This document discusses key concepts in real estate finance including debt, equity, and returns. It explains that debt requires repayment with interest, equity entails ownership and higher risk but no required repayment, and returns must exceed capital costs for a project to be feasible. The document also notes that an equity charge of 8% is used and that reported returns are often higher before accounting for equity charges and fees.

1. Real Estate
Capital
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Real Estate
Finance 101

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Debt / Equity Charge
+ Capital costs money (interest) during its use which needs to be paid back
+ This interest needs to be less than the total return attained during the project
– If the project nets 10% IRR and the Debt Costs 6% and Equity costs 15%, can you do
the deal with that equity? What are factors?
+ Debt / Loan
– No ownership in property
– Financial instrument of principal that requires repayment over a period of time at an
agreed upon interest rate
– At GNAP, we have no debt until stabilisation. Why does this make us competitive?
+ Equity
– Ownership in property
– Higher risk due to its lack of required repayment (not a financial instrument)
– Generally higher rates
– At GNAP, our equity charge is 8%
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Pre vs. Post Returns
+ Our returns take into account the cost of capital, which in the current fund is
– 8% or
– 525 basis points above the 10 year treasury
+ Equity Charge
– Amount of interest accrued on a monthly basis over the course of the project
– How does the equity charge affect acquisition strategy?
– Buy land now or later?
– Entitle prior to close or after close?
– Are options a good idea?
+ All return metrics are thought of in terms of “pre” or “post” which is to say “pre-equity
charge” and “post-equity and performance fee charge”
– Often times, pre-equity charge returns look good, but the post-equity charge means the
project is infeasible. Why?
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