Chapter 15 Characteristics Of Real Property Investments Flashcards
Net operating income
Net Operating Income – Equal to the Gross income minus expenses (and sometimes debt service). Also referred to as cash flow.
Capitalization rate
Capitalization Rate – The percentage which is the sum of the discount rate, the effective tax rate and the recapture rate representing the relationship between net operating income and present value. Formula: Value = Income / Rat
Time value of money (TVM)
Time Value of Money (TMV) – 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.
Leverage
Leverage – The use or borrowed capital (mortgage) to increase the potential return of an investment.
Cash on cash return
Cash on Cash Return – A percentage return on money invested in a property by an investor. Formula: Down Payment / Cash Flow.
Usable square footage
Usable Square Footage – Space that can be used or occupied by a tenant. Typically does not include elevators, stairs, mechanical spaces, etc.
Gross income
Gross Income – The total amount collected from rents and other income producing opportunities (washing machines, storage, etc.)
Rentable Square footage
Rentable Square Footage – Usable area that can be leased/rented to a tenant.
Common area
Common Areas – Spaces in a commercial building shared by the tenants or residents of the building. Common areas include lobbies, corridors, stairs, elevators, etc.
Net lease
Net Lease – A lease that requires the tenant to pay, in addition to rent, some or all of the property expenses that normally would be paid by the property owner. These include expenses such as real estate taxes, insurance, maintenance, repairs, utilities, and other items.
Gross lease
Gross Lease – A lease of property whereby the lessor is to meet all property charges regularly incurred through ownership.
Gross lease
Gross Lease – A lease of property whereby the lessor is to meet all property charges regularly incurred through ownership.
Percentage lease
Percentage Lease – A lease of property in which the rental is based upon the percentage of the volume of sales made upon the leased premises, usually provides for minimal rental.
Estoppel
Estoppel – An instrument executed by the mortgagor setting forth the present status and the balance due on the mortgage as of the date of the execution of the certificate.
Anchor store
Anchor Stores – A key tenant in retail. Typically one of the larger stores in a shopping mall, usually a department store or a major retail chain (Macys, Nordstrom, etc.).
Debt service
Debt Service – Annual amount to be paid by a debtor on an obligation to repay borrowed money.
Before tax cash flow
Before Tax Cash Flow – The net profit/loss calculated by subtracting expenses from income before taxes are paid.
After tax cash flow
After Tax Cash Flow – The net profit/loss realized after taxes are deducted.
Cash on cash return
Cash on Cash Return – A percentage return on money invested in a property by an investor. Formula: Down Payment / Cash Flow.
Lease escalation clause
Lease Escalation Clause – A contract provision allowing for one to pass an increase in costs to another party. Escalation clauses are usually related to influences beyond both parties control, such as inflation.
Leverage
Leverage – The use or borrowed capital (mortgage) to increase the potential return of an investment.
Net operating income
Net Operating Income – Equal to the Gross income minus expenses (and sometimes debt service). Also referred to as cash flow.
Gross income
Gross Income – The total amount collected from rents and other income producing opportunities (washing machines, storage, etc.)
Pro-forma statement
Pro-forma Statement – An accounting statement that forecasts income and expenses for a period of time, typically five or more years. Pro-forma statements are typically used by investors to estimate their rate of return for a particular property.
Tax shelter
Tax Shelter – Any method of reducing taxable income resulting in a reduction of the payments to tax collecting entities, including state and federal governments.
Rate of return
Rate of Return – A profit on an investment over a period of time, expressed as a proportion of the original investment.
Useable
Square footage
Usable Square Footage – Space that can be used or occupied by a tenant. Typically does not include elevators, stairs, mechanical spaces, etc.
Rentable
Square footage
Rentable Square Footage – Usable area that can be leased/rented to a tenant.
Amy purchased a property at a 4% Cap Rate. The interest rate on her mortgage is 5.5%. What will Amy experience in the deal…?
Negative leverage
A high-rise office building consists of how many stories?
More than 20
According to the ‘Time value of money’ concept, $1 today is worth what, as compared to $1 in the future…?
Worth more
The total amount collected from rents and other income producing opportunities is referred to as…?
Gross income
Eric works in a 20 year-old building that lacks some of the amenities found in newer office buildings. Eric most likely works in this Class of building…?
ClassB
Which of the following equations will yield positive leverage in a deal…?
Cap rate > interest rate
This retail property type typically consists of 1 – 2 anchor tenants…?
Outlet centers
James purchased a commercial property at a 7.5% Cap Rate. The previous owner agreed to finance the deal at 8%. Why may James elect not to go ahead with the financing…?
He will experience negative leverage
Larry purchased a property at a 6% Cap Rate. What must the interest rate on his mortgage be in order to avoid negative leverage…?
Less than 6%
This property type is NOT considered a primary commercial property type…?
Mixed use buildings
The capitalization rate refers to an investor’s return on his/her money if the property is purchased in what way…?
Using all cash
Retail Outlet Centers typically consist of how many square feet…?
100,000-300,000 square feet
Net Operating Income is equal to what…?
Income minus expenses
Town Brokers have recently signed a lease to occupy an entire office building. What type of lease did Town Brokers most likely sign…?
NNN Lease
When does an owner have positive leverage in a deal…?
When cap rate is greater than interest rate
Jerry is looking to buy a multi-family building. He would like to know how much rent can be collected if the building were 100% occupied. Which line of the pro-forma should Jerry look to find this information…?
Gross potential income
In what type of metering system can the electric bill be directly paid by the tenant, without having to be billed by the landlord…?
Direct meter
Under this type of lease, the tenant is given a greater opportunity to reach profitability as the business gets started…?
% lease
If the rent for a 15,500 sq.ft. office space is $25 per sq.ft., what is the annual rent for the space…?
387,500
In this type of lease, the tenant pays a fixed amount in rent, while the landlord pays for the building expenses…?
Gross lease
As interest rates go down, Cap Rates do what…?
Decrease
What is the Cap Rate on a building that was purchased for $2,250,000 and yielded an NOI of $185,000…?
8.2%
If the going Cap Rate for a multi-family building in a particular market is 5.0%, what will the purchase price be if the NOI on a property is $90,000…?
- $1,800,000
This clause in a commercial lease allows the landlord to restrict tenants from conducting certain business activities in their space, which may affect other tenants in the building….?
Use clause
If the going Cap Rate for a multi-family building in a particular market is 8.5%, what will the purchase price be if the NOI on the property is $125,000…?
1,470,588
Louis purchased a $6,200,000 office building at a 5.5% Cap rate. What is the NOI on the building…?
341,000
What is a common management fee to assume for a large multi-family building…?
5%
The Net Operating Income of a property does NOT include which of the following expenses…?
Capital expenditures
Many investors invest in commercial real estate for what reason…?
To write off taxes
The Effective Gross Income is equal to the Gross Potential Income minus what…?
Vacancies
Mortgage payments made by a property owner typically consists of interest and what…?
Principal
Which of the following is an example of a Capital Improvement…?
New roof
an investor invests $550,000 in cash to purchase a property that yields $140,000 in available cash, what is the cash-on-cash return for the investor…?
25.45%
Which of the following is the largest in area…?
Rentable square footage
Why may investors demand paying a lower price for a property when interest rates are high…?
Higher interest rate yield for lower cash flow
This line on a pro-forma includes the actual amount of rent collected by the landlord…?
Effective gross income
How can a utility bill be passed through to the tenant if sub-metering proves unfeasible …?
Rent inclusion
building’s Net Operating Income – Total Deductions is equal to what…?
Taxable basis
As interest rates go up, Cap Rates do what…?
Increase
