR) is needed to calculate the revenue per available room (RevPAR). The
average daily rate tells a lodging company how much they make per room on average in a given day.
Meanwhile, RevPAR measures a lodging's ability to fill its available rooms at the average rate. If the
occupancy rate is not at 100% and the RevPAR is below the ADR, a hotel operator knows that it can
probably reduce the average price per room to help increase occupancy.
Limitations of Using the Average Daily Rate (ADR)

The ADR does not tell the complete story about a hotel’s revenue. For instance, it does not include the
charges a lodging company may charge if a guest does not show up. The figure also does not subtract
items such as commissions and rebates offered to customers if there is a problem. A property’s ADR may
increase as a result of price increases, however, this provides limited information in isolation. Occupancy
could have fallen, leaving overall revenue lower.

-----

Revenue Per Available Room (RevPAR)

By JAMES CHEN Reviewed by AMY DRURY Updated May 7, 2021

What Is Revenue Per Available Room (RevPAR)?

Revenue per available room (RevPAR) is a metric used in the hospitality industry to measure hotel
performance. The measurement is calculated by multiplying a hotel's average daily room rate (ADR) by
its occupancy rate. RevPAR is also calculated by dividing a hotel's total room revenue by the total
number of available rooms in the period being measured.

KEY TAKEAWAYS

Revenue per available room (RevPAR) is a performance measure used in the hospitality industry.

RevPAR is calculated by multiplying a hotel's average daily room rate by its occupancy rate.

RevPAR is also calculated by dividing total room revenue by the total number of rooms available in the
period being measured.
RevPAR reflects a property's ability to fill its available rooms at an average rate.

An increase in a property's RevPAR does not necessarily mean greater profits.

An increase in a property's RevPAR most likely indicates an improvement in occupancy rate.

Understanding Revenue Per Available Room (RevPAR)

RevPAR is a metric used in the hospitality industry to asses a property's ability to fill its available rooms
at an average rate. An increase in a property's RevPAR means that its average room rate or its
occupancy rate is improving. However, an increase in RevPAR does not necessarily mean better
performance.

RevPAR fails to consider the size of a hotel. Therefore, RevPAR alone is not a good measure of overall
performance. A hotel may have a lower RevPAR but still have more rooms that earn higher revenues.

Additionally, growth in RevPAR does not mean that a hotel's profits are increasing. This is because
RevPAR does not use any profitability measures or information on profits. Focusing solely on RevPAR,
therefore, can lead to declines in both revenue and profitability. Many hotel managers prefer to use the
average daily rate as a performance measure since it is the main drivers of hotel occupancy. Therefore,
with accurately priced rooms, the occupancy rate should increase, and a property's RevPAR should also
naturally increase.

RevPAR Example

For example, a hotel has a total of 150 rooms, of which the average occupancy rate is 90%. The average
cost for a room is $100 a night. A hotel wants to know its RevPAR so it can accurately assess its
performance. The hotel manager can calculate the RevPAR as follows:

($100 per night x 90% occupancy rate) = $90.00

The hotel's RevPAR is, therefore, $90.00 per day. To find the monthly or quarterly RevPAR, multiply the
daily RevPAR by the number of days in the desired period. This calculation assumes all rooms are the
same price.

The hotel manager can make key assessments and decisions regarding the hotel property based on the
RevPAR. The manager can see how well the hotel is filling its rooms and how wisely the average hotel
room is priced. With a $90 RevPAR but a $100 average room, the hotel manager could reduce the
average rate to $90 to help realize full capacity.

Frequently Asked Questions

What Does RevPAR Tell You?

RevPAR is a metric used in the hospitality industry to assess a property's ability to fill its available rooms
at an average rate. An increase in a property's RevPAR means that its average room rate or its
occupancy rate is improving. Since it tells you the revenue per available room, whether it's occupied or
not, it can aid hoteliers in accurately pricing their rooms. Additionally, RevPAR can form the basis for
measuring properties against each other.

Where Does RevPAR Fail?

An increase in RevPAR does not necessarily mean better performance so using this alone to measure of
overall performance might lead to inaccurate results. Also, RevPAR fails to consider the size of a hotel. A
hotel may have a lower RevPAR but still have more rooms that earn higher revenues. Additionally,
growth in RevPAR does not mean that a hotel's profits are increasing. This is because RevPAR does not
use any profitability measures or information on profits.

What Are Alternatives to RevPAR?

The drawbacks to RevPAR has led to the birth of other metrics, focusing on revenue, profits, and growth,
to measure hotel performance. TrevPAR (total revenue per available room), accounts for the all the
revenue generated by the hotel, including revenue from other associated entities, such as its
restaurants. Another is ARPAR (adjusted revenue per available room), which is similar to RevPAR but
accounts for revenue and costs per occupied room. Finally, there is GOPPAR (gross operating profit per
available room) which is a strong indicator of performance across all revenue streams, including room
variables such as internet bills.

------

Demographics & Lifestyle Analysis

Related Content

Does your trade area population include more homeowners or renters? Baby Boomers, Gen-Xers, or
Millenials? Which ethnic groups are represented in the population? If they are home owners, how likely
are they to purchase home furnishings, renovate their homes, or spend leisure-time landscaping their
yards?

To analyze market opportunities for your downtown, you need to examine data and ask questions like
the above about residents of your trade area(s). This data must include the absolute number of
residents, as well as their household characteristics. Current and projected demographic, lifestyle and
consumer spending data about your trade area from secondary sources can provide this information.

Demographic and lifestyle data about your trade area can give you a starting point for an in-depth
analysis of specific business and real estate development opportunities. This data also can help the
broader community understand how it is changing.

Demographic Data

Lifestyle Data

Spending Potential Data

Using GIS to Analyze Your Market

Demographic Data
It is well understood that product preferences vary across different groups of consumers. These
preferences relate directly to consumer demographic characteristics, such as household type, income,
age, and ethnicity. For this reason, it is not only the amount of demand that truly matters to a local
economy. The mix of consumers also has a major impact on a local economy, and therefore must be
thoroughly examined in all trade area analyses. Unfortunately, far too much information often is
included in these studies. An enormous amount of data is readily available from a variety of private and
public sources, leaving the reader with tables and tables of demographic information overload.

Relevant Data Categories

Interpretation of demographic data is often missing in market analysis. What does the data say about
how the market is changing and how consumers spend their time and money? Specifically, what does
the data suggest about new business or real estate opportunities downtown? The following provides a
starting point in your understanding and interpretation of demographic data in relative to retail
spending.*

Population and households data allow you to quantify the current market size and extrapolate future
growth. Population is defined as all persons living in a geographic area. Households consist of one or
more persons who live together in the same housing unit—regardless of their relationship to each other
(this includes all occupied housing units Households can be categorized by size, composition, or their
stage in the family life cycle. Typically, demand is generated by the individual or the household as a
group. So, the entire family influences a household purchase, such as a computer or TV. Individual
purchases, on the other hand, are personal to the consumer. Anticipated household or population
growth may indicate future opportunities for a retailer. An analysis of household and/or overall
population growth provides the “big picture” of potential retail demand in a community. However,
further analysis is necessary to identify retail preferences within a community.

Household income data is a good indicator of residents’ spending power. Household income positively
correlates with retail expenditures in many product categories. When evaluating a market, retailers
look at the median or average household income in a trade area and will seek a minimum number of
households within a certain income range before establishing a business or setting prices. Another
common practice is to analyze the distribution of household incomes. Discount stores may avoid
extremely high or low-income areas. Some specialty fashion stores target incomes above $100,000. A
few store categories, such as auto parts, are more commonly found in areas with lower household
incomes. See the following box for more details on household income. Remember, though, that using
income as the sole measure of a market’s buying preferences can be deceptive. You need to consider all
categories of demographic data when analyzing a market.
Highly affluent households with annual incomes above $100,000 comprise one of the fastest growing
segments of the U.S. population, increasing by more than 2 percent each year since 2000. They are
strong consumers, as well as physically active and civic-minded. Gearing a retail mix toward this
segment may require a focus in luxury goods and services. High-end department and technology stores,
as well as cultural amenities like museums and concert halls, are frequented by the most affluent
households within a population.Middle-income households with annual incomes between $20,000 and
$50,000, are much more mindful of their expenses than highly affluent families. These households tend
to be more frugal and selective in their buying behavior, shopping at discount outlets for groceries and
other goods rather than high-end stores. Big box stores are particularly popular for middle and low-
income households. Low-income households with annual incomes below $20,000 are in a different
situation than affluent and middle-income households. Families at this income level are living in poverty
and thus spend very little on goods and services across the board.

Age is an important factor to consider because personal expenditures change as individuals grow older.
We’ve already noted that purchases change throughout a family’s life cycle, and that holds true for
individuals, as well. One important stage of life, and a category that’s growing as baby boomers age, is
the 65 and older group. Realizing and catering to the needs of an aging population can be beneficial to
any retailer. Consumer spending on drug stores and assisted care services flourish in areas with a large
elderly population. Accordingly, drug stores often do well in communities with a larger number of
people over the age of 65. In general, though, older populations tend to spend less on the majority of
goods and services. Studies indicate that nightlife and entertainment spending (restaurants, bars, and
theaters) by people over 65 is roughly half that spent by those under 65. Older adults also spend
considerably less on apparel than other age groups. On the other end of the spectrum, toy stores, day
care centers, and stores with baby care items do well in areas with many children and infants. Clothing
stores and fast food establishments also thrive in areas with a high adolescent population. Some
entertainment and recreational venues, such as movie theatres and golf courses, serve a broad section
of the population. Others, such as water parks or arcades, target certain age groups.

Education levels also figure into the socio-economic status of an area. Because income increases with
advancing educational attainment, many retailers focus on income level rather than education. There
are some exceptions to this, though. Bookstores are often cited by developers as a business whose
success is directly correlated with the number of college educated individuals in the trade area.
Similarly, computer and software stores are often located in areas with high levels of education. In
general, areas with high levels of educational attainment tend to prefer “the finer things.” That is, they
may have a preference for shopping at smaller, non-chain specialty retail stores located in their
downtowns. They also tend to visit cultural establishments like museums and theaters at a frequency
over three times greater than those without a college degree. On the other hand, less-educated
populations generally have lower incomes and thus tend to prefer shopping at discount retail outlets
and chain stores. This group also spends more money on car maintenance and tobacco products than
those with a college degree.

Occupational concentrations of white and blue-collar workers are used as another gauge of a market’s
taste preferences. Specialty apparel stores thrive in middle to upper income areas and those with
above-average white-collar employment levels. Second-hand clothing stores and used car dealerships
are successful in areas with a higher concentration of blue-collar workers. Office supply stores and large
music and video stores are especially sensitive to the occupational profile. These retailers target growth
areas with a majority of white-collar workers.

Ethnicity is another factor retailers consider when choosing merchandise to carry. Data show that
ethnicity affects spending habits as much as other demographic characteristics, such as income and age.
Tastes in goods and services vary between ethnic groups, and local retailers are wise to cater to the
different needs of ethnic groups in their trade area. Ethnicity influences retailers’ product mix, including
the lines of clothing they carry, and their advertising. Retailers that use segmentation based on race and
ethnic groups must make sure their efforts effectively measure the true preferences and behaviors of
the community.

Housing ownership and rate of housing turnover is an important factor for numerous retailers to
consider. Home ownership directly correlates with expenditures for home furnishings and home
equipment. Furniture, appliances, hardware, paint/wallpaper, floor covering, garden centers and other
home improvement products all prosper in active housing markets.

*Adapted from:

White, J.R., & Gray, K.D. (Eds.). (1996). Shopping centers and other retail properties: Investment,
development, financing and management. Hoboken, NJ: John Wiley & Sons.

Waldfogel, J. (2010). Who benefits whom in the neighborhood? Demographics and retail product
geography. In Glaeser, E.L. (Ed.), Agglomeration economics (pp.181-209). Cambridge, MA: National
Bureau of Economic Research..

Comparing the Primary Trade Area with Other Areas

Demographic statistics are especially useful if they are presented in comparison with other places. To
see how your trade area differs from other places, it is useful to provide two comparison sets of data:
comparable communities and the state or United States as a whole.

Comparing your trade area with other communities and the state allows demographic baselines to be
established. These baselines will help determine whether your trade area has low, median, or high
values in each demographic category. For instance, after examining demographics for your trade area, it
may appear that there is a high proportion of white-collar workers. However, this observation cannot be
verified until you know what constitutes an average number of white-collar workers.
Comparable communities can include five or six cities of similar size in the same region or state. The
cities chosen should reflect similar distances from metropolitan statistical areas (MSAs) of the region.
Depending on the geographic size of your primary trade area, you will need to select similar-sized trade
areas.

In addition to comparable communities, adding state or U.S. statistics will provide a broader benchmark
for comparing your community. State and U.S. data will include a blend of urban and rural areas.
Accordingly, it will not be limited to “similar places.” However, differences between the trade area and
the state or United States (such as per capita income) will be used later in your analysis of retail or
service business opportunities.

Demographic Data Sources

Detailed local census data is readily available free via the Internet through the U.S. Bureau of Census at
http://www.census.gov/. Census data can be retrieved at several geographic levels (county, city/village,
census tract, zip code, etc.). The U.S. Census website includes a link to its user-friendly data-filled
website called American FactFinder at http://factfinder2.census.gov. Use American FactFinder to view,
print, and download statistics about population, housing, industry, and business. Using FactFinder, you
can also find U.S. Census Bureau products; create reference and thematic maps; and search for specific
data.

In addition to the Census Bureau, there are numerous, nationally recognized data firms that can provide
demographic estimates for a particular trade area. While much of these firms’ data is based on the U.S.
Census and other public sources, they add value by providing annual updates. They also package the
data in user-friendly comparative formats that make it easy to compare one geographic area with
another. Furthermore, you are able to tap into the knowledge of skilled demographers who have
designed data products centered on particular industry needs. These firms provide a way to order
reports by simply calling a toll free number or downloading the data directly using their software. Prices
charged by these firms have become more and more affordable as competition has increased.

Following is an example of a demographic comparison report assembled for a sample community from a
private data source. The “subject trade area” column reflects demographics data on the trade area. The
“Comparable communities” column reflects the demographic averages of five or six other places and the
“State” column provides a third level of comparison.
Sample Demographic Comparison Report

Sample Demographic Comparison Report

Lifestyle Data

Adding consumer lifestyle data takes the market analysis a step further. This data recognizes that the
way people live (lifestyle) influences what they purchase as much as where they live (geography) or their
age, income, or occupation (demography). Lifestyle data enables you to include people’s interests,
opinions, and activities and the effect these have on buying behavior in our analysis.

Theory behind Lifestyle Segmentation

In his 2010 paper “Who Benefits Whom in the Neighborhood: Demographics and Retail Product
Geography,” Joel Waldfogel examines the relationship between a community’s lifestyle characteristics
and its product preferences. He concludes that retail is stimulated by large concentrations of
populations of similar characteristics and tastes. As a result, a community can develop product mixes
targeted to specific high-potential customer segments.

Concentrations of lifestyle segments create demand for specific products or services. This tendency to
clusteris based on the premise that “birds of a featherflock together.” Did you ever notice that the
homes and cars in any particular neighborhood are usually similar in size and value? If you could look
inside the homes, you’d find many of the same products. Neighbors also tend to participate in similar
leisure, social, and cultural activities.

The quality of a segmentation system is directly related to the data that goes into them. High quality and
useful systems allow you to predict consumer behavior. In a retail business targeting tourists, for
example, the systems allow the business to identify products and services that appeal to this market
segment. The usefulness of a segmentation system depends on how well the data incorporates lifestyle
choices, media use, and purchase behavior into the basic demographic mix. This supplemental data
comes from various sources, such as automobile registrations, magazine subscription lists, and
consumer product-usage surveys.
Lifestyle Data Sources

Several private data firms offer lifestyle cluster systems. The firms use data from the U.S. Census and
other sources to separate neighborhoods throughout the United States into distinct clusters. They utilize
sophisticated statistical models to combine several primary and secondary data sources to create their
own unique cluster profiles. Most models start with data from U.S. Census block groups that contain
300-600 households. In rural areas, the data is more typically clustered by zip code.

One example of a cluster system used in modern demographic analysis is ESRI’s Tapestry Segmentation
http://www.esri.com/data/esri_data/tapestry.html. The system divides every U.S. neighborhood into
one of 65 unique market segments based on socio-economic and demographic characteristics.

Sample Lifestyle Segment Summary

As an example, qualitative information provided by ESRI for its “College Towns” designation includes:

Demographic: Most residents are between the ages of 18 and 34, and live in single-person or shared
households. The racial profile is typically similar to the nation as a whole, with three-fourths of college
town residents being white.

Socioeconomic: Because many students only work part-time, the median household income ranks near
the low end of ESRI’s measurements. Most of the employed residents work in the service industry,
holding on-again, off-again campus jobs.

Consumer Behavior: Convenience dictates food choices. With their busy lifestyles, residents in college
towns frequently eat out at fast-food restaurants and pizza outlets during the week. Because many
college students are new residents to a town, bedding, bath, and cooking products are popular
purchases. Music and nightlife venues are extremely popular in college towns.

The Tapestry Segmentation also includes quantitative data, such as the purchase potential index that
measures potential demand for specific products or services. The index compares the demand for each
market segment with demand for all U.S. consumers and is tabulated to represent a value of 100 as the
average demand. Values above 100 indicate residents are more likely to purchase that product or
participate in the respective activity. Conversely, values below 100 indicate residents are less likely to
purchase the given product. For example, an index of 120 means that the spending potential in the
tapestry segment is 20 percent higher than the nation as a whole. Sample data for the “College Town”
segment is as follows:

Consumer Behavior Index to U.S.

Buy books 106

Shop at convenience stores 114

Go to bars/clubs 214

Attend movies 135

Owns a van or minivan 27

From this data, a clear picture of the important demographic, socioeconomic, and consumer behavior of
residents in college towns emerges. ESRI’s Tapestry Segmentation system provides similarly useful
information in all 65 unique market segments it identifies.

Other examples of segmentation systems include Experian’s Mosaic® USA at

http://www.experian.com/marketing-services/consumer-segmentation.html and Nielsen’s PRIZM at
http://www.claritas.com/MyBestSegments/Default.jsp.

Cautions Regarding Lifestyle Segmentation

Lifestyle segmentation generalizes the types of customers in your trade area, which is helpful in making
sense of a complex market. This simplification, however, may not fully capture the particular traits of
your customer base or may overlook the richness of groups in your area. Furthermore, since data are
not continually updated, lifestyle segments are based on a snapshot in time. This works well if social and
economic conditions remain constant; however, significant changes may make the segment less
representative of reality. Therefore, although lifestyle segments can greatly help you understand
customers in your trade area, you should take care not to place too much weight on segmentation
systems. Instead, regard the information as a part of the mix of demographic data.

Spending Potential Data

Estimates of household spending give a sense of the size of a market in dollars. For example, secondary
data are available that allow you to estimate the size of the local food or restaurant market, based on
the number of households in your trade area. Private data are also available to provide refined
estimates based on local demographics. It is important to remember that these estimates measure the
amount of spending by households residing in your trade area, not necessarily spending within your
trade area that also includes non-residents. Conversely, residents of your trade area may choose to
spend outside your trade area.

Consumer Expenditure Survey

The two-part Consumer Expenditure (CEX) Survey is the primary data source for spending-potential
estimates that covers a whole range of household spending from dining to travel expenditures. The
Bureau of Labor Statistics conducts the survey of American households continuously throughout the
year and has been doing so since 1980. The results of the survey provide a comprehensive snapshot of
household spending and are used to revise the important Consumer Price Index (CPI), which significantly
influences both national markets and policy.

The CEX survey includes a Diary Survey of daily purchases and an Interview Survey of general purchases
over time. The Diary Survey reflects record-keeping by consumer units (individual and household
shoppers) for two consecutive week periods. This component of the CEX collects data on small, daily
purchases that could be overlooked by the quarterly Interview Survey. The Interview Survey collects
expenditure data from consumers in five interviews conducted every three months. The data from both
surveys is integrated to provide a comprehensive database on all consumer expenditures.

Private Data Providers

Although the Consumer Expenditure Survey data alone provides valid and reliable estimates for your
market, some private data companies refine the CEX survey data for more sophisticated estimates that
may prove useful.

For example, ESRI uses Tapestry Segmentation lifestyle segments (see above), together with CEX data to
estimate household spending. A conditional probability model links spending by the consumers
surveyed to all households with similar socioeconomic characteristics. The results are spending
estimates based on the demographics of a particular trade area, which are reported together with the
average spending per household and a spending- potential index. The index compares the spending of
the trade area’s households to the national average (see the following Sample Spending Potential
Report).

Sample Spending Potential Report

Sample Spending Potential Report

Using GIS to Analyze Your Market

Demographic analysis is useful in understanding purchasing characteristics for different market

segments. While demographics can be collected and analyzed without the use of geographic
information systems, GIS often aids and enhances the analysis. Since most downtown professionals may
not be experts in GIS, you will probably want to enlist consultants, planners and/or marketing data
providers to offer technical mapping assistance. Following are two examples of using GIS to assist in
demographic analysis.

Using GIS to Visualize Trade Area Demographics

Demographic data for a trade area are often reported as single values for each demographic category.
For example, the trade area income is reported as one value, even though income can vary across the
trade area. GIS, however, can display demographic values in finer detail by geographic unit (zip code,
census block group, etc.). Mapping these variations may reveal valuable, visual information that can be
used to show the attractiveness of a downtown location and aid in business recruitment and expansion.

Effective demographic mapping requires an understanding of some basic cartographic concepts.

Perhaps the most important concept is an understanding of the problems associated with demographic
densities. By nature, downtown population density is usually higher than a similar-sized area on a
community’s fringe. Moreover, many business owners would view the large concentration of customers
as a competitive advantage over a non-downtown location. However, a map showing the number of
people in each geographic unit (e.g. census block group) does not always show this relationship.
As a real world example of this problem, consider the following of the La Crosse, Wisconsin, area
depicting the population by census block group. Why does this type of map fail to accurately represent
the number of customers in downtown? The problem is that the sizes of census block groups differ.
While the U.S. Census Bureau tries to control the number of households in each block group, it is not
always possible to make the units the same size. Problems associated with geographical barriers (rivers,
mountains, etc.), the nature of population distribution (sparse or concentrated), and household size can
cause wide variations in geographic sizes and population numbers in census block groups.

As a result, census block groups covering large geographic areas tend to dominate the viewer’s eye on a
map. When these large census block groups are located away from downtown, it appears that
downtown has a small population compared to the outlying urban areas. Additionally, there may be
many more block groups with smaller populations located in a smaller area. However, their small size
and small population values can become obscured on a map. Consequently, the larger number and
grouping of these smaller block groups need to be addressed. GIS can tackle this problem by creating a
map that accurately depicts population density.

Sample Map Showing Population by Block Group

Sample Map Showing Population by Block Group

The following map illustrates the same La Crosse, Wisconsin, area with an equivalent color scheme.
However, this new map has undergone a transformation and now accurately depicts the area’s
population density. Here, the viewer sees that there is a large population clustered around the
downtown and a relatively small population toward the urban fringes. The story told by the population
density map would not be seen in a single population value representing the entire trade area. As a
result, the new map aids in showing the potential of downtown as a business location and can be used
as a valuable business recruitment tool.

Sample Map Showing Population Density

Sample Map Showing Population Density

Using GIS to Analyze Visitor Demographics

The previous section discussed how GIS could create a useful visual representation of demographics.
However, GIS is not limited to producing maps and graphics. GIS can also be used as an analytical tool in
demographic analysis. As an example, consider the problematic nature of assembling demographics for
non-local visitors. Profiling visitors is essential in the study of tourists, commuters and other market
segments. While collecting demographics for the surrounding resident market is a straightforward
process, visitors can come from a wide area. Obtaining and analyzing demographics for every area that
produced a visitor is unrealistic using traditional methods. In these instances, GIS can be used to profile
demographics of the non-local market.

Many businesses dependent on visitors, such as hotels, maintain customer address lists. These
addresses are useful in market analysis because knowing where visitors live provides information about
their neighborhood demographics. What’s more, starting with a visitor’s address, GIS can be used to
quickly identify the census block group, or neighborhood, where a customer lives. Each census block
group is accompanied by rich demographic information available through the U.S. Census Bureau or
through private data providers. Specifically, each census block group, or neighborhood, includes
information on income, population, occupation, education, age and housing. This information can be
entered into a GIS and used as a surrogate for demographic information on each individual visitor.

Using this neighborhood demographic information as a surrogate is based on the premise that “birds of
a feather flock together.” As discussed in the section on lifestyle segmentation systems, people with
similar demographics tend to live near one another. Therefore, the demographics of a neighborhood as
a whole can be used to represent the demographics of an individual visitor from that neighborhood.
Using addresses, GIS can determine every neighborhood that produced a visitor and extract the
demographics of these neighborhoods. The demographics extracted from each visitor neighborhood can
be combined to produce a useful demographic profile of the visitor market.

The demographic profile is even more useful when it is given some perspective. Similar to the
comparable communities analysis discussed earlier in this section, the visitor demographic profile can be
used to determine what makes visitors demographically different from the general population. Instead
of comparing local community demographics to those of other communities, the visitor demographics
can be compared to the demographics of a larger region. For instance, if visitors primarily originate from
a three-state area, the visitor demographic profile can be compared to the demographics for the entire
population of those three states. These demographic profiles of the community visitors and the larger
region can be compared on a category by category basis.

The following example explains the steps used in GIS analysis of visitor demographics.
Step 1. GIS is used to map the locations of visitor addresses. As an example, the following shows a map
of visitor origins for a sample community.

Sample Map Showing Place of Visitor Origin

Sample Map Showing Place of Visitor Origin

Step 2. Once the visitor origins have been mapped, GIS is used to determine the neighborhoods
containing each visitor and extract the associated neighborhood demographics. These neighborhood
demographics are used as a surrogate for the demographics of an individual visitor. The following is a
map of one sample neighborhood showing visitor origins, as well as some of the demographics
associated with the neighborhood.

Sample Map Showing Neighborhood and Demographic Attributes

Sample Map Showing Neighborhood and Demographic Attributes

Step 3. GIS is used to combine all of the demographics extracted from every visitor neighborhood.
Combining the neighborhoods creates a demographic profile of the visitors. To aid in the analysis, GIS
also creates a demographic profile of the larger region. The regional demographic profile includes every
neighborhood in the region instead of just those neighborhoods that produced visitors. These two
profiles are then used to examine differences in visitor demographics. For instance, the table shown
below compares several demographic categories. The first column contains the demographic category;
the second column shows the visitor demographic profile; and the third column depicts the profile
created for the larger region. In this example, GIS was able to demonstrate that visitors originated in
neighborhoods that had higher incomes, a greater proportion of college-educated residents, more
executive and professional employees, a higher rate of home ownership, and more vehicles per
household than the overall three-state region.

Sample Table Comparing Demographics of Visitor Neighborhoods Compared to Region

Demographic Category Demographic Visitor Profile Demographic Regional Profile

Males 48.7% 48.9%

Females 51.3% 51.1%

Average Household Size 2.6 2.5

Median Age 36.5 36.5

Age Less Than 18 25.4% 26.7%

Age 16 or More 77.3% 76.2%

Age 25 Or More 66.6% 64.1%

Age 65 or More 12.6% 12.9%

Median Household Income $48,231 $37,561

Average Household Income $60,973 $40,302

Per Capita Income $21,564 $15,694

Education: High School 20.0% 21.5%

Education: Some College 12.4% 11.3%

Education: Associate Degree 4.4% 4.4%

Education: Bachelor’s Degree 13.1% 7.6%

Education: Graduate Degree 7.1% 4.1%

Occupation: Executive 15.4% 11.2%

Occupation: Professional 17.8% 13.8%

Occupation: Technician 3.6% 3.6%

Occupation: Sales 13.3% 11.2%

Occupation: Clerical 15.9% 16.1%

Occupation: Services 9.6% 12.5%

Occupation: Production 9.4% 11.1%

Home Owner 75.1% 67.3%

Home Renter 24.9% 32.7%

About the Toolbox and this Section

The 2011 update of the Downtown and Business District Market Analysis toolbox is a result of a
collaborative effort involving University of Minnesota Extension, Ohio State University Extension, and
University of Wisconsin Extension. The update was supported with funding from the North Central
Regional Center for Rural Development.

The toolbox is based on and supportive of the economic restructuring principles of the National Trust
Main Street Center. The Wisconsin Main Street Program (Wisconsin Department of Commerce) has
been an instrumental partner in the development of this toolbox.

This section builds on work originally completed by Matt Kures, Bill Pinkovitz and Bill Ryan of University
of Wisconsin Extension. This section includes new methods added by Ryan Pesch of University of
Minnesota Extension and Glen Halsted, graduate student at the University of Wisconsin-Madison. This
section was edited by Mary Vitcenda of the University of Minnesota Extension.

----

7 Real Estate Demographic Factors That Determine a Successful Investment

When it comes to real estate investment, there are many factors smart investors should assess before
making decisions. Demographics are often overlooked in favor of location, but they are just as
important.

Location and Demographics: Keys to Profitable Real Estate Investing

Demographics data, such as age, race, gender, income, crime risk, school quality, migration patterns and
population growth, come together to create the special characteristics of a neighborhood. As a result,
major demographic shifts can have a large impact on real estate trends for several decades to follow.

Understanding your location’s demographics will provide you with important insights into everything
from your prospective rental pool to possible maintenance issues to expect. This blog post covers seven
key real estate demographic factors you should consider before purchasing an investment property.

Crime risk

Everyone wants to live in a good neighborhood where they can feel safe and secure. However, some
areas are more subject to criminal activities than others.

Local crime rates can be easily overlooked by investors, even though they impact risk exposure, real
estate values, and investment and insurance rates. Furthermore, different thieves tackle different areas,
so more professional thieves will target affluent homes just as there is plenty of low-level crime in less
privileged areas.

Real Estate Demographics: Crime Risk

Crime rates can have a dramatic impact on property values. Studies show that a 10% reduction in crime
adds around 1.7% to the selling price.

High-paying jobs and opportunities

Job growth is one of the biggest factors in choosing an investment location. Simply put, if employers
aren’t hiring and people can’t find good jobs, they aren’t going to buy or rent a home in that specific
location.

As an investor, you want to take a good look at the employment and income trends in and around the
location you’ve targeted for investment. Look at the hard data, as well as indicators in job growth and
income trends and opportunities.
Amenities

Your target location’s amenities, such as quality schools, educated neighbors, nice architecture, or an
ocean view, will increase your investment’s value.

Let’s take school quality, for example. When determining where they can afford to live, most families try
to balance Median Home Value with school quality ratings. From an investment perspective, focusing on
neighborhood and district school quality rankings can help you locate pockets of potential.

Consider Worcester, MA, the second largest city in New England. Overall school quality is low; nearly
two-thirds of school districts in the U.S. are of better quality than the Worcester school district. Among
the 40 different neighborhoods in Worcester, however, one of them in particular stands out. Westwood
Hills boasts a top school quality rating (better than 80% of US neighborhoods). Its Median Home Value is
also the highest ($316,893) out of all of the Worcester neighborhoods.

For an investor looking to purchase in this area, Westwood Hills could offer the greatest potential
increase in value over time, due to demand from families who want access to quality schools in
Worcester.

Age and spending habits

Spending habits correlate with age. You may think that a younger demographic, like Millennials, have
more disposable income than Generation Xers or Baby Boomers. However, Millennials are also more
likely to have huge student debt and little savings.

In fact, research by Harry S. Dent shows that the peak age for spending on housing is age 44. Thus, age
demographics can be a good indicator of a viable market, especially if you’re interested in flipping an
investment property.

Population growth
Typically, population growth is a result of other favorable factors, such as a low unemployment rate, an
affordable cost of living, entrepreneurship, and access to a wide range of industries, to name a few.
Simply put, if people are moving to an area, the number of potential buyers and tenants goes up.

Targeting areas with a rising population and growing housing demand will increase the likelihood that
your property will appreciate. And likewise, growth translates into shortages of rental inventory and
rising rents. For buy and holds, rising rent means better cash flow and higher profits.

Ratio of tenants vs. owners

Another key real estate demographic factor is the ratio of rental vs. owner-occupied homes. Some areas
just have more renters. If you’re looking for income property, rental-oriented areas are naturally the
best fit.

But if you’re looking to fix and flip, the same area will make it harder to sell. In such cases, you’ll want to
look for locations where the owner occupancy is high. Pay specific attention to average rental rates and
sales prices to make sure the numbers make sense and you can recoup your investment.

The community

If you’re investing in multifamily apartments, a community of many young families will give you a much
better outlook and return on investment. Likewise, if you invest in commercial property, you’re more
likely to get tenants if the area is full of other businesses.

Look at the benefits the community-at-large brings to the table. Local businesses, child-friendly
activities, networking opportunities and the like will attract professionals with young families.

-----

Real Estate Development Cost Breakdown

by Daniel A Ezra, Managing Principal, DAE Group | May 4, 2020

What is a cost?

The definition of cost from an economic standpoint is that cost is whatever someone has to give up to
get something. There are four fundamental types of cost – time, energy, money and lost opportunity.

When dealing with real estate cost breakdowns the type of cost that is estimated is generally money.

Being able to accurately anticipate real estate project costs is essential to the development of a
successful project as it sets the baseline for what revenues need to be generated by the project to make
it viable.

Cost Categories of Real Estate Development

Real estate cost breakdowns vary depending upon what type of real estate is being considered – office,
retail, single-family, multi-family, industrial, medical, educational, hospitality or mixed use. Below is a
quick overview of some of the cost breakdowns of a real estate project at various times in the
development process:

Pre-Acquisition Costs

Land option costs

Market analysis fees

Legal fees

Environmental studies

Feasibility studies

Zoning and traffic studies

Development Costs
Land costs

Architect, design fees

Permit fees

Land preparation, demolition, utilities, grading

Construction Costs

Hard Costs

Materials and labor

General Contractor/Subcontractor fees

Soft Costs

Interior build out/finishes

Inspections

Security, telephone, cabling, millwork

Cost of Equity/Debt

Cost of money required to assess opportunity, buy, build, and operate the project.

Operating Costs

Property taxes

Insurance

Common area maintenance fees

Management fees, building maintenance & repair, property lighting, water, electrical, landscaping,
internet/technology, janitorial, window washing, parking lot maintenance, security, sales/leasing
commissions, elevator, water & sewer

Common problems with projecting real estate development costs

Real estate project costs vary from city to city and from one moment in time to another. When
anticipating real estate costs some of the most common problems include:

Underestimating
Missing types of cost

Supply chain disruptions

“Happy path” calculations – assuming the best circumstances

Weather delays

Failing to consider local labor customs

Poor “up front” planning

Inflation

Supply and demand

Aggressive scheduling

Change orders

To avoid the pitfalls of poor real estate cost breakdowns, have your numbers reviewed by experts, such
as the DAE Group. Better foresight early in the process can save you lots of time, energy, and money
later in the project.

----

COST COMPONENTS OF

A REAL ESTATE INVESTMENT

INITIAL INVESTMENT

PURCHASE PRICE

Unlike in other countries, Manhattan and Miami properties come with all kitchen appliances included in
the final selling price of the apartment.

FLOORING
In Manhattan, in contrast to Miami, floors are included when buying new construction from the
developer.

CLOSING COSTS

The closing costs estimate is approximately 3% of the purchase price without financing, 4.5% of the
purchase price if financing, which is approximately 2% of the mortgage amount. This Closing Costs
estimate comprises transfer taxes, as well as recording and legal fees. If purchasing offplan new
construction, depending upon market conditions, it is customary for the buyer to pay additionally the
seller's transfer taxes of 1.825% in NYC and a developer fee of 1.25%-1.75% in Miami.

OPERATING COSTS (CASH EXPENSES)

COMMON CHARGES (OR MAINTENANCE COSTS)

For Condos, common charges generally run from $0.80 and $1.25 per sq. ft. per month. Such costs
include common area heating, electricity, and cleaning; water; basic cable; security; building insurance;
and operation of building amenities (fitness center, concierge, lounge, pool, playroom, etc.).

