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Fina 210 > chapter 10: capital structure > Flashcards

chapter 10: capital structure Flashcards

1
Q

capital structure

A

The types and amounts of capital that are employed to finance a property

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2
Q

optimal capital structure

A

The capital structure that achieves the maximum return on equity

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3
Q

asset’s capital stack

A

the claims against an asset and the layers of capital

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4
Q

which claim has the first right to receive operating cash flow and proceeds from a sale or liquidation?

A

The most senior claim

typically a first mortgage

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5
Q

disadvantage of having the senior claim

A

also carries the lowest return

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6
Q

which is the most senior claim on cash flow?

A

the fixed dividend on preferred stock

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7
Q

the most junior claim on cash flow

A

the dividend on the common equity

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8
Q

when you sell property, the full principal amount of all debt, along with any accrued interest, must be paid prior to what?

A

prior to any proceeds being distributed to the equity holders

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9
Q

what happens when the sale of property does not bring enough money to repay all the debt

A

it must be paid in order of seniority

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10
Q

if a junior claim has a maturity date earlier than the senior claim, who has priority on the repayment on debt?

A

the junior claim

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11
Q

WEIGHTED AVERAGE COST OF CAPITAL (WACC)

A

the combined cost of the debt and equity employed to finance a property or entity

combines the cost of debt and the cost of equity in proportion to the amount of each present on the balance sheet

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12
Q

how to calculate the weighted average cost of capital)

A

(Kd · D) + (Ke · E) - t

Kd: cost of debt

D: debt

Ke: cost of equity

E: equity

t: marginal tax rate

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13
Q

how can negative leverage turn positive? can the opposite happen too?

A

if a property’s NOI improve

ye if property performance buggs

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14
Q

who own the residual rights to all cash flow and liquidation proceeds after the creditors have been paid?

A

Equity holders

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15
Q

what is the equity’s holder claim limited to?

A

It is limited only by the performance of the property

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16
Q

why is leverage employed?

A

Leverage is employed to increase the yield on equity

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17
Q

how does leverage increase the yield on equity?

A

If the return on the asset (ROA) is greater than the cost of debt (Kd)

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18
Q

how does leverage decrease the yield on equity?

A

If the return on the asset (ROA) is lower than the cost of debt (Kd)

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19
Q

how does one calculate leverage?

A

leverage = D / (D + E)

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20
Q

how do you calculate ROA?

A

EBITDA/Total capital

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21
Q

EBITDA

A

Earnings before interest, taxes, depreciation and amortization

22
Q

what is an after tax interest rate

A

the result of the property owner being able to deduct interest paid when calculating income subject to taxation

23
Q

when would you want a negative leverage?

A

Expect NOI to Grow

Need Cash to Acquire property

24
Q

when does the portion of a property’s operating cash flow required to service debt increase?

A

when the level of leverage increasea

25
Q

Mezzanine debt (mezz)

A

provides an additional level of capital beyond traditional senior secured or first mortgage financing

has more flexible covenants

has a higher level of risk than traditional financing and requires significantly higher return

serves as bridge financing

26
Q

how does mezzanine financing serve as bridge financin?

A

it has short maturity

has an expectation that the mezz will be refinanced once a new capital structure is implemented following asset stabilization or turn around

27
Q

when does the availability of mezz tend to diminish?

A

in troubled real estate markets

28
Q

Wrap-Around Debt

A

you already got a first mortgage, but another mans gives you a second one

when the maturity of the first comes to an end, the second mans pays for it, making him the only man you owe to both debts

29
Q

Participating Loans

A

give the lender an additional return based on the performance of the underlying asset

30
Q

what is the additional return of a participating loan based on?

A

annual operating performance

proceeds from enhanced valuation at maturity

or both

31
Q

Fixed participations

A

generally stated as a set percentage of profits after payment of the base interest rate

32
Q

Variable participations

A

call for the lender to be paid a variable percentage of earnings before taxes and net sale proceeds

The percentage depends on how well the property performs

33
Q

Convertible Loans

A

allows the lender to exchange all or a portion of their note for an equity interest in the asset

if the asset performs poorly, the lender will seek a return of their principal at maturity

If the asset performs well, the lender will convert their note into an interest in the asset

34
Q

preferred equity

A

receive dividends and liquidation proceeds before any funds are paid to common equity holders

senior to common equity

dividends paid at stated rate which is bigger than the ones of common shares

this dividend remain the same amount over time, while the latter could boom with gyu performance

35
Q

cumulative preferred equity

A

Securities with an accumulation feature

36
Q

conversion rights

A

allow the preferred shares to be exchanged into common shares at a set exchange ratio

Some preferred equity structures may include this

37
Q

what are hybrids used for?

A

used to provide leverage for common equity holders beyond the level where traditional secured financing sources are prepared to lend

given higher returns for the acceptance of the additional risk that comes with being subordinated to the senior lien holders

38
Q

sale leaseback

A

a transaction in which a property owner sells his or her asset to an investor and then leases it back from the investor

39
Q

benefits of a sale leaseback

A

allows the property owner to access the capital invested in the asset for other purposes while still maintaining the use of the property

may also include a right for the seller to repurchase the asset at the end of a given period

40
Q

which types of properties are the best candidates for sale leasebacks

A

Corporate headquarters, chain stores, and restaurants

41
Q

bargain purchase clause

A

The price to reacquire the asset sold after a sale leaseback might be set at a low level to encourage the user to repurchase the property at the end of the lease

42
Q

land lease

A

ease a parcel of land under a long-term agreement that allows the lessee to build and utilize a structure on the land

43
Q

subordinated ground lease

A

If the land lease is made junior to the bank loan on the structure

44
Q

unsubordinated ground lease

A

. If the ground lease is senior

45
Q

why are unsubordinated ground leases very safe investments?

A

because neither the owners nor lenders on the improvements are likely to lose their assets to the ground lessor through a default

46
Q

why are subordinated ground leases a riskier investments?

A

because in order to preserve ownership of the ground, a lessor may need to repay the first mortgage on the improvements

47
Q

air rights

A

he property owner’s rights to develop additional space, typi- cally vertically, on an existing building

48
Q

mineral rights

A

the property owner’s rights to exploit any minerals that are located on a property

49
Q

Oil and gas rights

A

owner’s right to explore for, drill for, and exploit hydrocarbon reserves

50
Q

Water, riparian, and littoral rights

A

the ability of a landholder to use the water and the shoreline on or adjacent to their property

Fina 210 (28 decks)

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