Chapter 16. Flashcards
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
Annual amount to be paid by a debtor on an obligation to repay borrowed money.
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 / Rate
Before Tax Cash Flow
The net profit/loss calculated by subtracting expenses from income before taxes are paid.
After Tax Cash Flow
The net profit/loss realized after taxes are deducted.
Cash on Cash Return
A percentage return on money invested in a property by an investor. Formula: Cash Flow / Down Payment
Common Areas
Spaces in a commercial building shared by the tenants or residents of the building. Common areas include lobbies, corridors, stairs, elevators, etc.
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
The use or borrowed capital (mortgage) to increase the potential return of an investment.
Net Operating Income
Equal to the Gross income minus expenses (and sometimes debt service). Also referred to as cash flow.
Gross Income
The total amount collected from rents and other income producing opportunities (washing machines, storage, etc.)
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
Any method of reducing taxable income resulting in a reduction of the payments to tax collecting entities, including state and federal governments.
Time Value of Money (TVM)
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.
Rate of Return
A profit on an investment over a period of time, expressed as a proportion of the original investment.
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
Usable area that can be leased/rented to a tenant.
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…?
Time Value of Money
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…?
Positive Leverage
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
- 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
profit on an investment over a period of time, expressed as a proportion of the original investment is also known as…?
Rate of Return
- How is a multi-family property valued different than an office building…?
Both property types are valued the same way
- Which of the following is considered a primary commercial property type…?
Industrial properties
Which of the following is NOT considered a main commercial property type…?
Vacant land
Space that can be used or occupied by a tenant is known as…?
Usable Square Footage
- A newly built office building is considered this Class of building…?
Class A
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…?
Class B
GAAP is an acronym for what…?
Generally Accepted Accounting Principles
Usable area that can be leased/rented to a tenant is known as…?
Rentable Square Footage
This type of office building consists of 1-3 stories…?
Low-rise office building
Walmart serves as the primary tenant in a large shopping center. Walmart can also be referred to as what…?
Anchor tenant
Retail strip centers typically consist of how many square feet…?
8,000 - 30,000 sq.ft.
What is an important aspect of industrial warehouse space…?
Ceiling heights
These types of properties are typically bought using emotions…?
Residential
The net profit/loss calculated by subtracting expenses from income before taxes are paid is known as…?
Before Tax Cash Flow
The amount of cash flow a property produces is NOT used in determining the value of this property type…?
Residential
The value of this property type is based primarily on an investor’s return on their money…?
Commercial
What is a primary focus of a commercial property owner, as opposed to a residential owner…?
Stability of cash flow
residential property owner, as opposed to a commercial owner, is typically NOT concerned with what…?
Cash flow of the property
As a commercial real estate owner, what should be your primary focus…?
The risk involved in the deal
Which of the following is NOT a characteristic of commercial investment properties…?
Desirability
Which of the following is NOT a primary characteristic of real property investments…?
Aesthetics
Which of the following may NOT be considered a main characteristic of commercial investment properties…?
Emotions
The net profit/loss realized after taxes are deducted is known as what…?
After Tax Cash Flow
Which of the following is a primary aspect of commercial investment properties…?
Leverage
A thorough review of a commercial investment property’s financials are conducted during this process…?
Due diligence
What should an investor look for when reviewing the financials of a commercial property…?
All of the above
Drastic changes in expenses and/or income
Net operating income
Gross income
A percentage return on money invested in a property by an investor is referred to as…?
Cash on Cash Return
Real estate is what type of investment…?
Illiquid
Real estate is known as an illiquid asset because of this…?
An owner’s equity cannot easily be withdrawn
Cash, in addition to the down payment, that an owner needs to run and maintain an investment property is known as this…?
Liquidity
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…?
Liquid
What is used by nearly every real estate investor to buy a commercial property…?
Leverage
Which of the following is NOT an example of using leverage in a real estate transaction…?
Buying a property using all cash
Abby purchased a commercial property using all cash at a 11% capitalization rate. What is Abby’s cash-on-cash return on the deal…?
11 (Percent %)
Phillip would like to buy a larger multi-family building. How can this be accomplished using less cash out of pocket by Phillip…?
Phillip should use leverage by obtaining a mortgage
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…?
10 (Percent %)
When does an owner have positive leverage in a deal…?
When the Cap Rate is greater than the Interest Rate
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…?
Positive Leverage
When will an owner experience a higher cash-on-cash return on his investment as compared to an all cash deal…?
When there is Positive Leverage in the deal
What is the equation for negative leverage…?
Interest Rate > Cap Rate
Which of the following will yield negative leverage in a deal…?
Interest Rate > Cap Rate
- When does an owner have negative leverage in a deal…?
When the interest rate on the mortgage exceeds the cap rate
Justin decided to purchase a property using all-cash. What can Justin do to increase his return on investment…?
