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Real Estate > Chapter 16. > Flashcards

Chapter 16. Flashcards

1
Q

Anchor Stores

A

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.).

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2
Q

Debt Service

A

Annual amount to be paid by a debtor on an obligation to repay borrowed money.

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3
Q

Capitalization Rate

A

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 / Rate

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4
Q

Before Tax Cash Flow

A

The net profit/loss calculated by subtracting expenses from income before taxes are paid.

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5
Q

After Tax Cash Flow

A

The net profit/loss realized after taxes are deducted.

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6
Q

Cash on Cash Return

A

A percentage return on money invested in a property by an investor. Formula: Cash Flow / Down Payment

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7
Q

Common Areas

A

Spaces in a commercial building shared by the tenants or residents of the building. Common areas include lobbies, corridors, stairs, elevators, etc.

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8
Q

Lease Escalation Clause

A

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.

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9
Q

Leverage

A

The use or borrowed capital (mortgage) to increase the potential return of an investment.

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10
Q

Net Operating Income

A

Equal to the Gross income minus expenses (and sometimes debt service). Also referred to as cash flow.

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11
Q

Gross Income

A

The total amount collected from rents and other income producing opportunities (washing machines, storage, etc.)

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12
Q

Pro-forma Statement

A

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.

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13
Q

Tax Shelter

A

Any method of reducing taxable income resulting in a reduction of the payments to tax collecting entities, including state and federal governments.

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14
Q

Time Value of Money (TVM)

A

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.

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15
Q

Rate of Return

A

A profit on an investment over a period of time, expressed as a proportion of the original investment.

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16
Q

Usable Square Footage

A

Space that can be used or occupied by a tenant. Typically does not include elevators, stairs, mechanical spaces, etc.

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17
Q

Rentable Square Footage

A

Usable area that can be leased/rented to a tenant.

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18
Q

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 is known as…?

A

Time Value of Money

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19
Q

Andrew bought a building at a 6% cap rate. The interest rate on his mortgage is only 5.2%. What will Andrew experience in the deal…?

A

Positive Leverage

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20
Q

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…?

A

Negative Leverage

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21
Q
  1. 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…?
A

He will experience negative leverage

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22
Q

profit on an investment over a period of time, expressed as a proportion of the original investment is also known as…?

A

Rate of Return

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23
Q
  1. How is a multi-family property valued different than an office building…?
A

Both property types are valued the same way

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24
Q
  1. Which of the following is considered a primary commercial property type…?
A

Industrial properties

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25
Q

Which of the following is NOT considered a main commercial property type…?

A

Vacant land

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26
Q

Space that can be used or occupied by a tenant is known as…?

A

Usable Square Footage

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27
Q
  1. A newly built office building is considered this Class of building…?
A

Class A

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28
Q

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…?

A

Class B

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29
Q

GAAP is an acronym for what…?

A

Generally Accepted Accounting Principles

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30
Q

Usable area that can be leased/rented to a tenant is known as…?

A

Rentable Square Footage

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31
Q

This type of office building consists of 1-3 stories…?

A

Low-rise office building

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32
Q

Walmart serves as the primary tenant in a large shopping center. Walmart can also be referred to as what…?

A

Anchor tenant

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33
Q

Retail strip centers typically consist of how many square feet…?

A

8,000 - 30,000 sq.ft.

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34
Q

What is an important aspect of industrial warehouse space…?

A

Ceiling heights

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35
Q

These types of properties are typically bought using emotions…?

A

Residential

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36
Q

The net profit/loss calculated by subtracting expenses from income before taxes are paid is known as…?

A

Before Tax Cash Flow

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37
Q

The amount of cash flow a property produces is NOT used in determining the value of this property type…?

A

Residential

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38
Q

The value of this property type is based primarily on an investor’s return on their money…?

A

Commercial

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39
Q

What is a primary focus of a commercial property owner, as opposed to a residential owner…?

A

Stability of cash flow

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40
Q

residential property owner, as opposed to a commercial owner, is typically NOT concerned with what…?

A

Cash flow of the property

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41
Q

As a commercial real estate owner, what should be your primary focus…?

A

The risk involved in the deal

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42
Q

Which of the following is NOT a characteristic of commercial investment properties…?

