Real Estate Finance And Investments | Secure The Promote

SecurethePromote Oct 23, 2020 10 min read

Commercial Real Estate Interview Prep

Preparing for interviews is tough. We've consolidated a list of questions from colleagues and those that have contributed to
SecureThePromote. Use these as a starting point and then dig deeper and/or broader depending on the nature of the interview
and the job that's up for grabs.

Websites to reference:

REFM - Real Estate Financial Modeling. Downloadable models and the

option to participate and become certified in real estate financial modeling.
Great place to start. Also, use our link to make sure you get the best deals!

A.CRE - Adventures in CRE. Another great place to start digging through

models and/or easy reads about CRE and the industry at large.

Mergers and Inquisitions - Provides a high level overview of different

segments of Commercial Real Estate.

THE INTERVIEW

BIG PICTURE

Understand the hiring dynamics (need)

- The firm must have a need. Most do not do long-range hiring. Understand the dynamics of supply of candidates and lateral
hires intersecting with a hiring demand.

What do firms look for in a candidate? (fit)

- Relevant skills (direct or tangential experience + ability to learn)
- Cultural and philosophical fit (i.e. are you a good person + do you share our views)

Know what you want to do and play to your strengths

- In two broad buckets - finance or property?
- Do you like to do deals (and love the numbers)? Acquisitions
- Do you like to execute projects? Development
- On the dividing line you can do acquisitions at a development firm, or you can do asset management at a private equity firm

FIT

You want to demonstrate "passion" in three key areas:

- Why the real estate industry?
- Why ________ (development, acquisitions, brokerage, etc.)
- Why us? (and also, why this city?)

How do you demonstrate "passion"?

- Do your homework - a lot of opportunistic research (beyond WSJ) like news sources, public filings, books, blogs, etc.
- Understand details and historical context about the market, trends, cycles, specific buildings, zoning, supply, firms, people,
etc.

How do you make someone interested in you?

- Have a view on the relevant market they care about and invest in
- Have a view on a recent and relevant competitor's deals
- Have a view on the company's specific deals (and try to add value)

KEY AREAS
What about Real Estate interests you?
- Why do you want to work in Real Estate
- What function within Real Estate are you interested in? Development? PE? IB? Consulting? Why?

How have you expressed that interest?

- What have you done (at school, in your career, etc) that illustrates your interest.

How knowledgeable are you about Real Estate?

- Views on the US real estate market
- Understanding of the different asset classes
- Familiarity with basic valuation methodologies
- Favorite building, real estate market to invest in, etc.

Why this firm?

- Research the firm, its properties, etc.

INTERVIEWING BEST PRACTICES

Do research on the company with whom you are interviewing
- If possible read bios of senior management
- Be able to talk to some recent deals done by the firm in an area that interests you
- Show you did your homework and that you are diligent and prepared

Do not waste their time by saying you want to get into a type of real estate that they are not in
- Have a different pitch for different types of Real Estate companies
- Show that you've done your homework

Do not give the impression that you will leave in a couple of years
- Real Estate is all about relationships and they take time to build

Do not get into a topic that is over your head

- Know what you know and what you don't know, be honest about it
- If you try to fake it, your efforts will be transparent and it is guaranteed to ruin your interview

SAMPLE INTERVIEW QUESTIONS

BEHAVIORAL

What excites you about this industry/job?

What are three of your strengths?

Three weaknesses?

Tell me about a failure.

Tell me about a time you led a team and it failed.

Tell me about a time you had to manage your boss.

How would your peers describe you?

Tell me about a time you had to convince your team to pursue an alternative course of action.

Tell me about a time others convinced you to change your mind.

INTEREST & EXPERIENCE

Why real estate finance and not real estate development? (or the reverse)

Where do you see yourself in 5 years? 10 years? Are you really committed?
What other firms are you talking to? (important to know other firms' specialty)

What sector of real estate are you interested in? Why?

For people with any experience in real estate: What was your best project and why; what was your worst project and why?

MARKET KNOWLEDGE

What are the hot markets and how long do you think they will remain hot?

What are the risks of entering a new market?

What property sector do you find most promising? Least desirable?

If you had $100 million, where would you invest it? Why? If you were preparing a memo for a real estate investment
committee, what would you include?

Is the housing market overvalued now?

Do you think real estate investors are justified buying at lower cap rates? Why or why not?

REAL ESTATE FINANCE

What is CMBS? What is LTV? What is NOI? How do you compute NOI?

What are 3 methods of appraising a property?

What is FFO? Why do REIT analysts use it?

What is a DSCR and how do the allowances vary by property type?