Coops charge a maintenance fee, which includes all of the common charges plus taxes (which are not
paid separately by the owner) and mortgage interest on the building, if any. The Coop corporation may
have outstanding mortgages on the building (for a roof repair or some other reason) and the interest
would be passed on to the Coop shareholders. Therefore, you will often see that a Coop’s maintenance
charges might be higher (even after adjusting for the taxes that are included in the maintenance fees),
since Condos, by law, are not allowed to take on debt.

REAL ESTATE TAXES

Real Estate Taxes (or Property Taxes) are calculated on the assessed value – a value given to the
property by its city government. A rate is then applied against this assessed value. The process is
somewhat esoteric, but the rule of thumb is 0.1% of the purchase price per month in Manhattan and
0.2% of the purchase price per month in Miami.

Manhattan has a number of tax abatement programs for certain buildings that reduces taxes for 10, 15,
or 20 years in some cases. See the Real Estate Taxes page for more information.

Miami has a homestead exemption for primary homebuyers of $25,000, but the value of such an
exemption is quite insignificant. See more discussion of this on the Real Estate Taxes page.

MORTGAGE

If the owner decides to obtain a mortgage, then he or she will have a monthly expense that includes
both interest and principal. Due to the nature of mortgage calculations, in the early years, the buyer will
be paying mostly interest, which is deductible for US tax purposes. In the later years, the buyer will be
paying mostly principal.

For instance, if the buyer bought a property for $1,000,000 and financed $500,000 at 5.5% for a 30-year
fixed term, the total mortgage payments for the year would be $34,067 (or $2,839 per month). Of this
amount, $27,332 would be tax-deductible interest. Over time, as the principal of the loan is paid off, the
amount of tax-deductible interest will decline. In the beginning years, however, it is a very large expense
to offset rental income.

For more information about mortgages, go to the Mortgage Financing page.

INSURANCE
An owner should obtain insurance on the property itself as well as liability insurance. This cost is only a
few hundred dollars per year. Often, the landlord will require his tenants to also obtain insurance, so risk
to the landlord is mitigated.

In Florida, the owner of a Free-Standing Home would want to obtain flood and hurricane insurance.

BROKERAGE FEES

In the US, sellers always pay the commission in a purchase transaction. The seller generally pays a
commission of 6% of the purchase price, which is divided equally between the buyer’s broker and the
seller’s broker. Therefore, buyers pay nothing to have us working on their behalf in a purchase
transaction.

If the buyer decides that they want to rent out their new apartment, in Manhattan, they would pay a
brokers commission equal to one month rent (only on the first year). In Miami, however, it is customary
for the owner to pay the commission (10% of the annual rent, divided equally between the buyer’s and
seller’s brokers) to find a tenant.

Find out more information about renting your home on the Property Management page.

NON-OPERATING COSTS
DEPRECIATION

The US government allows the owners of investment property to depreciate the purchase price and the
non-financing related closing costs over 27.5 years. For example, if the buyer purchases a property for
$1,000,000 and has non-financing related closing costs of $25,000 ($1,000,000 times 2.5% noted above),
the buyer could deduct $37,273 per year, or $3,106 per month, as depreciation. This is a significant non-
cash expense that can be deducted from rental income.

AMORTIZATION

The US government also allows an owner of an investment property to deduct the amortization of the
financing portion of the closing costs over the term of the loan. This is also a non-cash expense that can
be deducted from rental income.

NEGATIVE TAXABLE INCOME

Ultimately, with all the deductions (both cash and non-cash noted above) that the US government
allows, in the beginning years, an investor who finances their real estate purchase will have negative
taxable income (or tax losses). This is not to be confused with cash losses, since with a 40% down
payment, an owner is likely to break even for cash purposes (e.g., generate neither cash income nor
losses). These tax losses can be carried forward to years when the property is making income for tax
purposes, offsetting such income and eliminating taxes for those years. Over time, however, cash
income will grow as will the value of the property.

------
The Definitive Real Estate Development Cost Breakdown

By Than Merrill

It is true what they say: you need to spend money to make money; nowhere is that concept more
apparent than the almighty real estate development cost breakdown. It is in spending money on proper
construction projects, after all, that adds significant value to a subject property. What is the definition of
a successful flip, after all, if not for one that you put a little bit of money into only to realize more on the
backend? There’s no doubt about it; the real estate construction cost you incur in rehabbing a home is a
necessary evil, but one that can really work in your favor if you mind due diligence.

However, it is worth noting that not all real estate construction costs are created equal, nor will they
estimate themselves. No, as a real estate investor, it’s up to you — and you alone — to not only identify
the most important construction projects for a rehab, but it’s also your responsibility to estimate how
much they will cost.

If you want to learn how to estimate real estate construction costs effectively, look no further. Continue
reading to find out which costs you need to pay special considerations to, and how they factor into your
overall exit strategy.

COMMON REAL ESTATE CONSTRUCTION COSTS TO KEEP IN MIND

No two construction jobs are created equal, but there are projects which are universal. In fact, below
you will find a reliable real estate development cost breakdown:

Common Interior Construction Costs

Paint: It is almost always a good idea to paint your rehab. Be sure to add the cost of paint and labor to
your estimates, as they will most likely contribute to a better product, no matter what.
Hardwood: It is quite common for real estate investors to replace floors, whether they are wood, tile or
carpet. That said, there’s a good chance your rehab will benefit from new floors.

Kitchen: Includes cabinets, countertops, backsplash, plumbing, electrical, sink, garbage disposal, faucet
and additional amenities.

Appliances: Includes refrigerator, range, range hood, dishwasher and microwave.

Bathroom: Include vanity, countertop, mirror, sink, faucet, tub, surround, shower, faucet kit, towel bar,
fan, lighting, basic plumbing and electrical.

Framing: Includes new construction framing, framing changes, opening load bearing walls and subfloor
plywood.

Insulation: A good product should be insulated, so be sure to budget for insulation in the walls and attic.

Walls: Set aside some budget to take care of any damaged walls, and even to remove unwanted
popcorn ceilings.

Doors And Trim: It is almost always a good idea to replace interior doors.

Basement: Putting some money into the basement could pay huge dividends.

Foundation: Make sure the foundation is solid and void of any issues.

Common Exterior Construction Costs

Roof: Will you need to replace or repair the roof?

Gutters: Will you need to install new gutters or simply clean them out.

Siding: Are you going to repair the siding or change it altogether.

Masonry: Be sure to check the mason work around the chimney or any other brick and mortar work.

Painting: I recommend painting the home no matter what; it has a way of freshening any home up.

Windows: Replace windows if need be; they will make a huge difference in the final product.

Garage: Don’t forget to account for finishing the garage and the garage door.

Landscaping: A freshly landscaped yard can work wonders for curb appeal.

Concrete And Asphalt: Makes sure cracks in the foundation aren’t serious, and proceed to fix them.

Wooden Amenities: Don’t forget to check fences, pergolas and decks for any work they may need.

Septic: Not all homes have septic systems, but make sure you account for yours if you have one.

Pool: Pools can be tricky. If you are going to keep it, make sure it is a selling point and not an eyesore. If
you aren’t going to keep it, you need to account for filling it in.

Common Mechanical Construction Costs

HVAC Unit: Sometimes you may need to either inspect, repair, or install a heating, ventilation and air
conditioner unit.

Light Fixtures: Depending on the condition of the existing light fixtures, you should probably consider
installing some new ones.

Electricals: Many old houses may need a new electrical panel installed, or require you to update the
electricals throughout the house, altogether.

Water Heater: Water heaters are often neglected, but deserve your attention. Don’t forget to factor in
this cost if your home needs a new one.

How to calculate construction costs

Construction Hard Costs Examples

Construction hard costs, as their name would lead you to believe, are costs incurred from physical
construction, not excluding equipment. Otherwise known as “brick-and-mortar costs,” hard construction
costs are most closely associated with the building’s structure, site and landscape. Perhaps even more
specifically, however, hard construction costs are typically more tangible than their “soft” counterparts,
and are therefore easier to estimate. For a better idea of some of the hard construction costs you could
expect to see on a job site, here are some prominent examples:

Labor required for construction

Materials required for construction

Utilities
Equipment

Paving

Grading

Construction Soft Costs Examples

Contradictory to the previously discussed hard construction costs, their “soft” counterparts are those
costs that aren’t directly correlated to construction costs. In other words, soft construction costs are
costs incurred from indirectly working on a subject property. Common soft construction costs include,
but are not limited to:

Architectural and engineering fees

Legal fees

Permits

Taxes

Insurance

However, it is worth noting that soft costs don’t end once a project is complete but rather extend
beyond the completion of a project. Building maintenance, insurance, security, and other fees incurred
after the initial project has been completed are considered soft construction costs.
HOW TO ESTIMATE REAL ESTATE REHAB CONSTRUCTION COSTS

Pinpointing the real estate construction cost you can expect to incur on your next project is no simple
task, but it’s not impossible. Fortunately, the entire process can be broken down into five steps:

Understand Your Market: Mind due diligence and develop a better understanding of the market and the
people you intend to sell the home to. That way, you will know which upgrades to include and whether
they should be high end, low end, or average. Remember, you can’t possibly know how much something
will cost if you don’t know the exact item you intend to upgrade with.

Walkthrough The Property: This is where you will take the time to walk through the property and
inspect every square inch physically. Take note of every detail, namely, what needs to be fixed, replaced,
or added.

Confirm Condition: Be sure to go through everything with a fine-toothed comb. Ensure lights work (or
don’t), HVAC units do their job, and everything else is in working condition. Then, proceed to identify
your end goal for each item on the list. Does it need to be upgraded, fixed, or replaced?

Determine A Price: Here’s where things get tricky. At this point, you should have a list of everything you
want to do to the house. From here, it’s as simple as assigning a value to each item on your list, but I
digress. That’s easier said than done. It would help if you had an idea of how nice you want each of your
“fixes” to be. For instance, if you are rehabbing a home in a high-end neighborhood, you will most likely
want to use high-end materials.

Account For Every Detail: Rehabbing a house is a complex process; there are a lot of moving parts. It’s
entirely too easy to leave things off your to-do list, but try your best not to. That said, there are several
miscellaneous real estate construction costs that need to be considered. For example, soft construction
costs (like permits, taxes, and insurance) are easy to overlook.

There’s no doubt that this list simplifies the real estate development cost breakdown, but it hits on
some critical points, not the least of which includes due diligence. Estimating real estate construction
costs is, after all, reliant on acute attention to detail. You need to be able to envision what it is you want,
see it, and execute your plan. To do so, follow the five steps outlined above.

Real estate rehabbing costs

HOW TO ESTIMATE CONSTRUCTION COSTS FOR A NEW HOME

Learning how to calculate construction costs is an acquired skill. What’s more, calculating construction
costs on a new home is entirely different from rehabbing an existing home. Starting from scratch
completely changes things. In addition to the usual calculations rehabbers use, those calculating new
home construction costs should do the following:

Finalize Floor Plans: Building a new home allows owners to work with a blank canvas. In the beginning
stages of a project, however, no floor plan is finalized. That said, to estimate construction costs on a new
home, owners will need to have access to the final floor plans. There’s absolutely no way to get a real
estimate of how much a project will cost unless the final floor plans are available. Investors will also
want to confirm they are working with the right plans before moving onto the next step.

Identify Construction Costs Per Square Foot: The concept of identifying how much your construction
costs will add up to per square foot is relatively simple. For starters, you first need to determine the
total amount you anticipate spending on your rehab. Again, doing so requires acute attention to detail
and a mind for due diligence — there are many costs, and you need to account for every one of them.
Next, you identify the amount of usable living space the home has. When you have both numbers,
divide the total cost you expect to spend on the rehab with the total number of square feet in the home;
that should give you a good idea of how much the rehab will cost per square foot.

Determine The Style And Quality Of The Home’s Amenities: The style of the home and its respective
neighborhood will also play a huge role in the impending construction costs. For example, homes in a
luxury neighborhood will require luxury amenities; there’s really no other option. The home needs to at
least compete with local comparables. Therefore, investors will want to look at what their closest
comparables have to offer and match them. This will give investors a good idea of the quality of
materials and amenities to include, which can greatly impact project costs.
Leave Room For The Unexpected: It’s unfortunate, but a project is rarely brought to completion without
suffering any setbacks. Almost every construction problem will run into obstacles. That said, it’s
important to at least expect something to go wrong. That’s not to say something will go wrong, but
rather that your budget should be ok in the event something unexpected pops up. That way, you won’t
be set back too far if additional costs are added to the balance sheet.

Proactively Mitigate Overspending: Investors are advised to make their homes slightly better than
comparables. That said, it’s not always a good idea to include the most expensive amenities and
materials. While doing so will make the home look and feel great, the return on investment isn’t
necessarily there. Instead of getting the best available, include amenities that are merely a little better
than the ones other houses in the neighborhood offers. That way, you’ll have more attractive profit
margins and retain demand at the time of a sale.

How Do You Calculate Price Per Square Foot?

The formula for calculating the price per square foot isn’t all that difficult. However, there are subtle
nuances that need to be considered, like, for example, what areas can actually be counted towards the
square feet of a home. Consequently, not all square feet can be calculated, so it’s important to know
which areas a homeowner can account for. Once you know the exact square footage of a home, all you
need to do is follow this equation:

Home Value / Square Feet = Price Per Square Foot

COMMON MISTAKES TO AVOID

A truly great real estate development cost breakdown isn’t complete unless it accounts for common
mistakes. If for nothing else, all costs are created equal, regardless of whether or not they were planed.
Having said that, here’s a list of the costs real estate developers need to at least plan for, even though
they hope to never see them:

Underestimating real estate redevelopment costs

Leaving out or missing individual costs entirely

Not accounting for supply chain delays and disruptions

Assuming nothing will go wrong and best case scenarios

Accounting for weather delays

Ignorance of local labor laws and customs

Improper planning and neglecting due diligence

Neglecting to account for inflation

Inaccurately calculating both supply and demand

Not leaving yourself any downtime to account for delays

Changing orders frequently or at inopportune times

SUMMARY

Learning the ins-and-outs of the real estate development cost breakdown is an invaluable skill exhibited
by today’s best investors. That said, it’s not a skill they are born with; estimating construction costs with
the lowest degree of error is a skill that can be learned and honed. Those who master the real estate
development cost breakdown will find themselves with a distinct advantage, one that can
simultaneously mitigate risk and increase profit margins.
Key Takeaways

Those that know how to calculate construction costs on their projects will have a better chance of
realizing success.

Real estate rehabbing costs are a necessary evil; one that will only help you realize your ultimate goal:
profiting on a flip.

The more accurately you are able to estimate rehab costs, the better off you will be on a rehab deal.

-----

Rental Property Cost Analysis for Investors – Real Estate Investing 101

March 3, 2018 Mylene

Have you considered buying a rental property, or converting your current home into a rental? Here’s a
rental property cost analysis guide to help you get started.

If you’re thinking of converting your current home into a rental, read my article about converting
residences to rentals. You can count 75% of market rent toward your income qualification for the
purchase of your next home.

Rental Property Cost Analysis – Collect the Data

Here’s what you need to know for a rental property cost analysis:
Purchase price

Cost of any make-ready repairs

Monthly market rent

HOA fees

Any utilities not paid by renters

Interest rate (if financing)

Down payment percentage (if financing)

Rental Property Cost Analysis – Calculations

Four helpful calculations are Net Operating Income, Net Cash Flow, Capitalization Rate, and Gross Rent
Multiplier (GRM).

Net Operating Income

Net Operating Income tells you how much money the property generates each month. The formula is

Net Rental Income minus Total Expenses = Net Operating Income

NET RENTAL INCOME

Net Rental Income is the Gross Rental Income minus expected vacancy. In San Diego County, many
investors use 3% vacancy rate. For example:

$1500 gross rental income, minus 3% vacancy, or $45, makes $1455 Net Rental Income.

TOTAL EXPENSES
Some investors estimate expenses to be 30-35% of collected rents. If you want more accuracy, here’s a
list of expenses to use for your rental property cost analysis, and what percentages to estimate. Debt
service is not included:

Property management fees – 8%

Maintenance reserve – 5%

Any utilities not paid by tenant

Property taxes – 1.2% annually

Landlord’s insurance – approximately $50

HOA fees

To use the previous example, based on $1500 gross rental income and $150,000 purchase price:

Property management fees – $120

Maintenance reserve – $75

Any utilities not paid by tenant or HOA – n/a

Property taxes – $150

Landlord’s insurance – $50

HOA fees – $250

Total Expenses – $645

Net Operating Income = $1455 Net Rental Income minus $645 Expenses = $810

Net Cash Flow

In a rental property cost analysis, Net Cash Flow is the Net Operating Income minus any debt service.

A $150,000 purchase with 25% down and a 30-year fixed mortgage at 4.5% interest will have a monthly
mortgage payment of $570.

Net Cash Flow = $810 Net Operating Income minus $570 Debt Service = $240

Capitalization Rate

The capitalization rate is calculated by dividing the annual Net Operating Income by the property value.
When you analyze a rental property as an investment, the property value is your purchase price.

Capitalization Rate = Annual Net Operating Income / Property Value

In the above example, the estimated capitalization rate is $9,720/$150,000 = 6.4%

In San Diego County, the average cap rate is approximately 3.5%.

Gross Rent Multiplier

The Gross Rent Multiplier, or GRM, is the sale price divided by the annual rental income. In general, the
higher the GRM, the more expensive the property. If a GRM is 17 or higher, the property is probably so
expensive that you can’t collect enough rent to pay for it. A GRM between 8 and 16 is a good range,
because the property value is still high, you can expect long-term appreciation, and you either break
even or enjoy good cash flow. When the GRM falls below 6-7, the property values, rents, and
appreciation are all low.

Gross Rent Multiplier = Purchase Price / Annual Rental Income

Using the above example, the GRM is $150,000/$18,000 = 8.33

How Do I Decide Whether to Buy?

The numbers you want to see on a rental property cost analysis depend on your goals. Many investors
are satisfied with little to no cash flow, so long as they are not losing money each month. When I shop
for investment properties, I am satisfied with $50 cash flow, and a cap rate of 3%.

Why so little return? Because it’s not about the short-term return. Appreciate the long-term advantages
of owning investment property. Rental rates usually increase each year, bumping up your cash flow.
Over time, you pay off the mortgage, which builds your equity and net worth.

If that isn’t enough to convince you, read this Business Insider article about what Warren Buffett’s
investing philosophy, and investment real estate.

Bottom Line

Real estate is an investment you can finance. When I invest in the stock market, I need to pay 100% of
the investment up front. With rental real estate, you can often put only 25% down and finance the other
75%. If you buy a home that you occupy for only 3% down, you can keep that 97% loan when you
convert it to a rental property.

-----

Conducting a Physical Feasibility Analysis

In today’s fast-moving real estate market where properties turn over in a matter of days and loans are
being refinanced at all-time low rates, it is not uncommon for property owners to reassess their
properties. Whether trying to make a decision to sell or to refinance, business owners will look to their
facility managers to help get a comprehensive picture of their building in today’s market. Two key
components in the building analysis are physical feasibility and financial feasibility. In this first article of a
two-part series, we will provide you with the primary components to be included in a physical feasibility
analysis. Next month’s article will focus on conducting a financial feasibility analysis.

To determine physical feasibility, you must systematically evaluate the site and improvements of any
property being acquired, developed, or renovated. This evaluation examines the site and its
improvements separately, because the legal and tax consequences of a site and a building are different.
It is important to remember that almost every physical factor or characteristic has some financial
consequence or ramification. Physical factors (or forces that create them) have financial consequences
that make them major financial variables. Some of the major types include:

Legal/regulatory factors: Zoning, building codes, insurance requirements, approval processes in

government bodies and agencies, and environmental impact of site activity.

Base building factors: HVAC, historical patterns of building maintenance, condition of building envelope
(especially the roof), electrical system capacity, telephone signal network, lighting system, finishes, and
type of fire sprinkler system.

Tenant space factors: Floor plate size and shape, space measurement systems, mullion spacing,
usable/rentable/gross efficiency, and accessibility to systems via raised flooring or demountable walls.

Organizational characteristics of tenants or occupants: Growth rates and patterns, churn rates and
patterns, historical patterns of how space has been funded and acquired, space standards, adaptability
of workforce to hotelling and telecommuting, in-house decision-making responsiveness, degree of
technology intensiveness, and stance of real property organization.

Feasibility Considerations

The physical analysis of any property requires that you consider the following criteria in each step of the
feasibility process:
Marketability—What is the present marketability?

Functionality—How functional is the property with respect to the site plan and improvements in their
existing state?

Age—What is the effective age of the property and any improvement? What economic life remains in
the property as it is presently developed? If a major retrofit is planned, how long will it perform and how
much life will it add to the entire building?

Renovation—Is physical upgrading, restoration, rehabilitation, remodeling, or modernization required

and feasible? How much upgrading is required by code, and how much of this will add value to the
building?

Site analysis consists of examining several factors, including:

Site improvements

Site survey

Climate

Topographic features

Elevation and slope

Drainage

Flooding

Land/soil contaminants

Site utilities

Street analysis

Zoning ordinances

Surrounding uses
Historical, social, and economic conditions

Site Improvements

Site improvements do not automatically contribute to overall value, whether they are tenant
improvements to a rental space or improvements installed by the owners of the site.The cost of site
improvements does not necessarily equal the value contributed.

Site Survey

One of the most helpful items when inspecting a property is a civil engineer’s or land surveyor’s scaled
survey as-built drawing of the site and improvements. The drawing should indicate where the land and
improvements are and what they include. A good drawing of this type should show site shape,
dimensions, boundary bearings and distances, a legal description, (including acreage to four decimal
places), paved areas, parking space designations, landscaping, and the outline of the building
foundation. It should also show encroachments and easements, if any, ingress-egress points, location of
drainage catch basins, and location of utility lines.

Climate

Climate and solar considerations are important. Is the site in constant shade or exposed to unusual wind
and other weather conditions? What impact does the sun have on building orientation and heat gain?
The shadows that might be cast by a high-rise office building over neighboring properties may be
considered detrimental to market value by their owners. Are snow removal costs substantial?

Topographic Features

Many factors must be considered when evaluating topographic features of a site. These include the
slope, elevation, surface contours, water table, soil structure, soil bearing capacity, septic leaching
capacity, and other matters that affect the function of a site. Vegetation on a site is too often
overlooked. Certain types of trees indicate dry and sandy soils; others may indicate damp soil.
Elevation and Slope

Above-grade or below-grade elevations of a site, as compared to its adjoining streets or neighboring

properties, can be either a detriment or an advantage.

Drainage

Drainage retention is a growing environmental concern. Many communities have requirements for
newly developed sites, dictating that the rate of storm water runoff, after development, cannot exceed
what it was prior to development.

Flooding

The potential for flood hazard must be determined. If there have been slides, flooding, subsidence, or
even a history of earthquake problems, ongoing and future use will obviously be affected.

Land/Soil Contaminants

Contaminants are a more recent soil condition problem. Former industrial sites are particularly subject
to these conditions because they may contain chemical wastes, nuclear materials, asbestos,
polychlorinated biphinon compounds (PCBs), or other contaminants. The presence of air, soil, or water
contaminants might be discovered only by investigation of the site history. For example, a property that
is downwind of industrial areas and receiving airborne contaminants or hazardous fumes can be
evaluated through examination of public records.

Site Utilities
The presence and adequacy of utilities serving a site must be carefully cataloged. These normally include
sanitary sewer, storm sewer, domestic water supply, manufactured or natural gas, telephone, cable
television, and electric power. In some cities, steam or hot water is piped under city streets for heating.

Street Analysis

Carefully consider existing street improvements. The surface’s slope, grade, and drainage design are
important. Does water stand or pool? Does runoff cause shoulder erosion? Are there curbs and gutters?
How wide is the actual, legal street right-of-way? How wide is the improved or developed road surface?
Is there street lighting, and is it served by buried or overhead power? Are there center medians installed
that prevent left turns? Do they affect the usefulness of the site? What curb cuts are allowed from the
street to a site for access? What is the observed quality of all of the street improvements? Have they
been installed at minimum standards, or are they unusually well constructed?

Zoning Ordinances

Governmental and self-imposed private restrictions on property affect site use. Zoning may specify the
height and types of buildings—as well as their shape and bulk. Inconsistency of a jurisdiction’s
maintenance of zoning regulations can have a physical effect on a site.

Surrounding Uses

Surrounding uses are important because they have an impact on site value. An inventory of site
amenities and drawbacks is needed to account for factors such as highway and transportation access,
uses of adjoining properties, and appropriate site size for the intended use. Conditions that are
unfavorable to some users may create opportunity for others. Such conditions affect the market price of
a site, and there is an advantage to be gained through the recognition of opportunity.

Historical, Social, and Economic Conditions

Historical and social factors can affect the physical viability of a site. In the past, retail stores commonly
had large display windows. Today, many are built as blank-wall fortresses with no windows at all and
limited door openings to minimize economic loss in high-crime areas. A few years ago, a major
corporation designed and built multifamily units which did not meet the social and economic needs of
the low-income residents who would occupy them. Even the neighborhood where the site was located
was not acceptable to the intended occupants. The corporation had failed to investigate the history of
surrounding properties, including the one they purchased. The buildings did not rent well and still
continue to experience high vacancy levels.

When analyzing the physical building, the following items are key factors to assess:

Ceilings

Concrete construction

Curtain wall exteriors

Domestic water supply

Doors

Electrical, data, and communication systems

Elevators

Finishes

Glass

Heating, ventilation, and air conditioning systems

Interior enclosures

Lighting

Masonry construction

Plumbing systems

Qualities of design

Rest rooms

Roofs

Size, quality, condition, and code compliance of any improvements

Skylights
Sprinkler systems

Tenant improvements

Waste systems

Wear and tear

Windows

Wood construction

Although the information provided herein is by no means all-inclusive, it should give you a solid basis on
which to begin your physical feasibility analysis.

----

Real Estate

By JAMES CHEN Reviewed by GORDON SCOTT Updated Jun 14, 2021

What Is Real Estate?

Real estate is the land along with any permanent improvements attached to the land, whether natural
or man-made—including water, trees, minerals, buildings, homes, fences, and bridges. Real estate is a
form of real property. It differs from personal property, which are things not permanently attached to
the land, such as vehicles, boats, jewelry, furniture, and farm equipment.

KEY TAKEAWAYS

Real estate is a class of "real property" that includes land and anything permanently attached to it,
whether natural or man-made.
There are five main categories of real estate: residential, commercial, industrial, raw land, and special
use.

You can invest in real estate directly by purchasing a home, rental property or other property, or
indirectly through a real estate investment trust (REIT).

Real Estate

Understanding Real Estate

People often use the terms land, real estate, and real property interchangeably, but there are some
subtle distinctions.

Land refers to the earth's surface down to the center of the earth and upward to the airspace above,
including the trees, minerals, and water.

Real estate is the land, plus any permanent man-made additions, such as houses and other buildings.

Real property—one of the two main classifications of property—is the interests, benefits and rights
inherent in the ownership of real estate.

Broadly speaking, real estate includes the physical surface of the land, what lies above and below it,
what is permanently attached to it, plus all the rights of ownership—including the right to possess, sell,
lease, and enjoy the land.

Real property shouldn't be confused with personal property, which encompasses all property that
doesn't fit the definition of real property. The primary characteristic of personal property is that it's
movable. Examples include vehicles, boats, furniture, clothing, and smartphones.

Physical Characteristics of Real Estate

Land has three physical characteristics that differentiate it from other assets in the economy:

Immobility. While some parts of land are removable and the topography can be altered, the geographic
location of any parcel of land can never be changed.

Indestructibility. Land is durable and indestructible (permanent).

Uniqueness. No two parcels of land can be exactly the same. Even though they may share similarities,
every parcel differs geographically.

Economic Characteristics of Real Estate

Land also has some distinct economic characteristics that influence its value as an investment:

Scarcity: While land isn't considered rare, the total supply is fixed.

Improvements: Any additions or changes to the land or a building that affects the property's value is
called an improvement. Improvements of a private nature (such as homes and fences) are referred to as
improvements on the land. Improvements of a public nature (e.g., sidewalks and sewer systems) are
called improvements to the land.

Permanence of investment: Once land is improved, the total capital and labor used to build the
improvement represent a sizable fixed investment. Even though a building can be razed, improvements
like drainage, electricity, water, and sewer systems tend to be permanent because they can't be
removed (or replaced) economically.

Location or area preference. Location refers to people's choices and tastes regarding a given area, based
on factors like convenience, reputation, and history. Location is one of the most important economic
characteristics of land (thus the saying, "location, location, location!").
Types of Real Estate

There are five main types of real estate:

Residential real estate: Any property used for residential purposes. Examples include single-family
homes, condos, cooperatives, duplexes, townhouses, and multifamily residences with fewer than five
individual units.

Commercial real estate: Any property used exclusively for business purposes, such as apartment
complexes, gas stations, grocery stores, hospitals, hotels, offices, parking facilities, restaurants, shopping
centers, stores, and theaters.

Industrial real estate: Any property used for manufacturing, production, distribution, storage, and
research and development. Examples include factories, power plants, and warehouses.

Land: Includes undeveloped property, vacant land, and agricultural land (farms, orchards, ranches, and
timberland).

Special purpose: Property used by the public, such as cemeteries, government buildings, libraries, parks,
places of worship, and schools.

How the Real Estate Industry Works

Despite the magnitude and complexity of the real estate market, many people tend to think the industry
consists merely of brokers and salespeople. However, millions of people in fact earn a living through real
estate, not only in sales but also in appraisals, property management, financing, construction,
development, counseling, education, and several other fields.

Many professionals and businesses—including accountants, architects, banks, title insurance companies,
surveyors, and lawyers—also depend on the real estate industry.
Real estate is a critical driver of economic growth in the U.S. In fact, housing starts—the number of new
residential construction projects in any given month—released by the U.S. Census Bureau is a key
economic indicator. The report includes building permits, housing starts, and housing completions data,
divided into three different categories:

Single-family homes

Homes with 2-4 units

Multifamily buildings with five or more units, such as apartment complexes1

Investors and analysts keep a close eye on housing starts because the numbers can provide a general
sense of economic direction. Moreover, the types of new housing starts can give clues about how the
economy is developing.

Example: Housing Starts

For example, if housing starts indicate fewer single-family and more multifamily starts, it could indicate
an impending supply shortage for single-family homes—which could drive up home prices. The following
chart shows 20 years of housing starts, from Jan. 1, 2000, to Feb. 1, 2020.2

Housing starts

20 years of housing starts. Source: Federal Reserve Bank of St. Louis.

How to Invest in Real Estate

There are a number of ways to invest in real estate. Some of the most common ways to invest directly
include:

Homeownership

Rental properties
House flipping

If you buy physical property (e.g., rental properties, house flipping), you can make money two different
ways: Revenue from rent or leases, and appreciation of the real estate's value. Unlike other investments,
real estate is dramatically affected by its location. Factors such as employment rates, the local economy,
crime rates, transportation facilities, school quality, municipal services, and property taxes can drive real
estate prices up or down.

Pros

Offers steady income

Offers capital appreciation

Diversifies portfolio

Can be bought with leverage

Cons

Is usually illiquid

Influenced by highly local factors

Requires big initial capital outlay

May require active management and expertise

You can invest in real estate indirectly, as well.

One of the most popular ways to do so is through a real estate investment trust (REIT)—a company that
holds a portfolio of income-producing real estate. There are several broad types of REITs, including
equity, mortgage, and hybrid REITs. REITs are further classified based on how their shares are bought
and sold:

Publicly traded REITs

Public non-traded REITs

Private REITs

The most popular way to invest in a REIT is to buy shares that are publicly traded on an exchange. Since
the shares trade like any other security traded on an exchange (think stocks), it makes REITs very liquid
and transparent.

Like many stocks, you earn income from REITs through dividend payments and appreciation of the
shares. In addition to individual REITs, you can also invest in real estate mutual funds and real estate
exchange traded funds (ETFs).

What We Like

Liquidity

Diversification

Steady dividends

Risk-adjusted returns

What We Don't Like

Low growth/low capital appreciation

Not tax-advantaged

Subject to market risk

High fees

Mortgage-Backed Securities
Another option for investing in real estate is via mortgage-backed securities (MBS). These received a lot
of bad press due to the role they played in the mortgage meltdown that triggered a global financial crisis
in 2007-08. However, MBS are still in existence and traded.

The most accessible way for the average investor to buy into these products is via ETFs. Like all
investments, these products carry a degree of risk. However, they may also offer portfolio
diversification. Investors must investigate the holdings to ensure the funds specialize in investment-
grade mortgage-backed securities, not the subprime variety that figured in the crisis.

MBS Examples

Two popular ETFs that give ordinary investors access to MBS include:

The Vanguard Mortgage-Backed Securities ETF (VMBS): This ETF tracks the Bloomberg Barclays U.S. MBS
Float Adjusted Index, made up of federal agency-backed MBS that have minimum pools of $1 billion and
minimum maturity of one year.3

The iShares MBS ETF (MBB): This ETF focuses on fixed-rate mortgage securities and tracks the
Bloomberg Barclays U.S. MBS Index. Its holdings include bonds issued or guaranteed by government-
sponsored enterprises such as Fannie Mae and Freddie Mac, so they are AAA-rated.4

-----

Physical and Environmental Factors in Real Estate

The phrase “location, location, location” is a phrase used over and over again in the discussion of real
estate markets. It continues to be as relevant today because location is ultimately what brings value to a
piece of real estate. For example, a high-rise office building in downtown New York City would have
comparatively little value in the middle of rural Texas. Value is not only a function of the component
parts but of the market demand for that particular structure in that particular place. Location itself is
what makes real estate assets completely unique. Since no two structures can occupy the exact same
location, each asset’s value characteristics are one-of-a kind.
Physical Factors in Real Estate Analysis

Physical factors of a property are important because they can be the driving factor behind a
community’s economy. For example, a location next to a protected harbor would be expected to
develop industries related to shipping. Physical factors can determine whether a location is feasible for
development at all based on the soil conditions and topography. They can also drive the market demand
for specific types of real estate development in the location. A market analysis should consider these
physical factors for the subject property and their potential impact on current value and future cash
flows. Physical characteristics that both limit and encourage new development are key to understanding
the demand for and value of real estate in all market segments.

Physical factors important to real estate market analysis may include:

Location – Define the property boundaries and consider the neighboring properties as well. How does
this location fit in with the surrounding properties? Is the property being used in a way that makes
financial sense given the surrounding property types and property mix? Do the neighboring properties
add value to the location or not?

Natural geographic boundaries – Some properties have natural geographic boundaries such as rivers,
lakes, and oceans. While these natural boundaries limit the availability of land for development, they
can also add value to neighboring properties if utilized appropriately. So, the market analysis should
consider the impact on development options and value drivers for the subject due to the natural
geographic boundaries.

Topography – The topography of an area can have a huge impact on real estate development and can be
a crucial factor in a market analysis. Topography can influence issues such as runoff and flooding hazards
as well as availability of land for development. Areas in the Mid-west have large, flat plots of land that
would be easy to develop. On the other hand, areas on the west coast have a limited amount of land
along the coast that can be developed. California has little flat ground between the Pacific Ocean and
the mountains, so people are forced to develop into the sides of mountains.
Soil conditions – The market analysis may also contain information about the soil conditions of the
subject property, especially when they are relevant to the planned use or value of the property. Soil
conditions are most important when the planned land use involved growing crops or other vegetation.
Ideal soil types should also provide adequate drainage and be able to support the structure without
slippage that can cause cracks in the foundation.

Climate – To a certain extent, climate is important in any market analysis. Climate may be directly
relevant to income if the subject property is a resort or entertainment facility. Climate, however, is also
important to understanding the demand for real estate and economic drivers of an area. Locations with
warmer weather and mild winters tend to attract people and businesses. Therefore, population and
economic growth tend to be higher in these areas.

Natural resources – Historically, cities grew in locations with important natural resources. Today, natural
resources are still major economic drivers of industry and employment opportunities. Natural resources
can serve as an important economic factor for transportation (rivers or seaports), mining (natural gas,
coal, oil, etc.), or tourism (beaches and mountains).

Water availability – Water availability is not only important for factories or farmlands requiring water for
business but also for all economic stability in an area. A city without adequate water resources and
water quality faces poor economic growth prospects. This in turn influences the overall real estate
market forecasts for a location.

