ch 26-28 Flashcards
what is a condominium
is a building in which each owner has a percentage ownership of the entire property. The condo is for legal purposes real property. The condo owner, owns his or her individual apartment just as if it were a private home
Owns an undivided percentage of the common elements of the building along with the other unit owners
The condo is governed by a board of directors or board of managers that maintains the common elements and enforces the regulation
what are condominium documents
are generally divided into 3 parts: Declaration, Articles of Incorporation, and Rules and Regulations
The bylaws are the basic rules under which the condo operates
The condo sponsor is the condo’s owner or developer. The sponsor appoints the board members, appoints the managing agent, and puts a limit of his own control of the board
The offering plan also known as a prospectus or black book (floor plans, units available, parking info), must be reviewed by the NYS Attorney General’s Office to be sure the info is accurate and complete according to NYS legal requirements before the plan can be distributed to the public
The declaration explains the nature of the development project, including the name of the condo, the developer and the principal officers: a description of the units, the way the condo is governed and how the dues will be assessed; an explanation of repair and maintenance responsibilities and a description of the ownership interest between the condo association and the owner
what is a letter of intent (LOI)
is a written statement expressing the intention of the undersigned to enter into a formal agreement to purchase a condo
Contains : Price and deposits Completion date and closing date Use of the unit Non-exclusivity
What does a certificate of occupancy (CO) do
a new building cannot be legally occupied until the building department has issued a final or temporary CO. If a temporary CO expires and is not renewed a new buyer may find it difficult or impossible to renew his or her homeowner’s insurance policy or to sell or refinance the home
what is flipping
buying and selling quick or buying a unit from a developer as soon as it comes on the market (often b4 construction) and then reselling the contract to a third party before closing occurs. Flipping is a quick turn around of the unit for a faster profit, but it may only be done with the developer’s permission
Flipping can drive up the prices of the units in a development. It can cause financial problems for buyers who purchase the flipped units for much more than they would have paid if they bought directly from the developer
When can developers do a market test
as long as the follow the rules outlined in the Cooperative Policy Statement #1 (CPS1)
Covenants, conditions, and restriction are limitations and rules placed on a group of homes by a builder, developer, neighborhood association and or homeowner association. All condos and townhomes have CCRs
what is the right of first refusal and who typically has this right in a condo
this is the right of a person or entity to have the first opportunity to either purchase or lease real property. In some condos the association of unit owners retains the right of first refusal on the sale of any unit
what is the mansion tax
a 1% tax paid by the buyer on an residential property that sells for $1M or more
what is title insurance
will protect the buyer against any unpaid bills or liens against the condo association
A lender will require this to protect interest
what is the difference between a condo and a cooperative
it is the form of ownership. While a condo owner actually owns the unit, which is treated as real property, a co-op member does not directly own any real estate. The corporation owns or leases all real estate
Each unit in a co-op is allocated a number of shares of stock. When buying into the co-op a person is buying those shares in the corporation
Each month the shareholders pay a maintenance fee that covers their share of the operating expenses of their cooperative corporation
Co-op members are entitled to a tax deduction for their portion of the building’s real estate tax, their portion of the building’s interest payment on its mortgage and the interest payment on their own apartment loan
Should review financial statement b4 investing in a co-op
what is an underlying mortgage
1/ more mortgage on an entire building
What is contained in the financial statement of the co-op
Accountant’s opinion letter
Statement of financial position or balance sheet
Income statement
Notes to the financial statement
what is discussed in the board’s minutes
Can be helpful to prospective buyers
may discuss maintenance issues and make decisions about whether they will need special assessments during the year to cover certain expenses. Will give the prospective buyer an idea of what maintenance issues are of concern to the co-op board.
May also give the buyer info about the status of the mortgages that can’t be found in the financial statement, as well as , info about the reserve funds
who owns a co-op
the ownership of the building and all of the common elements is a fee simple ownership.
For shareholders, their interest is a leasehold estate.
