CE Investing1 Flashcards
Six characteristics of the real estate market
1 - Uniqueness 2 - Immobility 3 - Permanence 4 - Longevity 5 - Highly influenced by government policy 6 - Slow to respond
Going-concern value
The value of the property as a functioning business.
Salvage value
A structure that’s at the end of its useful life may be demolished, but some value can be realized if the improvements are sold.
Liquidation value
If a property is subject to foreclosure or a rapid sale, liquidation value comes into play. When properties are sold this way, it can affect the value of other homes in the neighborhood.
Value in use
The value of a property as it’s currently being used, which may or may not be its highest and best use.
Regression
The principle that says a lower quality property located adjacent to a higher quality property can lower the value of the higher quality property. This is related to the principle of conformity. Progression is the opposite of regression, and is also related to conformity.
Progression
The bump in value that a lower-value property gets by being near a higher-value property. So if your neighbor adds a second story in a quality remodel, the bump in value that your property receives is progression. Progression and regression are in back of the economic belief that it’s better to have the cheapest house in the nicest neighborhood than the nicest house in the cheapest neighborhood.
Contribution
has to do with how a change in a property impacts the value as a whole. This isn’t the same as the dollar value of the change. For example, adding a restaurant-quality kitchen to an otherwise modest house won’t increase the home’s value by the amount spent to renovate, but updating the countertops and cabinets might.
Integration
Integration is the time period when the property is being developed.
Equilibrium
Equilibrium is the period of a property’s stable use.
Disintegration
Disintegration is the time when the property is deteriorating and needs constant upkeep to maintain its viability.
Rejuvenation
Rejuvenation is when the property is redeveloped with new improvements and often with a different use. This is also known as revitalization.
What are tax benefits of restoring historic properties?
Investors who renovate historic properties can take a tax credit on up to 20% of the money they spent to renovate the property. Must have designation by the U.S. Department of the Interior and are listed in the National Register of Historic Places and follow renov guidelines.
How much in tax credits can an investor get for building to converting property to low-income houses
4% –if they are getting federal subsides from FSA or other fed agency; or
9% – if they have no subsidies.
A consumer who believes they are the victim of a fair housing violation may file a complaint with HUD within ______of the discriminatory act.
one year
HUD will investigate any complaint received and determine whether reasonable cause exists to bring a charge of illegal discrimination against the alleged offender, or dismiss the case within ______.
100 days
conciliation
One Option HUD has to address Fair Housing complaints. Conciliation is the process of obtaining assurance that the situation will be remedied from the alleged violator, and to take steps not to have a similar situation occur in the future. If there’s any doubt as to whether the violator will follow through, civil action can be taken to enforce the conciliation agreement.
Advantages of local handling of fair housing violations.
If state has comparable fair housing law, HUD can refer it there. There’s an advantage to filing locally, which is the response time. Generally, a complainant can expect an answer to a locally filed action within 30 days. At the federal level, an answer may take up to 100 days.
Penalty for filing false fair housing convictions
A person found guilty of falsely filing a fair housing complaint may receive a sentence of up to five years’ imprisonment or be subject to a $10,000 fine.
What are possible penalties for fair housing violations when handled by Admin Law Judge? Note: Filing administratively is and alternative to filing with HUD or local gov.
These penalties may be $16,000 for a first offense, as much as $37,500 for a second offense within five years, and as much as $65,000 for a third violation within seven years (some people never learn). The administrative law judge may also issue an injunction against the offender, which will require the offender to either do something (such as rent an apartment) or not do something (such as evict a tenant).
Where can people file/complain of fair housing violations.
HUD or Local Gov
Administrative Law Judge
Judicial Action
Attorney General can file action for people with pattern
What are penalties if found guilty of fair housing in a judicial action?
There is no limit on the amount of punitive damages The court can also issue injunctions.
Penalties if Attorney General finds fair housing violations
Civil penalties may be imposed up to $50,000 for a first violation, and $100,000 for subsequent violations.
How are fair housing complaints filed under the Civil Rights Act of 1866 addressed?
They go directly to federal court. Such actions may be filed any time within the state’s statute of limitation for torts. Violators who refuse to comply with a state or federal court fair housing decision may be held in contempt, fined, and held in prison for up to six months.
What penalties may a person who is found guilty of falsely filing a fair housing complaint receive?
A sentence of up to five years’ imprisonment or a $10,000 fine
What Makes a Residential Property Commercial?