Transportation patterns– Current transportation patterns and proposed changes to those patterns are
critical components of a market analysis. Traffic patterns determine the travel paths for the population
and thus the areas that will receive the highest concentration of potential client activity. Traffic patterns
are especially important for tenants whose business requires a high amount of foot traffic and visibility.
A location along a major roadway can represent a much higher demand then the neighboring population
would otherwise suggest.

Environmental Factors in Real Estate Analysis

Environmental factors refer to the interaction between people and urban development with the natural
environment. Every piece of real estate development impacts the environment in some way because
development changes the natural interaction among land, water, and animals. In many cases,
development occurs specifically because people desire to utilize the natural environmental resources of
a location. A market analysis should consider the property’s interaction with and impact on the
surrounding natural environment to the extent it will influence the project’s feasibility and value. The
overall impact on the environment is usually proportional to the size of the development, but there may
be other considerations due to the specific location or proposed use of the property.

A few of the environmental factors that a real estate market analysis may consider include:

Air and water quality – The quality of air and water can have a huge impact on property valuation. Cities
with poor air quality or poor water quality are less desirable and may over the longer-term experience
decline in population and valuation. Areas with clean air and water are highly desirable, and as a result,
those areas may experience higher than average growth in population and value in the future. Of
course, that growth also comes at a price, and the quality of the environment must be protected. As a
result, local governments may require stringent permitting procedures for large real estate development
that could negatively impact the natural environment.

Soil conditions – The soil present on a particular property can have a varying degree of impact on the
value and suitability for development. The property’s soil classification is important because it has
potentially huge implications to the cost and feasibility of future use and development. Issues related to
soil classification are important because they determine the hydrology, the soil’s interaction with water,
of the land. If the soil does not allow for adequate drainage, additional measures may need to be
implemented to properly account for runoff and erosion due to rainfall. Soil classification can also
determine whether or not the land has the ability to hold the weight of a structure without slipping or
cracking.

Wildlife – All real estate development impacts the area wildlife in some way. The impact may be
something small related to cutting down trees in which birds and insects lived. On the other hand, real
estate development may impact some type of endangered or protected plants and animals. In these
cases, development may be prohibited entirely. The market analysis may need to consider the potential
impact on surrounding wildlife and the cost associated with remediation efforts (such as a detailed
environmental analysis report or purchase of redevelopment credits in another location).

Wetlands – Soil that is covered by water all or part of the time may be classified as wetlands. There are
wetlands areas located throughout the country, and they are important to the local ecology because
they protect and improve water quality, store floodwaters, maintain surface water flow during dry
seasons, and provide habitats for fish and wildlife. Development in wetlands areas may be limited by
state regulators and the Environmental Protection Agency (EPA). In some wetlands areas, development
may not be feasible at all due to the continual presence of water. Real estate projects located in or near
wetlands areas should consider the potential costs of preparing the land for development along with the
purchase or restoration credits.

Environmental Impact and Sustainability in Real Estate

State law as part of a real estate development project may require environmental impact studies. The
actual regulations and requirements differ by state, but may include anything from an analysis of
additional traffic conditions on roadways to the impact on native plant and wildlife. Environmental
impact considerations include both the construction phase and the completed project. So,
environmental impact applies to existing structures as well as proposed new development projects.

The regulations and requirements of the environmental impact study are important in a real estate
market analysis because of the feasibility implications. The cost of complying with environmental
regulations may make construction or renovation plans too expensive to pursue. Alternatively,
compliance with environmental regulations could make a proposed use of existing construction so
expensive or restrictive that the project is no longer financially feasible. The market analysis should
address issues related to environmental impact, the potential costs up-front and over the expected
holding period, and any influence environmental factors may have on expected cash flows from the
property.

Sustainability is an increasingly important concept in global real estate development. Rather than
focusing simply on direct environmental impact to the property and immediate surrounding area,
sustainability considers the impact of development on the larger regional and global environment as
well as human interaction with the construction. More than simply the impact of traffic or development
on local air, water, or wildlife, sustainability considers the impact of building materials from their
sourcing to final use. Sustainability focuses on the use of renewable, local building materials and
healthier environments for living and working.

Issues of sustainability matter for market analysis because they influence the cost, risk, marketability,
and value of the property. Although the initial cost of construction and development can be slightly
higher, there are many long-term benefits as well. Those benefits include lower risk premiums and
lower operating costs. The desirability of and demand for sustainable real estate development in the
market also allows these properties to charge a rent premium and command a price premium in the
marketplace. As the demand for sustainability in the market grows, these properties may experience
higher than average growth rates, lower vacancy rates, and lower overall operating expense ratios. All of
these factors then influence proforma cash flow expectations and property valuations.

Conclusion

Analyzing the physical and environmental factors in a real estate market analysis benefits the financial
analysis in a number of ways. A thorough analysis of the location’s physical and environmental factors
provides accurate estimates of development costs. Property owners and developers can better
determine the financial feasibility of any project. The analysis also allows owners to create better pro
forma financial statements because they understand the conditions that ultimately influence the
neighborhood rental rates. Paying attention to the physical and environmental factors of a property can
help owners and developers to make the best financial decisions possible.

-------

Local and Regional Economic Analysis

This information can help business operators and investors make informed decisions regarding
development in the community. The information can also be used to identify potential opportunities for
downtown as the central place in the community and region. These opportunities may result from
downtown’s connection to area industry, institutions, and local amenities.

Learn More

Industry Concentrations and Employers

Labor Force and Employment Levels

Entrepreneurial Activity

Business Climate Analysis

Real Estate Activity

Transportation Patterns

Institutions

Tourism and Community Attractions

Quality of Life Measures

Appendix: Local Economics and GIS

Industry Concentrations and Employers

Analyzing industry concentrations and employers focuses on economic activity within a community. The
data being used includes people who work in the area, but may live in another region.

Earnings Mix

Breaking down earnings by sector provides a snapshot of the industry mix in an area. Earnings include
wage and salary disbursements, other labor income, and proprietor’s income (both farm and non-farm).
These numbers can be related as individual numbers, or as a percentage to provide an understanding of
the industry distributions. Furthermore, comparing the numbers for a local area to those of a larger
area, such as an entire state, point to differences in the local economy that may be useful in subsequent
market analysis steps.

These figures are available through the Bureau of Economic Analysis.

Personal Income Trends

Personal income trends provide an important measure of regional economic activity over time. Per
capita personal income is used as an indicator of the quality of consumer markets in an area, as well as a
measure of residents’ economic well being. When compared to state or national trends, it provides one
indication of how well the region’s economy is performing.
While income is derived from a variety of sources, wages and salaries are typically the largest
components of a region’s income. The impact of average wages on personal income however, are likely
offset by increases in other income sources (such as investment or retirement income) and increasing
labor participation rates over this period (i.e. more earners per household).

The Bureau of Economic Analysis (BEA) prepares quarterly and annual estimates of personal income by
and estimates of labor and proprietors’ earnings for all states.

Local Firm Employment

An analysis of local employers provides insight into the types of larger businesses in the area that may
provide drawing power. In addition to this, large employers set the precedent of success within a
community, which may reassure other prospective businesses. Furthermore, identifying these
employers, their number of employees, and their locations may help in later analysis, as they aid in
determining daytime employee populations for the trade area.

Employer listings are often available through your local chamber of commerce, your state employment
department (e.g. Wisconsin Department of Workforce Development), or the U.S. Bureau of Labor
Statistics.

Population:Employment Ratio to Analyze Local Markets

One common measure used to assess the region’s performance in capturing local markets as well as
assess the level of relative dependence on a particular industry is the Population/Employment Ratio.

When analyzing population/employment ratios, population serves as a surrogate for regional demand,
and employment can be considered regional supply. For this reason, it can be said that P:E Ratio
represents a simple measure of regional supply and demand. When local ratios are compared with
statewide or national ratios, it can be determined whether or not local demand is being met, if there are
local expansion opportunities, or if the area is importing demand from surrounding regions.

A second interpretation of the P:E Ratio is that it provides a measure of relative dependence on specific
industries. A P:E Ratio that is relatively small (i.e., high levels of employment given the region’s
population) indicates higher levels of dependence. Conversely, a P:E Ratio that is relatively large
indicates lower levels of dependence.

Location Quotient to Analyze Industry Concentrations

Another common tool used to analyze local economic strengths and weaknesses is the Location
Quotient (LQ). Using employment or income data for local sectors, this tool measures the ability of the
local market to capture local economic activity.

The Location Quotient’s critical value is one, which is equal to the national average. If the computed LQ
is greater than one for any sector, then that sector is said to be a strength of that community; therefore,
if the LQ is less than one, then the community is weak in that sector.

The Bureau of Labor Statistics provides a useful Location Quotient calculator on their website. This
calculator allows you to find LQ’s for various industries and regions across the country. This calculator
can be found on their website: www.bls.gov

Labor Force and Employment Levels

Labor force and employment data provide important information on the size and stability of a local
economy as measured by the local workforce. Trends developed from this data can help new and
existing businesses understand the strengths, weaknesses, and predictability of the area economy.

Trends in population growth (or decline) are sometimes used as a general measure of economic
performance; that is, areas with rapidly growing populations typically have strong job growth. More
importantly, looking at population estimates and projections will answer two key questions: What does
the current workforce look like? What will the workforce look like in the future? By comparing local
population growth to state or national population benchmarks, you can gain an understanding of how
your local workforce is changing relative to the state or the nation.

Monthly estimates of unemployment rates for metropolitan areas (MSAs), counties, and states provide
a rough measure of economic performance. Also, when compared to state and national unemployment
rates, local unemployment rates can point out strong regional economies.

Labor force participation rates (LFPRs) measure the number of citizens employed or looking for
employment as a percentage of the civilian non-institutional population. LFPR data help determine the
factors that lead to discouraged workers, or workers that have dropped out of the labor force.
Unfortunately, LFPRs are current only at the time of a decennial census.

There are many sources available to gather data on labor force, income, and employment.

State Employment Departments

The U.S. Census Bureau

The Bureau of Labor Statistics provides data for unemployment and labor force participation

The Bureau of Economic Analysis provides Employment by type, including wage and salary or proprietor

Entrepreneurial Activity

Measuring entrepreneurial activity is difficult as the definition of an entrepreneur varies. However,

common measures of entrepreneurial activity do exist.
Number of Proprietors

The simplest way to measure entrepreneurial activity is by measuring the number of business
proprietors, or self-employed people. This measurement has limitations, however. While the number of
self-employed people may increase, these proprietors may be different. Some proprietors employ a
large number of people as part of their businesses, and others may operate a business to support a
lifestyle or for secondary income. Nonetheless, these trends suggest that local business owners are a
growing part of the regional economy.

Proprietor’s Income

Trends in proprietor’s income provide additional perspectives on entrepreneurial activity. Proprietor’s

income is an important gauge of economic performance because it captures the income contributions of
locally-owned businesses. Local factors contributing to a lower average proprietor’s income are
unknown, but could include a locally larger share of lifestyle-type entrepreneurs, or fewer large, locally-
owned companies relative to other metro areas.

Your local chamber of commerce may have additional information on entrepreneurial activity in your
area. In addition to this, many of the same sources used to find information on labor force and income
can also be used to find information on entrepreneurial activity, including the U.S. Census Bureau.

Local and Regional Business Networks

Business networks such as Wisconsin’s New North, Michigan’s Detroit Young Professionals, or other
organizations devoted to professional networking help create an environment that is welcome to new
business leaders. Beyond simply networking, many organizations like these are devoted to the creation
and expansion of business opportunities within their local area.

Your local chamber of commerce can identify business networks in your area.

Business Climate Analysis

The information discussed in this section covers some factors that reflect the business climate of your
community. A proper business climate with stimulate growth and expansion within your community.

Retail Activity

Retail sales are a strong force within today’s economy. A local economy with high retail sales reflects a
strong consumer base with a willingness to spend. A more detailed analysis of retail spending in a
community is provided in the retail and service business opportunities section of this toolbox.

Retail sales measurements can collected from private data providers, or calculated from information
found in the U.S. Economic Census, which is published every five years.

Tax Revenue

Sales tax revenue is another good measurement of consumption. While some goods are sales tax
exempt, most consumer goods require sales tax to be paid. Sales tax revenue, as collected by county or
state, shows the relative level of economic strength within the region measured. Furthermore, when
broken down by industry, sales tax data shows the level of consumption within said industry. Higher
levels of sales tax revenue indicate higher levels of consumption—a result of a strong economy and
consumer base.

Sales tax revenue can be found through your state department of revenue, or a local taxing authority, if
applicable.

Tax Structure and Incentives

Tax structure and incentives can provide lucrative opportunities for new business growth. An economic
analysis should highlight the state and local tax structure, and emphasize any tax incentive programs
relevant to business.
Information on the state tax structure and tax incentives for businesses can be found through these
resources:

Local chamber of commerce

County or regional economic development corporation

State department of revenue

State department of workforce or economic development

Real Estate Activity

Real estate activity analysis incorporates several different real estate segments which are determined
based on intended use. These segments include the markets for office, retail, industrial, and housing
space.

Office Market

Understanding real estate trends in the market for office space can highlight areas of opportunity for
expansion of white collar office accommodations. High vacancy rates and low absorption rates are
typically negative indicators; however, some tenants may find this to be an opportunity.

Knowing the type of office space is also important. Office space is segmented by classes A, B, or C, based
on their quality. Class A space usually is most competitive and has the highest rent (typically the result of
a good location, condition, management, etc). Class C space, in contrast, is typically lower rent space in
older buildings.

Important office market data includes:

Gross available area

Class composition (A,B, and C)

Median rent per square foot

Vacancy and absorption rates

Retail Market

Information about commercial real estate locations, size, growth, and retail mix serve as a measure of
retail activity. Businesses want reassurance of the retail market vitality in an area. Providing this
information to prospective retailers will ensure they are confident with a location.

Important retail market information includes:

Size, growth and type of shopping centers

Gross leasable area

Tenant mix, number of stores, anchor stores

Frontage, visibility, and parking

Industrial Market

Downtown industrial space is mostly used light for manufacturing or warehousing. While the
requirements and desired attributes vary based on intended use, people looking to purchase or rent
industrial real estate often focus on size, location, zoning, and available utilities.

Important factors include:

Location relative to transportation infrastructure

Land zoning, costs, and taxes

Other uses of the district (manufacturing, warehousing, flex space)

Available utilities

Housing Market
The development of new housing, whether it is single family homes or multi-family buildings, requires
special analysis as presented in the housing section of the toolbox. Many factors play into the feasibility
of new construction or building rehabilitation.

Building permits and new construction often indicate a strengthening economy, as do low vacancy and
high absorption rates. Essential housing market data includes:

Legal attributes and zoning restrictions

Cost information (Median home value, rents, property tax, average utilities)

Vacancy and Absorption rates

Owner versus Rental property

Permits and New Construction

Physical information (average square foot, rentable area, waterfront, etc.)

This data is available through city and state sources. In addition, the U.S. Census Bureau’s Building
Permits data reports construction statistics by place and by county on new privately owned residential
housing units authorized by building permits.

The U.S. Census Bureau also provides additional data about home ownership, housing affordability,
housing vacancy, market absorption of apartments, and housing patterns including residential
segregation to see how affordable it is to buy or rent in various communities.

Transportation Patterns

Physical transportation infrastructure facilitates business development by transporting materials, goods,

and people into and out of a community. This infrastructure may include the waterways and ports,
railways, airports, and highways that connect a community other regions. Many smaller communities
rely heavily on road traffic to attract visitors and business.
Traffic Volume

Understanding street and highway traffic volume is essential to strategic business placement. Retailers
typically seek locations on major arteries and often rely on minimum average daily traffic counts to
survive. More specifically, businesses such as gasoline stations, convenience stores and fast food
restaurants choose locations based on traffic volume, ease of access, and visibility from high traffic
streets and highways. Conversely, while high traffic counts are desirable, extreme traffic congestion can
be a deterrent to shoppers. That is, high traffic may hinder visibility, parking and pedestrian friendliness.

While some private data providers sell traffic counts, this information can often be collected through
statewide Department of Transportations.

Transit

Many citizens of larger communities rely on public transportation to travel between residential areas
and business, shopping, and entertainment districts. Transit systems provide transportation for both
customers and employees. For this reason, public transportation activity is important to businesses.

Information on transit routes can be found through your local transit authority.

Parking

A common issue with downtown business districts is parking. Poorly designed parking will deter people
from frequenting downtown. For this reason, many businesses take parking into consideration when
deciding where to locate.

Parking information is often found on local city websites.

Commuting Patterns
Commuting patterns highlight counties with a strong economic base which are able to attract workers
from surrounding regions. Conversely, they also demonstrate which areas might lack local employment
opportunities for their residents. These “bedroom” communities offer a greater number of housing
options in comparison to other locations.

A valuable source to use to observe these commuting patterns is On the Map, an interactive mapping
application, provided by the U.S. Census, shows in high definition where people live versus where they
work.

Institutions

Large institutions often drive a local economy. These institutions can include educational facilities,
federal research centers, medical centers, military bases, prison systems and government. Most major
institutions provide stable employment opportunities, drawing people from surrounding areas. In
addition to this, major universities and hospitals often attract students and employees from across the
state and nation.

Because of the large role these institutions play within a local economy, communities with universities,
hospitals, or other large facilities should emphasize the role these institutions play within their local
economy.

Some important information includes:

Employment by institution

Number of users, patients, visitors, enrollees, etc.

Funding and grants

Other information (i.e. rankings, statistical descriptions, etc.)

Tourism and Community Attractions

Tourism is a driving force of many local economies. Analyzing tourist activity and the draw that large
community events can create is an important step in the economic analysis of your community.

Measuring Tourism

Visitor expenditures create a chain effect. First, businesses and their employees receive direct revenue
from tourists. These businesses and their employees then spend their income in the state, creating an
indirect impact that supports additional jobs, wages, salaries, proprietary income and tax revenues. To
state this more technically, the total economic impact of traveler expenditures is equal to the sum of the
direct and indirect impact.

Tourism is not a typical industry, and cannot be represented in its entirety by a few NAICS-classified
businesses. Tourism is the movement of people into an area for a brief period of time. Its economic
impact begins with the sum of every dollar visitors spend on lodging, retail purchases, gas, food,
entertainment or any other goods or services people buy.

More information and data on tourism in your area can be found at your state department of tourism.

Arts and Attractions

Major arts and attractions, such as sporting events, annual festivals, theaters, and farmer’s markets can
draw many people from surrounding regions. These events can provide an economic boost to
communities, especially smaller ones. Because of this, knowing attendance figures is important. Not only
must these figures be known for safety and logistical purposes, but are businesses will benefit by being
able to anticipate increased customer volumes. Also, many potential businesses may find these events
to make a location more lucrative.

Most event organizers will have attendance figures to provide for you. In addition to this, large outdoor
public events will often haven crowd estimates done by safety officials.

Quality of Life Measures

While definitions for quality of life vary by person, the role of quality of life in the economy has been
well documented. Talent and companies are mobile and are often attracted to areas with an appealing
quality of life. A growing body of research suggests that highly-educated individuals in many
knowledge-based occupations are “consumers of place.” That is, these individuals are attracted to
places with a high quality of life.

Even though there is no exact scale for measuring quality of life, it is possible to measure the factors that
determine a person’s perception of life in the community. Some factors that affect quality of life include:

Education. Because everyone wants their children to have access to high-quality schooling, quality of life
often includes information about high school graduation rates, standardized test scores, and post-
graduation plans.

Health. Health has become important to many people in the U.S. The U.S. Department of Health and
Human Services has a program to develop Community Health Status Indicators for each county in the
United States. The CHSI provides an overview of over 200 key health indicators including mortality.

Recreational Opportunities. Promoting recreational area creates an attractive image of your community.
Information about recreational opportunities can be found on state park websites. Also, many local
communities have information about local parks and other recreation on their websites as well.

Unemployment Rates. While often considered an economic indicator, unemployment rates can affect
the perception of a community. For more on employment data, please review the Labor Force and
Employment Level section of the toolbox.

Crime Rates. When starting new families, most people look for a safe, friendly neighborhood. For this
reason, low crime rates are an excellent selling point for a community. Crime statistics can be received
from local police departments, FBI.gov, and the Bureau of Justice Statistics.

Household Income. Many people look for a satisfactory level of household income when determining
quality of life. It must also be noted however, that affordable housing is an important factor to many.
For more information about household income, please review the information in the earlier sections of
this toolbox.

Appendix – Local Economics and GIS

GIS is able to turn a table of data into a useful map that can be analyzed. The maps created using GIS
demonstrate information graphically. Some information, such as the distribution of downtown
employees, is difficult to represent as a chart or table. GIS is able to turn these types of data into a
useful, easy to analyze map. Accordingly, the following discussion demonstrates a very useful GIS
application for analyzing local economic data.

Capturing the spending potential represented by downtown area employees requires that businesses
are accessible to employees. To thrive in a downtown environment, businesses need locations
accessible relative to places of employment. Research has indicated that most employees will not travel
more than a quarter-mile from their place of employment to purchase a good or service during working
hours. Accordingly, businesses seeking to capture the greatest amount of employee spending should
consider a location within a quarter-mile of large employment centers. These location considerations
may be particularly relevant for restaurants, retailers, personal services, convenience stores, health
clubs and banking services.

The example map that follows examines the number of employees working throughout the study area.
This map shows the estimated number of employees within a quarter-mile of any point on the map. The
highest employee concentrations are found in the area bound by the Milwaukee River, Wells Street,
Wisconsin Avenue and Jefferson Street. The blocks bound by these streets have 20,000 to 29,000
employees working within a quarter-mile.

-------

REGIONAL ANALYSIS

A process applied to real estate that pertains mainly to importance of the local economy and its
surrounding areas and where for other purposes the region may be more broadly defined.

What Questions Will This Report Help You Answer?

Which markets should I invest capital in?

How much home price appreciation can I expect in the top MSAs over the next five years?
Which markets will grow the most over the next two years from buyer demand and new home supply?

Which regions have the best and worst market fundamentals?

----

A Guide to the Break Even Ratio in Real Estate

by Yassine UgazuJun 27, 2019

The break even ratio is part of an important analysis method that is used by real estate investors and
mortgage lenders alike. It’s an effective way of assessing the financial viability of an investment
property. The break even ratio can help streamline loan applications or ensure that funds are being
invested wisely. In this article, we’ll highlight the importance of the break even ratio in real estate and
detail how it can be used to great effect when financing a real estate investment.

The Break Even Ratio Formula

Before getting to the formula, we first need to go over the variables that comprise it. Here’s a brief
overview of the components that make up the break even ratio formula:

The debt service of the property. This refers to the payments that are geared towards reimbursing the
interest and principal on a loan. The sum of all periodic payments is called an annual debt service (ADS).

The operating expenses of the property. These are all the yearly costs that come with managing real
estate investment properties.

This includes marketing, insurance, taxes, utilities, maintenance and repairs, accounting and legal, and
trash collection among many other expenses.
The gross operating income of the property. The gross operating income is the effective gross income of
the property. In other terms, it’s the result of subtracting vacancy loss and credit loss from the gross
potential income.

The break even ratio formula is quite intuitive and straightforward. You simply add the operating
expenses to the debt service, subtract any reserves, and divide by the gross operating income. Below is
an example that illustrates how to calculate the break even ratio.

Break Even Ratio= [(Operating Expenses + Debt Service)- Reserves]/ Gross Operating Income

Let’s take a rental property that has a debt service of $10,000 and operating expenses of $8,000. This
means that the total yearly expenses for this property are $18,000. Now let’s posit that this investment
property generates a gross income of $24,000. In this case, the break even ratio is: 18,000/24,000 =
0.75%. This percentage represents the break even point. In other words, 75% is the occupancy rate that
you need to cover all your expenses and break even.

Keep track of expenses and get operating income estimates using Mashvisor’s rental property calculator.

The Importance of Break Even Analysis

As we stated above, the break even ratio is valuable for both the investor and the lender. This metric
gives them a clear idea about the property’s cash flow potential. For example, a very high ratio means
that any drop in occupancy rate will result in negative cash flow. Conservative real estate investors and
lenders would think twice before committing to a property with a break even ratio above 90%. On the
opposite end of the spectrum, a low break even ratio is a good sign for investors and lenders. A low ratio
means that even with a high vacancy rate, the property will still be breaking even.

What Is a Good Break Even Ratio?

Like any metric in a typical investment property analysis, the ideal break even ratio depends on many
factors. Some private lenders have a high level of risk tolerance and are more likely to underwrite a loan
despite a high ratio. Furthermore, many experienced investors acquire underwater properties with the
aim of turning them around. The break even ratio of these properties can reach a staggering 95%.

Having said that, most real estate investors and lenders prefer to stay on the side of caution. The figure
that is considered optimal by most industry experts is 85% or less. Investment property with this break
even ratio will break even if the rental income drops by 15%.

Reducing the Break Even Point of a Rental Property

A high break even point is not an ideal situation for rental property owners. Not only are their loan
options limited, but they will also have trouble attracting investors. Reducing the break even point is
feasible, but it does require a complete restructuring of how the rental property is managed. Since the
break even ratio involves expenses and income, the way to reduce it is by doing the following:

Boost collected revenue

Lower operating expenses

Reduce fixed costs

Reduce cash investment

Improving these parameters requires year-around diligence and strict adherence to a coherent overall
strategy. Here’s a breakdown of what real estate investors can do to tackle each one.

There are several ways you can increase the revenue that a real estate investment property generates.
Since you can’t just increase the rental rate on a whim, you need to explore other revenue channels that
allow you to increase your rental income. This includes introducing new services and benefits such as
accommodation for pets, cable TV, etc..

Another effective strategy is to get aggressive and proactive when it comes to increasing occupancy.
Start looking for good tenants even where there is no vacancy and keep them interested in your rental
property. In the event of a vacancy, you will have a list of potential good tenants to choose from.
Lower Operating Expenses

The easiest way to reduce operating expenses is to simply scan the market for competitive prices. A
good way to do this is to create a spreadsheet of different providers and prices. This makes finding the
best deals quite easy and convenient. The other effective way of reducing operating expenses is to avoid
excessive repair and maintenance costs. This can be achieved by carrying out preemptive maintenance
on things like appliances and air-conditioning units.

Reduce Fixed Costs

The first step to reducing fixed costs is to lower your tax bill. Directly appealing to tax authorities and
requesting a reduction works in certain cases, but it is far from guaranteed. The best strategy is to seek
the assistance of a third party that handles your case in exchange for a percentage of the savings.

You can also reduce your debt service by taking on another mortgage with better interest rates. This can
be difficult, however, as most lenders will be deterred by the high break even ratio.

Reduce Cash Investment

You can reduce cash investment through several simple methods. Bringing in a partner to inject some
cash in exchange for a fair split is a way to do it. You can also free up capital by doing a sale and a
leaseback of part of the rental property. This will get you your initial investment back plus extra cash.

The break even ratio is an indicator that every housing market participant should be aware of. Having a
clear grasp of what this ratio entails allows both investors and lenders to screen investment properties
in an effective manner.

---

Breaking Even on a Real Estate Investment Property: Is This an Option?

by Nadia AbulatifJul 22, 2018

The one question that haunts real estate investors is whether it’s ok to break even on a real estate
investment property or not.

This article is going to have all the answers associated with the matter of breaking even on a rental
property. However, as a real estate investor, you’ve got to understand that it is a part of the investment
property analysis process. So, really, there is no way to go about the whole analysis process without
considering this type of calculation.

Before we get into the issue of whether you should settle for it or not, let’s take a look at what it means
and why is it important to calculate it.

What does breaking even on a real estate investment property mean?

The easiest way to put it is by saying that to break even on a real estate investment property is when
your monthly operating expenses are equal to your monthly rental income. This means that the
property is paying for its own expenses leaving you with zero cash flow/profits.

Note that this definition reveals the 3 most important factors that contribute to the break-even point,
which are: 1) The monthly rental income, 2) The monthly operating expenses which include
maintenance and repair, property management, and insurance among other expenses, and 3) The
mortgage payments.

The definition also means that there are cases in which you won’t need to deal with the concept of
breaking even. First of all, if you bought the property all in cash, then breaking even is not something
you will have to worry about. Another case is long-term leases. If you could guarantee a long-term
tenant occupying your rental property then go ahead. This dramatically decreases the possibilities of
breaking even on your real estate investment property.
Looking at the previous information, it leads us to another term relative to breaking even on a real
estate investment property: the break-even ratio.

What does the break-even ratio mean and why is it important?

The break-even ratio is a measure that is important for both real estate investors and mortgage lenders.
Basically, it indicates how vulnerable a real estate investment property is to default on the debt in case
the rental income decreases.

The significance of the break-even ratio shows in two aspects. First, for a real estate investor, it is part of
the investment property analysis when buying an investment property. In other words, you’ll be able to
determine the amount of money coming in and the amount going out from a real estate investment
property. Therefore, you want to know the possibility of not gaining money while still not losing any.

As for the second aspect, it comes from a mortgage lender’s perspective. This measure is mostly used by
lenders to determine whether you are eligible for financing a real estate investment property. Lenders
want to see a break-even ratio that is as low as possible. The lower, the better of an indicator it is to the
profitability of the rental property.

How to calculate the break-even ratio for a real estate investment property

Calculating the break-even ratio for a real estate investment property is not a big deal. In fact, it is as
easy as 1+1= 2. Here is an example of a rental property so you could see it in action:

After analyzing a few rental properties, John finally decides on one. He applies for a mortgage and the
lender wants to calculate the break-even ratio in order to determine eligibility for financing. After the
lender analyzes the property, he/she comes out with the following numbers: $700 in monthly mortgage
payments, $2000 in monthly rental income, and $300 in monthly operating expenses. So, this is what
he/she does to figure out the break-even ratio:

Step 1: He/she calculates the gross annual rental income:

$2000*12 = $24,000

Step 2: He/she calculates the annual mortgage payments:

$700*12 = $8,400

Step 3: He/she calculates the annual operating expenses:

$300*12 = $3,600

Step 4: He/she applies the break-even ratio formula:

BER = Total debt service+Annual operating expenses/Gross annual rental income

BER = $8,400 + $3,600 / $24,000 = 0.5 or 50%

This leaves us with the question: “What is a good break-even ratio?”

There is no specific answer to this question other than saying that any percentage less than 85% is ideal
for a mortgage lender. Therefore, if you are thinking of financing a rental property, make sure you
crunch some numbers beforehand.

Is breaking even on a real estate investment property an option?

The answer is yes, indeed. Breaking even on a real estate investment property is an option. A break-
even point is great news of no losses. For you, I guess it would be better if the property is not generating
cash flow as long as you know that it’s taking care of its own expenses.

Also, breaking even does not mean that you are not gaining anything at all. After all, a property will
experience a rise in value over time (appreciation). This means that you are not gaining anything in the
short run. Still, you will be able to gain something in the long run instead.

Moreover, with a property that is at a break-even point, you could easily turn that around and start
generating some cash flow.

As a matter of fact, boosting your rental income does not have to be so hard. Even a few minor changes
in your strategy could make a huge difference. Therefore, a break-even point is good news of potential
for your business.

-----

How Data Analysis Can Make You Rich in Real Estate Investments

June 2, 2020

By Larry Alton

IN THIS ARTICLE

Automated Valuation

Home-Flipping Reports

Foreclosure Reports

Choosing Your Property and Strategy

Many companies use data to improve various facets of their operations. It can also be incredibly useful
for investment functions, particularly for real estate investors who seek to maximize their portfolios.

When complex data is presented simply, it can have a strong impact on your investments. For example,
it can show which markets are ripe for investing and which to avoid. You can analyze current and past
trends to assess the income potential.

You can also learn things about other investors in the market, such as how many there are or how much
they’re making. You don’t want to enter an over-saturated market, nor do you want to enter a market
that’s not profitable for other investors.

The Beginner’s Guide to Real Estate Market Analysis

Before diving into real estate investing, make sure you understand how to compare markets and
properties. Whether you’re trying to decide between investing in Boise or Sacramento—or you’re just
comparing two similar homes—this guide will walk you through all the numbers you need to know.
From calculating cash-on-cash return to running a comparative market analysis, the experts at
BiggerPockets demonstrate the steps you need to follow and the statistics you must know with The
Beginner’s Guide to Real Estate Market Analysis.

So data analysis can point investors in the right direction. Each investor has a unique situation, so data
that applies to your current needs will be crucial to achieving success.

If building wealth and saving time appeal to you, here are some ways you can use data analysis to profit
from real estate investments.

Portrait of a concentrated Asian accountant at her workplace using her calculator. Concept of
accounting in business.

Automated Valuation
Being able to estimate current home values would be extremely difficult if it weren’t for the Automated
Valuation Model, which major real estate organizations use. Think about the role the big players in real
estate serve in data analysis.

Organizations like Trulia, Realtor, and Zillow set the data standards. They offer a variety of tools like
graphs that showcase neighborhood trends, the average cost of ownership in an area, mortgage
payment calculators, the history of a property, and so on.

Each tool is invaluable to both buyers and sellers for determining the value of a property, and investors
can take advantage of this information better than anyone.

Home-Flipping Reports

If home flipping is your investment preference, monthly and annual reports can identify various success
factors. You’ll learn such things as how many homes are being flipped in an area, how many are
profitable, and the saturation of home flippers in your area.

One of the most useful components of these reports is the ability to calculate how much an investor
takes in before deducting expenses and taxes, which is also called the gross yield. This provides a clear
idea of how profitable you could be if you can penetrate a particular home-flipping market.

Foreclosure Reports

Foreclosure reports can also be very useful. These can be used to assess an individual house, as well as
the market.

For example, if you see a sudden increase in the number of foreclosure report filings, you may intuit that
this market is experiencing economic difficulties and may not be the best place to invest.
Since profitable investing often depends on entering a good market early in the trend, such data can be
invaluable for determining whether to invest. It can help you find hidden gems in real estate markets
and avoid others that are unlikely to yield.

On the other hand, foreclosure reports don’t always present an accurate depiction of the current
market. Often, it’s a slow-evolving process, and many months may pass before a foreclosure report is
published. So the information can be valuable, but you should be aware that it doesn’t always apply to
the current market.

Choosing Your Property and Strategy

Without data, it’s too easy to spend months mulling your options and trying to devise a strategy. After
all that time and effort, you could still end up with a money pit.

Data analysis can both speed the process and help you avoid making a bad purchase. Using information
from reports, online real estate websites, MLS, and more, you can find the key data that will determine
your optimal course.

For example, a property that has been on the market for 300 days might be overpriced. A property that
has undergone multiple inspections but no final offer will likely have issues you probably don’t need.

As you select your property through the tactical collection and study of data, choose your strategy for
making money. You might have begun your initial search looking for a vacation rental, but decide on a
switch to a fix and flip because of the data you collected.

This is a small array of the data tools and benefits that are available to help investors make their fortune.
As you consider your next property, investigate further data analysis tools, and make a more intelligent
choice for your investment purchases.

-------
Real Estate Development

August 28, 2019

Real Estate Development Process: Factors to Evaluate Profitability

The real estate development process is critical in the long-term success of a commercial investment. The
goal is to develop a product that matches consumer demand, but it can be a challenging pathway to
identify the golden opportunities in the industry. Both new investors and experienced investing teams
alike need to lean on market data and information to measure potential profit as well as the possible
risk factors.

At the beginning of every real estate development venture, it is important to not only determine your
own strategic objectives; but to also look at factors that will affect the outcome: market demand, local
support or objectives, and location characteristics. While it might seem like an overwhelming process to
look through relevant information, it is essential to follow a proven framework that can be used to
organize the analysis and real estate development steps.

Framework for the Real Estate Development Process

Investing in commercial real estate not only carries quite a bit of risk, but it is also a complex process
when considering the initial analysis, construction phases, and ongoing maintenance required after
project completion. Many moving parts need to be addressed over a multi-year plan.