Some co-ops have a flip tax that is imposed when the unit transfers. A flip tax is not really a tax but a fee for the sale of a co-op unit
what documents are needed for a co-op transfer
Subscription agreement: the contract to purchase the shares in a co-op corporation
Proprietary lease: a proprietary lease is a lease given by a corporation to another. It is often used in a co-op context, where the owner is given a certain number of shares in the co-op, along with a proprietary lease for one of the residences in the building. In this manner, a stockholder in the co-op has a certain number of shares in the co-op, along with a lease to use one of the apartments under the conditions specified
what are articles of incorporation
they are the primary rules governing the management of a corporation in the US and Canada, and are filed with a state or other regulatory agency
what are bylaws
state how the co-op will conduct business and must be consistent with both State statutes and the articles of incorporation
what are house rules
less technical, and involve primarily quality of life issues. They are easier to amend, but harder to enforce than bylaws and are at the root of many conflicts a board may encounter
what does purchaser receive when close on a purchased unit
a stock certificate in his or her name
Do not receive a deed. Instead ownership of the shares entitles the purchaser to a long-term proprietary lease for the apt or unit
what does a shareholder need to make changes to their unit
an alteration agreement
what does a prospective purchaser need to do in order to buy into the co-op
a private interview along with an application packet
what kind of loan does a purchaser receive from a bank since they dont own real estate
a share loan
what is a recognition agreement
it is a 3 party contract usually between tenant-shareholder’s lender and the co-op, which is then signed and approved by the shareholder
name four items that are normally included in a board package
An application with basic info about the purchaser, including financial condition
One/two years of tax returns
Two to four personal reference letter
Two to four reference letters from work colleagues
what are some problems restrictions with subletting in a co-op
most co-ops prefer that units are not sublet to non-shareholder tenants
Co-ops that allows sublets have some potential issues. For example if the % of sublets is high the co-op may not be able to borrow money easily or refinance its underlying mortgage without paying much higher rates
Co-ops that do allow subletting often have restrictions on the length of time for which the shareholder-owner may sublet the unit
In some cases the bylaws or rules of the co-op will allows a sponsor who owns the shares allocated to a unit to sublet that unit, even though other unit owners may be prohibited from doing so
who is present at the board interview
either the entire board or more likely some subset of board members designated to perform this task and then report back to the full board
under what circumstances might allowing subletting in a co-op be a good thing
at any given time one or more individual shareholders in a building may have a change in circumstances that require them to relocate. A sublet allows that owner to collect the rent needed to make the maintenance payment
what is a condop
is a building which has been divided up into mixed-use segments, with each segment receiving a condo unit deed. Subsequently one of these segments is identified as a residential component that is owned by a co-op corporation. There are some situations in which a conversion to a condop might be worthwile
what is the IRS 80/20 rule
is a federal tax rule that requires residential co-ops to get at least 80 percent of their gross income from their tenant-shareholders and no more than 20 percent from other sources like commercial rents
what does the mortgage debt relief act of 2007 amend with the 80/20 rule
Now a co-op can also qualify if for the tax year in question one of the following is true:
At least 80% of the total square footage of the co-op property is used or available for use by shareholders for residential or residentially-ancillary purposes
At least 90% of the co-ops expenses are for the acquisition, construction, management, maintenance or care of the co-ops property for the benefit of its shareholders
what is the time value of money
is based on the idea that money available at the present time is worth more than the same amount in the future, due to its potential earning capacity
what is liquidity
is a term that refers to an asset’s ability to be easily converted through an act of buying or selling without causing a significant movement in the price and with minimum loss of value. Property is considered an illiquid asset which cannot be transferred as easily as other assets, such as stocks or bonds
what is leverage
is the use of borrowed funds to increase the potential return of an investment. financial leverage is created by mixing borrowed funds with equity (the cash contributed by the investor)
what is the debt to equity ratio
this is total liabilities divided by shareholders’s equity
Financial leverage can be measured by this
list three other risk factors an investor must consider besides financial risk
business risk
Inflation risk
Management risk
risk of unimproved or undeveloped property
is probably the riskiest of all property investments. It can be the most illiquid of all property types
what are the different office buildings
Low rise: 1-3 stories
Mid rise: 4-15 stories
High-rise: over 15 stories
Garden office: 1-5 stories with extensive landscape