A

Desirability

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43
Q

Which of the following is NOT a primary characteristic of real property investments…?

A

Aesthetics

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44
Q

Which of the following may NOT be considered a main characteristic of commercial investment properties…?

A

Emotions

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45
Q

The net profit/loss realized after taxes are deducted is known as what…?

A

After Tax Cash Flow

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46
Q

Which of the following is a primary aspect of commercial investment properties…?

A

Leverage

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47
Q

A thorough review of a commercial investment property’s financials are conducted during this process…?

A

Due diligence

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48
Q

What should an investor look for when reviewing the financials of a commercial property…?

A

All of the above
Drastic changes in expenses and/or income
Net operating income
Gross income

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49
Q

A percentage return on money invested in a property by an investor is referred to as…?

A

Cash on Cash Return

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50
Q

Real estate is what type of investment…?

A

Illiquid

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51
Q

Real estate is known as an illiquid asset because of this…?

A

An owner’s equity cannot easily be withdrawn

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52
Q

Cash, in addition to the down payment, that an owner needs to run and maintain an investment property is known as this…?

A

Liquidity

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53
Q

Mark recently purchased a commercial investment property. Even after paying a significant down payment, he still has enough cash to fund the operations of the property until the cash flow is sufficient. Mark may be considered what…?

A

Liquid

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54
Q

What is used by nearly every real estate investor to buy a commercial property…?

A

Leverage

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55
Q

Which of the following is NOT an example of using leverage in a real estate transaction…?

A

Buying a property using all cash

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56
Q

Abby purchased a commercial property using all cash at a 11% capitalization rate. What is Abby’s cash-on-cash return on the deal…?

A

11 (Percent %)

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57
Q

Phillip would like to buy a larger multi-family building. How can this be accomplished using less cash out of pocket by Phillip…?

A

Phillip should use leverage by obtaining a mortgage

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58
Q

What is the cash-on-cash return for an owner who purchases a $5,000,000 property, with an NOI of $500,000 using all cash…?

A

10 (Percent %)

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59
Q

When does an owner have positive leverage in a deal…?

A

When the Cap Rate is greater than the Interest Rate

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60
Q

Mark buys a building in which the Cap Rate is greater than the Interest Rate on his mortgage. What will Mark experience with the deal…?

A

Positive Leverage

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61
Q

When will an owner experience a higher cash-on-cash return on his investment as compared to an all cash deal…?

A

When there is Positive Leverage in the deal

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62
Q

What is the equation for negative leverage…?

A

Interest Rate > Cap Rate

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63
Q

Which of the following will yield negative leverage in a deal…?

A

Interest Rate > Cap Rate

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64
Q
  1. When does an owner have negative leverage in a deal…?
A

When the interest rate on the mortgage exceeds the cap rate

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65
Q

Justin decided to purchase a property using all-cash. What can Justin do to increase his return on investment…?

A

Utilize positive leverage

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66
Q

This document lists all of the tenants in a particular building and how much each is paying in rent…?

A

Rent roll

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67
Q

If the annual rent on a 22,500 sq.ft. office space is $945,000, what is the rent per sq.ft….?

A

$42 (Dollars)

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68
Q

Why might the rentable square footage be greater than the usable square footage…?

A

All of the answer choices provided are correct.

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69
Q

Which of the following is the largest in area…?

A

Rentable square footage

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70
Q

Which of the following is NOT considered a utility expense…?

A

Cleaning

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71
Q

In this lease type, the tenant’s only expenses are real estate taxes, while the landlord pays the rest of the expenses…?

A

Net Lease

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72
Q

In this lease type, the tenant is responsible for paying both the property taxes and premiums for insuring the building…?

A

Double Net Lease

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73
Q

City Brokers recently signed a lease on their new office space. As part of the lease agreement, City Brokers must pay for all of the building’s expenses. What type of lease did City Brokers sign…?

A

Triple Net Lease

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74
Q

XYZ Company recently signed a lease on their new office space. As part of the lease agreement, they must pay for property’s real estate taxes. What type of lease did XYZ Company sign…?

A

Net Lease

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75
Q

Under this type of lease, the tenant is given a greater opportunity to reach profitability as the business gets started…?

A

Percentage Lease

76
Q

In this type of lease, the tenant is required to report the performance of the business to the landlord…?

