Assignment 5 (Chapter 8)

Question 1

General Partnership

Answer 1

A partnership in which all partners share in both the management and the liabilities of the business. Each partner is jointly and severally liable for the debts of the partnership.

Question 2

Joint and Several Liability

Answer 2

In a general partnership, each partner can be held responsible for the full amount of the partnership’s debts, not just their individual share.

Question 3

Gross Lease

Answer 3

A lease agreement where the tenant pays a fixed amount of rent and the landlord covers all property expenses, such as maintenance, insurance, and taxes.

Question 4

Net Lease

Answer 4

A lease where the tenant pays a base rent plus a portion of the property’s operating expenses, such as taxes, insurance, and maintenance.

Question 5

Real Estate Investment Trust (REIT)

Answer 5

A company that owns, operates, or finances income-producing real estate, allowing investors to pool their capital to buy shares in a portfolio of properties.

Question 6

Equity REIT

Answer 6

A type of REIT that owns and operates income-generating real estate, deriving revenue primarily from rental income.

Question 7

Leasehold Estate

Answer 7

An interest in real property that grants the lessee (tenant) the right to use and occupy the property for a specific period, as stipulated in the lease agreement.

Question 8

Freehold Estate

Answer 8

An estate in land in which ownership is for an indefinite period, and the owner has full control over the property, subject to any restrictions or liens.

Question 9

Capitalization Rate

Answer 9

The rate of return on a real estate investment property based on the income that the property is expected to generate. It is calculated by dividing the net operating income by the property value.

Question 10

Net Operating Income (NOI)

Answer 10

The total income from a property after operating expenses have been deducted, excluding taxes and financing costs.

Question 11

Capital Cost Allowance (CCA)

Answer 11

The deduction that Canadian taxpayers can claim for the depreciation of property. CCA is used to calculate the taxable income from business or property.

Question 12

Undepreciated Capital Cost (UCC)

Answer 12

The remaining value of an asset after accounting for depreciation. It is the original cost minus the accumulated CCA.

Question 13

Debt Service Coverage Ratio (DSCR)

Answer 13

A financial metric used to assess a property’s ability to generate enough income to cover its debt obligations. It is calculated by dividing the net operating income by the total debt service.

Question 14

Loan-to-Value Ratio (LTV)

Answer 14

A ratio that compares the amount of a loan to the appraised value of the property securing the loan. It is used by lenders to assess the risk of a loan.

Question 15

Gross Rent Multiplier (GRM)

Answer 15

A metric used to evaluate the value of an income-producing property by dividing the property’s sale price by its gross rental income.

Question 16

Cash-on-Cash Return

Answer 16

A measure of the annual return on investment, calculated as the annual pre-tax cash flow divided by the total cash invested.

Question 17

Discounted Cash Flow (DCF)

Answer 17

A valuation method used to estimate the value of an investment based on its expected future cash flows, which are discounted back to their present value.

Question 18

Internal Rate of Return (IRR)

Answer 18

A metric used to evaluate the profitability of an investment, representing the discount rate that makes the net present value of all cash flows equal to zero.

Question 19

Straight Line Depreciation

Answer 19

A method of depreciating an asset where the same amount of depreciation is deducted each year over the asset’s useful life.

Question 20

Matching Principle

Answer 20

The accounting principle that requires expenses to be matched with revenues in the period in which they are incurred to produce the revenues.

Question 21

Real Property

Answer 21

Land and anything permanently attached to it, such as buildings and structures. Real property is immovable.

Question 22

Personal Property

Answer 22

Any movable property that is not permanently attached to land or buildings, such as vehicles, furniture, and equipment.

Question 23

Amortization

Answer 23

The process of gradually paying off a debt over a period of time through regular payments that cover both principal and interest.

Question 24

Balloon Payment

Answer 24

A large payment due at the end of a loan term, representing the remaining balance of the loan that was not amortized over the loan period.

Question 25

Easement

Answer 25

A non-possessory right to use or enter someone else’s land for a specific purpose, such as utilities or access. Easements can affect property value and use.

Question 26

Encroachment

Answer 26

An intrusion onto another person’s property, such as a fence or building that extends beyond the property line. Encroachments can lead to legal disputes and affect property rights.

Question 27

Zoning Bylaws

Answer 27

Local regulations that dictate how properties in specific geographic zones can be used. Zoning bylaws control land use, building height, density, and other aspects of property development.

Question 28

Building Codes

Answer 28

Standards and regulations set by local governments to ensure the safety, health, and welfare of the occupants of buildings. Building codes cover aspects such as construction materials, design, and electrical systems.

Question 29

Gross Income Multiplier (GIM)

Answer 29

A ratio used to appraise the value of an income-producing property, calculated by dividing the property’s sale price by its gross annual income.

Question 30

Operating Expense Ratio (OER)

Answer 30

A measure of the efficiency of a property in generating income, calculated by dividing operating expenses by effective gross income.

Question 31

Real Estate Syndication

Answer 31

A partnership or pooling of funds by multiple investors to invest in real estate projects. Syndications allow investors to share the risks and rewards of real estate investments.

Question 32

Limited Partnership

Answer 32

A partnership consisting of one or more general partners who manage the business and are personally liable for its debts, and one or more limited partners who contribute capital and share profits but have limited liability.

Question 33

Adjustable-Rate Mortgage (ARM)

Answer 33

A mortgage with an interest rate that can change periodically based on a specified index, leading to changes in the monthly payment amount.

Question 34

Fixed-Rate Mortgage

Answer 34

A mortgage with an interest rate that remains constant for the entire term of the loan, resulting in stable monthly payments.

Question 35

Property Management Agreement

Answer 35

A contract between a property owner and a property management company outlining the responsibilities and duties of the manager, including rent collection, maintenance, and tenant relations.

Question 36

Leasing Agreement

Answer 36

A contract between a landlord and a tenant that specifies the terms and conditions of the rental arrangement, including rent amount, lease term, and responsibilities of both parties.

Question 37

Accumulated Depreciation

Answer 37

A contra-asset account that represents the total depreciation taken on an asset since it was placed into service. It is subtracted from the asset’s cost to get its book value.

Question 38

Contra-Asset Account

Answer 38

An account that is used to reduce the value of a related account. Accumulated depreciation is a contra-asset account that reduces the value of property, plant, and equipment on the balance sheet.

Question 39

Lease Option

Answer 39

An agreement in which a tenant has the option to purchase the leased property at a predetermined price within a specified period. This provides flexibility for both the tenant and the landlord.

Question 40

Lease Assignment

Answer 40

The transfer of a lease from one tenant to another, where the new tenant takes over the rights and responsibilities of the original tenant under the lease agreement.