Research and development: 1-2 stories 50% office or dry lab and rest workshops, storage, or light manufacturing
Flex space: 1-2 stories can be for warehouse and light industrial or offices
what is malls
shops and association walkways and parking areas. Public area
what is regional centers
Regional centers are intended to serve as the focal points of regional commerce, identity, and activity. They cater to many neighborhoods and communities and serve a population of 250,000 to 500,000 resident
what is mega malls
super regional centers
what is outlet centers
100,000-300,000 sqft couple dept stores
what are the different industrial property
warehouse/manufacturing: focus on storage and distribution
Manufacturing
Flex
Loft building: several floors with large areas of unobstructed space, originally rented out for light industrial now for residential
name 2 advantages of investing in commercial property
very little risk of rent control. Business tenants are generally easier to deal with than apartment house tenants
what is net operating income
the net income produced by a specific property after all expenses have been deducted from the gross receipts
Expenses:
Variable expenses fluctuate according to the degree of occupancy. Here are some examples. Management fees are based on a percentage of rental income. Utility expenses. Expenses for cleaning. Fixed Expenses
Fixed expenses do not fluctuate. Real estate taxes. Insurance premium. Repairs and maintenance. Advertising and promotions
what is cash flow
is equal to cash received minus the cash paid out over a given period of time
Before tax cash flow is the measure of the cash received after the net operating income has been calculated and any mortgage related expenses are paid, but before taxes are taken into consideration
After tax cash flow is the profit that the investor actually receives from income-producing property after the income taxes are paid. It is the before-tax cash flow, minus the tax liability
what is taxable income
= NOI - depreciation - mortgage interest
what is a tax shelter
an investment designed to reduce or avoid income taxes
what is a real estate operating statement
usually presents cash inflows and outflows from operations and is broadened to include non-operating cash flows, such as those that come from debt services, income taxes, and capital expenditures
what is gross income
is the amount of revenue the property would generate if it had no vacancies. The gross rental income is adjusted to reflect vacancy losses to derive effective rental income. The effective rental income amount is then further adjusted to include income from other sources, resulting in the gross operating income
what is operating expenses
will show the cash expenditures that are needed to maintain and operate the property
what is debt services
is the principal and interest payments made on a debt over a period of time. Debt services are subtracted from the net operating income to get the before-tax cash flow
what is cash on cash return or equity dividend rate
is the ratio of annual before tax cash flow or after tax cash flow to the total amount of cash invested, expressed as a percentage (annual before tax cash flow / total cash invested = cash on cash return
how to estimate current operation costs
First identify comparable properties
Second compare data to published sources
what are two crucial physical traits that affect a property’s ability to stay competetive
Functional efficiency: is an assessment of how well a property does the job it is supposed to do
Physical durability: is a calculation of the buildings remaining physical life, which is based on how well the building was originally designed coupled with how well it has been maintained over its life
what is an income multiplier
express the relationship between price and either gross or net income. The current price of the property is divided by the income to give an idea of how effective the property is at generating income compared to its market price
what is operating ratio
this is the percentage of effective gross income that is consumed by the operating expenses. It is calculated by dividing the operating expenses by the effective gross income. Usually, the lower the ratio, the more efficient the property is
what is break even ratio
this calculation shows the percentage of effective gross income that is required the meet cash expenditures. It is calculated by adding debt services to operating expenses and dividing by operating income. Lenders use the break even ratio as one of their analysis methods when considering providing financing for an investment property. Too high of a break-even ratio would cause a lender to use caution
what is debt coverage ratio
it measures the investor’s ability to pay the property’s monthly mortgage payments from the cash generated from renting the property. Lenders use this ratio as a guide to determine whether the property will generate enough cash to pay rental expenses plus the loan payments. It is calculated by dividing the annual NOI by the annual debt service
what is a pro forma income statement
is similar to a historical income statement, except it projects the future rather than tracks the past. Pro forma income statements are an important tool for planning future business operations
what is capitalization rate
is designed to reflect the recapture rate of an investor’s original investment over the economic life of the investment to give that investor an acceptable rate of return on his or her investment. As the capitalization rate goes down, the value of the property goes up