The best approach is to identify the smaller projects based on key deliverables and milestones, which
work together to create the desired results in the future. Five primary phases are used in every real
estate development project:

Concept: The initial spark of ideas harnesses the vision into a plan of the possibilities. It is important to
work through the potential results, as well as obstacles that could be faced with development,
construction, and profitability. Location analysis and development strategies need to be considered
during this phase. The final result of the conceptual work is a vision statement, as well as clarity about
whether or not it makes sense to move forward with the project. Then, a development package can be
put together based on a detailed analysis of the site and characteristics of the project.

Definition: It is essential to evaluate the feasibility of the project by looking at initial capital
requirements, financing, operational costs, and anticipated revenues from the investment. This “pencil
test” is designed to dig into more details and appraisals that are required for both lenders and investors.
Ultimately, the project is funded through underwriting from the lender and investors who choose to
participate in the opportunity.

Planning: Once the money is available, then the developer can start moving forward by securing the
necessary permits. A document will be designed with the vision and other details that need to be
provided to the design team.

Implementation: This stage in the real estate development process is usually the longest part of the
project since it involves both design and construction. At this point, the design team is working on the
construction documents that will be required to get the building permit. When the plans are finalized,
and the permits are in hand, then it’s time for the construction phase to move forward.

Completion: The culminating point of this real estate development process is when construction
activities are done, and the building is completed. A certificate of occupancy is obtained and the
development is now ready for business. When the contractor finishes the construction work, the
property owner reviews the overall project and a formal hand-off occurs to turn the building over to the
owner or property manager. Once the building is opened up to clients, occupants, guests, and
customers, it can become a profit-generating asset for the owner.

Other Factors Required for Real Estate Development

The framework listed above shows the general flow of activities and tasks to take a commercial real
estate project from idea to realization. But this process obviously requires many other details and
factors that affect the success and outcome of each phase, such as:

Location evaluation
Site selection

Competition research

Due diligence

Feasibility studies

Municipality requirements

Budgeting and financial planning

Hiring the right contractors and team

Project communication

Construction phases, such as surveying, utilities, interior work, and more

Final inspections

The most important factor in the success of the project is ensuring that the right aspects are
implemented at the right time to support the overall success. If details are overlooked or delayed, it
typically costs both time and money since project completion is pushed back to accommodate
immediate needs. So, it’s easy to see why a good planning process is implemented at the start of the
project.

Building a Team of Pros for the Real Estate Development Process

Often, a range of industry professionals is utilized to support the process of identifying and developing
profitable commercial real estate opportunities. Participation might include:

Market analysts

Architects

Engineers

Attorneys
Site planners

Construction and environmental consultants

Lenders

General contractors and subcontractors

And more

Most investors show up to the table with money put into a project, but they lack the knowledge and
hands-on experience in the commercial real estate industry. Tapping into the skills offered by a variety
of industry experts will support the overall profitability and success of the investment.

A Real Estate Development Consulting Team You Can Trust

This framework is designed to be a guide to help you see the overall picture of what goes into the real
estate development process. In future articles, we will share more information about various aspects of
real estate development, including many crucial milestones and project evaluations that impact the
overall success of the project. The provided information not only helps you learn more about the
process required for real estate development, but will hopefully set you on a path to success with your
investments.

------

What Makes a Real Estate Development Successful?

by Ranah Asad Aug 8, 2018

Real estate development can be thought of as the basic foundation that holds together the real estate
industry. Real estate development is the process of buying land for building different real estate projects
(both commercial and residential). Real estate development is also responsible for financing real estate
deals and coordinating the process of property development from start to finish.
The big question is what makes a real estate development successful and what are the traits of a
successful real estate developer?

Let’s find out!

What is a real estate developer?

Real estate developers need to find property/land which they can plan to develop real estate projects
on. Their real estate projects may vary from commercial real estate to residential real estate. These two
categories include everything from retail, office and industrial development to single-family homes,
multi-family homes and buildings for apartment rentals.

A successful real estate developer can start out in many different fields. Some may start out as real
estate agents, while others may begin their career in construction. After some time, they may raise
enough capital to work with an urban or regional planner, architect, and builder to develop, build and
market a project, such as a new condominium development. Or after some time, they can take on
partners such as architects and financial asset managers who can assist them in developing their own
projects.

What does a real estate developer do?

Real estate developers are the seekers, the buyers, the owners and the managers for the whole project.
They are the ones who find and buy the land for the real estate development and prepare it for
construction. They are responsible for putting together a team of experts. This team may consist of
engineers, architects, and lawyers. Real estate developers have to prepare all the legal paperwork for
the real estate development. And they have to secure the financing for the overall project. It’s certainly
not an easy job but the money that real estate developers make is quite rewarding.

How much do real estate developers make?

One of the great ways to make money in real estate is through a real estate development career. Even
though there is no concrete figure as to how much real estate developers make, what we do know is
that they make more money than the other parties involved. So basically, they get the majority of the
profit because they do the majority of the work involved. Additionally, the profit a real estate developer
makes may exceed $ 1,000,000. Sounds good right?

You still have to keep in mind that there are many factors that influence the profit a real estate
developer makes. For example, the type of project may impact the amount of profit. Is it a shopping mall
or a residential apartment building? Another factor that influences how much a real estate developer
makes is the amount of money that the developer took from a bank in the form of a mortgage loan.
Also, you should always keep in mind that a single project might take several years before it’s finished
and the developer doesn’t get paid until the project is completed and sold.

What attributes make for a successful real estate developer?

1. Education

Getting an education or having a degree in real estate is highly recommended when wanting to become
a real estate developer. It will make the procedure for real estate development much easier and a lot
less risky. Why? Well, a real estate developer who has a real estate education will have more knowledge
of the different obstacles he/she might face while working in real estate development. A real estate
developer must have knowledge about the economy, the real estate market, building construction, and
finance prior to starting a real estate development.

2. Builds strong relationships

A successful real estate developer never underestimates the power of having strong relationships.
Developers need to build connections with lawyers, bankers, tenants, architects, engineers and general
contractors. They need to build these strong relationships with different professions in order to form a
successful team that will bring together a successful project.
To build strong relationships, a real estate developer must have excellent communication and
interpersonal skills. He/she must be diplomatic and have great leadership skills in order to build
relationships with others.

3. Creativity

Creativity is the key to a successful real estate development. Real estate projects do not come to life
from average performance but rather from immense creativity. Every real estate development project
starts off with an idea. The idea might be relevant to an ongoing project on a site or on a larger scale of
what a community needs. It is creativity that distinguishes one real estate developer from another. And
it is creativity that gave birth to the array of projects we see today like skyscrapers, green buildings and
other places where we currently work and live.

4. Tolerating risks

Risk tolerance is an important part of real estate development and an important attribute for successful
real estate developers. Not everyone has the courage to take risks and that’s because not everyone can
stand the possibility of things going not as planned. A successful real estate developer is one that can
measure and calculate risks. He/she should also be able to find ways to mitigate risks.

5. Problem solver

Of course with all the major duties that a real estate developer must accomplish, problems are bound to
happen. The trick is to understand that every problem has more than one solution. A successful real
estate developer should be able to deal with tight budgets, adjacent landlords, state authorities and
many other problems as well.

Tips on how to build a successful real estate development business

Get the right college degree: To get the first right job as a real estate developer, a college degree is
required. You can get a college degree in accounting, engineering, architect, urban planning or finance
to name a few.

Build your networks early: Build your networks early, either during college or once you enter this real
estate business. To build your networks, you can attend local real estate meetups or real estate
conferences. Your goal is to meet as many people as you can.

Get the right first job: As a beginner real estate developer, you want a first job that exposes you to the
maximum amount of development with the maximum possible learning speed. You can start by working
for companies that already develop different types of projects.

Get development internship: If you are having trouble finding a good job, then offer yourself up as an
intern for a small development company with the purpose of gaining real estate development
experience and knowledge.

Get a mentor: A mentor is great to have by your side throughout your real estate development career to
avoid pitfalls.

Give yourself plenty of time to build your career: A real estate development project takes time to
complete. That is why you shouldn’t rush to avoid making costly mistakes.

A final thought

Getting into the real estate development business is not an easy task. It takes a lot of knowledge and
experience to call yourself a successful real estate developer. But with the right sources, you can learn
everything you need to know about real estate development.

------

The Real Estate Development Process: Understanding the Risks and Milestones

Ian Formigle · May 05, 2016

Risk-Curve---Development

Real estate development is a multi-step process that can be complicated, lengthy and risky. It can take
years to bring a project from the initial planning stage through construction to final completion, and
there are plenty of obstacles that can pop up along the way. Yet development projects also can be highly
profitable investment opportunities. By definition, development projects provide the opportunity to
deliver a product that does not currently exist into a market, often providing the fresh new supply to
satisfy pent up market demand. When executed well, this aspect of a development project can translate
into a runaway success story, something that simply isn’t nearly as possible with an existing asset.
Investors can more confidently assess some of the risks associated with construction by better
understanding the “life cycle” of a development project.

Create an account to see the latest deals

Risk across project type and stage

Two factors can play a big role in the risk of a given project: the project type and stage. As shown in the
graph above, the project type can determine the steepness of the risk curve across the project life cycle.

An example of a project type with relatively low risk across all stages of the life cycle is a retail “build-to-
suit” project. In a retail build-to-suit, a developer secures a long-term credit tenant, such as a
McDonald’s or Walgreens, and develops a property to suit that tenant. For these types of projects,
construction risk is low because the buildings are fairly uniform, and leasing risk is almost non-existent
because the tenant is already identified and under lease with limited ability to terminate. There may be
some pre-development risk depending upon the regulatory hurdles, as described in the Pre-
Development section below.

At the opposite end of the spectrum, an example project type with relatively high risk across all stages is
called a “speculative” or “spec” project. In a spec industrial or office project, a developer may have few
or no leasing commitments before commencing construction. The developer justifies the project by
pointing to existing or projected demand for the property after completion. For speculative projects,
the leasing risk is high because there are no identified tenants at the outset, the construction risk can be
high if the project design is unique, and the pre-development risk can be high if financing is difficult to
obtain or regulatory hurdles abound.
As each step in a development project is completed, overall project risk incrementally abates. Early in
the cycle, there are more potential obstacles and unknowns. As a project nears the “shovel-ready”
construction stage, many of those potential obstacles have been addressed and resolved and there is
more certainty related to execution, costs, and schedule.

Below, we discuss items that are consistent across project types.

Early stage: Pre-Development

The early stage of a project focuses on due diligence, research and permitting. It is often the most
variable in duration. Investing at this stage carries the greatest and most varied risks because there are
many unknowns. Some of the common steps in this phase include:

Market analysis and feasibility studies

Land acquisition or securing option rights to purchase land

Environmental assessments

Surveys

Site plans, development plans, and building plans

Permitting

Some infrastructure improvements

Arranging construction financing

Because this stage is the riskiest, pre-development work is usually financed by the project sponsor or a
source of seed equity that might get taken out by the construction loan. Investments made during this
stage, therefore, provide for higher returns than those made during the later stages. One important
note for equity investors is that obtaining construction financing from a bank or other lender is a very
rigorous process, and if a developer already has a construction loan arranged, it usually means that a
number of major hurdles have been cleared.

Perhaps the greatest impediment to capital formation at this stage is the local jurisdiction permitting.
There are usually two distinct approvals required to begin construction: land use approval and building
approval.

A land use permit is a governing jurisdiction’s approval of the project on a conceptual level. Almost
every jurisdiction in the country, with the notable exception of Houston, Texas, has some form of land
use regulation, which provides a subject system of sorting and qualifying not only the proposed use of
land (retail, industrial, residential, etc.) but also the physical characteristics of the improvements (height,
density, setbacks, etc.).

The land use application process can delay a project for months or even years. For this reason, the land
use permit, while not the final approval for construction purposes, is often the greatest hurdle to
achieve project financing. Some items that might delay land use approval are:

Rezoning process

Appeals from neighbors or other interested parties

Disputes between the developer and the jurisdiction

An involved design process that requires multiple site plan iterations

By granting a building permit, a jurisdiction is approving a project on a technical level. A jurisdiction,
through its engineers, will review building plans to determine whether they meet certain safety
standards and conform to current building codes. The building permit application process is relatively
speedy compared to the land use process because is supposed to be based on objective criteria. For this
reason, it is less likely to delay fundraising. The building permit is generally the last milestone in the pre-
development stage.

Middle Stage: Construction

The middle stage involves constructing the improvements. Since the pre-development tasks have been
completed, the project risks at this stage are greatly reduced but certainly not eliminated. Some of the
common steps in this stage include:

Vertical construction

Project marketing

Drawing on construction financing

Pre-leasing

Arranging permanent financing (if not done during pre-development)

Arranging for the property manager (if not done during pre-development)

The project typically is financed at this stage by the sponsor, outside investors, and a short-term
construction loan. Often, the debt is distributed to the developer in increments called “draws” upon the
achievement of construction milestones. Investments and loans made during this stage generally
provide lower returns than pre-development investments but higher returns than those made for fully-
constructed or stabilized buildings.
The certificate of occupancy generally marks the end of the construction phase and allows for the
commencement of property operations. Like the building permit, it is based upon objective criteria
regarding construction quality and is a fairly administrative process.

Final Stage: Operation

The final stage of the development process, operation, is the first stage of the building’s life. While the
pre-development and construction risks may be removed by this point, obtaining tenants is still at risk.
Some activities during the final stage include:

Ongoing marketing and leasing

Finding a buyer, if not done earlier

Determining a hold strategy, if not selling

Ramping up property management

Achieving stabilization

The project is typically financed at this stage with construction financing or another round of short-term
“bridge” financing until the project reaches a threshold called “stabilization,” which is typically defined
as a certain occupancy level (perhaps 90% or better) for a certain duration (perhaps three consecutive
months). Upon stabilization, so-called “permanent” or long-term financing can be placed and used to
take out construction financing. Depending upon the amount of pre-leasing that was accomplished
during construction, this can be the least risky stage. For this reason, permanent loans and equity
investments will provide the lowest returns.

This snapshot view highlights the risk profile of development projects over time; however, many of the
same risks apply to the purchase or refinancing of an existing building, such as sponsor solvency and
expertise, economic conditions, and market factors also apply.
-----

Residential Real Estate Development

The central purpose of this article is to describe the research, procedures, steps, and processes involved
in successfully developing a vacant residential real estate parcel. The most typical real estate
development procedure may be outlined as follows:

Create the development idea

Control the vacant site or undeveloped land

Complete a preliminary market feasibility study

Have the preliminary plans and specifications drawn

Obtain a mortgage financing commitment

Cause the final market feasibility study to be completed

Complete the engineering final plans and specifications

Estimate the final total costs, direct and indirect

Complete a Discounted Cash Flow analysis of inflows and outflows

Analyze various risks associated with the proposed development

Begin actual construction of the streets, utilities, and lots

Marketing and Selling

The reader should realize that each of these development steps is interrelated. While they are listed in a
specific order, these steps cannot always be treated in this exact order or in isolation. For example, a
real estate developer may already own the land, and then proceed to determine its highest and best
use.

Development Idea

The real estate developer must have an idea, usually based on experience in the market place, or
intuition, about a residential real estate development that he/she believes the market demand for
exceeds market supply. For example, if the population and number of households in a local market are
growing, and the developer believes that he has an idea for a residential subdivision with innovative
amenities and attractions, and if the developer has a strong desire for creating that type of
development, then the developer should pursue the creation of that development. The two key factors
about having an idea for a real estate development are: (1) strong market demand for that type of
development or a market niche, and (2) a strong emotional and financial commitment by the developer
to create that type of residential development.

Purchase an Option on the Site

After the developer has a clear development idea in mind, he should review the number of available
appropriate sites in the market area. Hence, the first step in selecting the vacant site is to define the
market area. The market area could be a city, county, or a specific neighborhood in a city or county.
Obviously, the market area should be located in a high demand area, typically indicated by a growing
population and number of households. The development example used in this article will be a single-
family residential subdivision; however, the real estate development procedure would be similar for
various types of real estate developments.
Once the market area is clearly defined, with boundaries and limits, a simple way to locate available
potential sites is to tour the market area and review the listings of local real estate firms. Once potential
sites are located, the developer should select the optimum site based on location, access, topography,
zoning potential of highest and best use, and available utilities. When the optimum site is selected, the
developer should purchase an option on the land, or negotiate a contract for purchase subject to zoning,
final market feasibility, and specific financing terms and conditions. The key to negotiating an option
agreement on the land is to minimize the cost of controlling the site during the period of preliminary
market feasibility and arranging financing and zoning.

Preliminary Market Feasibility Study

When the developer has executed an option agreement or a contract to purchase the site, he/she must
complete a preliminary market feasibility study. An independent real estate expert usually completes it.
The study involves the research and analysis of demand based on population demographics and supply
based on an investigation of competing single-family residential developments in the market area. An
accurate preliminary analysis of demand is critical to the market feasibility of any proposed
development. For a proposed single-family subdivision, the number of existing households in the market
area should be estimated and the expected or forecasted growth of the number of households during
the next five years should be estimated. This data is readily available from local planning agencies, "Sales
and Marketing Management’s Survey of Current Buying Power" for counties and MSA areas in the
United States, and national demographic data services, like Claritas.

In addition to the number of existing and forecasted households in the market area, the annual income
distribution within the market area per household is important. Such information reveals the income
available for housing expenses, and hence, the likely price ranges of lots and homes in the proposed
subdivision

The data available annually from "Sales and Marketing Management’s Survey of Current Buying Power"
is categorized by states, counties, and metropolitan areas. The reported data includes current total
population and population by age groups, the number of households, total retail sales by store groups,
total and median effective buying income by percentage of households, and buying power index. The
"Survey of Current Buying Power" also includes five-year data projections for major urban areas by
counties; this data includes population, households, effective buying income, retail sales, and buying
power index. Household demand can be categorized by income levels, which can be used to estimate
the prices of lots and homes demanded. For example, if the market area is expected to increase by
2,400 households each year, and 25% of those households have incomes in the $50,000 to $75,000
range, house prices should range from $156,000 to $235,000. This analysis assumes that typical housing
costs are 25% of income, and a mortgage interest rate of 7% that is amortized over a 30-year term.

In addition to estimating the demand side, the market analyst must consider the existing and planned
competition for the proposed development in the market area. The analyst must tour the market area
to inspect the competing subdivisions in the trade area. The local planning authorities should be
contacted to discover any proposed subdivisions that have been approved for development. Then the
analyst must compare the total existing competing developments plus the proposed subdivision
developments with the forecasted demand for single-family lots and homes within the market area. If
the forecasted quantity of demand exceeds the projected quantity supplied, the preliminary market
feasibility study would indicate potential success for the proposed development. Of course, if the
existing competing developments that are available exceed the forecasted demand, then the developer
should not pursue the development of this new single-family subdivision.

Preliminary Plans and Specifications

If the market feasibility study indicates sufficient demand, the developer must contact an engineering
and/or architectural firm to draw preliminary plans and generate specifications for the subdivision
development. In the case of a single-family residential subdivision, the plans should include the road
layout, the preliminary lot designs (including the number of lots and typical size and frontage), the
layout of electric lines (either overhead or underground), the layout of the water lines, and the layout of
any sewer and drainage systems. Typically, the preliminary plans and specifications are sketches with
preliminary cost estimates. As a general rule of thumb, the cost of the development should be allocated
33% for the raw land or site cost, 33% for development costs, and 34% for profit to the developer.
Although many developers use these figures as a general rule, a discounted cash flow analysis should be
completed. This analysis will be discussed later in this article.

When the preliminary plans and specifications are completed, the developer should coordinate his plans
with the appropriate zoning and planning authority. If a zoning change is needed, it should be reviewed
and evaluated early in the development process.

Financing Commitment
After the preliminary plans and specifications are completed, the developer may apply for a
development mortgage loan. Because of the riskiness of such loans, the normal loan-to-value ratio may
be in the range of 60-66% of the total retail prices of the lots. The developer should shop for a
development loan as he/she would in shopping for a car or a home. He/she may contact many mortgage
lenders and actually present a loan submission to two or three lenders. The information furnished in the
loan submission should include the preliminary market feasibility study, the preliminary plans and
specifications, a description of the proposed development, the proposed mortgage loan terms and
conditions, a financial statement, and a resume showing the developer’s experience.

Typically, the development loan provides sufficient funds to pay for the site acquisition and the
development costs. The term of the loan would normally be a short-term loan, one to three years,
depending on the absorption forecast of lot sales. Because of the short term of the development loan,
the interest rate is usually fixed. The loan is repaid as a percentage of each lot sale, for example 50% to
75% of each lot sale would be deducted at each lot closing to repay the development loan as the lots are
sold. The mortgage lender will require that the development loan be repaid faster or more
proportionally than 100% of the lot sales. For example, the lender may want 100% payback within 75%
or 80% of the lot sales. This would, of course, require that the developer receive most of his/her profit
during the later stages of lot sales.

Final Market Feasibility Study

Once the developer receives a mortgage loan commitment, the developer should have the final market
feasibility study completed. This study should include a detailed analysis of the population
demographics including the number of households, income per household, typical expenditures per
household, and an estimate of housing costs by income levels per household, or housing expenditures
by income levels per household. The final market feasibility study should describe in detail all existing
and proposed, competing residential developments in the defined market area. It should also include an
informed estimate of lot absorption and prices, or how many lots are expected to be sold each month
and the suggested prices of those lots to fit with the supply and demand analysis.

Final Plans and Specifications

Concomitantly with the final market feasibility study, the developer should work with the engineering
firm to finish the final working drawings for the proposed subdivision development. This would include
final engineering drawings for the roads, exact legal descriptions of each lot, the plating and staking of
the lots, as well as any engineering drawings regarding earth moving, and utility layouts. These final
plans and specifications should be coordinated with the construction contractor and the appropriate
utility companies. Once the final market study and the final construction working plans and
specifications are completed, the developer can close the development loan, acquire the property, and
begin construction of the roads, utilities, and lots.

Cost Estimates

Cost estimates are categorized as direct and indirect costs. Direct costs are land acquisition costs,
engineering costs, construction costs, and marketing costs. Indirect costs include professional fees for
market feasibility analysis and appraisal, legal and accounting fees, and financing costs. Based on the
author’s development experiences, cost overruns can be disastrous to expected profits; hence,
development costs must be estimated accurately and include a contingency fund to pay for unexpected
additional costs.

Discounted Cash Flow Analysis

A Discounted Cash Flow analysis should be completed to calculate the present values of the cash
outflows and the present values of the cash inflows for financial purposes. An example of a Discounted
Cash Flow analysis for a residential subdivision appears below. The assumptions used in this example
are:

16% Discount Rate

48 Total Lots

6 Lot Sales per quarter

$36,000 Average Lot Price

$600,000 Development Costs ($12,500/Lot)

$500,000 Land Cost

$600,000 Loan Amount at 9% Interest & 50% Lot Releases

The discount rate of 16% is assumed in this example because of the relatively high risks in residential
development. The Cushman & Wakefield National Investor Survey (Spring, 1998) reported internal rates
of return expected by real estate investors to range from 12% to 13.8% for seasoned, income-producing
properties. The DCF shows the present value of the outflows to be $71,000, the present value of the
inflows to be $426,000, and the net present value to be $355,000. Under these assumptions, the
residential development example appears to be quite attractive.

Risk Analysis

The primary risk in developing a residential subdivision is the marketing risk, or the risk of selling six lots
per quarter at the average price per lot. Of course, there are additional risks: development costs
overruns, bad weather, increased interest rates, labor strikes, and others. However, given the
assumptions in the development example, the breakeven point is relatively low at 66% of lot sales, and
the net present value is attractive. (See below.)

If you have Excel on your computer, click here to download the above table as a spreadsheet.

Construction

All during the initial phases of the development, the developer should coordinate with a construction
contractor for the building of roads and installation of utilities. For marketing purposes, the developer
may want to build a single-family model home and some amenities. Frequently subdivision construction
is done in stages so that finished lots may come on line for sale as quickly as possible. Also, during
construction the developer will initiate advertising and other promotion to stimulate presale of some
lots. The developer may even sell packages of lots with favorable financing to local homebuilders so that
construction of speculative homes in the subdivision can begin promptly.

Marketing

The most critical stage of development is marketing and selling of the finished lots. Marketing includes
promotion, advertising, and sales. A marketing plan must be planned and implemented that meets the
sales goals based on the absorption and prices forecasted in the final market feasibility study. Promotion
activities may include announcements in local newspapers, radio, and television, locating directional
signs to the new subdivision, holding open houses, and creating brochures. Advertising can be classified
according to the most effective medium. It may be specific, name, or institutional advertising. The
advertising media should be selected based the results of the market feasibility study and it may include
billboards, newspaper, magazines, radio, television, home shows, or other appropriate media. The
developer should measure advertising results to insure the cost effectiveness of advertising
expenditures.

An employee sales person or a local real estate brokerage firm can conduct the sale of lots. In either
case, the sales commissions are a marginal expense and should be considered in the financial forecasts.

Conclusions

Real estate development can be very exciting, creative, and profitable. An experienced developer may
have the opportunity to borrow all of the development costs. However, there are real risks associated
with real estate development because risks and returns are directly related, and expected high returns
usually indicate high risks. Some common subdivision development risks are cost overruns, bad weather,
too few sales per month, lower prices, higher marketing costs, and labor strikes. Larger developments
that require large initial development costs and longer absorption periods are considerably more risky
than smaller developments. The trick is to sell lots much faster than interest accrues on the
development mortgage loan and before economic conditions change.

Some Readings in Real Estate Development

AIREA Research Series, Real Estate Market Analysis and Appraisal, (Research Report 3, Chicago, 1988).
Appraisal Institute, The Appraisal of Real Estate, 10th Edition, (Chicago: Appraisal Institute, 1992).

DeLisle and Sa-Aadu (Editors), Appraisal, Market Analysis, and Public Policy, (Boston: American Real
Estate Society, 1994).

Brueggeman and Fisher, Real Estate Finance and Investments, 9th Edition, (Homewood, IL: Irwin, 1993),
Chapters 17 and 18.

Clapp, Handbook for Real Estate Market Analysis, (Englewood, NJ: Prentice-Hall, 1987).

Downs, Principles of Real Estate Management, 13th Edition, (Chicago: Institute of Real Estate
Management, 1991).

Wurtzebach, Miles, and Cannon, Modern Real Estate, 5th Edition, (New York: John Wiley & Sons, 1994),
Chapters 24, 25, & 26.

-----

THE COMMERCIAL REAL ESTATE DEVELOPMENT PROCESS

TABLE OF CONTENTS

Site Selection and Deal Making

Site Selection and Evaluation

Due Diligence/Research

Site Investigation Reports/Feasibility Study

Municipality and Lender Required Reports

Preliminary Budgets Established (Proforma)

Purchase Contract Signed

Development and Entitlement

Hiring Architects, Engineers, and Consultants

Community Outreach and Communications

Municipality Submittal and Review

City Entitlement Process

Pre-Construction Coordination

Construction Drawings/Plan Submittal

Finalize Budget

Building Permits Approval

Close of Escrow

Construction and Tenant Turnover

Overall Construction Coordination

Pre-Construction Meeting

General Contractor Mobilization

Survey Staking

Earthwork

Pad/Foundation

Building Construction

Interior Work

On-Site Work
Off-Site Work

Inspections

Construction Close-out

Certificate of Occupancy

Tenant Move-in

Commercial real estate development is about taking ideas on paper and turning them into real property.
It’s a process that delivers a product in order to meet some form of consumer demand. But the
development process is intricate.

Real estate development involves participation from a wide variety of professionals, including:
architects, landscape architects, civil engineers, site planners, attorneys, environmental consultants,
surveyors, title companies, lenders, architects, general contractors, and subcontractors, amongst a
variety of others.

The commercial real estate development process is broadly broken out into three stages:

Site-Selection-Process__horizontal

Site Selection and Deal Making

The initial phase of commercial real estate development involves a tremendous amount of research and
analysis to determine if a proposed development is truly viable. A successful retail site must meet
market demand, satisfy tenant requirements, satisfy lending conditions and regulatory requirements,
and must accommodate the consumer.

Site Selection and Evaluation

Using multiple sources of information, commercial real estate developers look at all available properties
within a designated trade area that meet basic site requirements. Some of the most important factors
that go into determining the right site are:

Property size

Visibility

Traffic flow

Demographics

Zoning Restrictions

Surrounding Infrastructure

Potential Access Points

Competitors (and their performance)

Nearby tenants (and their sales data)

And there are a whole host of additional factors that play into finding the right property to fit the client’s
needs.

And another one of those important factors is the cost basis. Which site provides the developer, and/or
the client potentially lower construction costs and a greater investment opportunity?

Back to Top

Due Diligence/Research

In this phase of the commercial real estate development process, steps are taken in order to satisfy legal
requirements and ascertain the risks and advantages of the transaction. As a prospective buyer,
developers must thoroughly examine zoning restrictions, potentials liens, and possible encroachments
on the property.
The developer must ask themselves if the assumptions about the proposed development (legal, physical,
economic, market) are valid or have they been verified?

You have to find out what kind of requirements are needed in order to develop the property? You’ll also
want to determine what kind of offsite work you may be dealing with. Is the zoning in the area you’re
looking at going to be an allowed use? If the property needs to be rezoned or requires a variance, what’s
that process? There are a number of questions you’ll want to get answered about potential sites.

And getting this information generally involves reaching out to municipal planning departments.

It’s important to remember that no two municipalities are the same, so initial engagement with planning
departments will provide a sense of how pro-development the county might be.

Once you have the adequate information and have a specific site selected, that’s when you really dive
into the process. Working with the municipal/city planner, you’ll establish that for a specific site, you
plan to build for a specific user. This will give the city an idea of what your general development plans
are.

Once your site has been preliminary reviewed and selected, you’ll move forward with creating a site
plan. Doing this allows you to visually address if this project can actually work. Can you meet setbacks?
Can you meet parking requirements? These are just a couple of the questions you’ll be able to address
once the site plan has been created.

Back to Top

Site Investigation Reports (SIR) / Feasibility Study

Site Investigation Reports are a collection of data/questions assessing the potential issues with the site,
or what needs to be done in order to meet all requirements. These include requirements for:

Parcel Land Use and Zoning

Engineering

Building Permits

Fire Department Requirements

Building Setbacks

Parking Setbacks and Requirements

Landscape Setbacks

Lighting Ordinance

Signage Requirements

Access and DOT requirements

Off-site/Public Improvements

Utilities

Water

Sewer

Storm Drainage

Power

Gas

Phone/Cable

The goal of this data is to place emphasis on potential problems that could occur if a project is pursued.

A thorough examination will provide the developer with some confidence that the project is feasible and
has the potential to be profitable. Essentially the study asks, do the anticipated future benefits exceed
the expected future costs of the proposed commercial real estate development.
Some of the major financial factors to look at include:

Land Purchase & Acquisition Costs

Finance Costs

Professional Fees

Utility Connection Fees

Impact Fees

Permit and Review Fees

Construction Costs

Insurances

Closing Costs

Income & Profit

Back to Top

Municipality and Lender Required Reports

Site evaluation will also involve obtaining official reports denoting some of the physical and
environmental aspects and potential hazards on or associated with the site.

Phase 1 (Environmental Study)

The Environmental Site Assessment Phase 1 (ESA Phase 1) is an environmental due diligence report
prepared for real estate transactions such as land purchases and building purchases.
The main purpose of this report is to ensure there is no soil or groundwater contamination from
previous use or neighboring sites. Any contamination in these reports may impact the property’s value
or limit its use.

Geotechnical Study (Soil Study)

The goal of this study is to obtain information about the soil consistency and the geological structure of
the property. It may uncover certain characteristics of that site that would add costs to the project, and
the report will provide certain recommendations for the development project site.

In the case of a geotechnical study for a development project, the following are important areas of
examination:

Footprint of the building

Land area on which the building will be located

Land slope

Land closeness to water (lake, stream, river)

Geographical location where the building will be located

Survey

A property survey is a legal document that shows the location of all improvements relative to a
commercial property's boundaries. It depicts the boundaries and descriptions of the property
easements, rights-of-way, and encroachments found on the site.

This report generally contains an illustration of the physical features of the property and a written report
detailing the surveyor's opinions and concerns.

Back to Top
Preliminary Budgets Established (Proforma)

A preliminary budget, or proforma analysis calculates the projected financial return that the proposed
commercial real estate development is likely to create. It begins by laying out the proposed project in
quantifiable terms.

By sending site analysis and plans to consultants, contractors, our Director of Construction, and
Development team, we are able to get input on the site and determine what specifics are needed for
the project, estimated costs for particular improvements, consultant fees, etc.

All of that goes into creating a rough estimate of revenues that are likely to be earned, costs that will be
incurred, and ultimately the financial return the commercial real estate developer will likely see.

Back to Top

Purchase Contract Signed

development-plans_horizontal

Development and Entitlement

Once your site plans are created, due diligence research has been done, and purchase contract signed,
it’s time to get down to the development details. This next phase focuses on critical sign-offs and
approvals required for the newly proposed commercial real estate developments to come to life
through municipality approval.
Hiring Architects, Engineers, and Consultants

Getting a commercial development off the ground often starts with bringing in a number of consultants
including architects and civil engineers. Their role is to ensure the most viable development plans and
processes are going to be put into place, resulting in a successful and under budget development
project.

Architects

The goal of the architect is to draw up an initial concept scheme, and a good architect will ultimately add
considerable value to your project by designing a project that is functional for the tenant and appealing
to the marketplace and neighborhood it’s located in.

Landscape Architect

The landscape architect’s job is to design municipality required landscaping around the site plan. This
typically means natural plants and trees to offer shade and a natural aesthetic appeal.

Mechanical, Plumbing, Electrical Engineer

These engineers ensure the HVAC is designed adequately for conditions, plumbing is meeting the correct
connections and draining properly, and electrical wiring is properly placed in needed areas to meet
building codes.

Structural Engineer

Structural engineers work with architects to factor in the weight and loads of construction materials on
the ground they sit on. This is to ensure the building will support itself and not sink into the ground.
Their main goal is to develop a structural design that is both functional and cost effective.

Civil Engineer
A civil engineer is used to identify many of the technical issues relating to the civil design of project
elements. Storm drainage, parking lot and sidewalk design, driveway connections, and conforming to
grade requirements are managed by civil engineers. Factors such as topography, environmental issues,
or utilities play major roles in how sites are laid out and designed. The engineer's explanation of these
issues may result in a different development strategy for the property — one that provides a better
project at a lower cost.

Back to Top

Community Outreach and Communications

The commercial real estate development process is one that not only involves active parties, but
impacts the surrounding communities and businesses as well. The goal of community outreach during
commercial development is to keep a projects neighbors informed of the proposed development plans,
including benefits, potential rezoning, community impact, etc. The ultimate goal is to inform and
hopefully improve community sentiment for the project’s approval while taking consideration for their
input.

Back to Top

New call-to-action

Municipality Submittal and Review

In order for projects to become realities, they must first get the approval of the appropriate municipal
and government entities. Submittal and review often entails the following:

Zoning Review
Zoning review is meant to ensure the compliance with standards and provisions set by each
municipality, while encouraging quality development. It’s intended to encourage the most appropriate
use of the land, enhance aesthetic value, and facilitate adequate provision of transportation, schools,
parks, and other public requirements.

Site Plan Review

A detailed site plan is submitted, along with associated documents to particular government
departments, agencies, utility companies, etc. for review and initial comments. The purpose of the
review is to address how the particular development is designed and to address any issues related to
public safety, water supply, sewage disposal, utilities, traffic, emergency access, public obstructions, and
a variety of other elements.

Design Review

Provide architectural building elevations, landscape plans, and drawings related to design principles and
meeting the aesthetic requirements.

Once the site plan and design are approved during design review process, you are generally allowed to
submit construction drawings for review by the building department.

Back to Top

City Entitlement Process

Before a project can commence, you must be granted permission from local regulatory agencies and the
community. It is crucial to be prepared for this stage of the development process, as you may be asked
many questions from city planners, local residents, and government leaders.

Examples of Entitlement can be:

Rezoning

Zoning Variances

Use permits

Utility approvals

Road approvals

Landscaping

City Council or City Planning Commission Approval

Oftentimes, new commercial development must first receive approval from city council, city planning
commission, or some municipal body. Working with, and gaining approval from the city’s planning
department generally allows for a planning commission or city council to approve the project at a formal
public hearing. However, not all projects need the official approval of a city council or planning
commission.