A

Percentage Lease

77
Q

Which of the following occurs first…?

A

Signing of the lease

78
Q

The commencement date is typically earlier than this date…?

A

Move-in Date

79
Q

The landlord of a building needs to perform plumbing work in the bathroom of a tenant’s space. Which clause in the tenant’s lease will specify when the landlord is permitted to enter the tenant’s space to perform the work…?

A

Notice clause

80
Q

In a typical commercial lease, who is given the option to extend a tenant’s lease…?

A

The tenant

81
Q

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….?

A

Use clause

82
Q

A letter provided by the tenant to the landlord, which assures that their lease is binding, accurate, and being paid upon, is known as what…?

A

Estoppel letter

83
Q

If a tenant sublets their space to a sub-tenant, who is responsible for the lease…?

A

The tenant

84
Q

If a tenant assigns their lease to a new tenant, who is responsible for maintaining the lease…?

A

The new tenant

85
Q

If a landlord would like to pass a utility bill on to his/her tenants, what type of metering would be required…?

A

All of the answer choices provided are correct.

86
Q

In what type of metering system can the electric bill be directly paid by the tenant, without having to be billed by the landlord…?

A

Direct meter

87
Q

Which of the following is considered a ‘repairs and maintenance’ expense…?

A

Replacing broken windows

88
Q

Which of the following is an example of a qualified deduction an owner can take to reduce the amount of taxes owed on a property…?

A

Depreciation

89
Q

The taxable basis of a property is equal to…?

A

Net Operating Income - Total Deductions

90
Q

A building’s Net Operating Income - Total Deductions is equal to what…?

A

Taxable Basis

91
Q

Many investors invest in commercial real estate for what reason…?

A

To write-off taxes

92
Q

When do commercial property owners typically experience a tax loss on their investment…?

A

In the first few years after buying the property

93
Q

Jerry is looking to buy a multi-family building. He would like to know much rent can be collected if the building were 100% occupied. Which line of the pro-forma should Jerry look to find this information…?

A

Gross Potential Income

94
Q

Replacement reserves, as commonly found in pro-forma statements, typically account for what…?

A

Capital expenditures

95
Q

How much cash will an investor have to pay on a property where the bank is providing a loan at 75% LTV, on a purchase price of $5,500,000 and $450,000 in closing costs…?

A

$1,825,000 (Dollars)

96
Q

What is the available cash that a property yields if the income is equal to $550,000, the cash expenses equal $220,000, and the principal and interest amount to $75,000…?

A

$255,000 (Dollars)

97
Q

If an investor invests $720,000 in cash to purchase a property that yields $225,000 in available cash, what is the cash-on-cash return for the investor…?

A

31.25 (Percent %)

98
Q

What is the most common means by which commercial real estate is valued by real estate professionals…?

A

Cap Rates

99
Q

What is an underlying component that contributes to an investor’s decision as to what capitalization rate is appropriate for a particular property…?

A

he amount of risk associated with the deal

100
Q

What is an underlying component that contributes to an investor’s decision as to what capitalization rate is appropriate for a particular property…?

A

The amount of sweat equity needed to run the property successfully

101
Q

Which of the following properties would be considered the most risky as an investment…?

A

Duplex apartment house

102
Q

The effective gross income is equal to the gross potential income minus what…?

A

Vacancies

103
Q

The capitalization rate is equal to the annual return an investor will achieve if the property were purchased how…?

A

Using all cash

104
Q

The cap rate and the value (or price) of a property have what type of relationship…?

A

Inverse

105
Q

Lower interest rates will yield what…?

A

Lower Cap Rates

106
Q

As interest rates go down, cap rates do what…?

A

Decrease

107
Q

In a commercial lease, the price charged to the tenant is based on what…?

A

Price per Sq.ft.

108
Q
  1. The price/sq.ft. described in a commercial lease is typically represented on what basis…?
A

Annual

109
Q

If the annual rent on a 10,500 sq.ft. office space is $546,000, what is the rent per sq.ft….?

A

$52 (Dollars)

110
Q

James created a real estate syndication to purchase a multi-family building. He offered to pay his investors an 8% return first, after which he will split the remaining profits 50/50. What is the 8% return referred to…?

A

Preferred Return

111
Q

Which of the following is considered a main commercial property type…?

