Ownership-phase decisions, may be triggered by possible disposition-phase alternatives
Continue to own without any changes in the structure of ownership (hold and do nothing). Or
Continue to own with new debt financing (hold and refinance).
To determine whether the property should be sold or whether ownership should be retained
Investors can perform an incremental, or marginal, cash flow analysis. That is, they compare the cash flow from the sale price they estimate that they would receive today to the cash flows that would be received if they continued to own the property for some period.
This is an incremental, or marginal, analysis because investors estimate whether the present value (PV) of the cash flows from continuing to hold exceeds the cash flow from a current sale. In fact, investors can calculate the internal rate of return (IRR) of the decision to continue to hold versus a current sale. The estimated cash flow from a current sale would be the investment amount in the incremental IRR calculation, and the cash flows from continuing to hold would serve as the cash flows.
The Refinance Decision
A large percentage of both residential and commercial mortgage originations in the last decade have been refinancing as a result of frequent declines in mortgage interest rates. Because of high costs and potential benefits involved, mortgage borrowers should consider the refinancing decision carefully.
In common practice, a rule of thumb often is proposed as a refinancing decision criterion. This rule of thumb is based on the spread between the existing contract rate and the rate that is currently available. Under the interest rate spread rule, when the current market rate drops to some minimum spread below the rate on the existing mortgage loan, the borrower should refinance. The spread often suggested is 1.5 percent to 2 percent. However, the interest rate spread rule has it's deficiencies.
Continue to own without any changes in the structure of ownership (hold and do nothing). Or
Continue to own with new debt financing (hold and refinance).
To determine whether the property should be sold or whether ownership should be retained
Investors can perform an incremental, or marginal, cash flow analysis. That is, they compare the cash flow from the sale price they estimate that they would receive today to the cash flows that would be received if they continued to own the property for some period.
This is an incremental, or marginal, analysis because investors estimate whether the present value (PV) of the cash flows from continuing to hold exceeds the cash flow from a current sale. In fact, investors can calculate the internal rate of return (IRR) of the decision to continue to hold versus a current sale. The estimated cash flow from a current sale would be the investment amount in the incremental IRR calculation, and the cash flows from continuing to hold would serve as the cash flows.
The Refinance Decision
A large percentage of both residential and commercial mortgage originations in the last decade have been refinancing as a result of frequent declines in mortgage interest rates. Because of high costs and potential benefits involved, mortgage borrowers should consider the refinancing decision carefully.
In common practice, a rule of thumb often is proposed as a refinancing decision criterion. This rule of thumb is based on the spread between the existing contract rate and the rate that is currently available. Under the interest rate spread rule, when the current market rate drops to some minimum spread below the rate on the existing mortgage loan, the borrower should refinance. The spread often suggested is 1.5 percent to 2 percent. However, the interest rate spread rule has it's deficiencies.
COMMERCIAL REAL ESTATE
TRANSPARENCY | CAPITAL PRESERVATION | INCOME STREAM | TAX SHELTER | HEDGE AGAINST INFLATION
VALUE APPRECIATION | PRIDE OF OWNERSHIP
TRANSPARENCY | CAPITAL PRESERVATION | INCOME STREAM | TAX SHELTER | HEDGE AGAINST INFLATION
VALUE APPRECIATION | PRIDE OF OWNERSHIP
