Finding the right partner takes time. Don’t be discouraged if a partner you thought would be ideal does not work out. Companies should interview at least three potential partners before selecting one. In a way, it’s a lot like dating.You don’t necessarily marry the first person you go out with. In business, you don’t want to form a partnership with the first potential partner you meet. Someone better suited to your needs may come along at any moment.
In the Bank of America/Exult case, the bank knew it wanted to outsource its human resource capabilities and Exult wanted to demonstrate to others that it could manage a business on that scale. But as they explored their partnership, they discovered they might benefit in other ways. For example, Exult manages the payroll for many of its clients. Those payroll services could be managed through Bank of America, providing both seamless service for Exult’s clients and additional business for the bank.
Derivative contracts, in particular credit-linked notes on corporate bond indices, have a variety of uses: to gain synthetic exposure, as an arbitrage tool, to effect overlay strategies and to invest cash balances efficiently. The growing popularity of JECI and Trac-X as well as the exchange traded funds on the iBoxx Euro Liquid Corporate Index and the Goldman Sachs USD InvesTop Corporate Bond Index demonstrate the rising sophistication of market participants in the credit markets. They have realized that using a benchmark index that also has a liquid derivative contract can be of great benefit to investors.
The index market is becoming increasingly competitive and commercial. With little differentiation in construction methodology, competition between index providers is focusing on brand. Nevertheless, investors have to keep in mind their intended usage, be that fund management, trading, advice or research.
Expenses are the second important variable to consider. As I mentioned earlier, the definition of net operating income is income minus expenses. In the previous section, we showed you the specifics you need to review to estimate the income potential of a property. In this section, you’ll see how to assess the expenses.
Just as we did when we verified income, you’ll want to get a picture of the current expenses. Unlike the income calculation where our goal was to be 100 percent on the money in terms of accuracy, with expenses the goal is to get reasonably close. We’ll find out all the minute details later in the game. This is another area where your team of pros can help you.
At this point, we have verified the actual potential income for the pr< >pcrty. Remember that’s the income the property could generate at current rents with 100 percent occupancy. But certainly, it is highly unlikely that this property is or will be 100 percent occupied every day of every year from now until eternity. So we have to take into account vacancy and turnover from residents moving in and out. And while we’re at it, we should consider any other income generated from sources like laundry facilities, parking, and so on.
The typical pro forma lists these values as well. And surprise! these numbers, too, I have found to be inaccurate most of the time. Vacancies are usually understated and other income is usually over-inflated. The key here is to try to project what the vacancies and other income will be in the future. It’s nice to know where you’ve been, but where you’re going is really more important. That’s why the windshield is so big and the rearview mirror is so small.
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