What kind of leverage can a well leased office building carry? Would it all come from one lender? How would that leverage be
priced in today's markets (spreads)?

REAL ESTATE DEVELOPMENT

What is FAR? Why is it important?

What is a triple net (NNN) lease?

What is an expense stop? Why is it important to the landlord?

What is the impact on rents, stock and assets prices from a 10% increase in population?

How would you decide how much to pay for land if you wanted to develop it?

What's a good real estate market to invest in right now and why? Both inside and outside of the U.S.

What are typical condo sale prices ($/sf) in ___________ (market you're interviewing in).

TECHNICAL FINANCE QUESTIONS

Guesstimating
How many bricks do you think you need to build the building across the street?
- Just show how you think/process. 100% accurate answer isn't the goal here.

How many floors are in this building?

What is the Net Rentable Area of this building?

How many light panels (fixtures) are in this building?

Financial Questions
How much debt can the building we're in support?
- Requires you to estimate NRA, know market rent and opex to estimate NOI, know cap rate and LTV.

What's a better investment, buying a hotel in Vegas or an office property in Manhattan?

- Open ended question - do you understand the current market fundamentals? More importantly do you understand the
risk/reward of each investment?

You buy a building at 8% cap rate, 50% LTV, 6% interest. Assuming no taxes or other leakage. What is the equity yield year
one?
- Say upfront you assume no principal amortization, no taxes, no depreciation, and no other leakages:
- Plug $8MM NOI at 8% cap rate (Value = NOI/cap rate = $8MM/8%) = $100MM
- 50% LTV - $50MM debt, $50MM equity
- 6% interest on debt = 6% x $50MM = $3MM
- NOI less debt interest = $8M - $3M = $5M to equity
- Equity yield = $5MM/$50MM = 10%

You invest $100 today and without any further inflows or outflows you sell for $100 in 5 years. What's the IRR?
- Trick question. Do not do NPV! Think of IRR as profits. First you return capital (i.e. break even) then you start making
profits. So IRR is the profit in excess of your return of capital. You made no profits, so IRR = 0%. If you discount $100 by
years at 0% then you get $100. Check in excel. You might intuitively think you "lost" money but IRR is just a gross return
function, it has nothing to do with inflation or time value of money. A $100 in 5 years is worth $100 today at 0% discount rate.

You invest $1 today, $1 end of year 1, $1 end of year 2, and get $3 end of year 3. What's the IRR?
- Another trick question. Do not do NPV! You invested a total of $3 and you got back $3. You made no profits. IRR = 0.

You invest $3 and get $1 every year forever. What's the IRR?
- "Return on capital" every year is $1/$3 = 33.3%. This is a perpetuity formula (check that value today = $1/33.3% = $3)

You invest $100 today and get $10 for 4 years (year end) and $110 end of year 5. What's the IRR?
- Again, what's the "return on capital" in year 1? 10/100 = 10%
- Year 2 = 10/100 = 10%
- Year 3 = 10/100 = 10%
- Year 4 = 10/100 = 10%
- Year 5 = 10/100 = 10%
- Plus you get principal back in 5 years (which generates 0% IRR as per above)
- So you get exactly 10.00% IRR
- Note: if you do not get $10 every year, but you compound, then your $100 turns into $100*(1+10%)^5 = $161. But you still
get a 10% IRR. Working backwards, if you're told that you don't get anything for 5 years and then get $150 end of year 5 (still
a 50% total return, or a 1.5 multiple) but you know the IRR is definitively less than 10% (about 8.5% IRR).

You invest $100 today and without further inflows or outflows what do you need to sell for in year 3 to get a 10% IRR?
- Basically asks if you can do the following compounding math:
- Balance end of year 1 = $100 x (1+10%) = $110
- ... year 2 = $110 x (1+10%) = $121
- ... year 3 = $121 x (1+10%) = $133

What's the relationship between IRR and NPV?

- Straight up corporate finance. IRR is the discount rate at which NPV equals zero.
- If someone asks you "What's an IRR?" Say as above and add "it's the internal rate of return, or the discount rate at which
NPV = 0"

The project generates a 10% IRR. Sponsor contributes 5% of equity and coinvestor 95%. Sponsor receives 20% promote
after a 15% IRR to the investor. What's the co-investor's IRR?
- Trick question. Key things to watch out for are: (a) project generates only a 10% return for all parties; (b) 15% iRR to investor
is the "hurdle rate" (or "preferred return"), and (c) it's implied (or you clarify your assumption) that capital contributions are pari
passu (in proportion) and distributions up to the hurdle rate are also pari passu.
- Because you're not making above the 15% hurdle rate, both sponsor(GP) and co-investor(LP) make the same return of 10%

Your acquisition project generated 15% IRR over 5 years. What's the multiple?
- You need to know the relationship between IRR and multiples and be comfortable going back and forth between the two.
- For simplicity, assume that all cash is compounded towards back-end with no current income
- 15% IRR over 5 years is roughly a 2.0x multiple. 100 x (1+15%)^5 = $201.