Commercial residential = Five or more dwelling units (still multi-family residential, but also commercial residential)
Tenant’s right of first refusal
, does one of two things. It lets the tenant have the first crack at another vacant space in the building before another party. This right says that the tenant can match an offer from that other party for that vacant space, and the clause is most commonly seen in leases where the tenant anticipates needing to expand in the future. Or it allows the tenant the opportunity to purchase the property if the owner has decided to sell it
Periodic estate termination
A periodic estate automatically renews itself for successive tenancy unless one party terminates. This is also an inheritable leasehold estate, which means that if either the owner or the tenant dies, the lease does not automatically terminate. The period involved may be any negotiated period of time—even for a single week or month.
Estate at will notice of termination
An estate at will may be terminated at will by either party. An estate at will is not inheritable, which means that upon the death of either party to the lease, the leasehold automatically terminates.
Constructive Eviction
Constructive eviction is when the tenant is prevented from the quiet enjoyment of the premises. If the premises have become unlivable due to a breach of warranty of habitability, a tenant may vacate and not be held responsible for lease payments. To claim constructive eviction, the tenant must actually leave while the conditions that make the premises uninhabitable exist. The lease is then terminated, and no rents are due; however, the tenant may have to go to court to prevail against a claim of unpaid rent.
When is a condo considered a security an not real estate
Second-home condo investments that are purchased with a money-back guarantee and lock-in management agreement are generally considered by the SEC to be securities
How make sure condo is not considered a security
make sure management agreement and condo purchase agreement are viewed as separate transactions.
Publicly assisted cooperatives provide rent and mortgage interest subsidies and two types of low-down-payment FHA loans:
FHA Section 213: Provides up to 97% insured financing for certain qualified cooperative projects.
FHA Section 221(d)(2): provides up to 100% insured financing, and is specifically designed to meet the needs of certain inner-city housing shortages.
condop
To get by 80/20 rule. This is essentially a mixed-use building where the developer retains ownership of the 20% of the building used for commercial purposes, and the remaining 80% is the residential portion, operating as a cooperative. Cooperative shareholders under a condop structure have flexibility in selling and subletting similar to that of condominium owners.
80/20 rule for coopss
There used to be an 80/20 rule restricting co-ops from receiving passive income greater than 20% percent of their operating budget in any given year. If they did, their not-for-profit tax status was in jeopardy.
80/20 rule replaced in 2007: Cooperative housing must now meet one or more of the following requirements for the taxable year in which the taxes and interest are paid or incurred:
1- 80% or more of the gross income must be derived from tenant-shareholders
2 - 80% or more of the total square footage must be for residential purposes, or purposes related to residential use (such as residential facilities)
3 - 90% or more of the expenses of the cooperative corporation are paid or incurred for the purchase, construction, management, maintenance, or care of the corporation’s property for the benefit of the tenant-shareholders.
Which document includes the size of units, construction, floor plans, amenities, recreation facilities, make and model of appliances, windows, how the landscaping of the property will be maintained, and the actual land on which a condominium building is situated?
Offering Plan
Which document details the duties of the condominium board and the scope of its power?
Bylaws
Condo declaration is
A declaration of condominium is recorded and typically includes a legal description of the condominium property, a description of all the units and common areas, the percentage interest and voting rights of each unit owner, and the CC&Rs. Each unit owner will receive a unit deed, which is also recorded.
What is another name for a super-regional mall?
Mega Mall
Blane owns a barbershop. He polls his customers and learns that they tend to come from less than a mile away. That’s probably because Blane’s store is in which type of location?
Strip malls tend to offer goods and services for a very local area of one mile or less.
Length of a strip mall lease
strip mall leases run three to five years and include the option to renew. The renewal option protects the tenants, since it’s unlikely that a business with steady clientele from the surrounding area will want to relocate. After the initial three- to five-year lease period expires, many businesses will continue to renew their leases indefinitely.
Most common strip mall leases
most strip center leases establish a base rent, but also include rent increases in their renewal options to offset rising operating costs, including utilities, insurance, maintenance, and property taxes.
lease renewal option
he investor/landlord is agreeing to give up control of the property for the term of the lease and for the potential renewal period (also known as the option period). When there’s an option period in play, the lease can be renewed at the sole discretion of the tenant. The landlord has no say in whether the option will be exercised.
What is the average length of a strip store lease?
3-5 yrs
Neighborhood shopping center
1- Services people within a three-mile area, and typically serves a local population of 5,000 to 40,000. 2 - This type of shopping center is usually built on a four- to 10-acre lot.
