# GIPS Capital Return 2011 Q59

Just finished the 2011 PM Mock and amongst many wrong answers i got the GIPS RE return calc wrong. Capital Return = (V1 - V0 - Capex + SaleProceeds) / CE V1 = 13m V0 = 11.7 Capex = 2.7m Sales=3.5m CE=13.25m Makes sense according to the formula BUT why dont we adjust for the Capital Contribution in the numerator? Portfolio Value has increased by 1.3m but there was a 1.5m contribution during that period aswel? Thanks in advance for any views.

That was something I put into my notes (the formula for capital return does not include capital contributions in the nominator unlike modified dietz)

Dont see how it can be justified as a 11% increase when about 8% of that has come from Contributions - that isnt a return. i guess ill just accept it and move on. rule 1 - dont question CFAI. CFA “JUMP!”, ME “HOW HIGH?”

Agreed. But, i think the key is that you don’t know what is in the “Portfolio Fair Value”.

jmac is right, capital contributions will reflect into V1.

If you subtracted capital contributions from the numerator you would understate the return. Consider: Beginning value of house = 100 capital contribution = 10 capex = 10 Ending value of house assuming no change in market value = 110 (i.e. just increase in value due to capital improvements). If you included capital contributions your numerator would be 90 and it would look like you lost money.

trying to help - let’s see how this goes Return component of RE = true change in intrinsic value MV1 - MV0 (as is basic) + you add any thing that would’ve reduced MV1 e.g. Sales - you subtract anything that would’ve increased MV1 e.g. Cap expenditures. * if you make contributions to the account (artifical increases) it should be subtracted thoughts…?

famouschicken Wrote: ------------------------------------------------------- > If you subtracted capital contributions from the > numerator you would understate the return. > Consider: > > Beginning value of house = 100 > capital contribution = 10 > capex = 10 > Ending value of house assuming no change in market > value = 110 (i.e. just increase in value due to > capital improvements). > > If you included capital contributions your > numerator would be 90 and it would look like you > lost money. In that case, you would lose money indeed Espenses (here, capital expenditures) is an integral part of direct real estate investing. It is similar to trading expenses of equities, don’t you count it an expense?

I was answering SK22’s question about why you don’t include capital contributions in the numerator. And anyway, no, capital expenditures in real estate are not like expenses in trading equities. Capital expenditures for direct real estate investments are costs incurred to acquire or improve the asset, and are added to the value of the asset. It’s like if I added a second floor to my house, the house value increases.