An acquisition project generated a 2.5x multiple over 5 years. What's the IRR?
- 2.5x multiple is slightly over a 20% IRR

What's the IRR if the multiple generate is 3.0x in 5 years?

- ~25% IRR
- Rules of Thumb
- 10% IRR over 5 years = 1.6x
- 15% IRR over 5 years = 2.0x
- 20% IRR over 5 years = 2.5x
- 25% IRR over 5 years = 3.0x
- 10% IRR over 3 years = 1.3x
- 15% IRR over 3 years = 1.5x
- 20% IRR over 3 years = 1.7x
- 25% IRR over 3 years = 2.0x
- 20% IRR over 2 years = 1.7x
- 30% IRR over 2 years = 1.4x

You have an opportunity to buy an asset at an initial yield of 7%. You can obtain 65% LTV, 8% interest-only loan (without
principal amortization). Assume 0% tax rate, no cap rate compression, and no NOI change over a 5 year hold. Does this deal
make sense, why?
- This is a trick question (again, I know). Without doing any math you should see that the deal makes 7% and debt costs you
8%. Your income won't go up and you won't get a boost to returns from back-end appreciation at sale, so your IRR will be the
same as the equity yield.
- When debt costs > equity yield - this is called negative leverage. Basically debt is dilutive to your returns.
- Now, if the question asked the same thing, but said that your "NOI will compress" or that "NOI will go up" (so long as your
IRR will be >8%) then you can say that this deal might make sense.
- The ideal "qualified" answer you give is: "No, it's negative leverage because your equity yield is less than debt interest.
However, if my income increased and/or cap rate compressed such that I can make more than 8% equity IRR, then this deal
might make sense because at least debt is no longer dilutive to my returns."

Do you think a 60% IRR generated over 1 month hold is a good return?
- Open ended question - Makes you think about trade-off between IRR vs hold period and multiple, portfolio churn, risk-
reward, and amount of equity committed vs absolute profits generated.
- A 60% return over one month is roughly 60%/12 = 5% return per month. Since you only held it for one month, you made
5% on your money. Is that a good return? Probably not. That's only a 1.05x multiple. Most investors want to generate high
IRRs but also absolute dollar profits, which is driven by multiples (hopefully at lease 1.3x). So if someone gave you $100MM to
invest and you return $105MM while they expected at lease $130MM (1.3x) or even $180MM (1.8x) back, then they won't be
too happy. It's great you made an LP a "60% annual return" but you only made a 5% total return and many times less in profits
than they expected and now the LP must redeploy that capital.
- At extremes, a 1.05x multiple on $10B = $500MM in profits. And if you took almost no risk generating that %500MM,
then it's arguable a very good risk-adjusted return over one month.

PRIVATE EQUITY/ACQUISITIONS/RE IB

What is a cap rate? How would you choose a cap rate for a Class A office building in Miami?
How would you value an office building? Retail? Multifamily? Industrial? Hotel?

Two properties are across the street from each other in Midtown Manhattan. The properties look exactly the same from the
outside. Why might one be worth more than the other?

(Interviewer opens a large document to a wide angle picture of an asset from the parking lot)... What do you see? Would you
want to own this? Why/Why not? How would you value it? What concerns you?

Is an apartment building investment that yields a 23% expected IRR on equity more attractive than an investment of an equal
amount in a supermarket anchored strip shopping center that provides a 18% expected IRR on equity?

You've been asked to fly to Chicago for a due diligence trip and site visit for a potential investment. What would you do before
you leave to prepare? What would you want to achieve while you are there?

In a JV Partnership, what does each party bring to the table? Do you understand the basic equity and promote structure of a
JV? If so, walk me through the rationale.

If you could invest in any real estate market where would it be and why?

What would you say your biggest weakness would be as an investor?

Would you rather buy or rent in this housing market? Why?

Why would you invest in core single-tenant office assets if you could just buy the tenant's corporate bond?

Would you rather have $100 in inventory or $100 in accounts receivable?

If you could invest in either a mortgage security or a corporate bond, which would you choose?
- Both have same coupon, same risk profile. You'd likely want the mortgage security because payments are more frequent
(monthly) than the corporate bond (bi-annually). Always opt for more frequency.