Public Hearing

A public hearing will take place for local property owners and residents, in order to hear feedback on the
proposed commercial development. Any individual or community group including a neighborhood
council has the right to speak on the proposed project.

Back to Top

Pre-Construction Coordination

In the preparation for the commercial construction process, commercial developers will dive into
handling construction bids. Based on the proposed scope of work, general contractors will prepare and
submit estimate bids of the project cost and schedule for completion.
Through this process, developers are not only able to narrow down the search for general contractors,
but also apply the estimates towards finalizing the budget.

Back to Top

Construction Drawings/Building Plan Submittal

Once a project receives approval from the city planning commission or city council, you move into
construction drawing/building plan submittal with the building department.

The municipality will then review the plan for compliance with the approved preliminary site plan,
project conditions of approval, the required building plan checklist, and all applicable codes and
ordinances. The site planner reviews the site plan for final approval with the building plans.

Back to Top

Finalize Budget

As the project works its way through the entitlement and approval process, a commercial real estate
developer will begin to get a much better sense of what cost and timing is required to construct the
project successfully.
Some important keys to successfully budgeting are: familiarizing yourself with all relevant government
building codes; understanding which line items are necessary and which are flexible; accounting for
hidden costs; and being flexible with your budget.

Creating a final budget takes into account factors such as:

Permits

Site preparation

Insurance

Construction costs (both hard and soft)

Back to Top

Building Permits Approval/Issuance

Once plans have been reviewed during the usual rounds of the review process, and determined to be in
compliance with the city/municipality codes, building permits are then issued. These permits give the
developer authority to start construction work and allows for appropriate inspections to be performed.

Back to Top

Close of Escrow
This is essentially the final step in the execution of the initial real estate purchase transaction. A title
company or other trusted party will transfer funds and the deed of trust to the involved parties.

For some commercial real estate developers, this step in the process may come at a different stage.
Some developers may prefer to close on a property once all of the permits and approvals are in place,
while others may actually close before the final permitting process.

Getting a property fully approved, entitled, and closing on the land requires time, experience,
relationships, and persistence. But once the project has been given approval and is entitled, it’s ready
for contractors and builders to bring the commercial development to life.

Back to Top

construction_horizontal

Construction and Tenant Turnover

Now that your development plans have been submitted and approved, your permits issued, and you’ve
closed on the property, it’s time to start building. This is where the contractors and builders will bring
the commercial development to life.

Overall Construction Coordination

As a commercial real estate developer, the construction aspect of the project revolves around managing
and coordinating the construction stage, as opposed to actually constructing the building. Working with
general contractors and subcontractors, the overall construction coordination often consists of:
Weekly Construction Calls and Reports

As a way to stay in direct contact with general contractors, a developer’s construction department will
generally take part in weekly update calls. These status updates focus on the overall progress of the
development, while going over upcoming schedules and time frames. Additionally, the calls will address
any major issues that may hinder the timely completion of the project.

In addition to the weekly construction calls, written progress reports are submitted by the general
contractors to the developer in order to address the project status, schedules, etc.

Handling RFIs from Contractors and Architects

During the construction phase, commercial developers are also responsible for managing Requests for
Information (RFIs). These requests often come in because not all construction documents may address
every single matter of the construction process.

These requests are issued in order to help contractors get clarification on project details or ask for a
decision to be made on particular elements.

Back to Top

Pre-Construction Meeting

Before any digging or hammering, it’s important that the developer, general contractor, subcontractors,
architects, and other involved parties are on the same page about the overall construction plan and the
expectations.

These meetings should be used to:

Establish the appropriate roles and responsibilities

Determine special project needs and requirements

Establish quality expectations

Define problem-solving measures

Develop a schedule of project meetings

Address questions and concerns about the construction phase of the project

The plans and guidelines that are discussed and laid out in the pre-construction meeting will help you
navigate issues down the road and ensure you’re on course for a successful project.

Back to Top

General Contractor Mobilization

Generally, the first step in beginning the actual construction of the commercial project is mobilizing
crews to the site. This entails organizing and planning to get contractors, equipment, and materials to
the site in order to start work.

At this same time, permits are typically pulled for the property, including building, electrical, plumbing,
mechanical, etc.

Back to Top
Survey Staking

Once you’re ready for your plans to become a reality, survey staking is one of the first steps you will
take.

This is the process of taking a planned development and physically mapping it out on the site. Generally
staking is used to represent the property lines, inner and outer walls of the building, the storm and
drainage flow, and concrete features such as driveways, sidewalks, and curbs.

During staking, you’ll also likely take soil samples from the site. A soil engineer will test to ensure the
subsurface soil conditions match the conditions of the initial investigation, and may modify design
recommendations as necessary.

Back to Top

Earthwork

This is the stage in which the actual ground on which the new development will sit begins to take form
to adequately construct the new building. Earthwork in excavation and backfilling of soil up to required
depth is required for the construction of the foundation and trenches.

Earthwork can involve steps including:

Importing and exporting of soil

Soil stabilization

Construction grading
Compaction and density testing

These are the main steps in preparing the site for proper and safe building construction.

Back to Top

Pad/Foundation

Once proper earthwork has been completed and the ground is set, the construction process will move
into setting the building’s foundation.

The initial step is to excavate for the building’s footings – elements that are put into place in order to
ensure a stable base that will support the future load bearing foundation walls. Taking into account the
composition of the surrounding soil, you’ll excavate a trench in order to set the building’s footings.

From there, crews will dive into laying the forms, setting rebar, and pouring the foundation for the
building. The foundation is designed to provide support for the entire structure.

Back to Top

Building Construction

The building construction is when the property you envision begins to take form as you add structure to
your property. Frames, walls, roofs, and all of the major components of building the “bones’ of a
commercial real estate development. Some of the major work involves:
Site Utilities

Site utility work includes preparing the property to connect to public utilities. These including water,
sewer, electric, and gas.

Framing

Framing consists of creating the broad pieces that will give support and shape to the building. This may
involve either a wood frame, structural steel, or concrete.

Roofing

Depending on the type of roof, this may involve elements such as building out the rafters, ceiling joists,
trusses, insulation, structural deck, and the appropriate roof covering.

HVAC

Involves preparing the installation site by setting either setting a pad or installing a rooftop support
structure. The ductwork and electrical is also prepared for interior connection.

Back to Top

Interior Work

The interior work that goes into a new commercial development involves many of the details that
customers and occupants will see and deal with on a daily basis. The interior work is what takes the
building from being a bare shell, to a habitable development. There are a lot of minor details that go
into this step of the development process, but the major interior work that’s performed is:
Interior Electrical

Ductwork

Insulation

Drywall

Flooring

Ceiling

Doors and Hardware

Painting

Fixtures

Back to Top

On-site Work

Beside the construction of the building itself, work must be done on the surrounding property in order
to make for a complete, well-rounded commercial development. Some of that on-site work includes:

Site Grading

This is the process of distributing dirt in a strategic way to ensure the proper water runoff and to
prepare the site for additional work, such as paving and landscaping.

Paving and Striping Parking

Once the site is properly graded, you can move forward with paving the parking area. The parking area
should be smooth, contain a level, compacted base, and have proper drainage. Then, upon proper
paving, the lot can be striped.
Landscaping

This involves installing irrigation, planting decorative or shade trees, bushes, flowers, gravel, or any
other elements that add to the visual appeal of the property.

Back to Top

Off-site Work

Refers to work outside of the property site that is meant to support the new development. This includes
infrastructure such as access roads, sidewalks and curbs, and other supplemental utility work.

Back to Top

Inspections

Upon completion of each project, inspections must take place to ensure that the major elements meet
all municipal codes and ordinances. While periodic inspections take place during the construction phase,
final inspections must be performed to assure that the buildings are safe for occupancy. Elements
inspected include:

Structural and Building envelope

Roof surface

Plumbing
Electrical

HVAC

Fire/Safety

Interior Elements

Back to Top

Construction Close-out

The close-out of a project typically involves developing a detailed schedule of duties including punch
lists, equipment testing, start up procedures, and occupancy. Close-out may also involve gathering and
retaining critical records and documentation for the project, in case there are any questions or issues to
be addressed after project completion.

The close-out process addresses everything from the work performed by contractors to returning of
rented equipment. It’s to ensure that your new development is more than prepared to be turned over
to the tenant.

Punchlist

The construction punchlist is used to address any unresolved tasks or issues before final occupancy. It’s
used as a control measure to ensure the quality standards of the developer and future tenant are met.

The punchlist usually includes a plan for completion of items including any minor repairs to finishes,
cleanup, or any outstanding installations.

Back to Top
Certificate of Occupancy

Once the project meets all of the final inspections, codes, and ordinances, the appropriate municipal
agency will issue a Certificate of Occupancy for the property.

Issuance certifies that the property is suitable for occupancy by the proposed user, or type of user, and
that the building complies with the plans and specifications that were initially submitted and approved.

Tenant Move-in

The “final step” in the commercial real estate development process: tenant move-in. As it implies, this
means the property is prepared for the tenant to set up shop and eventually open for business. The
project has officially gone from conceptualization to construction to handing over the keys.

-----

Real Estate Analysis

Market and Financial Analysis

Our market analysis work includes residential, office, retail, industrial, recreation uses (e.g. golf course,
marina), and cultural/tourism uses (e.g. convention facilities, hotel, museums, arts facilities). The scope
of our market studies can include:
Current market conditions.

Future absorption and supply.

Target market definition.

Competitive context for development proposals.

Development timing and phasing.

Selling prices or lease rates.

Marketing strategies.

Design implications.

Our financial analysis work can include:

Revenue and cost analysis (pro formas) to determine project feasibility.

Financial modeling for sensitivity testing.

Complex modeling for large, multi-year projects.

Residual land analysis.

Highest and Best Use Studies

Property valuations depend on assumptions about highest and best use (the use that is legal, physically
possible, financially feasible, marketable, and generates the highest land value). Because of our
combined expertise in urban planning, market analysis, and financial feasibility analysis, we are often
asked to participate in complex valuations by providing opinions about development potential and
highest and best use.

Impact Assessment

We can apply our market and financial analysis expertise to evaluate the potential impacts of proposed
developments. Our impact analysis work includes:
Retail market impacts of proposed major retail developments.

Impact of new residential development on rental housing markets.

Impacts of land use transitions, particularly from industrial to more intensive use.

Peer review of impact studies prepared by others.

Potential for new development to stimulate revitalization of commercial areas.

------

Real estate development

Real estate development, or property development, is a business process, encompassing activities that
range from the renovation and re-lease of existing buildings to the purchase of raw land and the sale of
developed land or parcels to others. Real estate developers are the people and companies who
coordinate all of these activities, converting ideas from paper to real property.[1] Real estate
development is different from construction or housebuilding, although many developers also manage
the construction process or engage in housebuilding.

The Solidere development of the Beirut seafront and harbor

In the Netherlands, virtually all housing is developed and built through property developers, including
development in upmarket segments.

Developers buy land, finance real estate deals, build or have builders build projects, create, imagine,
control, and orchestrate the process of development from the beginning to end.[2] Developers usually
take the greatest risk in the creation or renovation of real estate and receive the greatest rewards.
Typically, developers purchase a tract of land, determine the marketing of the property, develop the
building program and design, obtain the necessary public approval and financing, build the structures,
and rent out, manage, and ultimately sell it.[1]

Sometimes property developers will only undertake part of the process. For example, some developers
source a property and get the plans and permits approved before selling the property with the plans and
permits to a builder at a premium price. Alternatively, a developer that is also a builder may purchase a
property with the plans and permits in place so that they do not have the risk of failing to obtain
planning approval and can start construction on the development immediately.

Developers work with many different counterparts along each step of this process, including architects,
city planners, engineers, surveyors, inspectors, contractors, lawyers, leasing agents, etc. In the Town and
Country Planning context in the United Kingdom, 'development' is defined in the Town and Country
Planning Act 1990 s55.

Credentials Edit

Many aspects of the real estate development process require local or state licensing, such as acting as a
real estate broker or sales agent. A real estate developer is not a professional designation; there are no
schools or associations who recognize or protect the term as a trademark.[citation needed]

Paths for entering the development field Edit

Main article: Real estate development education

No single path automatically leads to success in real estate development. Developers come from a
variety of disciplines— construction, urban planning, lending, architecture, law and accounting, among
others. Recent specialized programs that award a Master of Real Estate Development (MRED) degree
are also available. The graduate programs in real estate development are the most comprehensive
education in the real estate industry. Other formal education includes a Master of Science in Real Estate
(MSRE), or an MBA.

Organizing for development Edit

A development team can be put together in one of several ways. At one extreme, a large company
might include many services, from architecture to engineering. At the other end of the spectrum, a
development company might consist of one principal and a few staff who hire or contract with other
companies and professionals for each service as needed.
Assembling a team of professionals to address the environmental, economic, private, physical and
political issues inherent in a complex development project is critical. A developer's success depends on
the ability to coordinate and lead the completion of a series of interrelated activities efficiently and at
the appropriate time.[3]

Development process requires skills of many professionals: architects, landscape architects, civil
engineers and site planners to address project design; market consultants to determine demand and a
project's economics; attorneys to handle agreements and government approvals; environmental
consultants and soils engineers to analyze a site's physical limitations and environmental impacts;
surveyors and title companies to provide legal descriptions of a property; and lenders to provide
financing. The general contractor of the project hires subcontractors to put the architectural plans into
action.

Land development Edit

Further information: Land development

Purchasing unused land for a potential development is sometimes called speculative development.

Subdivision of land is the principal mechanism by which communities are developed. Technically,
subdivision describes the legal and physical steps a developer must take to convert raw land into
developed land. Subdivision is a vital part of a community's growth, determining its appearance, the mix
of its land uses, and its infrastructure, including roads, drainage systems, water, sewerage, and public
utilities.

Land development can pose the most risk, but can also be the most profitable technique as it is
dependent on the public sector for approvals and infrastructure and because it involves a long
investment period with no positive cash flow.

After subdivision is complete, the developer usually markets the land to a home builder or other end
user, for such uses as a warehouse or shopping center. In any case, use of spatial intelligence tools
mitigate the risk of these developers by modeling the population trends and demographic make-up of
the sort of customers a home builder or retailer would like to have surrounding their new development.
[4]
------

Real Estate Development Feasibility Analysis Guide

OVERVIEW

As an entrepreneurial real estate developer, you will be presented with numerous development project
opportunities. Many of the projects will not be a fit and can be quickly dismissed. A few will warrant
further study and perhaps result in an offer to purchase. Of those where offers are extended, a couple
will result in an executed Purchase and Sale Agreement.

This guide covers the pre-development due diligence required for projects under serious consideration.
When we say serious consideration, we mean the period from the time you begin contemplating an
offer on a development site to the time you decide to go “hard.”

A WORD ON PREDEVELOPMENT CAPITAL

Having capital to pay for predevelopment costs, including the costs of detailed due diligence, is what
separates developers from the “wannabes”.

Tying up a development site and conducting the necessary due diligence requires an investment of time
and money. The money required may be several thousand to tens of thousands of dollars, depending on
the size and complexity of the project.

Money invested at the outset of a project is high-risk capital. This kind of money is difficult to raise from
outside sources and invariably comes out of the developer’s pocket.

SITE ANALYSIS – CAN I BUILD MY PROJECT/WHAT ISSUES WILL NEED TO BE RESOLVED?

The Desirability of the Location and Surrounding Neighborhood. Typically, location considerations are
addressed early in the process. The desirability of the site is presumably what attracted the developer
initially.

Some of the key factors to be considered when assessing a site’s location include:

The site’s place within the regional or metropolitan landscape. Is the site located in an up and coming
area of town, a wealthy enclave, or an underserved community?

The site’s location within the specific neighborhood/ area of town. Is it a “Main & Main” location or a
little off of the beaten path?

The immediate area/neighborhood surrounding the site. Consider neighboring property uses, the
condition of the surrounding buildings and properties, street conditions, and nearby parks and
architectural features.

Street location. Is the site on a busy corner, the going-to-work or going-home side of the street? Is the
site visible and easily accessible?

Title and Survey. Reviewing title and the survey will confirm the legal existence of the site and illuminate
restrictions on the use and development of the site.

Typical title and survey pick up encumbrances, encroachments, easements and other rights of third
parties in or to a property. Contractual restrictions on use and development such as CC&Rs will be
reflected (although not necessarily in detail), but land use type restrictions may not show up of record

An ALTA survey confirms the property’s location and boundaries. It also indicates the location of any
easements and rights of way of record or evident from an inspection of the property, the existing
improvements, any encroachments, and above-ground (and sometimes below-ground) utilities.
Zoning and Entitlements. Each governmental authority (city, county, municipality, commission, district)
with jurisdiction over the property and from which a development approval must be sought will have its
own approval process and disposition toward to new development projects. Understanding the land-use
landscape and process is critical.

What can be built as of right on a development site can be determined by reviewing the applicable
current Zoning Code, General Plan, Specific Plans, other land-use regulations, and the site’s existing
entitlements. In most cases, the developer will not be building an as-of-right project and will need the
appropriate governmental authorities to approve the specifics of the developer’s project.

Whether or not a project is an as-of-right project or requires additional entitlements, an experienced

local land-use attorney will be needed to understand the approval process, timeline, costs, roadblocks,
and the likelihood of success. Project approvals from development friendly cities may take less than a
year and require a modest outlay of fees and costs. In large cities with challenging entitlement
environments like Los Angeles, projects can take years to receive necessary entitlements and
entitlement costs can run into the millions.

Environmental Review. Environmental due diligence is an assessment of the environmental risks and
liabilities associated with a site, the process and costs of undertaking any required compliance and
remediation work, and any permitting requirements. The environmental issues one may encounter
depend on the type of project contemplated and location of the site and can include concerns related to
underground storage tanks, hazardous substances, wastewater discharge, air emissions, water supply,
wetlands, threatened and endangered species, and asbestos removal.

Utilities. It is critical to understand the availability of and costs associated with bringing utilities to a
development site. Items to consider include determining the location of existing utilities and utility
easements; the entities and districts providing service to the site; the capacity of existing utilities to
serve the new development; and the cost of tap and connection fees that may be charged to the new
development.

Additional Considerations. Other due diligence items that can be very important include floodplains,
topography, cultural and historic preservation, geotechnical, water table, drainage, seismic activity, and
traffic studies and drive times.
Site Analysis – Key Documents and Professionals

Below is a short list of some of the key professionals and resources that should be consulted when
performing a Site Analysis.

Professionals

Attorneys

Engineers

Environmental Consultant

Surveyor

Title Insurance Company

Resources

Phase I ESA

Phase II ESA

Traffic Study

Geotechnical Survey

Topography Map

Aerial Map

Floodplain Maps

Wetlands Maps

Zoning and Planning Laws and Regulations

The NAHB provides a good checklist of site-related due diligence considerations.

MARKET ANALYSIS – WHO IS THE TARGET MARKET, WILL THE PROJECT WORK AT THIS LOCATION, HOW
WILL THE PROJECT RENT/LEASE/SELL FOR?

Are there enough buyers and renters who will buy or lease your project at the price point you will be
charging? Below are some of the key parameters in a market study.

Population and Demographics. Population and demographic data provide an understanding of the
people who live in and around proposed project — how the population has grown and changed in the
past and how demographers expect the population to evolve in the future. The data also is critical to
understanding whether the target market for the project exists in sufficient numbers to support the
project, be it buyers, renters, shoppers, or workers.

Local Economy. A strong and growing local economy often is the foundation for successful real estate
development. Key components to consider in assessing the local economy include:

Regional economic output and growth

Comparison of economic data with similar regions

Business and political climate

Entrepreneurial activity

Population size and growth

Composition of the civilian labor force

Employment growth
Total employment and the unemployment rate

Education levels

Industrial diversity

Largest employers

Cost of living

Household income

Market Amenities and Attributes. What is available in the surrounding area that benefits or hurts the
desirability of a site? Positives can include parks, shopping, walkable work/live environments,
employment opportunities, public transportation, quality education, and entertainment and dining
options. Negatives can include traffic congestion, a high cost of living, lack of entertainment and dining
amenities, pollution, poor schools, high crime rates, a poor economy, and declining property values.

Competitive and Comparable Projects. Are there similar projects in the area? How have they performed
and how will they affect the success of the proposed development? Further, what other projects are on
the drawing boards? Are there projects currently in planning or development aimed at a similar target
market?

Supply and Demand-Competition. When the development project comes to market, will there be
sufficient demand at projected pricing? This analysis includes a mixture of demographic, economic and
real estate specific market forces. Below are a number of factors that should be taken into
considerations:
Key demographic and economic factor

Current supply of similar products

Supply growth

The development cycle

Rental rates/selling prices of comparable properties

Absorption and vacancy of comparable projects

Competitive projects on the board or currently being developed

How the proposed project can be distinguished from comparable properties.

Market Analysis – Key Documents and Professionals

Below is a short list of some of the key professionals and resources that should be consulted when
performing a Market Analysis.

Professionals

Marketing professionals

Real estate brokers

Demographers
Resources

Federal, state and local government data (census, building permits, economic/labor)

Third party demographic data

Local maps

Broker site package

Comparable analysis

FINANCIAL ANALYSIS – HOW WILL THE PROJECT BE FINANCED AND WILL IT GENERATE THE REQUISITE
RETURN?

Development Budget. Early in the due diligence process, a development budget will need to be created.
This budget, which will be modified many times as the project crystalizes, will be based at the outset on
a ton of educated guesswork and assumptions, prior experience, and third-party input. To create the
budget a broad outline of the project, a preliminary developmental timeline, and assumptions regarding
various cost and line items will be needed.

Financial Structure. How the project will be financed, including debt structure (leverage, costs, interest
rate, and terms) and equity assumptions, including desired rates of return.

Pro Forma. The project pro forma will need to be created, combining the development budget, timeline,
and financial structure. The pro forma will give a first indication of the profit and returns that might be
expected from a project. At this stage, the pro forma should look really good. It is almost always the case
that projects will take longer and cost more than anticipated. If the project looks tight financially at the
outset, the project business plan likely needs to be reconsidered.

Financial Analysis – Key Documents and Professionals

Below is a short list of some of the key professionals and resources that should be consulted when
performing a Financial Analysis:
Professionals

Attorneys

Architect

Engineer

Project managers

Contractor

Mortgage Bankers

Lenders

Equity sources

Placement agents

Resources

Proprietary and third-party construction cost data

Site plan

Development timeline

Conceptual plans and drawings

Zoning Codes

------

Pro-Forma 101: Part 1 – Getting Familiar With a Basic Tool of Real Estate Analysis

by Wayne Lemmon
As a planning commissioner I’m sure you’re used to rolling up your sleeves and getting to work when
your board meets. I urge you to take the same attitude in working your way through this lengthy, but
highly rewarding, article. Don’t be put off by all the numbers and calculations. If you take the time, you’ll
learn a lot — especially if, like many citizen planners, you’re not very familiar with the world of real
estate development.

You can also take a look at a conversation I had with Wayne about his article.

Planning commissioners frequently find themselves wishing they knew more about how real estate
development really works in terms of dollars and cents.

If members of the board had a better appreciation for the push and pull of costs and income, time and
risk, and how changing one factor can affect a whole domino chain of other factors, the entire process of
real estate development would be more understandable.

viewing plans on a construction siteTo achieve a minimum level of “literacy” about the economics of
development requires at least a navigational knowledge of the basic tool of real estate feasibility
analysis — the proforma.

A proforma analysis is a set of calculations that projects the financial return that a proposed real estate
development is likely to create. It begins by describing the proposed project in quantifiable terms. It
then estimates revenues that are likely to be obtained, the costs that will have to be incurred, and the
net financial return that the developer expects to achieve.

The proforma is the basic “go / no-go” analysis that developers use to decide on whether to move
forward with a project. There are few “absolutes” as to how such analyses can be constructed, but there
are common practices and techniques that nearly all proformas attempt to provide in one form or
another.

By way of a basic introduction to this subject, I have created a simple case study proforma analysis for a
hypothetical residential subdivision. Figure 1 shows a simplified summary table from this generic case
study. We’ll use this as a guide throughout the article as we consider some of the challenges developers
face in putting a project together — and how several key variables can affect the overall success of the
project.
Figure 1 chart for pro forma article

What is being proposed?

The first thing that has to be done is to set out in quantifiable terms just what is being proposed to be
built. This might take the form of a table of rentable floor areas for a retail center, office building, or
warehouse; the number of rooms by type of room for a hotel; or, as in our example, the number of
houses by size and model in a residential subdivision.

Architects refer to this as the project’s “program.” This tabulation also sets out the non-income
producing space for things like parking, lobby areas, mechanical and utility rooms, and other support
space. The quantities of floor areas, spaces, dwelling units in this table are used as the basis for
calculating sales or rental income, as well as construction costs.

For our example case study, our hypothetical developer will probably have in mind a group of home
plans that may have been used in other communities. The builder can’t precisely anticipate exactly how
many units of each plan will be bought, so simple totals and averages can be used. Let’s assume that this
project will include a total of 50 homes, and that overall, the home plans are likely to average about
2,200 square feet of finished space, for a total of 110,000 square feet of finished built space project-
wide.

What revenues will be generated?

To answer this question, the developer will have performed a market analysis that recommends
appropriate rents, charges, or sales values. The developer’s experience will also come into play, drawing
on knowledge of what comparable projects obtained in rents or sales. The developer may answer this
question with a highly detailed market study, or simply pencil in the values being used at another nearby
project.

Gross Sales:

a calculatorIn the example illustrated here, we are proposing to build a 50-unit housing subdivision. The
sale prices will vary with each house plan according to each model’s size and features, but in our
imaginary market, the homes could be expected to command base prices generally ranging in the high
$300,000’s.

After adding in estimates and allowances for premiums on choice lots, and customer-selected options
and upgrades, the homes in our hypothetical project are shown at the top of Figure 1 as averaging a
total price of $400,000 per unit, generating $20 million in gross sales revenues.

Less Commissions, Fees:

These revenues will be reduced, however, by the costs of selling the homes. Sales commissions will need
to be paid to sales agents who may be part of a real estate agency contracted to market the project, or
in-house sales staff, or independent realtors who bring customers to the project, or some combination
of all of these. Legal fees, closing costs, and other “transactional” costs also have to be deducted from
gross revenues. In Figure 1, we are assuming that commissions and fees could amount to $800,000
leaving Net Project Revenues of $19.2 million.

-----

Site Analysis for Real Estate Developments + Case Study

Site analysis for real estate development is one the basic prerequisite for the feasibility study and
development analysis. Real estate development is a wide term which might include activities ranging
from the restoration and re-sale of existing buildings to the purchase and development of new buildings
on vacant lands.

In this post we will be exploring how to do site analysis of a vacant land for the feasibility study and
development analysis, however; the concepts remain same for any real asset acquisition and
development. Site analysis is a preliminary phase in real-estate development that encompasses study of
the climatic, topographical, legal, and infrastructural characteristics of a specific site.
A well-conducted site analysis allows real-estate developers to improve a project, by ensuring that they
purchase the land at the right price and the resources are effectively utilized.

Site Analysis Components

When doing a site analysis for real estate developments, below are the various factors which should be
explored, and answered:

Zoning Regulations

Perhaps, the first and most important factor in doing a site analysis is making ourselves sure of the the
zoning regulations. Zoning regulations specify what type of real estate development could be done on
the said site - residential, commercial, or industrial. Zoning regulations also dedicates the limit of the
size and bulk of structures that can be developed on a piece of land. Building height, setbacks,
easement, density, and other development parameters are usually controlled by the zoning regulation.

Zoning is controlled by the local government bodies, and the base idea is to separate residential real
estate from other property uses, like industrial. A simple way of getting the zoning regulations for a
piece of real estate is to simply check the zoning map of the district.

Usually, development parameters are provided with the land title but should be always checked with
the local authorities. Basic zoning information could also be found online, like for Toronto, you can check
this zoning by-law map, while in Vancouver, you can check this zoning by-law map.

Have a look at below zoning map for the city of Vancouver.

Zoning map
Accessibility and Visibility

The value of a land is primarily driven by what could be built on that site, which is mostly governed by
the zoning regulations. However, there are other factors which are also equally important.

The accessibility and visibility of a site is another major factor to consider when doing a site analysis for
real estate development. It becomes rather important for commercial real estate developments.
Accessibility refers to how convenient it is to get to the site, while visibility refers to how easy it is to be
seen from a major highway or other landmark structures.

Sometimes for mega mixed-use real estate developments, accessibility and visibility might not be as
important. However, for stand-alone real estate developments, choosing a suitable location with easy
access and visibility makes a huge difference.

Site Analysis for Real Estate Developments

If a site is accessible though more than one major highway, it becomes more valuable.

Context and Characteristics

The context and characteristics of a site are another important factor to be considered while doing site
analysis for real estate development.

The context and characteristics of a site refer to its properties, relative to its urban and natural
environment - the topography of the area. Certain physical factors might affect the desired end products
in real-estate development. Runoffs and flooding hazards are examples of a poorly conducted site
context analysis.
Factors like the climate of an area, available natural resources, proximity to the city center, and soil
conditions are just a few of the external factors to consider when conducting a site context analysis.

In real estate development, the intended purpose of a piece of land might change solely based on the
context of the site. A factor like poor soil condition, could see an intended site developed into
something else, or devalue the land due to increased construction cost (various forms of ground
improvements could be required).

The context and characteristics of a site also include proximity to natural resources or views. The
proximity of Toronto and Vancouver to the sea is one of the factors that have influenced the surge in
real estate development in both cities. Tourist attractions like the Toronto Islands and Stanley Park
respectively, have consequently led to immigrants settling and acquiring real estate.

Surrounding Land Use and Competition

Another factor to consider while doing a site analysis is to study the surrounding land use, and to
understand the competition for the land and for a particular type of real estate asset in the vicinity. Land
use refers to the modification of the natural environment into built environments, while land
competition is said to occur when multiple real estate companies compete to acquire a land.

Land competition could occur for countless reasons, but most of the time, it is greatly influenced by the
natural resources found in the land, location, and surrounding land use. The surrounding environment of
a real estate greatly affects it. A piece of land with multiple uses and geographical advantage tends to
come at a very steep price. Carrying out an analysis of the surrounding land use will better help
understand the value of the land and its development potential.

If the said site is surrounded by lands which are zoned for multi-family housing, it does not make much
sense to acquire such land for same use. Whereas a land zoned for multi-family development located at
a mixed-use development would be highly desirable.

Proximity to Demand Generators

Demand generators in real estate are locations or buildings strategically located to draw consumer's
attention towards their service. A well-placed office building in the proximity of a residential site or a
hotel/school could greatly increase the value of a site in due time.

Similarly, a residential zoned land near a commercial district would also be highly valued. A land zoned
for retail development in a residential area with high disposable income would be similarly expensive.

SWOT Analysis

The final step in doing site analysis for real estate development is the SWOT analysis. SWOT, a quite
common acronym stands for strengths, weaknesses, opportunities, and threats.

SWOT analysis encompasses the intangibles in acquiring a real estate, and it is required to clearly
itemize the weaknesses and the strengths of a land, accounting for factors not previously considered,
and also for detecting the threats and opportunities of it.

When conducting the SWOT analysis, the weaknesses and strengths are regarded as the internal factors
and characteristics, while the threats and opportunities are the external factors.

We will investigate the SWOT analysis into more detail in some future post.

Case Study

As a case study, we will be doing a site analysis for a land parcel which has been listed for sale. The site is
located at located at 799 Gorman Park/Sheppard Ave W 128, Toronto, Ontario.
Before we start the site analysis, just to put things in perspective, we must note that according to
Livingin-Canada.com, in the last 10 years, the average price of owning a house in Canada has seen an
increase of over 60%, with Vancouver and Toronto seeing the most surge in recent years. Precondo.com
estimates the cost of owning a house in Toronto surged from $430,000 in 2010 to $940,000 in 2020, an
increase of over 100%.

Zoning Regulations:

Checking the Toronto zoning by-law map we observe that the real estate is designated residential-
detached zone (RD) and according to the section 10.20 of the Toronto zonal by-laws, this piece of land
can be used for any form of residential development, like a detached house, or low rise condo building;
however, with certain conditions it can also be used for commercial real estate development. The listing
also says that the land is made up of 6 properties (all detach bungalows) with a total land area of 0.924
acres. Property is recently re-zoned for a 9-story mixed-use building.

Case Study Site Analysis

The current zoning must be confirmed with the local authorities.

Accessibility and Visibility:

The site is in Clanton Park neighborhood of Toronto with a good road connectivity and is about 15km
from the Downtown Toronto. Site is located at the corner of a T-junction and accessible from the Allen
Road (1.25km) and the Wilson Height Boulevard (500m). Now defunct Downsview Airport is 8m drive
(4.1km). There are school, parks and sport facility within walkable reach.

map

The site has good accessibility and visibility, for a residential development.
Context and Characteristics:

The site is made up of 6 existing properties, all detached bungalows on a land totaling 3,740 square
meters in area. The land is relatively flat and has no extreme topographical disadvantage. Toronto is
relatively prone to storms and floods but with about 13km to the nearest shoreline, it is relatively safe.
Existing structures needs to be demolished and cleared.

Surrounding Land Use & Competition:

The land is in a residential zone, making it relatively serene and peaceful. There is no existing conflict
with regards to the site, and competition is mild, mainly due to its location at a corner. However, the site
does not offer much differentiation as compared to the surrounding land use.

Proximity to Demand Generators:

The site is in Clanton Park and is surrounded by two public schools, one private school, and a college.
Also, three shopping malls, fifteen entertainment/sport facilities, twenty restaurants, four hotels and
two art galleries are also located in the vicinity. However, there is no commercial development in the
area.

SWOT analysis:

The below table summarizes the SOWT analysis for the site:

Site Analysis SOWT

Buying a residential land in a residential neighborhood does not offer much differential; however, it
should also be noted that the Covid-19 pandemic has severely impacted the real estate in Canada, and it
appears that residential real estate would be the first to recover. The site presents an opportunity for
residential real estate development at a right land price.
Conclusion

Site analysis for real estate development is a must for feasibility study, development analysis and
valuation. A site analysis covers the study of the climatic, topographical, legal, and infrastructural
characteristics of a specific site.

Case study provides an insight into how site analysis can be done for real estate developments.

----

Real Estate Development Model

Deal Summary and Cash Flow Model

What is a Real Estate Development Model?

A real estate development model usually consists of two sections: the Deal Summary and the Cash Flow
Model. Within the Deal Summary, all important assumptions – including the schedule (which lays out
the timeline), property stats, development costs, financing assumptions, and sales assumptions – are
listed and used to calculate the economics and profitability of the project.

The Cash Flow Model begins with the revenue build up, monthly expenses, financing, and finally levered
free cash flows, NPV (net present value), and IRR (internal rate of return) of the project. In the following
sections, we will go through the key steps to building a well-organized real estate development model.

Deal Summary
1. Schedule and Property Stats

The first step in building a real estate development model is to fill in the assumptions for schedule and
property stats. Here is a list of items that should be included:

Real Estate Development Model Schedule

2. Development Costs

For the next step in creating a real estate development model, we will input the assumptions for
development costs in terms of the total amount, cost per unit, and cost per square foot. Development
costs might include land cost, building costs, servicing, hard and soft contingency, marketing, etc. Using
the property stats filled in earlier, we can calculate all the numbers and complete the development costs
section. The section should look something like this:

3. Sales Assumptions

In sales assumptions, we will calculate the total revenue from this project. Suppose market research is
done and based on comparables, we believe that $500 per square foot is a realistic starting point for the
sales price. We will then use this as the driver for revenue. After calculating sales (total, $/unit, $/SF),
sales commissions (e.g., 50%), and warranty, we can figure out the net proceeds from this project.
4. Financing Assumptions

For financing, there are three critical assumptions: loan-to-cost percentage, interest rate, and land loan.

Before calculating the total loan amount, we need to figure out the total development cost amount.
Since we have not yet calculated the interest expense, we can link the cell to the cash flow model for
now and obtain the value once the cash flow model is filled in. The commissions are the same as the
sales commissions in the sales assumptions section. The total development costs can be calculated as:

Total Development Cost = Land Cost + Development Cost + Sum of Interest and Commissions

Now we can fill in the rest of the financing assumptions.

