- A commercial building priced at $1.5M. You want to buy it. You need to know its NPV. - How much money you have to put down (equity). - How much you have to borrow. - Ask owner how much is its NOI. - NPV = init equity + after-tax CF’s (ATCF) + final net price you get when you sell it. After-tax CF’s (ATCF) = NOI - debt payment - taxes you pay (every year based on NOI - deprectaion - interest porion of debt). ATER = price you sell it for - cap gains tax - remaining mortgage Do your NPV and see if it’s positive 2) You look at a commercial building that you like. Someone says that its annual NOI is $1M. You scratch your head and say gees how much is this thing worth? You want to know the capitalization rate (Ro) so that you can find market value = NOI/Ro. - Easiest way, what’s the typical Ro for building like this? Friends help you out by pointing to many buildings which had NOI = $1.1M and sold for $8M. Then Ro = $1.1M/$8M = 13.75%. - So you figure thi building is worth, MV = $1M/0.1375 = $7.27M. - Another way, is to build up the rate your self. Ro = rf + illiquidity premium + potential loss premium +/- growth in value of bulding (recapture premuim). Say, that comes to 12%. - Final way, is to use bands of investment method. You know that Ro has to be something like a WACC: Ro = Wd * (mortgage constant) + We * (Rce). Easiest way to find the mortgage constant is 12*monthly payments/principal. 3) PE valuation. You are a PE firm and you look at a nice company worth $6M. You want to buy it because you think it will be woth $8.4M in only 5 years. You don’t want to pay the entire amount, so you go to the bank and say, pay 60% of the cost and you’ll get 50% interest in 5 years. So, they pay $3.6M and get $1.8M after 5 years (plus their principal). Cool. Where do we get the other $2.4M? You go to a big investor and say pay $2M and you’ll get 10% on your money every year (for 5 years). He does not get any other money, he’s almost like a debt issuer, he’s a preference share owner. Ok, we still need $400,000 to come up with the full $6M. Easy, you (the PE firm) pay $360,000 (that’s not much), and to entice managers, you ask the to pay $40,000 only. You’re in business now. After 5 years, you are right, the company is worth $8.4M. You sell it. The bank gets $1.8M, the big investor (the preference share guy) gets $2M * (1.1)^5= $3,221,020. What remains is $3,378,980 to share between you (the PE firm) and management. You get 90% (because you’re mean and vicious) = $3,041,082, and the managers get $$338k (not too bad). I can go into VC valuation and first and second round stuff. Cheers.

Thanks Dreary, nice summary.

Dreary Wrote: ------------------------------------------------------- > 1) A commercial building priced at $1.5M. You want > to buy it. You need to know its NPV. > > - How much money you have to put down (equity). > - How much you have to borrow. > - Ask owner how much is its NOI. > - NPV = init equity + after-tax CF’s (ATCF) + > final net price you get when you sell it. > > After-tax CF’s (ATCF) = NOI - debt payment - taxes > you pay (every year based on NOI - deprectaion - > interest porion of debt). > > ATER = price you sell it for - cap gains tax - > remaining mortgage > Do your NPV and see if it’s positive > > 2) You look at a commercial building that you > like. Someone says that its annual NOI is $1M. > You scratch your head and say gees how much is > this thing worth? You want to know the > capitalization rate (Ro) so that you can find > market value = NOI/Ro. > > - Easiest way, what’s the typical Ro for building > like this? Friends help you out by pointing to > many buildings which had NOI = $1.1M and sold for > $8M. Then Ro = $1.1M/$8M = 13.75%. > - So you figure thi building is worth, MV = > $1M/0.1375 = $7.27M. > > - Another way, is to build up the rate your self. > Ro = rf + illiquidity premium + potential loss > premium +/- growth in value of bulding (recapture > premuim). Say, that comes to 12%. > > - Final way, is to use bands of investment method. > You know that Ro has to be something like a WACC: > Ro = Wd * (mortgage constant) + We * (Rce). > Easiest way to find the mortgage constant is > 12*monthly payments/principal. > > 3) PE valuation. > > You are a PE firm and you look at a nice company > worth $6M. You want to buy it because you think > it will be woth $8.4M in only 5 years. You don’t > want to pay the entire amount, so you go to the > bank and say, pay 60% of the cost and you’ll get > 50% interest in 5 years. So, they pay $3.6M and > get $1.8M after 5 years (plus their principal). > > Cool. Where do we get the other $2.4M? You go to > a big investor and say pay $2M and you’ll get 10% > on your money every year (for 5 years). He does > not get any other money, he’s almost like a debt > issuer, he’s a preference share owner. > > Ok, we still need $400,000 to come up with the > full $6M. Easy, you (the PE firm) pay $360,000 > (that’s not much), and to entice managers, you ask > the to pay $40,000 only. > > You’re in business now. > > After 5 years, you are right, the company is worth > $8.4M. You sell it. The bank gets $1.8M, the big > investor (the preference share guy) gets $2M * > (1.1)^5= $3,221,020. What remains is $3,378,980 to > share between you (the PE firm) and management. > You get 90% (because you’re mean and vicious) = > $3,041,082, and the managers get $$338k (not too > bad). > > I can go into VC valuation and first and second > round stuff. Cheers. Nice one Dreary…cheers

Thanks Dreary, if you do the same for VC valuation and first and second round stuff. would be awesome…