Hi guys, I have two superdays next week: one for a large Real Estate Private Equity Firm and another for a Large REIT. In my previous interviews I've been fairly confident in my answers to technical questions aside from two: Walk me through a DCF valuation on an asset.....How do you find an appropriate discount rate? So I understand the basics of a DCF (forecasting CF's and applying a discount rate to get present value) but I may not be describing it efficiently enough and I am sort of lost on where we get a discount rate from in the world of real estate.

There are really are a number of factors that can play into answering #2, many have already been said Different Tax Codes Different access points - turning lanes, street lights, traffic counts...etc One building can have much more attractive transferrable debt Tenant Roster Space allocation Valuable/Less-Valuable lease structures (Reimbursements, tenant roll, termination rights) Leaner operations Walkable amenities - or even on-site amenities for an office building (café, gym, cleaners, day-care, etc...).

1. Walk me through a DCF valuation on an asset.....How do you find an appropriate discount rate? Your discount rate is the return of the next best deal you could undertake. So a good starting point is the unlevered IRR your could achieve on a comparable deal. For a database of discount rates, look at IRR's annual Viewpoint publication. Discount rate is your total return (income plus appreciation). Cap rate is the income component of your total return. 2. There are two identical (age, condition, etc.) assets across the street from each other, why might one be more valuable than the other?

Also, for #2. Might sound silly, but one side of the street could get better sunlight. This can be huge. Also, even more obvious than the first point, the views the building has. You could have 2 exact buildings, exact tax structure, exact everything. But if one building's views are obstructed, you better believe the one with unobstructed views will command higher rents & be more valuable.

On a high level, I find it helpful to think of discount rate (in any asset class) as compensation for the risk you are taking. As mentioned, you may look at comparable deals to get a sense of what a similar asset is yielding (or has been sold / traded for, and thus what someone else views as an appropriate yield / return for that asset) and establish a starting point for how to think about your deal.

Two Superdays Next Week--Advice On How To Answer Two Possible Questions

Hi guys, I have two superdays next week: one for a large Real Estate Private Equity Firm and another for a Large REIT. In my previous interviews I've been fairly confident in my answers to technical questions aside from two:

Walk me through a DCF valuation on an asset.....How do you find an appropriate discount rate?
So I understand the basics of a DCF (forecasting CF's and applying a discount rate to get present value) but I may not be describing it efficiently enough and I am sort of lost on where we get a discount rate from in the world of real estate. How is the Discount Rate linked to the cap rate?
There are two identical (age, condition, etc.) assets across the street from each other, why might one be more valuable than the other?
I know that one of the main reasons is due to tenant grade quality and lease rollover schedule. But sometimes the interviewer asks, "What if both have identical tenants and lease rollover schedules?"

If some of you real estate pros could provide me with some guidance, it would be much appreciated. Thanks!

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Two Superdays Next Week--Advice On How To Answer Two Possible Questions

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