The Max Loan Amount obtained for this project = Total Development Cost x Loan to Cost Percentage

Equity amount = Total Development Cost – Max Loan Amount

Financing Assumptions in Real Estate Model

The figures above will be the assumptions from the Deal Summary section. Once we complete the Cash
Flow Model, we will come back and complete the Development Pro Forma section and add a sensitivity
analysis.
Cash Flow Model

1. Revenue Build Up

The first step in calculating revenues is to find out the townhome absorption and closings. Absorption is
the number of available homes being sold during a given time period, while closings are the number of
homes closed once the construction is complete.

Now we can build up the revenue using the absorption and closings information.

Townhomes sales = Sales Price/Unit x Townhome Closings

First 50% Commissions (charged when homes are sold) = – Townhome absorption x Sales Price/Unit x
(Commission% /2)

Second 50% Commissions (charged when homes are closed) = – Townhome closings x Sales Price/Unit x
(Commission% /2)

Warranty = – Warranty cost/Unit x Townhome closings

Total Net Revenue = SUM(Townhome sales + 50% Commissions + 50% Commissions + Warranty)
(*Note that commissions and warranty are in negative amounts.)

2. Expenses

Now we’ll find out the development expenses, which include land acquisition cost, pre-construction
spending, and construction spending. The numbers can be found in the development costs assumption
section from the Deal Summary.

Land Acquisition Cost = Land cost

Pre-construction spending = Pre-construction spend ($/month)

Construction spending = (Development costs – Pre-construction spending)/No. of months of

construction

Total Development Costs = SUM(Land acquisition cost + Pre-construction spending + Construction

spending)

3. Costs to Fund and Proceeds to Repay Capital

The Cost to Fund is the shortfall in the project cash flow that needs to be financed. When the total net
revenue is less than the total development costs, there is a negative cash flow that we need to cover.

When total net revenue becomes greater than the total development costs, there will be positive
proceeds that we can use to pay back borrowed capital. We can use the following formulas to calculate
the two numbers:
Costs to Fund = IF((Total Net Revenue – Total Development Costs) > 0, (Total Net Revenue – Total
Development Costs), 0)

Proceeds to Repay Capital = IF((Total Net Revenue – Total Development Costs) < 0, (Total Net Revenue –
Total Development Costs), 0)

4. Financing

Next, we calculate the loan balances, draws, repayments, and interest accrued. The table below
summarizes the calculations for the first period and the following periods:

Financing

We should also perform a quick sanity check to ensure none of the ending balances exceeds the max
loan amount.

5. Free Cash Flow and IRR

We can now calculate the levered free cash flows and resulting IRR of this project.
Levered Free Cash Flow = SUM(Costs to Fund, Proceeds to Payback Capital, Loan Draws, Loan
Repayments)

Equity Balance is simply the cumulative FCF:

The first-period balance = Levered Free Cash Flow

Following period balances = Previous Balance – Levered Free Cash Flow

Finally using the XIRR formula, we can calculate the Levered IRR for this project:

Levered IRR =XIRR(All Levered Free Cash Flows, Corresponding Time Period)

-----

How to Run a Neighborhood Analysis for Real Estate Investing

By Jeff Rohde

Last updated on June 9, 2020

There are literally dozens of different ways to invest in real estate.

For example, “cash cow” rental property generates solid predictable monthly cash flow, workforce
rentals provide housing to teachers and service workers, and small multi-family property makes it easier
to grow a property portfolio fast.
Although there are lots of different ways to invest in rental real estate, there’s one thing that all of these
properties have in common. They were selected because the neighborhood analysis indicated a high
likelihood the property would meet or exceed the buyer’s investment objectives.

What is a Neighborhood Analysis?

A neighborhood analysis is a report real estate investors create to help calculate the investment
potential of a rental property based on the characteristics of the neighborhood the property is located
in.

For real estate investors using a buy-and-hold investment strategy, a neighborhood analysis can help
reveal how attractive a particular property will be to tenants this year, next year, and even 10 years
down the road. Factors such as good schools, and proximity to employment, shopping, and recreational
amenities will support the long-term appeal to tenants and buyers when the time comes to sell.

Many active rental property investors combine a larger market analysis with a neighborhood analysis. A
market analysis is similar to having a book about a specific real estate market, while each neighborhood
analysis makes up the individual chapters of the book.

It’s important to understand how each neighborhood relates to the larger market for a couple of
reasons.

First, a specific property may offer what seems to be great potential, but if the surrounding houses are
rough and uncared for, the great property may end up being not so great after all. Second, even though
the overall market is strong, buying a property in the wrong place can result in market value decreasing
and rents eroding over time.

Macro Factors in a Neighborhood Analysis

Let’s begin by looking at some of the macro – or big picture – factors to consider when putting together
or reading a neighborhood analysis.
Note that all of these factors contribute to the concept of highest and best use (HBU) in real estate.
Developed back in the late 1800s, HBU states that the highest and best use of a property is always the
use that produces the highest value for the property, regardless of how the property is currently being
used.

1. Location

As the saying goes, the three most important things about real estate are ‘location, location, location.’
That’s actually another way of describing the highest and best use of a piece of land or property.

Even though there is a strong demand for single-family rental houses and small multi-family property in
most real estate markets, a neighborhood analysis may discover that specific parts of a market have
problems.

Sometimes, developers push the envelope by building in fringe areas that are underserved by
transportation and amenities, making housing in the area difficult to rent. So, while the overall market
might see a positive demand for housing, specific submarkets or groups of neighborhoods may be
negatively impacted due to the location within the greater market area.

2. Social

The social macro factor is somewhat subjective, but important nevertheless. In part, that’s because
many tenants, and sellers and buyers, may perceive a property to be better or worse than the market
value might suggest, simply because they believe that it is.

Property address is one example of a social factor. For example, a house along North Michigan Avenue
(also known as The Magnificent Mile) in the Gold Coast neighborhood of Chicago has more social value
than a bigger property four blocks away.

A good school district is another example of a social factor used in a neighborhood analysis. Even if a
tenant doesn’t have school-age children, being in a highly-rated district implies that the neighbors and
houses will be ‘better’ – and the rent somewhat higher - than those in a school district with a lower
rating.
3. Physical

Physical barriers or ‘dividing lines’ such as canals, railroad tracks, highways, hills and mountains are the
third macro factor to consider when reviewing a neighborhood analysis. In some markets, a house that
is located on the ‘wrong side of the tracks’ may be worth thousands of dollars less than a similar
property on the opposite or ‘right’ side of the tracks.

However, the right railroad tracks can also increase property value if the tracks are used for mass transit.
That’s because property located in transit-oriented developments or close to public transit in urban
areas usually sells and rents for a premium price.

How to Create a Neighborhood Analysis

After reviewing the macro factors of a real estate market, the next step is to drill down and create a
neighborhood analysis to gain a better idea of your potential return on investment.

There are a number of key statistics used to analyze the investment potential of different neighborhoods
within the same city or town:

Neighborhood ranking

Home values

Population growth

Employment and unemployment rates

Median income levels

Owner-occupied homes vs. renter-occupied homes

School district ratings

Educational attainment

Crime rates

Rental analysis
Market rental rates

Rental income

Vacancy rates

Percentage of renter-occupied households

Financial data

Property asking price

Comparables of recent sales, pending sales, and expired listings

Historical rental income for turnkey property

Cap rate comparing net operating income (before paying a mortgage) to market value

Cash-on-cash return

Gross yield

Net cash flow

Annualized return

Total return

Appreciation potential

Creative Research to Choose the Right Neighborhood

Researching neighborhood statistics and crunching the numbers is one good way to compile a
neighborhood analysis. But, before investing a large amount of capital in rental property, it’s important
to do everything you can to ensure the area is the best choice.

Here are six creative ways to research the right neighborhood for your next investment property:

1. Review the enrollment trends in the schools closest to your intended purchase to learn if the school
district and area is growing.
2. Research building permits to identify new construction and the amount of property being significantly
updated to help gauge the future demand for property and price appreciation trends.

3. Make the most of your MLS sales comps by digging deep into data and analyzing statistics such as:

Days on market

Median sales price

Median price per square foot

Percent of price change during the listing period

Difference between original list price and final sales price

Reasons why listings were taken off of the market or expired without being sold

4. A large number of “For Rent” or “For Sale” signs are a warning that a neighborhood isn’t as good as it
might seem to be on paper. That’s because a vibrant area that’s good for investment should have low
vacancy and a high level of demand instead of one street after the other loaded with yard signs.

5. Driving the neighborhood – or having someone from your local real estate team take a drive – is a
great way to get a feel for the neighborhood. Ask them to explore the neighborhood at different times
of the day and on different days during the week, including weekends.

Looking at things such as how well the front yards are kept up, where cars are parked, and the overall
pride of ownership is a great way to understand the individual personality of the neighborhood you’re
thinking about investing in.

6. An easy way to determine if a neighborhood is trending upward is by the amount of development and
new businesses opening in the immediate area. Commercial real estate investors and residential
property developers invest millions of dollars on projects only after they’ve done extensive research on
the immediate market. Rental property investors can increase their odds for success by buying property
where the big players are building.
Final Thoughts

One of the best things about a neighborhood analysis is that you can use the same system to analyze the
investment potential for any area in the country.

When you’re monitoring rental property opportunities on an on-going basis, a neighborhood analysis
can help you to quickly learn if a new property is worth taking a closer look.

-----

The Site Selection Process of REC

What You, the Client, Are Doing

What Your Tenant Rep is Doing

What Your Project Manager is Doing

What the Landlord is Doing

Working with your tenant rep broker and project management team, determining how much space you
need and deciding what needs and wants are most important, such as location, amenities, TI, etc.

Doing discovery and performing a needs assessment to determine your space needs and priorities.

Preparing a site selection timeline.

Reviewing your current lease to understand your options at your existing space.

Working with you and your tenant rep broker to determine a preliminary timeline, budget, etc.

Helping you engage an architect to evaluate space needs.

Reviewing options presented by your broker and deciding which spaces to tour. Surveying the market to
find available options (or off-market options coming available) that meet your criteria.

Organizing options to present to you.

Reviewing spaces from the survey and advising you which spaces would offer the best potential for a
build-out. Responding to tenant rep’s requests for information about available spaces at their property.

Following up with the tenant rep broker to better understand the tenant’s needs and size to point them
to the suite or building that would work best.

Sharing all building marketing collateral (floor plans, flyers, property videos, etc. for available spaces)

Touring properties decided on during the market survey to see each space in person.

Creating a shortlist of top two or three options.

Setting up tours with landlords and taking you to tour properties and spaces in person. Performing test
fits to determine how each design would work for you.

Helping you understand the scope and cost of renovations that would be needed in each space.

Meeting you at the property, touring you through the property, available spaces and amenities.

Comparing proposals submitted by landlords. Working with your broker to analyze each option and
compose counter-proposals. Sending requests for proposals to properties decided upon in your shortlist,
collecting responses and organizing into an apples-to-apples report to share with you. Beginning
preliminary construction pricing estimates on shortlist properties. Crafting an initial proposal for you and
walking your tenant rep broker through the deal terms being presented.
Working both internally and with your tenant rep to structure an ideal lease. Negotiating with the
landlord to work toward finalizing the best lease terms for you.

Walking you through a financial analysis of different deal structures to see which one will work best
given the scenario.

Providing input to the financial analysis and negotiation in terms of construction costs and a
recommended Tenant Improvement (TI) allowance, as well as how long construction will take so you can
negotiate the correct commencement date. Negotiating with your broker to finalize proposal terms that
landlord and tenant are in agreement with.

Making a final decision on which property or space to move forward with. Formally submitting the fully
negotiated offer to the landlord with which the tenant wants to move forward with. Formally submitting
a final proposal to the tenant broker that the landlord is willing to accept.

Working with your lawyers and tenant rep broker to finalize lease documents. Working with you, your
legal team and the landlord broker to finalize the lease documents. Reviewing the work letter and
providing comments in regard to language in the lease. Working with the landlord’s attorney to finalize
lease documents.

Legally committing to a space.

Beginning to plan for build-out and move-in.

Accepting the lease terms and assisting you with the lease signing process. Beginning the architectural
design process and submitting proposals for permits and bids. Accepting the lease terms and
coordinating signing of the agreement by the landlord.

Finalizing design decisions, communicating regularly with project manager about progress of the project.
Making the proper hand-off to the project manager or building’s property management that will be
assisting you. Overseeing construction, handling communications and scheduling with contractors /
vendors.

Updating schedule and budget throughout the project.

Communicating project progress with you and ensuring quality control.

Helping connect building architect, property manager and construction manager with tenant and
tenant’s broker.

Moving in to the new space Communicating with project management and/or property management to
ensure a smooth and timely move-in. Overseeing final completion of the project and obtaining the
Certificate of Occupancy.

Assisting with enlisting office moving team, IT installation, furniture Install, etc.

Working with you and the architect to put together the appropriate punch list and obtain all close out
documents required by the work letter in the lease.

Enjoying the new space and focusing on your business. Continuing to advise you on the market.

Consulting with you on any changing real estate needs, upcoming expansion or renewal options, etc.

Acting as a resource if your space requires any additional alterations, repairs, warranty items, etc.
Reaching out to tenant rep broker anywhere from 4 to 12 months out from your lease expiration to
discuss renewal or expansion

------
Site Selection & Due Diligence

The foremost aspect of the real estate development process is site selection. It entails a detailed
evaluation of the project needs and matching those needs with the best possible site locations.

Site selection is a vital stage of the real estate development process. After understanding the type and
purpose of the real estate to be developed, we then search for potential sites and gather all relevant
information. We take a look at cost, location, size, accessibility, topography, tax incentives, etc., of all
potential sites and then do a thorough comparison. We also take into consideration the advantages and
disadvantages of siting the real estate in a particular location. Such analysis helps us to determine the
best-fit site for the project through practical comparison of cost and design features.

We understand also the importance of investigating both the short-term and long-term characteristics
of each potential site, which is why we do not rush into making hasty decisions when it comes to site
selection. To this end, we carry out proper investigation through due diligence. During this due diligence
period, we carry out investigations to confirm if:

The zoning would allow the siting of the real estate in that area;

There is adequate availability of public utilities;

There are no potential environmental hazards on the site by conducting geo-technical investigations.

We understand that there is no perfect site; for a site that is not ideal, with a creative design we can still
meet the requirements of our clients.

-----
Site Selection

Location, location, location. Everyone knows that these are the three prime ingredients for successful
real estate ventures. Why is location and site selection so important? Because the economic factors
affecting a location are virtually uncontrollable by a developer. Real estate professionals evaluate
alternative locations during the development decision-making process in order to select the best
available alternative because, once a decision has been made, the factors beyond the property
boundaries will have dramatic influence on the property for its entire economic life. In order to
minimize risk in a project, a real estate purchaser/user should seek to minimize locational risk and
maximize locational rewards. This locational analysis and site finding can best be completed by savvy
real estate professionals, such as the members of the Commercial In-Sites team – a group of
professional advisors who know the market well and who have successfully completed site finding
assignments for many clients. Since one of our brokers has earned both the CCIM and SIOR designations
and two other brokers are working on their designations, we are exceptionally well trained to handle
these types of assignments.

The first step in a site selection analysis is to clearly define the objectives of our client – which generally
includes specifications of the general market region(s) to be served and nearly always, in the case of
large multi-site retail/commercial chains, includes specific rules of thumb regarding location and market
areas.

Given a solid understanding of a particular market region, and assuming a specific commercial use, we
identify a specific trade area for a particular location, or in the alternative, we can define the most
effective location in light of existing or proposed competition for the specified use. This evaluation
considers locational evaluations on a micro-level and combines analyses of demographics,
transportation and access, and existing and projected competition. In the end result, our objective is
provide specific recommendations. This includes summaries of information which are designed to help
our clients reach a fully informed, prudent business decision.

------

Using Site-Specific and Market-Driven Characteristics to Choose the Right Self-Storage Parcel
Choosing the right property on which to develop a self-storage facility is a careful process that considers
many factors. Owners and developers who analyze key site and market characteristics will fare better
than those who go by their “gut."

Jon Suddarth | May 20, 2019

Every spring during “March Madness,” nearly 100 million Americans tune in to the National Collegiate
Athletic Association (NCAA) basketball tournament to cheer on their favorite teams. In the days leading
up to the competition, roughly 40 million people complete approximately 70 million brackets, trying to
predict which team will advance to the next round. Some take a sophisticated approach, relying on
advanced analytics, while others use more arbitrary methods, making choices based on uniform colors,
names or mascots, for example. Generally, those who depend on on research tend to outperform their
cavalier counterparts.

The same is true in the world of self-storage development: Those who rely on quantifiable data and
market research are generally more effective than those who ignore facts and figures. Owners and
developers who use analysis to choose a building site have a much greater likelihood of finding one
that’ll enjoy long-term success. While site selection remains an imperfect science in an ever-evolving
development climate, following are some of the key factors to consider during the process.

From Macro to Micro

While there’s truth to the saying “All real estate is local,” most self-storage owners and developers
prefer to pursue opportunities in large metros that are performing well on a regional level, and where
population and employment growth are trending in the right direction. Once they identify a general
area, they begin looking at more detailed features. These include site-specific factors and self-storage
market-driven characteristics. Let’s look at both.

Site-Specific Factors

Traffic counts/visibility. Does the site have a retail-type location with excellent visibility, high traffic
counts and direct ingress/egress? If not, the opportunity should likely receive a pass.
Physical characteristics. What are they? Does the property have suitable soils for new development?
When possible, physically walk the site and invest in a geotechnical analysis, topography survey and
wetlands analysis, when applicable, to determine how the site’s physical factors might affect
construction costs. If a parcel is marketed at a price that’s too good to be true, there’s likely a reason—
one that could cost you more in the long run.

Zoning restrictions. It’s important to understand how zoning could impact your project. You might
discover there are major use restrictions or that self-storage is prohibited altogether. Further,
understand floor-area-ratio and setback restrictions.

Environmental issues. Contact a local consultant to get a sense of whether any environmental issues are
likely to be identified on the site. If there are any red flags, it’s prudent to investigate the impact before
spending more time and money on the project.

Title. While title is often a relatively simple piece of the site-selection process, review a title commitment
and ALTA survey to ensure there are no easements or ownership issues that would prevent the
development from proceeding. If there, it’s best to address them early in the process.

Market-Driven Characteristics

Self-storage market characteristics are the major determinant in whether to pursue a site or move on to
the next opportunity. Some important items of focus include:

Competitive supply. We’re talking about existing competition and upcoming planned or proposed
projects. For the former, evaluate all facilities within a three-mile radius, including their size, quality,
location and operator experience. For new supply, expand the search to approximately six miles. This
can have a significant impact on the success of your project, as other new facilities could be in lease-up
at the same time as yours. It’s critical to study future competition and understand how it could impact
rental activity.

Existing square feet per capita. This is the tried-and-true metric of the self-storage development game.
Though there are occasionally exceptions, if the addition of your project and all other viable
planned/proposed projects will cause the square feet per capita to exceed the metro average,
reconsider if storage is the highest and best use for the property. This simple test could save you from
potential troubles and prevent overbuilding.

Demographics. Look at population growth, households, household formations (new starts), housing type
and size, and median income to see how these factors could influence your project.

-----

Definition of 'Microeconomics'

Definition: Microeconomics is the study of individuals, households and firms' behavior in decision
making and allocation of resources. It generally applies to markets of goods and services and deals with
individual and economic issues.

Description: Microeconomic study deals with what choices people make, what factors influence their
choices and how their decisions affect the goods markets by affecting the price, the supply and demand.

-----

Basic Concept of Supply and Demand:

One of the most useful classes I took in college and graduate schools was Microeconomics. I love
economics theory – so elegant. Economics make sense to me. At the core of market pricing, there is a
concept called supply and demand. How much supply is there in the market place plotted on a graph
against price on Y-axis and quantity on the X-axis? How much demand is there in the market place
plotted against the same graph? In this theoretical exercise, the Supply curve and the Demand curve
intersect and meet within the graph that determines the theoretical price. Simplistically, the following
theoretical conclusions can be made:
a) Supply goes up (Demand remains the same), pricing decreases

b) Supply goes down (Demand remains the same), pricing increases

c) Demand rises (Supply remains the same), pricing increases

d) Demand goes down (Supply remains the same), pricing decreases

------

COVID-19: Hotel Real Estate in a Turbulent Macro-Economic Environment

Jochen de Peuter

Would you invest your money and time in a hotel project? Once more, the world is hit by a crisis, a
pandemic this time, which affects all world economies. Many industries are suffering in particular the
hotel industry.

What is the problem of hotels and hotel real estate in times of Covid19 virus? Hotels are a capital-
intensive business and require a lot of capital to build, buy, maintain, operate or renovate. In particular,
a luxury hotel project on a favourable location, such as big city centres or top tourist destinations,
require a big wallet. Secondly, any new hotel project or hotel renovation consume a lot of time to
organise, often several years. Imagine now it is your money and your time, how well would you sleep if
you were planning a hotel real estate investment during a downturn of macro-economic activity?

Knowing in advance the long term risk level and expected return of a hotel investment will give a better
night rest, in particular in case the capitalization rate (how well your asset can generate future income)
will be above the market average. In our own professional experience at EHL Advisory Services, we have
seen that external macro-economic variables play a very significant role in the long-term capitalization
rate of the asset. Some examples of macro-economic variables we consider are economic recessions,
socio or geopolitical factors, currency rates, politics, consumer trends, global disasters, technology
disrupters, financial markets, country GDP, flight routes, legislation, destination management, etc.

In relation to the subject, I have found an interesting report on macro economic variables and hotel
performance (2016) that measures the correlation between hotel market performance indicators (ADR,
RevPAR, Expense and Profit), Gross Domestic Product (GDP), Unemployment, and Consumer Price Index
(CPI) over a 60-year period. The results of the study conclusively demonstrate:

A strong correlation around 90% between unemployment or GDP and hotel KPIs.

A zero lag time between macro-economics and hotel performance.

A progressively strengthened relationship-correlation over the last 60 years.

A support that hotel investments being an inflation hedge (CPI).

The results of the study point out that the increased mobility of assets, increased communication and
the internet has led to a zero lag time and give managers less time to alter their operating activities.
Therefor investors must be more aware of the macroeconomic environment and more vigilant of how
macro changes impact the operations. Secondly the role of the macroeconomics impact progressively
hotel performance.

According to an article by Stuart Pallistar on hotel investment trends in Europe, recent investors have
become more risk adverse and feel attracted by safe havens with economic and political stability with
excellent credit ratings like Switzerland or Germany. As well, stable growth markets such a Croatia have
gained interest.

In addition to the macroeconomics, each specific location is different and therefor part of a second
investigation “to get the right product, at the right time, at the rights place, at the right time and to the
right person”. At the end, the consumer is the one who brings the money. This analysis, part of the
microeconomics, is at least as important as the macroeconomic investment investigation. As hospitality
consultants, out of our professional experiences, EHL Advisory Services understands well the macro and
microeconomics of hotel projects. We advise investors to secure their project success with help of a
proper analysis prior to counting the expected
-----

Importance of macroeconomic analysis in real estate practice

Gus Agosto Gus Agosto

Having a view on the macroeconomic trends is critical when analyzing the real estate market. Real
estate does not operate in a vacuum. Thus, it is essential for a real estate practitioner to grasp the role
of the industry and knows the current events and how macroeconomic affect the real estate market,
both in the aggregate supply and demand and the expectation of the buying public.

Real estate plays an important role in the economy. Residential real estate provides housing for families.
It is the greatest source of wealth and savings for many families. Commercial real estate, which includes
apartment buildings, create jobs and spaces for retail, offices and manufacturing. Real estate business
and investment provide a source of revenue for millions.

Rerb

Real estate, renting, business and construction are both measured by, and contributes to Gross
Domestic Product (GDP). As shown in the graph, its growth continues. In 2016, it contributed P1.8
trillion, 13 percent of the country’s gross domestic product. It exceeded its 2000 record of P3.5 trillion.
At that time, real estate, renting and business was a hefty 9 percent component of GDP.

Private construction, which is mostly done by property developers and individuals, contributed P1.2
trillion in the gross domestic product. It is one of the contributor in providing employment and help in
lowering unemployment rate.

Beside GDP, real estate market in the country is fueled by increasing foreign direct investment. Since
2007, the accumulated foreign direct investment totalled to P 2.1 Trillion. Meanwhile, the overseas
Filipino workers remittances increases by 17% . From 22 Million in 2013 to $ 26.8 Million in 2016.
Understanding key real estate relationships has a strategic implication on real estate decision making
and portfolio management. The changing real estate environment can be linked to the macro-economy.
Knowing the relationship between macroeconomic variables and real estate performance , and knowing
whether these links are consistent or changing overtime ca provide a useful tool in leveling up our
service to our clients and to our daily real estate practice.

------

The Philippines' infrastructure agenda offers new opportunities

Faced with recession and uncertainty over the length of the pandemic, President Rodrigo Duterte’s
administration is hoping that landmark projects under the P8trn-9trn ($159.1bn-179bn) Build, Build,
Build (BBB) infrastructure plan can kick-start economic recovery.

Supply & Demand

The initial phase of the pandemic proved disruptive to global supply chains, leading to fears that the
construction industry would be unable to source the building materials or commodity inputs from
overseas necessary to carry out projects.

In March 2020 imports fell by 26.2% year-on-year (y-o-y) to $6.91bn, partly reflecting the delayed arrival
of raw materials needed for the government’s construction drive, according to Nicholas Antonio Mapa,
an economist at ING Bank Philippines. A similar trade picture continued for most of 2020, resulting in a
so-called import implosion as demand for consumer goods and capital formation contracted by double-
digit percentages each month. In addition, imports that arrived in the Philippines were held up as a
result of quarantines and widespread lockdowns.

In an effort to mitigate these challenges, it was not uncommon for developers to house construction
workers on-site – both to protect them from potential infection and ensure the continuity of vital
projects. Nonetheless, in the first quarter of 2020 the total value of construction works dropped by
20.1% y-o-y to P86.1bn ($1.7bn), reflecting the impact of movement restrictions and the struggle of
some private contractors to access financing. In terms of floor area, construction projects approved
between January and March 2020 totalled 7.9m sq metres, down from 9.5m sq metres one year earlier.

Adequate Inventory

This slowdown in activity led to the accumulation of surplus materials that carried through to the end of
the year. Slack demand for building materials was reflected in the weakness of the construction
materials wholesale price index in the National Capital Region – used as a reference in the pricing of
government projects – which eased from 1.8% in July and 1% in August to 0.5% in September, bringing
the average increase over the first nine months to 1.4%. That compares with growth of 3.8% during the
corresponding period in 2019. Sustained growth in materials prices can be understood within the
context of BBB, and the government’s commitment to increase infrastructure spending from 5.4% of
GDP in 2017 to a record 7.3% by end-2022. Indices reflecting the prices of plywood; plumbing and
accessories/waterworks; reinforcing and structural steel, and fuel and lubricants all fell in September
2020, whereas those for sand, gravel, concrete products, cement and painting works increased.

Local Materials

The situation prompted the Cement Manufacturers’ Association of the Philippines and the Philippine
Iron and Steel Institute to announce there was ample supply of domestic construction materials to meet
the government’s ambitious infrastructure goals. The statement also expressed support for the
prioritisation of locally made products and construction materials for infrastructure and public work
projects, as outlined in the Bayanihan to Recover as One Act (Bayanihan 2), signed in September 2020 to
galvanise the rebound.

In a pandemic emergency report published in May, the Inter-Agency Task Force Technical Working
Group posited that there could similarly be high demand for indigenous plants and animals for
pharmaceutical use, water supply for disinfection and sanitation purposes, and wood and non-wood
products for the construction of quarantine and shelter facilities. The report also called for financial
support for an intensification of domestic agro-forestry activity in order to mitigate potential shortfalls.

Looking ahead, construction material prices are expected to rise in 2021 as relaxed mobility restrictions
and low interest rates spur construction activity, and with it demand for construction materials.
------

The evolution of office space in the Philippines

With the pandemic inducing a significant shift towards working from home as companies follow social-
distancing rules, in the Philippines co-working spaces are emerging as a solution for firms seeking to
decentralise while ensuring a sound operating environment for employees. In a sign of the economic
fallout from Covid-19, in late September 2020 the Department of Trade and Industry said that around
90,000 businesses – or 6% of all those registered – remained closed. However, adaptation has been key
to ensuring business continuity for those that have stayed open or reopened.

Remote Workforce

A report from advisory firm Willis Towers Watson found that during March 2020, when Luzon was under
its strictest lockdown, 99% of office-based firms allowed employees to work from home and 44%
facilitated social distancing through minimal office staff and staggered shifts. Around half the companies
surveyed had adopted multiple types of work arrangements for their employees. While in many cases
this shift has been essential, some members of the newly remote workforce have faced challenges such
as inadequate work space and poor ICT infrastructure. This is especially important as the digital shift has
put pressure on already lagging bandwidth. The Philippines’ average download speed for fixed
broadband was 27.07 Mbps in October 2020, compared to 229.42 in Singapore, 183.58 in Thailand and
140.74 in China, according to Ookla’s Speedtest Global Index.

Indeed, the shift to remote work has highlighted the importance of improving connectivity. In April 2020
a World Economic Forum report on worldwide changes predicted that the pandemic would “catalyse
sustained collaboration between the public and private sectors to increase internet access beyond the
current crisis”. In the meantime, companies and employees are likely to search for alternatives. “In the
Philippines people want to work near home, but not from home,” Lars Wittig, country manager of Regus
and Spaces by IWG, told OBG. “This is because home internet connections are often poor, and it is not
always easy to carve out a dedicated work space amid the neighbourhood noise.”

Co-Working Alternatives
Co-working spaces could be poised to fill the void. Since the pandemic such facilities have aimed to
enable creativity and engagement, as well as enhance continuity planning for businesses looking to
reorganise the workforce and cut real estate costs. To meet social-distancing requirements, co-working
spaces have reduced capacity, created buffer zones, and reinforced cleaning and personal hygiene
practices. WeWork Philippines’ enterprise memberships expanded by 10% between March and July
2020 as large firms made flexible alternative arrangements for employees. Despite being down from the
25% growth seen in 2019, this signalled co-working spaces have a role to play in the recovery.

“The pandemic sparked a new trend in the Philippines – one of working not from home, but near
home,” Jet Yu, founder and CEO of commercial real estate consultancy PRIME Philippines, told OBG.
“Co-working spaces are perfectly positioned to fit this market sentiment.” The emphasis on proximity
has been compounded by a push by many large firms to decentralise operations and close offices. Doing
so not only cuts overhead costs, but disperses staff and minimises viral risk for a large portion of the
workforce.

The global shift to remote work could also lead to de-urbanisation and decentralisation in large
population centres. “The pandemic has led to an emphasis on flexibility in terms of work stations and
work-fromhome solutions,” Wittig told OBG. “Even before the outbreak of Covid-19 the co-working
segment was booming. When the pandemic is over, people will no longer want to go to crowded
downtown areas and, as such, suburban and provincial areas will see the most significant growth. At the
same time, many large companies are looking to complement headquarters with satellite offices near
employees’ homes – a trend that is likely to benefit co-working spaces,” he added.

----

Can large-scale building projects fuel the Philippines' recovery?

While Covid-19 has thrown the Philippines’ economy into flux, early indications suggest that
construction and real estate is one of the most resilient sectors, and could provide a platform for
national recovery. However, with construction projects delayed by lockdowns during the second quarter
of 2020 and demand for office space and high-end residential developments weakened by mobility
restrictions, the sector still faces headwinds. At the same time, however, the disruption of the pandemic
is giving rise to new opportunities, and agile developers have the chance to establish a firstmover
advantage as tenants and buyers seek projects that meet the demands of the new normal.
Structure & Oversight

The regulatory architecture of the industry has benefitted from the government’s long-running efforts to
shift services online, which was especially beneficial during the pandemic. For example, the Construction
Industry Authority of the Philippines (CIAP), the state agency that regulates building under the auspices
of the Department of Trade and Industry, provides contractors with the option to renew their licences
online via digital payments. The CIAP portal also allows users to schedule managing officer exams, apply
for contractor licences, register for government infrastructure projects and submit performance
evaluations. Such efforts to move permitting processes online, including improvements to the procedure
for obtaining the occupancy certificates necessary to secure construction permits, helped lift the
Philippines’ ranking in the World Bank’s 2020 “Doing Business” report by 29 places, to 95th out of 190.

The non-profit Philippine Constructors Association (PCA) is the main industry body and leads training
and skills development. Under the Philippine Construction Industry Roadmap (PCIR) 2020-30, the PCA is
working with the Technical Education and Skills Development Authority to train 2000 globally
competitive construction supervisors needed to carry out the government’s ambitious infrastructure
agenda, which centres on the Build, Build, Build (BBB) programme. The PCIR aims to boost the
construction industry’s economic contribution from P2.3trn ($45.7bn) in 2018 to P130trn ($2.6trn) by
2030, with BBB acting as the catalyst.

The National Economic and Development Authority (NEDA), the state economic planner, reviews and
approves BBB projects. As such, NEDA guides the deployment of P8trn ($159.1bn) of spending
earmarked for 20,000 public infrastructure initiatives, primarily transport and mobility projects (see
Transport & Infrastructure chapter), but also spanning education, health care, ICT, urban development
and the environment.

BBB implementation is largely the responsibility of the Department of Public Works and Highways
(DPWH), the Department of Transport, and the Bases Conversion and Development Authority (BCDA),
the latter of which handles mixed-use developments. As the Philippines emerges from the pandemic,
the Board of Investments’ Investment Priorities Plan (IPP), released annually to promote investments
eligible for government incentives, will be monitored closely by interested parties. The “We Recover As
One” report, published in May 2020 by the Inter-Agency Task Force Technical Working Group, suggests
that activities critical for the supply of essential goods for the construction and rehabilitation of health
facilities could be incentivised via tax breaks.
Response & Recovery

The government’s Covid-19 response can be broadly broken into two phases. The first hinged on the
Bayanihan to Heal as One Act (Bayanihan 1), which empowered the executive to direct and finance the
public health and social support response. In August 2020 these emergency measures gave way to the
Bayanihan to Recover as One Act (Bayanihan 2), which aimed to stimulate economic recovery. The bill
approved P165.5bn ($3.3bn) in assistance to low-income households and health care workers, cash for
test-and-trace programmes, and other financial support measures, including a 30-day grace period on
residential and commercial rents. The bill also suspended most building permits required for telecoms
operators to build new cell towers for three years, reflecting the urgency attached to improving digital
infrastructure for remote learning and working.

Other Bayanihan 2 provisions relevant for the construction industry include P1bn ($19.9m) for the
DPWH to build tourism infrastructure, P4.5bn ($89.5m) to build and maintain isolation facilities, and
another P4.5bn ($89.5m) for the construction of temporary medical isolation and quarantine facilities,
field hospitals, dormitories for frontline workers and the expansion of public hospital capacity. Aside
from these industry-specific measures, the bill has the potential to underpin a broadbased recovery of
the economy into 2021, provided Covid-19 transmission remains relatively under control and additional
lockdowns are not required.

Create

The pandemic also gave fresh impetus to long-standing proposals to phase out tax incentives for certain
businesses operating in Philippine Economic Zone Authority (PEZA) areas. Under the Corporate Recovery
and Tax Incentives for Enterprises (CREATE) bill, the government is pushing forward a revised tax reform
package. CREATE is a modified version of previous reform bills that failed to pass Congress under the
administration of President Rodrigo Duterte: Tax Reform for Attracting Better and High-quality
Opportunities (TRABAHO) and the Corporate Income Tax and Incentives Rationalisation Act (CITIRA). In
its previous incarnations, the legislation proposed a reduction in corporate income tax from 30% to 25%,
before further reducing the rate by one percentage point a year in 2022-27 to achieve a regionally
competitive rate of 20%. This was to be funded by the rationalisation of incentives such as 10-year tax
holidays offered to PEZA occupants, notably those in the manufacturing and business process
outsourcing (BPO) industries that have generated vibrant demand for light industrial and commercial
real estate in recent years. However, the realities of the pandemic, and its impact on exporters in
particular, have amplified calls for the incentives to remain in place or be phased out more gradually.
Now approved by both the House of Representatives and the Senate, it is set to be enacted before the
end of 2020. If an appropriate balance can be struck between fiscal needs and investor expectations,
this should help sustain buoyant demand for PEZA land and office space.