A

Apartment buildings

112
Q

This retail property type typically consists of 8,000 - 30,000 sq.ft….?

A

Strip Center

113
Q

The use of borrowed capital (mortgage) to increase the potential return on an investment is known as what…?

A

Leverage

114
Q

The practice of using ‘other people’s money’ to buy real estate is an example of what…?

A

Leverage

115
Q

Which of the following is an example of using ‘other people’s money’…?

A

Syndicating capital

116
Q

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…?

A

Class B

117
Q

This type of office building consists of 3-15 stories…?

A

Mid-rise office building

118
Q

This type of office building consists of 20 or more stories…?

A

High-rise office building

119
Q

At what size does a bank treat a residential building as commercial…?

A

5 units or more

120
Q

The pricing of residential real estate is based, in part, on which of the following…?

A

Emotions

121
Q

This retail property type is typically 30,000 - 100,000 sq.ft…?

A

Neighborhood Centers

122
Q

Retail outlet centers typically consist of how many square feet…?

A

100,000 - 300,000 sq.ft.

123
Q

Mega malls consist of how many anchor tenants…?

A

3 or more

124
Q

This retail property type typically consists of 1 - 2 anchor tenants…?

A

Outlet Centers

125
Q

What is an important aspect of industrial warehouse space…?

A

Ceiling heights

126
Q

According to the ‘Time value of money’ concept, $1 today is worth what, as compared to $1 in the future…?

A

Worth more

127
Q

What is a major expense that may require an owner to be liquid to cover the costs…?

A

Finding a new tenant to occupy a recently vacated space

128
Q

Which of the following is NOT an example of using leverage in a real estate transaction…?

A

Buying a property using all cash

129
Q

The capitalization rate refers to an investor’s return on his/her money if the property is purchased in what way..

A

Using all cash

130
Q

What is a common management fee to assume for a large multi-family building…?

A

5 (Percent %)

131
Q

In this lease type, the tenant is responsible for paying both the property taxes and premiums for insuring the building…?

A

Double Net Lease

132
Q

Town Brokers have recently signed a lease to occupy an entire office building. What type of lease did Town Brokers most likely sign…?

A

NNN Lease

133
Q

This type of lease is often used when a large, single tenant occupies the entire building…?

A

NNN Lease

134
Q

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….?

A

Use clause

135
Q

What will a landlord demand of their tenants when attempting to obtain financing on the building…?

A

An estoppel letter

136
Q

In what type of metering system can the electric bill be directly paid by the tenant, without having to be billed by the landlord…?

A

Direct meter

137
Q

What clause in a commercial lease accounts for increases in market rents, real estate taxes, and expenses…?

A

Lease escalation clause

138
Q

Which of the following refers to the amount of potential rent an owner can receive if his/her building were 100% occupied…?

A

Gross Potential Income

139
Q

The taxable basis of a property is equal to…?

A

Net Operating Income - Total Deductions

140
Q

When do commercial property owners typically experience a tax loss on their investment…?

A

In the first few years after buying the property

141
Q

This document is used by investors to estimate how a property will perform in the future…?

A

Pro-forma

142
Q

What do lenders typically have a buyer place in an escrow account…?

A

Capital reserves

143
Q

Which of the following is NOT an underlying component of a capitalization rate…?

A

Passive income

144
Q

The capitalization rate is equal to the annual return an investor will achieve if the property were purchased how…?

A

Using all cash

145
Q

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…?

A

Using the cap rate formula, the purchase price will equal the NOI divided by the cap rate. This equals $125,000 / 0.085 = $1,470,588.

146
Q

Why may investors demand paying a lower price for a property when interest rates are high…?

A

High interest rates yield a lower cash flow

147
Q

Lower interest rates will yield what…?

A

Lower Cap Rates

148
Q

As interest rates go down, cap rates do what…?

A

Decrease

149
Q

James created a real estate syndication to purchase a multi-family building. He offered to pay his investors an 8% return first, after which he will split the remaining profits 50/50. What is the 8% return referred to…?

A

Preferred Return

150
Q

The pricing of residential real estate is based, in part, on which of the following…?

A

Emotions

151
Q

This retail property type typically consists of 8,000 - 30,000 sq.ft….?

