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Concepts

December 13, 2018

5 min read

Deciphering Debt Risk in Private Real Estate Investments: The Role of WACC

Risk management is an integral part of any investment decision, and real...

WACC is a financial metric that calculates the average rate of return a company is expected to provide to all its security holders, including debt holders and equity investors. Essentially, it reflects the cost of capital from all funding sources. The formula for WACC is:

WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)

Where:

E = Market value of equity

V = Market value of equity + market value of debt

Re = Cost of equity

D = Market value of debt

Rd = Cost of debt

Tc = Corporate tax rate

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November 29, 2017

5 min read

An Overview of Core, Core Plus, Value-Add and Opportunistic Investments

If you spend any time around commercial real estate...

If you spend any time around commercial real estate, you’re bound to hear the terms core, core plus, value-add and opportunistic real estate thrown around. These terms are used to define the level of risk and return potential of an investment property. Not only are the physical attributes of the property used to define an investment but the amount of debt financing to support the project is also imperative.

To explain why the debt financing has such an important role, I find it easy to understand if you look at a single-family property. If a property has a long-term lease in place, it can sound attractive to a conservative investor who wants to play it safe. However, if the same property has been primarily financed through debt with very little equity, it can paint a very different picture. Should the property value decrease, the owner could end up owing more on the property than it’s worth.

As a commercial real estate investor, you should know about each of these terms. Let us take you through them one by one to help you understand them better.

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