3- Usually a major tenant—usually a supermarket, but sometimes a discount drug store—that occupies approximately 30% to 50% of the center’s gross leasable space.
4- about 20 tenants
4 - One central, off-street parking
What is the bonus in leases for neighborhood shopping centers
Under the terms of this lease, each commercial tenant is required to pay a fixed minimum rental amount. Then, either in addition to or against this fixed minimum, the commercial tenant agrees to pay a certain percentage of their gross sales
What is a noncompete clauses in shopping center?
non-compete clauses, in which the property manager agrees not to lease to a business that competes with the contracted tenant. For example, the lease for Tan-U-Fast might include a non-compete clause in which the landlord agrees not to lease to any other tanning facilities.
Which type of shopping centers are often converted to condos?
Neighborhood shopping centers: If the owner wants to sell before the conversion, selling individual buildings rather than the entire shopping center as a single purchase will bring in the most profit. The current tenants may first be offered the opportunity to purchase their units and receive an interest in the parking spaces within the center’s common area.
Hale plans to develop a neighborhood shopping center. What size lot will he need?
A neighborhood shopping center typically serves a local population of 5,000 to 40,000 people within a three-mile trade area, and is usually found on a four- to 10-acre lot.
Community Shopping Center
1 - Designed around one or more major dept store (Walmart/target) known as anchor/magnet
2 -Known as large neighborhood centers
3 - Large range of products
4 - 15-40 stores serves serves a three- to six-mile area.
5 - sites that range from 10 to 40 acres
6 - Some are all outdoor/Some covered
7 - Cross between regional shopping mall and neighborhood center
Common lease terms for community shopping centers
1 - don’t have non compete clauses
2 - last 15 to 20 years
3 - usually have “right of first refusal” clause.
4 - New busns usually incl cancellation clause if the business is unable to pull in a certain gross volume
5 - Prop manger right to audit books of businesses
6 - Percentage leases that allow annual adjustments
7 - Community fees to tenants upkeep common areas (lots and sidewalks) and for animadverting the center
Typical tenant mix in regional shopping centers
50% general merchandise stores
25% service and related businesses
15% clothing and shoe stores
10% dry goods shops.
Regional Shopping Centers
1 - Designed around one or more major dept store (Macy’s/JCPen) known as anchor/magnet
2 -Known as Malls
3 - Draw trade 5-15 miles
4 - 40-80 stores
5 - sites that range from 40 to 100 acres
6 - Enclosed most of the time
7 - 400,000-800,000 sq feet
Super Regional Shopping Centers
- Also known as megacenters or megamalls
- Includes office buildings and apartment buildings that buffer the shopping center
- 800,000+ leaseable square feet
- 60 to 120 acres, and serve a trade area of five to 25 miles.
- Designed in a relatively compact way, so expansions tend to grow up (or down)
- 3 or more anchor stores
- self-contained consumer market
Lease types for Regional Shopping Centers and Super Regional Shopping Centers
percentage and net leases.
What is the average gross leasable square feet for a super-regional shopping center?
1.2 million
Gross lease
With a gross lease, all expenses related to the property are part of the lease payment and are paid by the landlord.
Full service leases (type of gross lease)
landlord handles all of the maintenance and utilities, taxes, etc., so tenants can focus on growing their busines
Modified gross leases
referred to as “MG.” Here, all (or part) of the nets are included as part of the base rent. Unlike a triple net lease, this agreement includes one, two or all three of the nets as part of the base rent. It’s important to define what part of the nets have been included or modified. Typically, a modified gross lease will include all the nets in the base rent, but not utilities or janitorial.
Net leases (3 kinds)
triple net lease – tenant pays rent + all expenses (T.I.M.: taxes, insur, maintenence); shares CAM (common area maintenance) with other tenants
Single net (N) or double net (NN) lease, the tenant pays one or two of these expenses, but not all three.
Absolute net – Rare, Triple Net Lease where no legal defenses if a tenant fails to meet lease payment obligations. ex. still pay if property goes to eminent domain proceeding.
Loft leases
Loft leases provide for rental of floor space for wide open loft type spaces. Because there are no (or few) room dividers, the tenant may wish to divide the space. Loft leases, however, generally preclude the tenant from making structural changes or any changes that could impact utility services.
Percentage lease
Tenant pays a base rent plus an additional charge that is a percentage of the tenant’s GROSS SALES. \
often the tenant begins by only paying the base rent, with the percentage rent kicking in after a specific amount of gross sales are met, which is the break-even point. The natural “breakpoint” or break-even point, is calculated by dividing the base rent by the established percentage. The percentage charged is stepped up gradually as the tenant’s business grows.
