Abimael Martell
2543abe371
Justified print breaks words at syllables; after paragraph lines are joined
with spaces those breaks survive as "de- fendant" — thousands of them in a
long document — and, when an emphasis span was split with the word, as
"Bap-** **tist".
Whether the hyphen belongs in the word cannot be decided locally ("de-
fendant" is one word, "Third- Party" is a hyphenated compound), so the
document is used as its own dictionary. For each break:
1. fragments appear joined elsewhere ("defendant") -> join plain
2. appear hyphenated elsewhere ("six-month"), or the
continuation is capitalized ("Hinds- Radix") -> keep the hyphen
3. both fragments are words the document uses and the
continuation has 4+ letters ("commercial- type") -> keep the hyphen
4. no evidence -> leave untouched
The policy contains zero hard-coded words: vocabulary evidence,
capitalization, and two length invariants. The 4-letter floor keeps
suspended hyphens intact in any language ("mid- and long-term", "klein- und
mittelgroß", "kuva- tai video") because conjunctions are near-universally
1-3 letters. Fragments over 40 combined characters are fused reading-order
noise and are never joined. The vocabulary is collected after scrubbing the
break pairs themselves and excludes fenced code blocks; table rows and code
blocks are never rewritten. Split emphasis spans rejoin inside their
markers. Runs under the existing fix_hyphenation option (default on).
On a 1,370-page justified legal reporter this rejoins ~8,000 broken words
(98.8% of breaks; evidence-less ones stay visibly intact); word recall
against a reference extraction rises from 97.8% to 99.1%. No "six-month" ->
"sixmonth" class errors, and no fused-column corruption by construction:
no rule joins without evidence.
Regression-checked against a ~200-document corpus with semantic scoring
against an OCR baseline: zero regressions. Three in-repo fixture snapshots
regenerated with each diff inspected. 17 unit tests cover every rule, the
vocabulary scrubbing and code-block exclusion, the length gates, chained
breaks, mismatched emphasis markers, accented and Cyrillic words, German
and Finnish suspended hyphens, and the table/code skips.
6.2 KiB
HowShould CommercialRealEstate
BePriced?
Commercial real estate pricing C O M M E R C I A L R E A L E S T A T E pricingisliketheweather:everyonetalks needs disciplined and systematicabout it, but few understand it. Most observers base “appropriate” real estate analysis of the data. pricing on historical norms. The cap rate—anindicatorofvaluerelativetosta- bilized net operating income (NOI) before capital expenditures, tenant improvement,andleasingcommissions— isthemostcommonlyusedmetricofreal estate pricing. But cap rates have been largelyunresponsivetoalternativeratesof return available to investors, with the P E T E R L I N N E M A N exception of BBB bonds, throughout
8 4 Z E L L / L U R I E R E A L E S T A T E C E N T E R
Table I: Cap rate correlations Cap Rate Correlation With:* BBB Corp 10-Year Bond Yield S&P Dividend Treasury (10-15 yr) Yield Multifamily 0.187 0.771 0.068 Industrial-0.221 0.748-0.307 CBD Office-0.449 0.694-0.458 Retail-0.181 0.649-02.58
- Based on 25 years of data for the 10-yrT & S&P DivYld; and 14 years for BBB. Figure 1: NCREIF cap rates vs. 10-yearTreasury 12 10 8 Percent 6 4 2 1982 1986 1990 1994 1998 2002 2006 Apartment Retail ndustrial 10-yr reasury CBD Office
most of the past twenty-five years (Table presented in Figure 2 with an eighteen-
I). Such a relationship defies investment monthlag.Thisdataprovidesanoverview theory,asrealestatepricingshouldchange ofthepricingofinstitutionalqualityreal as property risks and the returns of alter-estate.Figure2reflectsthesecapratesnet nativeinvestmentschange. of the ten-year Treasury yield. Since cap Figure1displaysNCREIFcapratesby rate spreads are highly correlated across property type compared to the ten-year propertytypes(TableII),wecanspeakof Treasury yield. Because the National “cap rates” without reference to property Council of Real Estate Investment type with little loss of insight. Cap rate Fiduciaries (NCREIF) cap rate data is spreadswerenegativeintheearlytomid- seriouslyflawedduetoappraisallags,itis 1980s, when purchasing real estate was R E V I E W 8 5