Utilize positive leverage
This document lists all of the tenants in a particular building and how much each is paying in rent…?
Rent roll
If the annual rent on a 22,500 sq.ft. office space is $945,000, what is the rent per sq.ft….?
$42 (Dollars)
Why might the rentable square footage be greater than the usable square footage…?
All of the answer choices provided are correct.
Which of the following is the largest in area…?
Rentable square footage
Which of the following is NOT considered a utility expense…?
Cleaning
In this lease type, the tenant’s only expenses are real estate taxes, while the landlord pays the rest of the expenses…?
Net Lease
In this lease type, the tenant is responsible for paying both the property taxes and premiums for insuring the building…?
Double Net Lease
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…?
Triple Net Lease
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…?
Net Lease
Under this type of lease, the tenant is given a greater opportunity to reach profitability as the business gets started…?
Percentage Lease
In this type of lease, the tenant is required to report the performance of the business to the landlord…?
Percentage Lease
Which of the following occurs first…?
Signing of the lease
The commencement date is typically earlier than this date…?
Move-in Date
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…?
Notice clause
In a typical commercial lease, who is given the option to extend a tenant’s lease…?
The tenant
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
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…?
Estoppel letter
If a tenant sublets their space to a sub-tenant, who is responsible for the lease…?
The tenant
If a tenant assigns their lease to a new tenant, who is responsible for maintaining the lease…?
The new tenant
If a landlord would like to pass a utility bill on to his/her tenants, what type of metering would be required…?
All of the answer choices provided are correct.
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
Which of the following is considered a ‘repairs and maintenance’ expense…?
Replacing broken windows
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…?
Depreciation
The taxable basis of a property is equal to…?
Net Operating Income - Total Deductions
A building’s Net Operating Income - Total Deductions is equal to what…?
Taxable Basis
Many investors invest in commercial real estate for what reason…?
To write-off taxes
When do commercial property owners typically experience a tax loss on their investment…?
In the first few years after buying the property
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…?
Gross Potential Income
Replacement reserves, as commonly found in pro-forma statements, typically account for what…?
Capital expenditures
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…?
$1,825,000 (Dollars)
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…?
$255,000 (Dollars)
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…?
31.25 (Percent %)
What is the most common means by which commercial real estate is valued by real estate professionals…?
Cap Rates
What is an underlying component that contributes to an investor’s decision as to what capitalization rate is appropriate for a particular property…?
he amount of risk associated with the deal
What is an underlying component that contributes to an investor’s decision as to what capitalization rate is appropriate for a particular property…?
The amount of sweat equity needed to run the property successfully
Which of the following properties would be considered the most risky as an investment…?
Duplex apartment house
The effective gross income is equal to the gross potential income minus what…?
Vacancies
The capitalization rate is equal to the annual return an investor will achieve if the property were purchased how…?
Using all cash
The cap rate and the value (or price) of a property have what type of relationship…?
Inverse
Lower interest rates will yield what…?
Lower Cap Rates
As interest rates go down, cap rates do what…?
Decrease
In a commercial lease, the price charged to the tenant is based on what…?
Price per Sq.ft.
- The price/sq.ft. described in a commercial lease is typically represented on what basis…?
Annual
If the annual rent on a 10,500 sq.ft. office space is $546,000, what is the rent per sq.ft….?
$52 (Dollars)
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…?
Preferred Return
Which of the following is considered a main commercial property type…?
Apartment buildings
This retail property type typically consists of 8,000 - 30,000 sq.ft….?
Strip Center
The use of borrowed capital (mortgage) to increase the potential return on an investment is known as what…?
Leverage
The practice of using ‘other people’s money’ to buy real estate is an example of what…?
Leverage
Which of the following is an example of using ‘other people’s money’…?
Syndicating capital
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…?
Class B
This type of office building consists of 3-15 stories…?
Mid-rise office building
This type of office building consists of 20 or more stories…?
High-rise office building
At what size does a bank treat a residential building as commercial…?
5 units or more
The pricing of residential real estate is based, in part, on which of the following…?
Emotions
This retail property type is typically 30,000 - 100,000 sq.ft…?
Neighborhood Centers
Retail outlet centers typically consist of how many square feet…?
100,000 - 300,000 sq.ft.
Mega malls consist of how many anchor tenants…?
3 or more
This retail property type typically consists of 1 - 2 anchor tenants…?
Outlet Centers
What is an important aspect of industrial warehouse space…?
Ceiling heights
According to the ‘Time value of money’ concept, $1 today is worth what, as compared to $1 in the future…?
Worth more
What is a major expense that may require an owner to be liquid to cover the costs…?
Finding a new tenant to occupy a recently vacated space
Which of the following is NOT an example of using leverage in a real estate transaction…?