Performance

Estimating economic losses from the pandemic is difficult as the challenges are ongoing, but the
aforementioned “We Recover As One” report indicated that the construction industry lost P37.9bn
($753.8m) during the initial enhanced community quarantine period, which lasted for two months in
Metro Manila. On the upside, NEDA said construction could be incentivised to build quarantine and
other health facilities, as well as rehabilitate existing ones. One notable development in this regard was
the addition of a virology institute in New Clark City to a list of some 100 priority BBB projects under the
auspices of the BCDA. NEDA also anticipates an uptick in construction in rural areas as urban dwellers
able to work remotely relocate away from congested cities. The authority called for the adoption of
digital construction technologies such as modular design, and encouraged local authorities to foster
take-up by implementing standardised structural specifications that could be deployed at scale.

The near-term outlook for construction is uncertain given the stubbornly high Covid-19 case count
throughout much of 2020 – around 433,000 to date as of early December – with Fitch Solutions
forecasting the sector will contract by 9.8% in 2020. While the government is actively pushing an
infrastructure-led recovery, obstacles such as incomplete feasibility studies, problems acquiring right-of-
way permits and local government bureaucracy could delay recovery until 2021, when the ratings firm
expects the industry to grow by 9.5%.

Those forecasts are to some extent guided by fiscal constraints, with the government trimming its 2020
infrastructure programme to P785.5bn ($15.6bn), or 4.2% of GDP, down from the P881.7bn ($17.5bn)
spent in 2019. Difficulty arranging deals that usually require face-to-face interactions, notably public-
private partnerships (PPPs), is also likely to hamper activity, as will corporate caution over capital
investments. On a positive note, Fitch Solutions suggested that potential government measures to
lengthen the term of PPP projects, or defer collection of the state’s share of revenue, could help attract
investors.

Foreign direct investment (FDI) recovered somewhat after slowing at the start of the pandemic, helped
in part by the relatively successful efforts to control the virus in China, Japan and South Korea, which are
major sources of FDI. Overall, net FDI inflows fell by 18.3% year-on-year (y-o-y) in the first half of 2020 to
$2.99bn, according to Bangko Sentral ng Pilipinas (BSP), the central bank. However, FDI rose for a third
consecutive month in July, registering a 35.2% y-o-y increase to $797m, indicating a positive outlook.

Looking to 2021, NEDA recommends that the DPWH ring-fences funding for road and transport
programmes under the BBB, while local government units direct funding towards wholesale food
terminals and trading centres, warehouses, cold storage, mobile storage, cold chain and refrigeration
facilities.

Offering a further note of optimism, engineering and infrastructure conglomerate Megawide

Construction said it expects the domestic construction industry to reach a value of P3.3trn ($65.6bn) by
2023, up 50% on its 2018 valuation, for a compound annual growth rate of 8.6% over the period.
Megawide highlighted the government’s intention to maintain infrastructure spending of at least 5% of
GDP for the foreseeable future under the PCIR 2020-30, as well as the robust growth of the middle class,
which is expected to underpin demand for retail mall developments in particular.

Commercial Market

There are indications that the commercial real estate market has remained resilient in the face of the
pandemic, at least in major cities. Property consultancy Leechiu said in August 2020 that despite the
pandemic, it expects demand for office space nationwide to reach 800,000 sq metres by the end of
2020, up from 482,000 sq metres in August, driven by the tech and BPO sectors. According to Leechiu,
global efforts to downsize in-house operations have spurred demand for outsourcing in the Philippines.
The firm highlighted the June 2020 announcements by US-based customer service company Alorica and
Singapore’s Everise that they would hire 4000 and 2000 more staff, respectively, in the Philippines. In
the first three quarters of 2020 demand from the BPO sector helped new leases outpace vacancies,
lifting net absorption of office space by some 57,000 sq metres. Much of that growth occurred in the
second quarter of the year, when new leases rose by around 50% y-o-y to 77,000 sq metres, with
demand for BPO space in Cebu a primary catalyst. However, despite a robust start to the year, demand
from Philippine online gaming operations (POGOs) fell in the second quarter as a result of new taxes and
international travel restrictions that prevented Chinese operators and workers from taking up
occupancies. POGO firms run online gambling operations aimed at clients outside the Philippines,
predominantly those in China. However, Colliers International said it expected delays in new
construction due to poor labour mobility to limit the impact of falling demand on vacancies and rents.
These delays also helped ease demand for construction materials, allowing suppliers to cover expected
shortfalls of key inputs (see analysis).
Demand Shifts

Bayanihan 2 introduced new measures to double tax revenue from POGOs, which had an immediate
impact on demand for office space. Offshore gaming licensees, including gaming operators, agents,
service providers and support providers, are now subject to a 5% tax on turnover, replacing an existing
2% gross revenue tax. The new law was brought in amid a lockdown-enforced hiatus in POGO
operations. As of mid-October 2020, 33 of the 55 licensed POGO operators had been allowed to resume
operations. According to Leechiu, the new rules had prompted POGOs to vacate 103,000 sq metres of
office space by September 2020, almost half the floor area vacated nationwide for the year. While this
accounted for 6% of the overall space leased to POGOs – which hold 11% of office leases – Leechiu
warned that BPO and manufacturing companies could follow suit if tax incentives are not protected to
some extent in the CREATE bill.

“The pandemic has made the office rental market uncertain but we are optimistic that the market will
bounce back in two to three years. Measures to mitigate the challenges include reducing rental rates by
up to 25%, strengthening relationships with existing industry partners and forging new connections that
can boost the prospects for stability or even growth,” Reynaldo A Cruz, executive director of AtlasOffice,
told OBG.

In the medium term the government hopes that financial technology (fintech) firms can replace BPO
companies and POGOs as sources of demand for PEZA commercial space. In September 2020 the
government proposed the Financial Technology Industry Development Act 2020, which seeks to
establish a Financial Technology Office (FTO) responsible for a fintech industry roadmap. The FTO would
issue special investor resident visas for executives of foreign fintech firms.

The use of digital payment services has increased substantially as a result of the pandemic-related
movement restrictions, with transactions on InstaPay – the national electronic transfer service –
reaching P175.5bn ($3.5bn) in the March-May period, up 54.4% from December-February. BSP has also
issued draft guidance on the establishment of digital banks, opening up potential for a new segment to
drive office demand.

In the meantime, there has been a significant rise in demand for flexible office space, which includes co-
working centres and serviced offices. This runs contrary to the trend in developed markets, where
remote workers are tending to operate from home rather than risk contact with strangers in a shared
space. In the Philippines, however, cramped homes and weak ICT infrastructure have prompted some
companies to direct staff towards co-working arrangements (see analysis). Average fixed-broadband
download speeds are one-tenth of those in Singapore and substantially lag behind most other countries
in the region, according to Ookla’s Speedtest Global Index. In the longer term, the ongoing adaptation to
new forms of remote work could potentially lead to de-urbanisation in city centres, or growth in
regionalised work centres. Real estate services firm CBRE suggests landlords should adopt a more
proactive approach to flexible space and take on a more service-oriented role. Colliers, meanwhile,
advises hoteliers to explore the viability of converting unused areas into flexible work space.

REIT Direction

Real estate investment trusts (REITs) – publicly traded companies that own, operate or finance income-
producing properties – have the potential to galvanise construction and real estate in the Philippines.
Singapore is the largest REIT market in Asia outside of Japan and hosts more than 40 REITs with a market
value of about S$100bn ($72.3bn), while Malaysia has about half that number, for total capitalisation of
RM43.4bn ($10.3bn). The Philippines has long aspired to emulate this success, which in theory allows
individual investors to pool finances and earn dividend income from property investment, while
providing developers with income they can reinvest in real estate and infrastructure. REITs have
notionally been possible in the Philippines for over a decade, but aggressive minimum public ownership
requirements imposed by the Securities and Exchange Commission (SEC) prevented the concept from
taking off. Those rules specified that at the time of listing on the exchange, a REIT must have at least
1000 public shareholders, each owning at least 50 shares, who in the aggregate own at least 40% of the
outstanding capital stock of the REIT in the initial year, increasing to 67% within three years of listing. A
value-added tax (VAT) on the transfer of properties to the REIT also curbed investor enthusiasm.

In January 2020 the SEC dropped the VAT requirement on the transfer of property to a REIT in exchange
for shares, adding to existing benefits enjoyed by transferors of property such as exemptions from
capital gains tax and creditable withholding tax. The SEC also imposed a reinvestment requirement on
REIT sponsors: they must detail plans to reinvest within one year the proceeds from sales or income
from REIT shares or securities in real estate or infrastructure. The Philippines Bureau of Internal Revenue
adjusted the minimum public ownership from 40% to 33%, removed the twothirds ownership
requirement and will monitor REIT dealings to ensure the reinvestment requirement is met. Notably,
REITs are not limited to the initial property transferred to them and can incorporate debt, including
mortgage debts, into their balance sheets.

The shift in rules has sparked significant investor interest in REIT structuring and initial public offerings
(IPOs), not least because they increase cash flow by generating revenue as dividends that are income tax
exempt. They also have a lower capital cost because the REIT security acts as a bond that offers a
predictable rate of return, provided the property holding does not encounter valuation problems. REITs
are required to declare dividends of at least 90% of distributable income. REIT fund managers can be
domestic corporations and trusts, as well as foreign corporations licensed to do business in the
Philippines.

In August 2020 Ayala Land-backed AREIT was the first REIT to successfully complete an IPO, attracting a
total P13.6bn ($270.5m) across primary and secondary offerings that were twice oversubscribed. AREIT
intends to use the proceeds from the primary offering to purchase another property, with capital from
the secondary offering being reinvested into local real estate developments. Developer DoubleDragon
Properties is also reported to be preparing to bring its most valuable property portfolio, DD Meridian
Park in Pasay City, into a REIT that would aim to raise P17bn ($338.1m). In line with the reinvestment
requirement, DoubleDragon would use the proceeds to construct about 450,000 sq metres of floor area
to augment its leasable portfolio.

Retail & Industrial

The pandemic has impacted the retail and hospitality sectors globally, and the Philippines is no
exception. In the first quarter of 2020 vacancies at Metro Manila malls rose to about 10%, up from 9.8%
in the third quarter of 2019, according to Colliers. The firm forecast this will rise to 12% by end-2020,
based on expectations that only about half the 108,900 sq metres of new leasable retail space will be
occupied. As a result of the uncertainty over the take-up of new retail developments, Colliers
recommended mall operators consider converting vacant mall space into micro-warehousing, especially
near Metro Manila.

One bright spot is the Senate approval in late September 2020 of amendments to the Retail Trade
Liberalisation Act, which aims to attract more foreign investment in the retail sector. The amendments
lower the minimum capital requirement from $2.5m to $300,000, and decrease the capital
requirements attached to individual store openings. The sector was further boosted in October 2020
when it was announced that malls could again operate at 100% capacity in areas of the country under
general community quarantine.

Despite the damage caused to exporters, demand for industrial space has yet to exhibit signs of distress.
Rommel Leuterio, director and adviser to the chairman of Science Park of the Philippines Inc (SPPI), told
OBG that the company was still closing deals that opened before the pandemic using digital tools. “We
booked record sales in 2019, pre-Covid-19, and that is continuing this year, primarily from discussions
commenced pre-pandemic,” he said, adding that in 2021 and beyond it is more difficult to judge
because of foreign investors’ inability to make site visits and uncertainties surrounding the efforts of the
Department of Finance to alter incentives for those who locate in PEZA zones.

Leuterio also noted an evolution in demand at the SPPI’s light industrial and science parks, moving from
an initial emphasis on electronics exporters to more domestic-focused food and consumption
companies. Demand for logistics facilities is also robust given the rising importance of e-commerce.
Turnover from digital retail transactions reached $3bn in 2019, up from $500m in 2015, and is on track
to exceed $12bn by 2025.

Residential

The picture in the residential property market is mixed, with prices holding up well in the first half of
2020 but expected to decline significantly in some areas by the end of the year. In the second quarter
BSP’s residential real estate price index was up 27% y-o-y – a 34.9% increase in the National Capital
Region and 18.1% outside it. By category, condo prices rose the fastest, up 30.1%. Single detached
homes increased by 24.1% – the fastest pace since records began in 2015 – while townhouse prices rose
by 10.8%, and duplexes were up 0.8%. Demand for property outside of locked-down cities, including
seaside residences, coupled with excess liquidity in the financial system, helped drive the market. In the
first half of 2020 take-up of mid-income or higher properties accounted for 80% of the pre-sale market,
up from 71% one year earlier, indicative of strong demand for luxury developments.

Most real estate firms expect the worst impacts will be felt in late 2020, before a projected recovery
helps reinvigorate the residential market in 2021. Colliers predicted that condo prices could fall by 15%
in 2020, prompting speculation that overseas investors – particularly those from China – could be
preparing to capitalise on attractively priced assets. The fall can be partly linked to the exodus of POGO
workers, with broker KMC Savills estimating that condo rents in areas with high POGO exposure could
fall by as much as 25%.

Commercial banks’ 10-year mortgages worth up to 80% of the housing value tend to carry interest rates
in excess of 5%, suggesting repayments may come under pressure if the recession endures. In response
to Covid-19, public home loan provider Pag-IBIG Fund offered up to six months of payment relief, more
affordable amortisation and waived penalties under a special restructuring programme. It also granted a
60-day grace period on all loan repayments.
Outlook

As ever, the future of construction and real estate will be closely linked to that of the national economy.
Despite the slowdown in 2020, the Philippines is well positioned to bounce back from the pandemic.
Debt to GDP and inflation remain moderate, giving the government scope to catalyse recovery through
infrastructure spending. Covid-19 has interrupted many BBB projects, but the programme has not been
derailed and will continue to present opportunities for engineering, design and construction firms.
Indeed, the Duterte administration has earmarked P1.1trn ($21.9bn) for the BBB under its proposed
2021 budget. As for real estate, foreign investors seeking attractive returns are likely to be enticed by
the introduction of REITs and fewer restrictions in retail, which should provide strong residential and
commercial momentum in 2021.

-----

HOW TO DEAL WITH NEGATIVE CASH FLOW PROPERTIES

by Hamza Abdul-Samad

February 14, 2017

Yikes! You’ve fallen into the rabbit hole of real estate; you have negative cash flow properties. The
ultimate goal of an investment property is to create the opposite, to have positive cash flow properties.
In simple terms, a positive cash flow is when you are earning more than you are spending on a property.
A negative cash flow is when your rental income is lower than the cost of your expenses. But hey, if you
do have negative cash flow on a property, it’s not the end of the world. Here are some ways to deal with
negative cash flow properties.

Try a Different Rental Strategy

Sometimes the reason investors end up with negative cash flow properties is that they’d opted for a real
estate investment strategy that isn’t suitable for their area or property. In that case, it’s time to try
something new.

Instead of going with a usual long-term lease, try to rent short-term. If the property is near a college or
university, business district, airport, or a hospital, then this a strategy you should pursue. Potential
tenants in these areas will want to rent short-term. For example, college students tend to rent for one
semester at a time. Most travelling business employees prefer to stay in a short-term rental than a
hotel, as they get the ‘home-away-from-home’ vibe. Short-term leases tend to charge higher rent per
an amount of time than long-term ones. This will help turn your negative cash flow to positive.

Not interested in renting traditionally? Then try out Airbnb. By renting on Airbnb, your property will
function as a vacation rental, and interested guests can view your property online. There are many,
many perks of renting through Airbnb, but let’s stick to our purpose of negative cash flow. By being an
Airbnb host, you’ll earn rent on a nightly basis, which results in higher returns than a typical traditional
rental. Renting through Airbnb could be the difference maker in creating lucrative positive cash flow
properties.

Review and Fix What Went Wrong

Obviously, something went wrong with your business plan. Take a look at your situation and analyze
what had gone wrong. Were your costs underestimated? Were they overestimated? Did the property
have high vacancies? Was the property lacking renovations and functionality? Was the property doomed
to fail due to a poor location or structure? Properly managing the property and its expenses is key to a
successful and gainful property. Discover what lead to negative cash flow in the first place. Remember,
the first step to eliminating a problem is to find out what it is.

Use Smart Data

In this kind of situation, you’re probably telling yourself “if only I could’ve seen the future of my
property”. Well, you can! Almost. The closest thing to predicting the future of your property is to use
predictive analytics.
What exactly is predictive analytics? It’s basically data that uses past trends to predict the future of
properties. It gives investors an idea of what kind of investment they’re in for.

Mashvisor’s calculations are all based on up-to-date predictive analytics. This will help you flip your
negative cash flow properties to positive ones in multiple ways. You’ll know how much you could earn, if
the market is suitable, which strategy to follow, and much more.

That’s not the only way Mashvisor can resolve your negative cash flow quagmire. You could analyze your
cost projections by listing and breaking down your expenses. This is a strong indicator of potential cash
flow. To avoid vacancies, which are a common cause of negative cash flow, you can learn what to do to
optimize occupancy rates.

Try a Rent-to-Own

You could also decide to provide a rent-to-own for your tenants. This is another viable solution to the
problem of negative cash flow properties. Essentially, a tenant pays small deposits which are credited
back at the time of the purchase. Also, the tenant continues to pay rent in addition to an amount that
the two parties agree upon. The additional amount is also credited back to the tenant. The process may
take between one to five years.

Both parties benefit from this kind of deal. Tenants who aren’t qualified for mortgages are able to buy a
property. There are also benefits to an investor who wants to fix negative cash flow properties. The
investor receives money from the deposits, occupancy rates remain constant as the tenant continues to
pay rent, and maintenance is decreased since the tenant is now operating the rental as their future
home. All in all, an investor receives higher cash flow. If you want to pursue this strategy, make sure
your tenant is qualified for payments and rent. Screen them meticulously.

Charge for Special Amenities and Renovate

As a real estate investor, you should milk every buck could possibly earn, within reason, of course. This
could a be a solution to negative cash flow properties. If your property offers a special amenity, such as a
swimming pool or outdoor space, then charge extra. This will increase your rent, slowly healing the
negative cash flow. You could even rent separate spaces, like garages, to non-tenants to boost your rent.
Renovations also increase your property’s value, leading to a higher rent. Adding an extra bathroom or
bedroom will definitely warrant more pay.

Keep it Cool With Your Tenants

No need to over-complicate this one. Have good relations with your tenants. As previously mentioned, a
common cause of negative cash flow properties is high vacancies. A friendly rapport will most likely keep
your tenants at your properties, unless they are forced to relocate due to job or study conditions. This
will lead to high occupancy rates, preventing negative cash flow. Why would they want to leave if they
had such a great landlord?

-----

WHY POSITIVE CASH FLOW IS A MUST WITH INCOME PROPERTIES

by Victoria Daibes

February 5, 2018

With every real estate investment, there must be a good return on investment (ROI) and fast cash flow
returns to deem any rental property profitable. Investing in real estate is the ideal safe investment with
steady returns and long-term real estate appreciation. Buying a rental property reaps real estate
investors passive income (rental income), directly proportional to the location and the macro-economic
conditions. If the economy is in upswing, the housing market will also experience positive repercussions
and vise versa.

Before real estate investors hone in on a rental property, they study the macro market conditions, the
economy, the real estate market, and then the rental property itself. Without grasping and
understanding real-time macro and micro conditions, real estate investors can never guarantee
profitable and positive cash flow properties to build wealth in real estate.
Before we delve into how to find positive cash flow properties, we must understand what it really means
and its importance in real estate.

What Does a Positive Cash Flow Property Reap?

To put it in the simplest terms, real estate investors capitalize on rental properties for positive cash flow
to acquire:

A positive net profit

Cash surplus

Cash returns which exceed fixed costs and operating expenses

A Positive Cash Flow Property Hypothetical Example:

A real estate investor buys a rental property for a total price of $500,000. He takes a loan of $300,000 at
5% interest.

He decides to rent the property for $600/week and incurs the following expenses:

Mortgage: $288.46 ($300,000 x 0.05 /52)

Property management fees: $42.00 (7% of rental income)

Landlord’s insurance: $13.46 ($700/year)

Repairs and maintenance: $30.00 (5% of rental income)

Total expenses = $391.92/week

Therefore, the real estate investor would be earning a surplus of cash, or a positive cash flow return, of
$208.08/week after his expenses. The positive cash flow property would have accumulated $10,820.16
in extra income at the end of the year.

5 Reasons Why Positive Cash Flow Is a Must for Income Properties

1. It generates passive income for real estate investors/landlords

This goes without saying! Buying a rental property, whether in the traditional sense or for a short-term
rental strategy like Airbnb, must give real estate investors high returns and cash surplus. To be profitable
in real estate, rental income must exceed total expenses and generate excess cash returns, as shown in
the example above. Essentially, your rental property pays you cash, gives you extra income, and acts as a
financial cushion for many years to come. This is exactly why so many people gravitate towards starting
a real estate business; it is a safe investment with a good ROI.

2. Rental income increases over time

When real estate investors buy positive cash flow properties, their rental income essentially increases
over time simply because as your rental income incrementally increases, your major expenses (i.e.,
mortgage payments) stay relatively the same. So, long story short, the higher the rental income, the
more cash flow returns investors earn per month. Not only do your tenants pay down your mortgage
payments, but also you increase the equity of the rental property down the line to give you more
leverage. More on that in the next point.

3. Real estate investors leverage their equity to buy more rental properties

If you buy a rental property with a mortgage loan, essentially you accumulate equity of owning the real
estate property down the line. This means that as you build your equity and gain full ownership of the
rental property, you gain leverage to use this equity against buying more real estate to build your real
estate business and diversify your portfolio.
4. A positive cash flow property is a safer investment than a negative gearing strategy

A positive cash flow property makes money in two ways: rental income and appreciation. Meanwhile, a
negative gearing property does not make money from rental income. On the contrary, negative geared
properties occur when the cost of owning a property exceeds the income it generates each year. These
properties make money when they are sold for a lump sum.

5. Building a real estate business provides financial freedom

Real estate investing paves the way for building wealth and long-term financial security. Given the right
location and suitable economic conditions, real estate investors can find positive cash flow opportunities
to build wealth and generate significant passive income on a monthly basis. It goes without saying that
real estate investing will always be in demand, and it will never go out of style. But with all this said,
make sure you choose the right housing market and the right rental property for reaping big profits and
building your real estate business.

How to Find a Positive Cash Flow Property

Real estate market analysis (macro) and investment property analysis (micro)

Without the right real estate analysis and due diligence, investors cannot deduce if a rental property will
be profitable and reap positive cash returns down the line. To make smart decisions in real estate,
investors use financial metrics (cap rate, cash on cash return, etc.) and tools (like Mashvisor investment
property calculator) to estimate ROI and pocket big profits.

Mashvisor’s investment property calculator

The rental property calculator helps investors calculate the ROI, taking into account fixed and operating
costs.
Key calculations of the investment property calculator include:

Cash on cash (CoC) return: The cash on cash return equals the net operating income (NOI) over the total
cash investment. A good benchmark to keep in mind is at least 8% of CoC return to insure good
profitability.

Capitalization rate: The cap rate is the ratio of the net operating income over the real estate property
value.

Positive/negative cash flow: The cash flow estimates cash returns, whether positive or negative.

Conclusion

Successful real estate investing is about capitalizing on positive cash flow properties to earn fast cash
and long-term real estate appreciation. If you are a first-time investor, seek professional advice from a
real estate agent or a real estate broker. Find the best methods to conduct real estate market analysis
and investment property analysis. Find the best tools to measure financial metrics and estimate cash
returns and overall net profits on any real estate investment. Understanding how to estimate the ROI on
a rental property is key to guaranteeing long-term profits and building a successful business in real
estate.

------

The Ultimate Beginner’s Guide to Real Estate Investment Analysis

by Eman Hamed Mar 2, 2019

If you have ever thought of buying real estate as an investment, then you’ve probably been curious
about how to analyze the financial details of an investment property. Beginners in the real estate
investing business always ask: How do real estate investors recognize if a certain property for sale would
make a good deal or is a rip-off? The following is our guide on how to do real estate investment analysis
on any residential rental property you might consider buying.
What Is Real Estate Investment Analysis?

A real estate investment analysis is basically the process of analyzing investment opportunities to decide
whether or not they’ll give you the profits you’re aiming for to achieve your investment goals. For the
real estate investor, this is perhaps the most crucial part to success. There are generally 4 steps to
analyzing rental properties, which are:

Determining the market value of the rental property

Calculating the operating costs

Finding the market rents

Calculating your return on investment

Seems simple right? Well, maybe not. Keep reading our guide for beginner investors where we walk you
through each step.

Part 1: Property Valuation

Sellers of investment properties will always try to sell for maximum profits. Meanwhile, a real estate
investor hopes to buy the property at a fair market price. It can be hard to calculate what a real estate
property should sell for because values can vary significantly between two similar properties. So, the
first step in real estate investment analysis is to find the real value of the property to avoid overpaying.

To find the value of residential real estate properties, you need to find comparable properties (comps).
Comparable properties are simply other properties in the area that have similar characteristics and were
sold recently. By looking at what rental properties have sold for, real estate investors can get a hint to
the value of another property. This is known as comparative market analysis.

For example, a single-family home in your neighborhood will rise in value if similar single-family homes
are rising in value, and vice-versa. This allows you to determine how well or how bad your choice of
investment property is in comparison to the overall performance of other investment properties in the
area and the overall performance of the housing market.
Looking for rental comps in your area to begin your real estate investment analysis? Find them in a
matter of minutes using Mashvisor’s Investment Property Calculator.

Real estate investment analysis - rental comps

Before moving on to the next part, it’s important to mention that larger investment properties (like
multi-family homes) are valued differently. You can’t just compare an apartment building to others to
see how much it is worth. Instead, the value of these real estate rental properties is related to their
income potential (how much rental income they generate).

Part 2: Calculating Costs and Expenses

Every real estate investment property comes with different costs and expenses which impact the returns
and profits that you can expect to gain. So, the next step of the real estate investment analysis is to
gather enough information about the property before making the purchase to calculate your operating
expenses. These include, but are not limited to:

Property taxes

Insurance

Utilities

Turnover costs

Maintenance expenses

Property management fees

Marketing/rental fees

Principal/interest payments

The seller will provide you with pro-forma data (estimated data about the property’s value). However,
remember that a seller wants you to buy the rental property, so he/she will likely give you high
estimates of the rental income or neglect to mention operating expenses that you’ll face down the line.
Therefore, you can’t always guarantee accurate pro-forma data.

So, the real estate investor should ask the seller/previous owner for actual data on the rental income
and operating expenses. For example, ask to see previous years of tax returns, property tax bills,
maintenance records, etc. Once you have the pro-forma data and the actual data, you’ll be in a better
position to decide whether this property makes for a good investment. This step of real estate
investment analysis is part of your due diligence before buying an investment property because it
assures you won’t run into surprises after closing the deal.

Part 3: Finding Market Rents

The rent that you’ll charge tenants after acquiring the property is an important consideration. You want
your rental income to cover your operating expenses, make reasonable profits, and be competitive
within the local market at the same time. To estimate the rent you can receive from investment
properties, you need to determine the overall market rent.

You can determine the market rents by simply asking other real estate investors/landlords in the area
where you’re investing. Local real estate agents and property managers can also give you an idea of
what rents are. In addition, finding and analyzing rental comps will also allow you to see what similar
residential rental properties are renting for.

To make this step of the real estate investment analysis easier, use Mashvisor’s Heatmap. With this tool,
you can see the average monthly rental income (traditional and Airbnb) that you’ll receive from
investing in that location. What’s more, the Heatmap uses color codes to help real estate investors
determine how well the housing market is performing compared to surrounding areas.

Part 4: Calculating the Return on Investment

This is the part where all the data you’ve gathered will come together to give a final estimation of
whether or not buying the rental property makes financial sense. There are different types of ROI you
can calculate for real estate investment analysis. The most important ones are:
Cash Flow: This is the amount of money left after all rental expenses, principal payments, and interest
have been paid. As a real estate investor, it’s important to estimate your future cash flow as you want to
ensure you’re buying positive cash flowing rental property to make money in real estate.

Cap Rate: This is the ratio of the net operating income (NOI) over the property’s value. Knowing the cap
rate is great for quickly comparing multiple properties in a given area, determining market trends, and
identifying the level of risks associated with the investment property.

Cash on Cash Return: This is the cash you get back compared to the cash you invested in the property. It
takes into account your down payment, closing costs, repair costs, etc. So, knowing the cash on cash
return is extremely important because it lets you know whether you’ll have the money to pay your bills.

As you can see, each metric for calculating the return on investment tells you something about your
choice of rental property. So, it’s important to account for all of them in your real estate investment
analysis and not make a decision depending on just one.

The Bottom Line

It’s obvious that with real estate investment analysis, you’ll have all the information you need to make
the right decisions with confidence. Without it, on the other hand, a real estate investor may face severe

-----

Real Estate Investment Analysis

Buying right can result in profitable cash flow

Potential investors may do an real estate analysis of this row of detached homes before investing in a
project.

•••
BY JAMES KIMMONS Updated October 28, 2019

It is cruital for a real estate investor to do an investment analysis before entering or beginning any new
project. A successful rental home investor might have dozens of homes in their portfolio. Various factors
lead to financial success with real estate investing. It is necessary to consider all of them. Buying right
can result in double-digit returns and a solid flow of cash for years. Alternatively, if you don't do the
necessary due diligence, you could find yourself the owner of a worthless investment property.

Net Operating Income

Any investment analysis begins with understanding net operating income (NOI). This value is the total
income your property generates less any expenses it incurs. Such expenses include the costs you pay to
maintain the property. Simply subtract total expenses from total income to arrive at your NOI. To
determine your monthly NOI by dividing the resulting number by 12.

However, there is one catch. Your total expenses do not include loan costs.

Cash Flow

Your cash flow is what's left when you make an additional adjustment for those loan costs, typically your
mortgage. You're left with your cash flow when you subtract debt service from your NOI. This is your
profit.

The more you borrow, the less your cash flow will be. Your NOI will equal your cash flow if you pay cash
for the property.

Cash flow is admittedly a function of a great many inputs, and any of them can change and damage—or
improve—a situation. Some inputs are influenced by the market and the economy. The demand for
rental property can plummet overnight when a major local employer closes or moves. The Federal
Reserve can increase the overnight interest rates driving up the cost of borrowing, and impact the
overall real estate market. This change can make the cost of buying new properties more expense and
reduce your cash flow.
You can't control things like this, but you can hopefully avoid these situations by doing your due
diligence about the health and plans of local employers. Keep abreast of economic news and plan for
changes in the interest rates. You're probably in good shape if your properties are profitable with a long
lease that have been recently renewed.

The Depreciation Factor

Of course, the Internal Revenue Service (IRS) is going to want a percentage of all this rental income.
However, investing in real estate offers quite a few tax breaks as well. One beak is the property
depreciation deduction which is a valuable component in property analysis.

Depreciation even reduce taxable profits from other investments for those in high tax brackets. You can
often use your leftover losses against other investment income when the costs of maintaining and
renting a property plus depreciation total more than your taxable profit.

It's not actually a cash loss because depreciation isn't coming out of your pocket. It's a calculated
number treated as an expense for tax purposes. You can still have a positive monthly cash flow while
showing an operational loss for tax purposes.

Property Taxes

You must pay property taxes if your business owns rental property, but you can deduct these taxes for
income tax purposes. Businesses pay property tax on the assessed value of their real estate in the same
way that individuals pay property tax on the assessed value of their homes.

The tax for the year is distributed between the previous and new owners when real estate is sold during
a taxing year. This percentage split is based on how much of the year you owned the property as
compared to how long the previous owners had the structure.

Landlord Insurance

Landlord insurance will help to cover the value of the building and functions much like standard
homeowners property insurance. The policy will cover damage from tenants and losses from storms. If
your property is in a high-risk area and exposed to flood, earthquake, and wildfire be sure to get the
appropriate insurance to cover your investment.
If you do find yourself at a loss after an event you can apply to the Small Business Administration (SBA)
Disaster Assistance program for a loan that will help repair the damage.

----

Duterte vetoes 9 items in CREATE law

By Ruth Abbey Gita-Carlos March 27, 2021, 10:14 am

Share

MANILA – President Rodrigo Duterte has vetoed nine items in the new Corporate Recovery and Tax
Incentives for Enterprises (CREATE) Act to ensure it would serve its purpose as a fiscal relief and
recovery measure for Filipino businesses affected by the pandemic.

In a statement issued Friday night, Presidential Spokesperson Harry Roque said Duterte has applied
direct veto to the proposed increase in the value-added tax or VAT-exempt threshold on the sale of real
property to up to PHP4.2 million.

While the vetoed item will benefit even those not originally targeted for the VAT exemption, the
President believed it is prone to abuse, as properties could be parceled into lots so that the individual
values fall within the VAT-exempt threshold, Roque explained.

He said Duterte has also vetoed the proposed 90-day period for the processing of general tax funds due
to “administrative impracticability” as it would be difficult for the Bureau of Internal Revenue (BIR) to
implement the proposal.

Roque added that the proposal “may cause delay or erroneous processing of refund claims.”
“Aside from this, the Tax Code itself requires the Commission on Audit to examine refunds. With such a
report, the BIR may resort to granting refunds haphazardly, or denying an application outright – which
must be avoided at all costs,” he said.

The definition of investment capital, which excludes the value of land and working capital, has also been
vetoed by the President, Roque said.

“The government must adopt measures now used by investment promotion agencies and to not exclude
land and operating expenses from the measure of an investment’s total scale as this may lead to an
underestimation of our investment promotion performance,” he said.

Roque said Duterte has also vetoed the “redundant” incentives for domestic enterprises because he
believed the proposed item is “unnecessary” and “weakens the fiscal incentives system.”

He said the “generous, targeted, and performance-based” enhanced deductions to domestic activities in
priority sectors under CREATE law are already sufficient incentives.

Duterte has also rejected the proposal to allow existing registered activities to apply for new incentives,
saying this is “fiscally irresponsible and utterly unfair to the ordinary taxpayer and to unincentivized
enterprises,” Roque said.

“The principle must be: only new activities and projects deserve new incentives,” he said.

Other vetoed items, Roque said, are the limitation on the power of the Fiscal Incentives Review Board,
as well as the enumerated industries that either do not merit support through incentives or are
expected to become obsolete in the short-term.

He said Duterte has also decided to apply direct veto to the proposed provision enabling the President
to exempt any investment promotion agency from the reform as it is “contrary to the government’s
steps in rationalizing our fiscal incentives system.”
“It can also be used as a highly political tool dismantling and disregarding studies and discussions based
on empirical evidence. Exempting any investment promotion agency from the CREATE Act, which
provides for transparency, accountability, and proper administration of tax incentives, may be used as
an escape from the accountability measures,” Roque said.

The last item vetoed by Duterte is the proposal to automatically approve applications for incentives as it
is “contrary to the declared policy to approve or disapprove applications based on merit,” he said.

The CREATE Act or Republic Act 11534 inked by Duterte on Friday cuts corporate income tax rate to 25
percent from the current 30 percent.

-----

Philippine Real Estate Services

Dayanan Philippines Business Consultancy Experts can provide you with real estate development,
investment analysis and market research reports encompassing the following:

1. Real Estate Development Market Studies

a. Regional analysis covering economic and demographic factors including population, income and
employment growth, available infrastructure, public services, regional accessibility and other factors.

b. Site analysis to determines your site’s allowable land use and zoning, availability of utilities, vehicle
and pedestrian accessibility, access to mass transportation and provides a general context of the
locale/neighborhood.

c. Competitive analysis identifying specific competing developments within your market area and
provides an in-depth assessment of pricing, product features, amenities and the overall competitive
market.
d. Market potential defined by interpreting the various supply and demand factors and identifying the
types of buyers drawn to your site. We then identify the highest and best use for your site, outline
several strategies and propose the best type of project that would be apt for your market. Sophisticated
statistical analyses are employed to determine which factors would contribute most to your property’s
value and what price levels would be attractive to your market, ultimately defining the best pricing for
your product that the market would accept.

e. Financial proforma modeling and investment analysis determines what kind of returns your project
can attain.

f. Data presentation using Geographic Information Systems (GIS) to give a visual understanding of the
market.