A

Strip Center

152
Q

This retail property type is typically 30,000 - 100,000 sq.ft…?

A

Neighborhood Centers

153
Q

The amount of cash flow a property produces is NOT used in determining the value of this property type…?

A

Residential

154
Q

The net profit/loss realized after taxes are deducted is known as what…?

A

After Tax Cash Flow

155
Q

The concept that $1 dollar today is worth more than $1 in the future is known as what…?

A

Time value of money

156
Q

According to the ‘Time value of money’ concept, $1 today is worth what, as compared to $1 in the future…?

A

Worth more

157
Q

Brian would like to buy a larger commercial building. How can this be accomplished using less cash out of pocket by Brian…?

A

Brian should use leverage by obtaining seller financing

158
Q

Which of the following is NOT an example of using leverage in a deal…?

A

Using all cash

159
Q

Which of the following equations will yield positive leverage in a deal…?

A

Cap Rate > Interest Rate

160
Q

The annual amount to be paid by a debtor on an obligation to repay borrowed money is known as what…?

A

Debt Service

161
Q

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 is known as…?

A

Time Value of Money

162
Q

Which of the following is NOT considered a main commercial property type…?

A

Self storage buildings

163
Q

Which of the following is considered a major commercial property type…?

A

AAll of the above
BApartment buildings
COffice buildings
DIndustrial buildings

164
Q

If an owner has enough cash to fund the operations of a commercial investment property while the cash flow becomes stabilized, he is considered this…?

A

Liquid

165
Q

Ely recently purchased a commercial investment property using a jumbo loan from the bank. Ely’s use of bank financing is an example of what…?

A

Leverage

166
Q

The practice of using ‘other people’s money’ to buy real estate is an example of what…?

A

Leverage

167
Q

What is used to calculate an investor’s cash-on-cash return if the property is purchased using all cash…?

A

Capitalization rate

168
Q

Phillip would like to buy a larger multi-family building. How can this be accomplished using less cash out of pocket by Phillip…?

A

Phillip should use leverage by obtaining a mortgage

169
Q

When will an owner experience a lower cash-on-cash return on his investment as compared to an all cash deal

A

When there is Negative Leverage in the deal

170
Q

What determines the difference between the various types of net leases…?

A

The amount of expenses paid by the tenant

171
Q

Tech Company recently signed a lease on their new office space. As part of the lease agreement, they only have to pay a fixed rent, without having to pay any of the building’s expenses. What type of lease did Tech Company sign…?

A

Gross Lease

172
Q

Which of the following lease types typically results in the lowest rent per square foot…?

A

Triple Net Lease

173
Q

Under a NNN lease, who is responsible for maintaining the roof and structure of the building…?

A

Even though the tenant pays for all of the expenses in a triple net lease, the landlord is still responsible for maintaining the exterior of the building.

174
Q

What will a landlord demand of their tenants when attempting to obtain financing on the building…?

A

An estoppel letter

175
Q

What would a commercial building owner consider a ‘repairs and maintenance’ expense, as opposed to a capital expenditure…?

A

Patching a roof leak

176
Q

Patching a leaking roof is an example of a repairs and maintenance expense. The remaining answer choices are considered capital expenditures.

A

Patching a roof leak
Installing a new roof
Renovating the lobby
Installing a new HVAC system

177
Q

Which of the following is an example of a ‘contract services’ expense…?

A

Elevator maintenance services

178
Q

Which of the following refers to the amount of potential rent an owner can receive if his/her building were 100% occupied…?

A

Gross Potential Income

179
Q

As compared to a residential building, finding a new tenant for a commercial building often takes…?

A

Longer

180
Q

What do lenders typically have a buyer place in an escrow account…?

A

Capital reserves

181
Q

The amount of rent that a landlord actually collects, before expenses, is referred to as what…?

A

Effective Gross Income

182
Q

The capitalization rate of a property can be determined by which of the following formulas…?

A

Cap Rate = Income / Value

183
Q

A higher cap rate will yield what…?

A

A lower price

184
Q

Why may investors be willing to pay more for a property when interest rates are low…?

A

Low interest rates yield higher cash flows

185
Q

Lower interest rates will yield what…?

A

Lower Cap Rates

186
Q

As interest rates go down, cap rates do what…?

A

Decrease

Real Estate (23 decks)

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