Chapter 15 - Investment Real Estate Flashcards
Calculate NOI from an annual property operating statement
See Fig 15.4
Calculate sales against a percentage lease
Percentage leases are used in retail leases. Rent is base plus a percentage of the tenant’s income once that income exceeds a set amount
Divide base rent by the threshold rate to determine the sales threshold. Then subtract the sales threshold from the actual sales. If actual sales exceeded threshold sales, that overage is multiplied by the threshold rate to determine the Additional Rent due. Add that to the Base Rent to determine Total Rent due for the year.
What is the formula for Equity Dividend Rate?
BTCF
——– = equity dividend rate
Equity
BTCF = NOI-ADS
What is a loan constant and how is it used?
The constant annual percentage of the original loan amount required as principal and interest payments.
Calculate by dividing annual debt service by the original loan amount.
It can be used to determine a mortgage payment amount by multiplying the loan constant by the loan amount. Once you have the monthly payment, you can determine the annual debt service.
If loan constant is lower than the capitalization rate, there is positive leverage, and the Equity Dividend Rate is higher than the Capitalization Rate. That’s good. If loan constant is higher than cap rate, that’s bad.
Difference between positive and negative leverage
If the annual constant on the debt service is less than the overall rate of return (OAR), there is positive leverage.
If Equity Dividend Rate is higher than Cap Rate, there is positive leverage.
Determine the amount of down payment to achieve an investor’s specified rate of return.
Determine mortgage amount to get Annual Debt Service
Subtract Annual Debt Service from the NOI to get Before Tax Cash Flow (BTCF)
Divide BTCF by the investor’s required Equity Dividend Rate (his required return percentage).
That will get the down payment.
What are dynamic vs static risks?
Static: associated with fire, storm, flood, theft, or liability from accidents. Can get insurance to cover the risk of this type of risk.
Dynamic: changes in the economy, Supply and demand conditions, and tax code changes. Can’t be insured against, so mitigate by analysis and a higher required return.