Rent set-off
A tenant’s right to set off rent if the landlord hasn’t paid a utility bill, for instance, and under what conditions a set-off is allowed
Five lease clauses
1 - Use - how the tenant may and may not use the space.
2 - Subordination Tells tenant lease is subordinate to the mortgage.
3 - Nondisturbance No evict if terms met.
4 - Attornment -tenant agrees if owner is forclosed, they remain tenant for new owner
5 - Estoppel Certificate - verifies facts that are in writing.
6 - Sublease/Assignment – most say no assign/sublease
Build to Suit
- Landowner builds to satisfy the needs of a specific buyer, or, if holding onto the property, a long-term tenant, such as a business.
- Usually done for commercial, industrial, or office space, rather than residential.
Plottage
Plottage refers to the increase or decrease in land value that occurs when several parcels are combined into one large plot, as that value compares to their combined total value if sold individually
Assemblage
The process of combining separate adjacent parcels into one piece.
Excess Land
Can be excised (separated) from land and sold separately without harming the ability to develop the original parcel. Excess land should be valued separately in an appraisal.
Surplus land
Surplus land, in contrast, is more land than is needed for the planned development, but not enough land to carve out for another purpose. Surplus land would be valued with the original parcel, and it may or may not add value to the land.
Speculator vs. Developer
A speculator will subdivide tracts and sell the lots unimproved. A developer will improve the lots (adding water, power, sewer, etc.), and then sell them as improved. A developer may also improve the land by adding residential or commercial construction before selling.
Dead Money
Investors call investing in vacant land “dead money” because vacant land doesn’t produce income. Therefore, the longer a vacant piece of land is held, the more potential income is lost—income that could be making more income and increasing investment return. Unimproved land is a financial drain because debt service, taxes, and insurance have to be paid whether any income is being realized or not.
The Interstate Land Sales Full Disclosure Act
Passed in 1968 and originally administered by the U.S. Department of Housing and Urban Development (HUD) through the office of Interstate Land Sales registration, regulates the sale of unimproved lots across state lines. It does so in order to keep gangsters, con artists, and other hooligans from selling property to unsuspecting consumers sight unseen. While it used to be administered by HUD, the Consumer Financial Protection Bureau (CFPB) is now tasked with overseeing it.
The primary difference between general building codes and the FHA’s minimum property standards relate to the durability of a dwelling’s _________.
Fixtures
Business risk
Risk that an investment will not realize the required return on investor capital.
Capital risk
Either the ability to secure financing at an affordable rate, or the loss of the principal amount invested.
Dynamic risk
A type of business risk that is uninsurable because it’s determined by economic, tax, and market changes.
Financial risk
Risk that is directly related to leverage—the higher the leverage, the higher the risk.
Static risk
An insurable business risk that includes insuring for accident liability, fire, theft, and vandalism.
scheduled gross income
Income a property could bring in if it were leased at full capacity, with all tenants paying full rent
Pro Forma Statement
reworking a property operating statement to make ti more realistic (good or bad)
Formula to figure out cap rate
Net operating income ÷ capitalization rate = approximate value
Formula to find NOI from cap rate and house purchase price.
Value (purchase price) × cap rate = net operating income
Cash-on-cash return
The ratio of annual before-tax cash flow to the amount of cash they’ve invested, and it’s expressed as a percentage.
after-tax-cash flow
Take the profit yielded from the investment and subtract income taxes that apply to the property’s income.
Operating leverage (high and low)
Refers to the relationship between the investment or company’s fixed costs and its variable costs.
High level of fixed costs relative to variable costs = high operating leverage
Low level of fixed costs relative to variable costs = low operating leverage
Impacts of high operating leverage
A company with high operating leverage that experiences an increase in sales doesn’t experience a proportional increase in expenses, so these companies often have a higher operating income than other companies do. For this reason, companies with high operating leverage can substantially affect profit by increasing sales—either via entire sales volume, or via per-unit price.
On the flip side, when sales drop, fixed costs don’t. Because of this, companies with high operating leverage can experience extreme fluctuations in gross profit.
Impacts of low operating leverage in an investment
an increase or decrease in the amount of overall sales doesn’t have as profound of an impact on gross profit as it does with a company with high operating leverage. Instead, the sales increase or decrease is met with a similar uptick or downturn in gross profit.
Financial leverage
The use of borrowed funds as a source of capital. Investors commonly use borrowed funds for investment purposes.