Buying a property using all cash
The capitalization rate refers to an investor’s return on his/her money if the property is purchased in what way..
Using all cash
What is a common management fee to assume for a large multi-family building…?
5 (Percent %)
In this lease type, the tenant is responsible for paying both the property taxes and premiums for insuring the building…?
Double Net Lease
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
This type of lease is often used when a large, single tenant occupies the entire building…?
NNN Lease
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
What will a landlord demand of their tenants when attempting to obtain financing on the building…?
An estoppel letter
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
What clause in a commercial lease accounts for increases in market rents, real estate taxes, and expenses…?
Lease escalation clause
Which of the following refers to the amount of potential rent an owner can receive if his/her building were 100% occupied…?
Gross Potential Income
The taxable basis of a property is equal to…?
Net Operating Income - Total Deductions
When do commercial property owners typically experience a tax loss on their investment…?
In the first few years after buying the property
This document is used by investors to estimate how a property will perform in the future…?
Pro-forma
What do lenders typically have a buyer place in an escrow account…?
Capital reserves
Which of the following is NOT an underlying component of a capitalization rate…?
Passive income
The capitalization rate is equal to the annual return an investor will achieve if the property were purchased how…?
Using all cash
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…?
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.
Why may investors demand paying a lower price for a property when interest rates are high…?
High interest rates yield a lower cash flow
Lower interest rates will yield what…?
Lower Cap Rates
As interest rates go down, cap rates do what…?
Decrease
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…?
Preferred Return
The pricing of residential real estate is based, in part, on which of the following…?
Emotions
This retail property type typically consists of 8,000 - 30,000 sq.ft….?
Strip Center
This retail property type is typically 30,000 - 100,000 sq.ft…?
Neighborhood Centers
The amount of cash flow a property produces is NOT used in determining the value of this property type…?
Residential
The net profit/loss realized after taxes are deducted is known as what…?
After Tax Cash Flow
The concept that $1 dollar today is worth more than $1 in the future is known as what…?
Time value of money
According to the ‘Time value of money’ concept, $1 today is worth what, as compared to $1 in the future…?
Worth more
Brian would like to buy a larger commercial building. How can this be accomplished using less cash out of pocket by Brian…?
Brian should use leverage by obtaining seller financing
Which of the following is NOT an example of using leverage in a deal…?
Using all cash
Which of the following equations will yield positive leverage in a deal…?
Cap Rate > Interest Rate
The annual amount to be paid by a debtor on an obligation to repay borrowed money is known as what…?
Debt Service
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…?
Time Value of Money
Which of the following is NOT considered a main commercial property type…?
Self storage buildings
Which of the following is considered a major commercial property type…?
AAll of the above
BApartment buildings
COffice buildings
DIndustrial buildings
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…?
Liquid
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…?
Leverage
The practice of using ‘other people’s money’ to buy real estate is an example of what…?
Leverage
What is used to calculate an investor’s cash-on-cash return if the property is purchased using all cash…?
Capitalization rate
Phillip would like to buy a larger multi-family building. How can this be accomplished using less cash out of pocket by Phillip…?
Phillip should use leverage by obtaining a mortgage
When will an owner experience a lower cash-on-cash return on his investment as compared to an all cash deal
When there is Negative Leverage in the deal
What determines the difference between the various types of net leases…?
The amount of expenses paid by the tenant
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…?
Gross Lease
Which of the following lease types typically results in the lowest rent per square foot…?
Triple Net Lease
Under a NNN lease, who is responsible for maintaining the roof and structure of the building…?
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.
What will a landlord demand of their tenants when attempting to obtain financing on the building…?
An estoppel letter
What would a commercial building owner consider a ‘repairs and maintenance’ expense, as opposed to a capital expenditure…?
Patching a roof leak
Patching a leaking roof is an example of a repairs and maintenance expense. The remaining answer choices are considered capital expenditures.
Patching a roof leak
Installing a new roof
Renovating the lobby
Installing a new HVAC system
Which of the following is an example of a ‘contract services’ expense…?
Elevator maintenance services
Which of the following refers to the amount of potential rent an owner can receive if his/her building were 100% occupied…?
Gross Potential Income
As compared to a residential building, finding a new tenant for a commercial building often takes…?
Longer
What do lenders typically have a buyer place in an escrow account…?
Capital reserves
The amount of rent that a landlord actually collects, before expenses, is referred to as what…?
Effective Gross Income
The capitalization rate of a property can be determined by which of the following formulas…?
Cap Rate = Income / Value
A higher cap rate will yield what…?
A lower price
Why may investors be willing to pay more for a property when interest rates are low…?
Low interest rates yield higher cash flows
Lower interest rates will yield what…?
Lower Cap Rates
As interest rates go down, cap rates do what…?
Decrease