Figure 2: Capratespreadsover10-yearTreasury
Basis Points -200
-400
-600
-800
| 1982 | 1986 | 1990 | 1998 | 2006 |
|---|---|---|---|---|
| Apartment | Industrial | Office-CBD | Retail |
1982 1986 1990 1994 1998 2002 2006
Table II: Correlationsofspreadsbypropertytype Correlation of Cap Rate Spreads Over Treasury Multifamily Industrial CBD Office
| Multifamily | Industrial | CBD Office | |
|---|---|---|---|
| Industrial | 0.937 | ||
| CBDOffice | 0.924 | ||
| Retail | 0.922 | 0.969 | 0.964 |
more about investing in tax losses than burst, cap rates spreads steadily com- real estate cash streams. When tax laws pressed, recently falling to approximately dramatically changed in 1986, cap rate zero. And if NOI cap rate spreads are spreads rose, though they generally roughly zero, cash flow cap rate spreads remained negative due to the availability (after reserves for tenant improvements, of excess leverage through 1990 and pro-leasing commissions, and capital expendi- jections of strong cash flow growth, in tures) are well below zero. spite of weak fundamentals. This compression of cap rates and cap Throughout the first two-thirds of the rate spreads over the past five years has 1990s, spreads substantially widened as generated enormous wealth for real estate capital abandoned real estate. Spreads fur-owners. In fact, the combination of cheap ther widened in the latter part of the debt and cap rate compression covered a 1990s, as investors scorned cash flow dur-multitude of property underwriting ing the tech bubble and treasury rates errors made during the past five years, as drifted downward. As the tech bubble neither cap rate compression nor narrow-
8 6 Z E L L / L U R I E R E A L E S T A T E C E N T E R
ingdebtspreadswerepartoforiginalpro formamodels.Thiscapratespreadcom- pressionoffsetweakcashflowsinapost- recessionary economy from 2002 to 2005, while continued compression, combined with improved cash flows, pushed property values skyward in 2006 throughmid-2007. Cap rate compression reduced the importance of the ability to add value. After all, if all you had to do to make moneywastoleveragetothehiltwhilecap ratesfell,whytakeontheextraworkand riskofattemptingtoaddvalue?Stateddif- ferently: Why print money if it is laying everywhereonthestreets? In Tables III and IV, we demonstrate thepowerofcapratecompressionviavery simple pro forma cash flow analyses that assume Year 1 NOI of $100; a going-in cap rate of 9 percent; an LTV of 70 percent; and an interest rate of 7 percent. Withineachfigure,wedisplaytwoscenar- ios, which vary based on NOI growth assumptions.ScenarioIassumesthatNOI growsby3percentperyear,whileScenario IIassumesavalue-addNOIgrowthof20 percentbetweenyearstwoandthree. The only other difference between TablesIIIandIVisinresidualcaprates, which are assumed to be 6 percent and 9 percent, respectively. Based on these assumptions, we calculate the equity IRRs. It is clear that cap rate compression is a significant factor in driving
returns. That is, cap rate compression from 9 percent to 6 percent increased IRR on leveraged stabilized properties by 250 percent, to a staggering 57 percent. Who needs to take on value add riskatthisreturnforstabilizedassets? Intheearly1980s,moneywasmadein real estate by mastering the creation and syndication of tax gimmicks. In the late 1980s, one made money by mastering bank and S&L connections to over-leverage.Intheearly1990s,onemademoneyin realestatebyhavingaccesstoequity—the morethebetter.Duringthelate1990s,one made money from real estate by realizing large spreads between cap rates and debt costs.And,overthepastfiveyears,theway to make money in real estate was to own realestateonahighlyleveragedbasisascap ratesplunged. Theclassicassetpricingmodelisthe capital asset pricing model (CAPM). CAPM is a simple, yet elegant, model that relates asset pricing to the risk-free rate(F),theabilityofanassettoreduce portfolio variance (B), and the expected rate of return on the market bundle of investableassets(M).CAPMisfarfrom perfect,butprovidesacrudebenchmark for asset pricing, around which discrep- ancies and novelties arise. Specifically, CAPM states that an asset’s price is set suchthattheexpectedreturnforanasset
(R)is R=F+ β(M-F). R E V I E W 8 7