2. Development advisory – sharing our deep understanding of the Philippine real estate development
industry, we provide advice on the local development process, particularly on procuring the required
permits from various government agencies.

3. Representation and brokerage services – we help you identify a property, conduct due diligence,
negotiate with the different parties and eventually acquire the property.

4. Joint venture/real estate syndication – we can assist you in structuring joint venture/real estate
syndicates and identifying potential partners and investors. Financial waterfall structures can be
employed to determine the distribution of funds.

------

The Philippine Environmental Assessment Policies

Published: 2016.05.10
Princess Alma B. Ani

Senior Science Ressearch Specialist

Philippine Council for Agriculture, Aquatic and Natural Resources Research and Development (PCAARRD)

Introduction

Environmental Assessment (EA) refers to the process of systematic analysis, evaluation and
management of the potential environmental and social effects, short-term and long-term, of proposed
actions or projects. It is an administrative tool that integrates environmental considerations in
development initiatives to ensure that the proposed projects will have minimal environmental impacts
and be environmentally sound (ADB, 2003). When properly implemented, it can serve as basis to
improve project design and implementation through measures that prevent, mitigate and compensate
for adverse environmental impacts.

The increasing and growing economic activities that failed to adequately account for the detrimental
impacts of development activities to the environment led to the advent of environmental impact
assessment (EIA). EIA, which involves evaluating and predicting the likely impacts of the projects on the
environment, has an important role in resolving these environmental problems through its ability to
contribute to environmentally sound and sustainable development. The concept was based on the
Environmental Impact Assessment study framework first introduced in the United States in 1969
through the National Environmental Policy Act (NEPA). In 1992, Principle 17 of the Rio Declaration
adopted EIA as a national instrument for sustainable development which “shall be undertaken for
proposed activities that are likely to have a significant adverse impact on the environment and are
subject to a decision of competent national authority” (Tuyor et al., 2007). Since then, environmental
assessment process has become an essential component for any proposed project.

In the Philippines, environmental protection is recognized in the 1987 Constitution which stipulates that
“The State shall protect and advance the right of the people to a balance and healthful ecology in accord
with the rhythm and harmony of nature.” Anchored on the principles of sustainable development, it is
the State’s responsibility to ensure that environmental protection is institutionalized and materialized
through assessment systems and processes.

The Philippines’s policies that embody the protection to the environment against potential deterioration
and damage is institutionalized through the establishment of the Environmental Impact Statement (EIS)
System and the Environmental Impact Assessment (EIA). The country’s EIS System is considered one of
the most comprehensive environmental systems in the world. It is even described as “extremely
comprehensive” (Tan 2002 as cited by Tuyor et al., 2007) that does not merely focus on regulation of
industrial pollution but aims at protecting the entire spectrum of the environment and the rights of the
local communities. However, the environmental assessment in the country is project-based.

This paper provides an overview of the policies that established the environmental assessment in the
Philippines, the challenges and issues to implement these policies, and some policy implications
including the recent policy initiatives of the government on EIS.

Evolution of the Philippine environmental assessment policies

This section discusses the evolution and development of the environmental assessment policies in the
Philippines. These policies provide a comprehensive legal and procedural framework governing the
conduct of EA in the country for projects that are likely to have significant environmental impacts,
directly or indirectly, to human welfare and ecological and environmental integrity.

A. The Philippine environmental policy

Environmental assessment in the Philippines was first conceived in 1977 with the issuance of the
Presidential Decree (PD) 1151, otherwise known as the Philippine Environmental Policy. PD 1151 was
established to address the urgent need to formulate an intensive and integrated program to protect the
entire spectrum of the environment. It stipulates the requirement for an environmental impact
assessments and statements to uphold the State’s policy to (1) create, develop, maintain and improve
conditions under which man and nature can live in harmony with each other; (2) fulfil the social,
economic and other requirements of present and future generations; and (3) insure the attainment of
an environmental quality that is conducive to a life of dignity and well-being. Clearly, PD 1511 indicated
the national intent to support an intergenerational responsibility and achieve sustainable development
through environmental assessment laws.

PD 1511 encourages the use of all practicable means, with considerations of other national laws, to
exploit the environment without degrading it or endangering human life, health and safety or creating
adverse conditions for agriculture, commerce and industry. Moreover, the law provides importance to
the preservation of historic and cultural aspects of the Philippine heritage; attainment of rational and
orderly balance between population and its resource use; and improvement in the utilization of
renewable and non-renewable resources.

The law mandates all national government agencies and instrumentalities, including government-owned
and controlled corporations (GOCCs) as well as private corporations, firms and entities to prepare and
file EIS for any project or activity that may significantly affect the quality of the environment. The EIS
shall provide detailed statement on:

the environmental impact of the proposed action, project or undertaking;

any adverse environmental effect which cannot be avoided should the proposal be implemented;

alternative to the proposed action;

a determination that the short-term uses of the resources of the environment are consistent with the
maintenance and enhancement of the long-term productivity of the same; and

whenever a proposal involves the use of depletable or non-renewable resources, a finding must be
made that such use and commitment are warranted.

As indicated in the Letter of Instruction (LOI) No. 422, an Inter-Agency Committee composed of various
government departments and agencies, enumerated as follows, and led by the Department of Natural
Resources (now Department of Environment and Natural Resources) is directed to form, implement and
monitor policies and programs to carry out the provisions of PD 1511.

Department of Natural Resources

Department of Agriculture

Department of Health

Department of Local Government and Community Development

Department of Public Works, Transportation and Communications

Department of Education and Culture

National Economic and Development Authority

Energy Development Board

National Pollution Control Commission

Philippine Atomic Energy Commission

Human Settlements Commission

Laguna Lake Development Authority

Philippine Council for Agricultural and Resources Research (now Philippine Council for Agriculture,
Aquatic and Natural Resources Research and Development)

National Housing Authority

National Irrigation Administration

University of the Philippines Natural Science Research Center

Philippine Coast Guard

Philippine Atmospheric, Geophysical and Astronomical Services Administration (PAGASA)

PD 1511 is a landmark law that establishes the foundation of the precautionary principle of
environmental policies in the country by requiring submission of an environmental impact statement on
projects and activities that may adversely affect the environment. It further embodies and upholds the
State’s recognition, as stipulated in the 1987 Constitution, of the right of the people for a healthful
environment.

B. The Philippine EIS system

PD 1586 or better known as the law Establishing an Environmental Impact Statement System Including
Other Environmental Management Related Measures and for Other Purposes, signed on June 11, 1978,
strengthened the EIS required under PD 1511 by formalizing the establishment of the Philippine
Environmental Impact Statement (EIS) System. It was established on the basis of the regulatory
requirements of the Environmental Impact Statement and Assessment instituted for environmental
protection.

Under Section 4 of PD 1586, the President is empowered to declare certain projects or areas, by his own
initiative or upon the recommendation of the National Environmental Protection Council[3], as
“environmentally critical” and prohibits the implementation or operation of these projects without first
securing an Environmental Compliance Certificate (ECC)[4]. Clearly, the law stipulated ECC as a
requirement to conduct environmentally critical projects (ECPs)[5] or operate in environmentally critical
areas (ECAs)[6]. On the other hand, for environmentally non-critical projects, EIS and ECC are not
required, however, they may be required to provide additional environmental safeguards.

As a regulatory policy, penalty clause for violating the rules and regulations of PD 1586 is stipulated.
Violations against the rules and regulations issued by the NEPC and non-compliance of the terms and
conditions in the issuance of the ECC or of the standards shall be punished through suspension or
cancellation of ECC and/or a fine in an amount of not exceeding Fifty Thousand Pesos (Php 50,000.00).
The amount that will be generated from the penalties shall be automatically appropriated into an
Environment Revolving Fund.

1. Environmentally critical projects and areas

With PD 1586 declaring certain projects and areas as environmentally critical, Presidential Proclamation
(PP) 2146 or the policy “Proclaiming Certain Areas and Types of Projects as Environmentally Critical and
Within the Scope of the Environmental Impact Statement System Established Under PD 1586” was
issued on December 14, 1981. PP 2146 identified the ECPs, broadly categorized into: (1) heavy
industries; (2) resource extractive industries; and (3) infrastructure projects, and ECAs (Table 1). In
addition, PP 803 was signed on June 6, 1996 which identified golf course projects as environmentally
critical.

Table 1. Environmentally critical projects and areas under Presidential Proclamation 2146.

2. Institutional framework and general procedure

The Department of Environment and Natural Resources (DENR) is tasked to administer the EIS System
through the Environmental Management Bureau (EMB) and its regional offices (ROs). The DENR-EMB
central office provides not only policy direction, oversight and overall guidance on EIA concerns, but also
reviews and processes ECPs. On the other hand, the DENR-EMB ROs review and approve projects
considered to be located in ECAs, as well as projects outside the EIS system purview.
Environmentally critical projects require the completion of an Environment Impact Assessment (EIA) and
the submission of an EIS report[7] while projects in ECAs are subjected to Initial Environmental
Examinations (IEE)[8]. DENR determines whether a proposal is an ECP or a project to be implemented in
an ECA, if either or both of these conditions apply, the proposal is required to secure an ECC. Otherwise,
DENR-EMB or the ROs can issue a Certificate of Non-Coverage (CNC)[9] certifying that the project will
not significantly affect the quality of the environment.

Likewise, LGU also plays a critical role in ensuring that all development projects in their jurisdiction that
are classified as ECPs or located in ECAs are subjected to the EIA review process. They are also
responsible in facilitating community participation through public outreach or consultation.

3. IES Implementing Rules and Regulations

The implementing rules and regulations (IRR) of PD 1586 are provided in five issuances (1979-1984;
1984-1992; 1992-1996; 1996-2003; and 2003-present) which are all geared at rationalizing, streamlining
and simplifying the system. Among these policies, the Department of Environment and Natural
Resources Administrative Orders (DAO) No. 21, series of 1992, No. 37, series of 1996 and No. 30, series
of 2003 are the most relevant and comprehensive legal pronouncements of the EIS system.

a. DAO No. 21, series of 1992 (DAO 92-21)

The DAO 21, s. 1992 provides for the comprehensive administrative regulation of EIS which lodged the
issuance of the ECC for ECAs to the DENR Regional Offices. In order to effect projects that are beneficial
and acceptable to majority of the stakeholders and to a wider community, one of the key objectives of
the DAO 92-21 is to involve the stakeholders in dialogues and exchanges of views, information and
concerns. The consultations shall serve as venue to determine social acceptability of projects and bases
for the possible reforms in the EIA System.

b. DAO No. 37, series of 1996 (DAO 96-37)

The DAO 37, series of 1996 provided for the strengthening of the implementation of the Environmental
Impact Statement (EIS) System established under PD 1586 and promulgated revisions on the DAO 92-21.
The underlying principle of the DAO 96-37 is to uphold the balance between socioeconomic growth and
environmental protection. As an integral part of the EIS System, the AO mandates for public
consultations and participation through the institutionalization of the Multipartite Monitoring Team
System (MMTS)[10]. It also embodies social acceptability and other environmental safeguards.

DAO 96-37 adopts the ECPs and ECAs identified in PP 2146. It also identifies projects and undertakings
not covered by the EIS System. The noted innovations of the AO included scoping[11] which considers
full public participation, environmental risk assessment, carrying or assimilative capacity of the
environment, the presumption of public risk and accountability statements of proponents and
preparers, DENR and stakeholders (Ipat Luna as cited by the Interface Development Interventions, Inc.,
no date). Further, the AO provides guidelines on the contents of the EIS which include among others
baseline environmental conditions, environmental risk assessment, environmental management plan,
proposal for monitoring and evaluation, results of the public consultation and social acceptability and
accountability statements.

c. DAO No. 30, series of 2003 (DAO 03-30)

The DAO 30, series of 2003, was issued in pursuant to the Administrative Order 42 of former President
Gloria Macapagal-Arroyo which intended to rationalize the implementation of the Philippines EIS
System. DAO 03-30 which superseded DAO 96-37, was established to streamline the implementation of
the EIS System in the country to make it a more effective planning and management tool.

Under DAO 03-30, the scope of the EIS System is based on two factors: (1) the nature of the project and
its potential to cause significant negative environmental impacts; and (2) the sensitivity or vulnerability
of environmental resources in the project area. Similar to its predecessor (DAO 96-37), salient provisions
of DAO 03-30 include among others mandates for scoping, public participation, inclusion of social
acceptability in the assessment, environmental carrying capacity analysis and environmental risk
assessment. It further classifies the projects and areas to be covered by the EIS System into four
categories:

Category A. Environmentally Critical Projects (ECPs) with significant potential to cause negative
environmental impacts;

Category B. Projects that are not categorized as ECPs, but which may cause negative environmental
impacts because they are located in Environmentally Critical Areas (ECA’s);
Category C. Projects intended to directly enhance environmental quality or address existing
environmental problems not falling under Category A or B.

Category D. Projects unlikely to cause adverse environmental impacts.

4. EIS procedural manuals

The procedural manuals serve as primary reference to clarify the steps and procedures required to
implement the IES System in the country. They are designed to be used as reference materials for DENR
staff or personnel, project proponents, EIA preparers and practitioners, environmental units of
government agencies, local government officials, non-governmental or people’s organization, and other
stakeholders involved in the implementation of the Philippine EIS System. The manuals focus on the
processes rather than the technical aspects of the EIA.

Villaluz (2003) presented a summary of the salient contents of the procedural manuals for the EIS
System. The procedural manual issued in 1992 discussed the step-by-step procedure in the preparation
and review of Environmental Impact Statements. Among others, the manual contained guidelines for
the following:

the form and content of the documentation requirements;

the conduct of consultation to show proof of social acceptability;

the composition of the external EIA Review Committee (EIARC)[12];

the allocations in an Environmental Guarantee Fund (EGF); and

the creation of Multipartite Monitoring Team (MMT).

The second edition of the manual provided a detailed discussion of the guidelines in the conduct of the
following:

scoping which include the technical definition of ECPs and ECAs and those under categories C and D of
projects and areas;

the procedural and substantive review;

the Environmental Risk Assessment;

the Environmental Management Plans (EMP);[13]

public hearings and consultation; and

penalties and sanctions for violating requirements of the EIS system.

Issues in implementing EIS

The implementation of the Philippine EIS System has been confronted with various issues and
challenges. The following are the key issues that were highlighted in several reports (Tuyor et al., 2007,
Villaluz, 2003 and Interface Development Interventions, Inc., no date):

Loose specification of projects to be covered by the EIS. While the law provides the list of projects and
areas to be subjected under EIS, the lack of delineation in ECAs poses confusions to proponents or even
implementers in the DENR.

Incongruities/inconsistencies of the IRR. DAO 03-30 withers down the provisions of DAO 96-37 on public
participation and social acceptability. Under DAO 03-30, public hearing is limited to ECPs only or “unless
otherwise determined by EMB” which means that EMB has the discretion to decide on the conduct of
this activity. It should be pointed out that achieving social acceptability requires taking into
consideration the views, opinion and circumstances of as well as information from the stakeholders
which can be addressed through adequate and appropriate public consultations and hearings. However,
the vagueness of the operational definition of social acceptability resulted to confusions and uncertainty
of the outcome of EIS.

Project-based nature of environmental assessment rather than holistic that looks at the environmental
impacts and dynamics of mix of projects.

More attention is paid on the procedural and regulatory/bureaucratic procedures rather than on the
technical aspects, resulting in generally poor quality environmental assessment characterized by
voluminous reports and lack of focus and depth of analysis on critical issues and impacts.

Overlap with other laws such as the Republic Act (RA) 7942 or the “Philippine Mining Act of 1995”, RA
8371 or the “Indigenous Peoples Rights Act of 1997”, RA 8749 or the “Philippine Clean Air Act of 1999”,
RA 9275 or the “Philippine Clean Water Act”, and other departmental orders and functions of the
Department of Agriculture (DA), the Department of Agrarian Reform (DAR) and local government units
(LGUs). Jurisdictional conflicts have caused confusion among project proponents which are usually
resolved through court rulings. The overlapping of policies also resulted to processes that are more
circuitous, time-consuming and ineffective.

Limited participation of the LGUs. The centralized administration of environmental assessment policies
vested the authority and responsibilities to the DENR which do not have the enough human resources to
perform the very rigid requirement of EIA. It should be noted that environmental projects and
undertakings are fundamentally local in scope.

Limited capabilities of the government to perform a complex monitoring system. The monitoring
protocols under EIS are very complex yet human resources and other resources such as equipment and
laboratories as well as data collection and storage need strengthening.

Conclusion and policy implications

Environmental assessment has been globally regarded as a crucial tool in achieving sustainable
development. The Philippine EIS System provides the framework and mechanism to pursue the
country’s environmental policies and goals. As part of the EIS System, EIA has become an important
process to determine the potential impacts of projects on the environment and the communities
involve. However, several issues and challenges have been observed which included processes that are
rigorous and complex yet do not provide in-depth analysis on critical environmental issues and impacts,
overlapping and conflicting implementation strategies between and among interrelated agencies,
limited participation of the LGUs that are the key units in local communities and lack of human
resources to implement IES aggravated by the limited trainings to improve capabilities and poor facilities
for environmental analysis. Hence, there is still a need to improve the quality of environmental
assessment in the country in order to maximize its potential as basis for an informed decision-making
and in preventing and mitigating negative impacts to the environment. Further, the EIS policies as well
as rules and regulations should be revisited and amended to be able to respond to the demands of the
changing times and be relevant with the advent of climate change and related policies on risk reduction
management.

-----

EMB MC 2020-31 | GUIDELINES ON THE (5) YEAR VALIDITY OF ENVIRONMENTAL COMPLIANCE

CERTIFICATE (ECC) PURSUANT TO DENR ADMINISTRATIVE NO. 30 SERIES OF 2003

Pursuant to DENR AO No. 2003-30, ‘The ECC of a project not implemented within five years from its date
of issuance is deemed expired. The proponent shall have to apply for a new ECC if it intends to pursue
the project. The reckoning date of project implementation is the date of ground breaking, based on
continue reading : EMB MC 2020-31 | Guidelines on the (5) Year Validity of Environmental Compliance
Certificate (ECC) Pursuant to DENR Administrative No. 30 Series of 2003
EMB MC 2020-30 | INTERIM GUIDELINES ON PUBLIC PARTICIPATION IN THE IMPLEMENTATION OF THE
PHILIPPINES ENVIRONMENTAL IMPACT STATEMENT SYSTEM (PD 1586) DURING THE STATE OF
NATIONAL PUBLIC HEALTH EMERGENCY

This Memorandum Circular is pursuant to Republic Act No. 11469 or the Bayanihan to Heal as One Act
and the IATF Resolution No. 11, item B2, “Mass gatherings, defined as a planned or spontaneous event
where the number of people attending could strain the planning and response resources of the
community hosting the event, shall continue reading : EMB MC 2020-30 | Interim Guidelines on Public
Participation in the Implementation of the Philippines Environmental Impact Statement System (PD
1586) During the State of National Public Health Emergency

EMB MC 2020-27 | PROJECT THRESHOLD FOR EXTRACTION OF NON-METALLIC RESOURCES APPLYING

FOR ENVIRONMENTAL COMPLIANCE CERTIFICATE (ECC)

Consistent with the Bureau’s effort to streamline and harmonize the implementation of the Philippine
Environmental Statement and the Philippine Mining Act of 1995 in relation to non-metallic resources,
the threshold stated in Item 2.1.3 of Annex A of EMB Memorandum Circular No. 2014-005 shall as
follows:

EMB MC 2020-26 | IMPLEMENTATION OF ENHANCED ONLINE PROCESSING OF CERTIFICATE OF NON-

COVERAGE (CNC) APPLICATIONS FOR CATEGORY D PROJECTS UNDER THE PHILIPPINE ENVIRONMENTAL
IMPACT STATEMENT SYSTEM (PEISS)

Consistent with the Bureau’s efforts to standardize, streamline and rationalize the Philippines EIS System
and pursuant to RA 11032, An Act Promoting Ease of Doing Business and Efficient Delivery of
Government Services amending for the purpose Republic Act 9485 otherwise known as Anti-Red Tape
Act of 2007, and for other purposes, Automated processing for Certificate continue reading : EMB MC
2020-26 | Implementation of Enhanced Online Processing of Certificate of Non-Coverage (CNC)
Applications for Category D Projects under the Philippine Environmental Impact Statement System
(PEISS)

EMB MC 2020-23 | CLARIFICATION ON THE REQUIREMENTS OF WASTE-TO-ENERGY (WTE) PROJECTS

RELATIVE TO ECC APPLICATION PURSUANT TO DAO 2019-21

Pursuant to the issuance of DENR Administrative Order No. 2019-21, otherwise known as “Guidelines
Governing Waste-to-Energy FAcilities for the Integrated Management of Solid Waste”, Waste-to-Energy
Projects, regardless of the power generating capacity, are now covered by the Environmental Impact
Statement System, and are required to secure Environmental Compliance Certificate (ECC). Hence, the
following is provided: continue reading : EMB MC 2020-23 | Clarification on the Requirements of Waste-
To-Energy (WtE) Projects relative to ECC Application Pursuant to DAO 2019-21

EMB MC 2020-18 | ADOPTION OF DAO 2019-16 FOR ECC PROCESSING OF NON-ECP UNDER THE BUILD,
BUILD, BUILD PROGRAM OF THE GOVERNMENT

In the interest of service and to harmonize the implementation of PD 1586 of the Philippines
Environmental Impact Statement System for projects under Build, Build, Build Program of the
Government, the procedures and requirements under the DENR Administrative Order No. 2019-16 in
ECC processing shall be adopted for Non-Environmentally Critical Projects requiring Environmental
Impact Statement continue reading : EMB MC 2020-18 | Adoption of DAO 2019-16 for ECC Processing of
NON-ECP under the Build, Build, Build Program of the Government

DAO 2017-15 | GUIDELINES ON PUBLIC PARTICIPATION UNDER THE PHILIPPINE ENVIRONMENTAL

IMPACT STATEMENT (EIS) SYSTEM | TEMPLATE MEMORANDUM OF AGREEMENT (MOA) | TEMPLATE
MANUAL OF OPERATIONS (MOO)

Consistent with the State Policies and Principles of the Philippine Constitution on the right of the people
to a balanced and healthful ecology and on encouraging non-governmental, community based or
sectoral organization that promote the welfare of the nation, the provisions of PD 1151 and PD 1586 |
Template Memorandum of Agreement (MOA) | Template continue reading : DAO 2017-15 | Guidelines
on Public Participation Under the Philippine Environmental Impact Statement (EIS) System | Template
Memorandum of Agreement (MOA) | Template Manual of Operations (MOO)

-----

What Are the Main Segments of the Real Estate Sector?

By GREG DEPERSIO Updated Mar 15, 2020

The main segments of the real estate sector are residential real estate, commercial real estate, and
industrial real estate.

Residential Real Estate

The residential sector focuses on the buying and selling of properties used as homes or for non-
professional purposes. The residential real estate sector is comprised of single-family homes,
apartments, condominiums, planned unit developments, and more. For the past few years, this segment
of the real estate industry has been steadily increasing in value; in 2019, median home prices were up at
approximately $316,000 while the residential real estate market as a whole was valued at more than
$27 trillion.

While there has been a lot of discussion recently on whether younger generations such as Millennials
are still buying property, the trend towards urbanization and growth of large cities will definitely inform
residential real estate prices for years to come.

Commercial Real Estate

The commercial sector consists of real estate used for business purposes; common types include
shopping malls, retail, office spaces, hotels, or other spaces used for business purposes. Some of the
latest estimates of the commercial real estate market from 2018 show a valuation of approximately $16
trillion. However, as prices fluctuate in the global economy, a number of investors have shown hesitance
to continue investing in the commercial real estate segment.

According to Deloitte's 2020 commercial real estate outlook, approximately 81% of executives surveyed
from high-grossing broker firms said they were likely to maintain or even reduce their technology
investments in their buildings. Still, "two-thirds of respondents with a predominant office property
portfolio expect growth in rental rates and one-third anticipate a decline in vacancy levels."

Industrial Real Estate

The industrial real estate segment is comprised of properties used for manufacturing and production,
such as factories, plants, and warehouses. Utility companies such as PG&E, for example, will own a lot of
industrial real estate as assets, including but not limited to power plants that work to generate
electricity. This real estate segment also closed out 2019 strong, and rents are expected to rise.
(For more on real estate prices, see: The Truth About Real Estate Prices).

Metrics Used in the Real Estate Sector

The different segments have different metrics that investors and analysts use to gauge the health of the
real estate industry. All three segments feature publicly traded real estate investment trusts, or REITs,
portfolios of properties whose stock prices investors frequently use to determine and analyze industry
trends.

REITs in the residential sector include Essex Property Trust Inc. (ESS) and National Retail Properties Inc.
(NNN). Home prices also serve as a gauge for the health of this segment, although following the recent
housing market crash of 2008, special attention has been paid to ensuring that home prices do not
reflect an inflated housing bubble.

In the commercial real estate sector, the largest REITs include Simon Property Group (SPG) and Rouse
Properties (RSE). Investors in this sector also look at sales data for office buildings and retail
developments and lease price trends for office and retail space.

-----

4 Types of Market Segmentation With Real-World Examples

June 23, 2020 | By Stephen Rötzsch Thomas

When you’re looking to improve the effectiveness of your marketing, segmentation should always be
one of your first ports of call. Learn about the 4 most common types of market segmentation, plus some
other ones that you may have missed.

Market segmentation is an increasingly important part of a strong marketing strategy and can make all
the difference for companies in competitive market landscapes, such as e-commerce.
When up against a range of online competitors, effective communication is the best way to differentiate
your business. Market segmentation offers an opportunity to pinpoint exactly what messaging will drive
your customers to make a purchase.

The 4 basic types of market segmentation are:

1. Demographic Segmentation

2. Psychographic Segmentation

3. Geographic Segmentation

4. Behavioral Segmentation

We’ll go into the 4 types in a lot more detail below.

In this article, we’ll cover

1. 🙋 Demographic segmentation

2. 🚣 Psychographic segmentation

3. 🌎 Geographic segmentation

4. 🛍️Behavioral segmentation

5. 📊 Other types of segmentation

6. 📈 The benefits of segmentation

7. Conclusion

Audience segmentation for eCommerce - Book a Yieldify demo now!

The 4 types of market segmentation with examples

The purpose of market segmentation is to identify different groups within your target audience so that
you can deliver more targeted and valuable messaging for them.
There are four main customer segmentation models that should form the focus of any marketing plan.

For example, the four types of segmentation are Demographic, Psychographic Geographic, and
Behavioral. These are common examples of how businesses can segment their market by gender, age,
lifestyle etc.

Let’s explore what each of them means for your business and your market segmentation strategy.

4 types of market segmentation: Demographic, Psychographic, Geographic, Behavioral

1. Demographic segmentation: The who

Demographic segmentation might be the first thing people think of when they hear ‘market
segmentation’. This is perhaps the most straightforward way of defining customer groups, but it remains
powerful. Demographic segmentation looks at identifiable non-character traits such as:

Age

Gender

Ethnicity

Income

Level of education

Religion

Profession/role in a company

For example. demographic segmentation might target potential customers based on their income, so
your marketing budget isn’t wasted directing your messaging at people who likely can’t afford your
product.
Luxury goods manufacturer Montblanc worked with Yieldify to present a selection of offers across their
website. One sought to raise conversions using a Father’s Day deal that offered a free gift to those
spending over £200 – an amount that acknowledged the spending expectations of Montblanc’s target
audience and saw a +118% uplift in conversions for those targeted.

Another offer was aimed specifically at corporate gift buyers – a market segment that Montblanc
particularly appeals to – and resulted in a +30% uplift for that segment.

Market Segmentation isn’t just about your business reaching customers more effectively – it’s also
about those customers seeing messaging that is more relevant to them!

2. Psychographic segmentation: The why

Psychographic segmentation is focused on your customers’ personalities and interests. Here we might
look at customers and define them by their:

Personality traits

Hobbies

Life goals

Values

Beliefs

Lifestyles

Compared to demographic segmentation, this can be a harder set to identify. Good research is vital and,
when done well, psychographic segmentation can allow for incredibly effective marketing that
consumers will feel speaks to them on a much more personal level.

In our experience working with luxury resort business Omni Hotels & Resorts, for example, were aware
that a big sector of the company’s target audience was always keen to get the very best price they
could. By targeting a notification campaign specifically towards comparison shoppers, Omni Hotels &
Resorts achieved a 39% conversion rate uplift.

3. Geographic segmentation: The where

By comparison, geographic segmentation is often one of the easiest to identify, grouping customers with
regards to their physical location. This can be defined in any number of ways:

Country

Region

City

Postal code

For example, it’s possible to group customers within a set radius of a certain location – an excellent
option for marketers of live events looking to reach local audiences. Being aware of your customers’
location allows for all sorts of considerations when advertising to consumers.

Using Yieldify’s tools, an online shoe store could show different products depending on where the
visiting customer was based: wellington boots for someone in the countryside, pavement-friendly
trainers for a city-dweller, strappy sandals to resort visitors, and so on!

In large nations like the United States, customers could be presented with options that match with local
weather patterns. Geographical identification is an important part of seasonal segmentation, which
allows businesses to market season-appropriate products to customers.

Some recent examples of proper geographic segmentation came from the response by e-commerce
businesses to the coronavirus pandemic. During lockdown stages, many businesses shifted their focus to
local communities to highlight how their services could still be accessed online.

Conversely, as public spaces began to open up again purely e-commerce brands had to shift their
marketing plans to maintain the levels of business they had seen over the lockdown period.
4. Behavioral segmentation: The how

Behavioral segmentation is possibly the most useful of all for e-commerce businesses. As with
psychographic segmentation, it requires a little data to be truly effective – but much of this can be
gathered via your website itself. Here we group customers with regards to their:

Spending habits

Purchasing habits

Browsing habits

Interactions with the brand

Loyalty to brand

Previous product ratings

Customer segmentation feature by Yieldify

All of these are datasets that can be harvested from a customer’s usage of your website. At Yieldify, we
utilize behavioral segmentation to deliver highly relevant and targeted campaigns based on a number of
behavioral patterns:

Number of sessions to your website

Number of pages visited

Time spent on site

URLs visited

Page types visited

Shopping cart value

Campaign history

Referral source
Exit intent

Inactivity, and more.

For example, we can distinguish between a first-time visitor and someone who’s already been on your
site multiple times but haven’t purchased. Based on this behavioral data, we can tailor our messaging
accordingly:

First time visitor: Hey, learn about our latest collection!

Returning visitor: Join our loyalty program and start saving!

Working with online wine club Vinomofo, we used behavioral segmentation to target three distinct
audiences: new visitors, returning visitors, and returning clients.

One of the best examples of this type of segmentation is showing new visitors a $15 incentive in
exchange for joining the community. Returning visitors who had already subscribed but have not
redeemed their coupon yet were reminded on their first order incentive. Whereas returning customers
saw a campaign about Vinomofo’s premium services.

This targeted approach focused on purchasing habits reached a 34.02% conversion rate uplift with new
and 29.24% CR uplift with returning visitors!

Other types of market segmentation with examples

Though the most common types of market segmentation are demographic, psychographic, geographic,
and behavioral, there are other types that are also worth considering and can offer excellent
opportunities in the right context.

Technographic segmentation
Technographic segmentation identifies and groups customers with regards to the role technology plays
in their lives. This might mean recognizing groups of early adopters when marketing new technologies. It
might also be as simple as recognizing the device users access the site from and presenting deals
differently.

With personalization, it’s easy to target adverts at specific groups like this. Consumers accessing an
online phone store via the Safari internet browser might be more interested in Apple products – and can
be shown these as a result.

Generational and life stage segmentation

Generational and life stage segmentation both expand on aspects of the demographic approach.
Identifying customers by generation allows for broad but distinct approaches depending on age.

Life stage segmentation, however, works similarly whilst divorcing life experience from age itself.
Instead, it groups customers by factors including marital status, home-ownership, and whether or not
they have children (and more specific still by considering the ages of their children).

Bank of America, for example, has successfully used life stage segmentation in their digital marketing
strategy. Medialogic details BoFA’s “Family Life Banking” program that invited customers to segment
themselves by clicking on a relatable tab within and email. From there, the customer would land on a
custom microsite designed specifically for their segment.

BoFA life stage segmentation example | Yieldify

Transactional segmentation

Transactional segmentation is based on previous interactions your customer has had with your brand.
Whilst it can draw on behavioral elements, it also has a much wider scope – considering the initial
source of their registration with your business, how long it has been since their last order, and how
many orders they’ve made overall.
Yieldify worked with clothing retailer Turnbull & Asser to boost conversion rates on their online store.
Offering free shipping to all their customers would have been too expensive, so Yieldify targeted a
specific transactional segment of their userbase – offering free shipping to those with a set value of
items already in their carts.

Turnbull & Asset transactional segmentation example

The shipping offer encouraged many of those targeted to make the extra purchases necessary to claim
it, and drove over £22,000 of extra revenue for the brand.

Picking up on information like this is a particularly effective strategy across multiple industries, including
top competitors to mass global retailers like Amazon, presenting e-commerce businesses with the best
understanding of their customers, and encouraging return visits.

Firmographic Segmentation

Whilst the above marketing segmentation strategies mainly focus on B2C organizations, Firmographic
segmentation can be extremely useful to those in the B2B world.

Firmographic segmentation is the process of analyzing and classifying B2B customers based on shared
company or organization attributes & characteristics.

This segmentation strategy allows B2B companies to better understand and target their audience and
marketing campaigns. This process is very similar to the way B2C marketers would use demographic
segmentation.

This type of market segmentation predominantly uses 7 factors to identify customer segments.

Industry

Location
Company Size

Status

Number of employees

Performance

Executive Title

Sales Cycles Stage

This market segmentation process can help form an effective B2B marketing strategy by identifying
target customers and tailoring marketing efforts to these specific customer segments.

10 Benefits of Market Segmentation

There are many benefits of market segmentation, our top 10 are below. You’ll see most relate to

1. More effective marketing

This is the biggest and most obvious benefit to well-implemented market segmentation. By better
recognizing the needs of your customers, you can identify more effective tactics for reaching them and
improving their interactions and experience with your business. Making your marketing efforts even
more effective.

2. More efficient spending

After all, your targeted marketing is going to allow for better returns on investment, and you’ll waste
less money on marketing that reaches the wrong audience.

3. Higher quality leads

You’ll also notice that the more targeted more marketing is, the better your leads become. You’re
reaching the right people, and they’re starting to notice you!

4. Identifying niche markets

Similarly, your research into segmentation may help you recognize areas of the market you’d not
considered before. This might even lead to the development of new products that are aimed specifically
towards these markets.

5. Improved customer retention

By identifying your customers by their needs, you can put out marketing that offers irresistible reasons
for a return visit. This is proven to increase customer retention, customer loyalty and lifetime value.

6. Differentiating your brand

The purpose of market segmentation is not only to help you reach your audience but also to allow your
customers to see the true value of your brand via marketing that speaks to them – and in doing so puts
you head and shoulders above your competitors.

7. More focus

Ultimately, thoughtful customer segmentation will allow your business to focus every element of its
activity to better reach those that it serves. Your marketing becomes focused on your customers’ needs,
your research and development may focus on meeting those needs, your spending will be focused on
achieving these, and not wasted on mistargeted marketing and planning.

Everything becomes better suited to giving your customers what they need, and as a result, your
business becomes exactly the sort of business they want to be buying from. This can greatly help with
the return on investment of all your marketing activity.
In conclusion

So, as you can see there are many different types of marketing segmentation you can choose from to
find and define your target market and effectively promote your product or service.

Your customers’ every decision is judged on whether the result is what they want, or whether it is what
they need. Market segmentation allows you to recognize these needs and market directly to them,
without any wasted messaging.

Whether it’s telling new drivers about the best car insurance for them, or sharing offers on barbeques
and sun-chairs to those living in the middle of a heatwave, market segmentation offers you thousands of
ways to ensure your customers see you as exactly what they want, and exactly what they need.

----