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Finance 331 > chapter 17: sources of commercial debt and equity capital > Flashcards

chapter 17: sources of commercial debt and equity capital Flashcards

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1
Q

estimated market value of all commercial real estate

A

6.5 trillion

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2
Q

there can be multiple forms of ownership

A

true

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3
Q

general partnership

A

multiple owners, unlimited liability for each equity holder, flow-through taxation of both taxable income and cash distributions

  • treated as conduits for tax purposes
  • do not face double taxation
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4
Q

limited partnership

A

created and tax the same as a general partnership

  • have at least one general partner and one limited partner
  • limited partners have limited liability
  • limited partners dont have as much power and have a principal agent relationship
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5
Q

C corporation

A

a legal and taxable entity separate from the owners who are shareholders in the corporation

  • earns income and incurs tax liabilities
  • income from underlying properties may be taxed twice
  • shareholders have limited liability
  • operating decisions are made by managers
  • not desirable for commercial real estate
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6
Q

subchapter S corporation

A

possesses the same limited liability benefits for its shareholders as C corporations

  • a separate legal entity but not a separate taxable entity
  • pay no income taxes
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7
Q

limited liability company (LLC)

A

a hybrid form of ownership that combines the corporate characteristics of limited liability with the characteristics of a partnership

  • greater flexiblity than S corporations
  • cheaper and easier to run than a limited partnership
  • preferred ownership form for many real estate investors
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8
Q

tenancy in common

A

one of the oldest forms of co-ownership

  • fee simple interest with multiple owners
  • investors receive seperate deed but are direct owners
  • investors can hold different ownership %s
  • 35 investors or less
  • became popular again in 2002 bc of income tax avoidance (but generally considered bad form for investing in RE) but dropped again after 2008
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9
Q

disadvantages of TIC

A
  • sponsor fees may consume 15-25% of equity raised
  • TICs overpaid for properties
  • joint&several liability
  • co-owners must unanimously approve all major things or agree to be bound by majority vote
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10
Q

optimal ownership form

A
  • LLCs and LPs are dominant
  • S corporations popular with some
  • C- corps and GP are rarely chosen
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11
Q

intermediary

A

an entity that invests in real estate and sells claims on those investments to the ultimate investors

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12
Q

ultimate equity investors

A

investors can hold ownership positions directly or through intermediaries
-most cant invest directly

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13
Q

comparing direct vs. indirect investments

A
  • control
  • access to managerial expertise
  • liquidity
  • risk sharing
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14
Q

direct investment

A

-gives complete control
-but investor must supply the expertise
-liquidity of it reflects liquidity of entire market
-makes more sense the more the portfolio increases
-popular with large institutions but also smaller end of investor spectrum
(single family homes, etc)

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15
Q

pension funds

A

retirement savings accounts that now represent a major source of equity capital in commercial real estate markets

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16
Q

life insurance companies

A

are a major source of commercial real estate capital

  • as of 2011, owned 27 billion of commercial real estate assets
  • but more active as RE lenders than as investors
17
Q

other investors in private RE equity markets

A
  • foreign investors
  • commercial banks
  • savings associations
18
Q

investment through intermediaries

A

seperate accounts
commingled real estate funds
real estate private equity funds

19
Q

seperate accounts

A
  • large investment management company will buy, hold, dispose of properties on behalf of investors
  • allows investors to access expertise of manager in exchange for fees
  • limited liqudity
  • does little to help diversify portfolio
  • conflicts of interest due to loss of full control
  • closest alternative to direct ownership that still involves intermediation
20
Q

securitized investments

A

pool money from multiple investors, purchased or resold in either public or private markets
-the norm in commercial real estate

21
Q

syndication

A

the pooling of equity capital by investors to purchase real estate in private market

22
Q

syndicate

A

a group of persons or legal entities who come together to carry out a particular activity
-a group organized to develop a parcel of land, buy an office building, purchase an entire portfolio of properties, make mortgage loans, or perform other RE activities

23
Q

Commingled real estate funds (CREFs)

A

offered by many banks, life companies, investment banks, RE advisory firms

  • organized as LPs
  • targeted to pension funds that do not have in-house expertise
  • fund managers pool contributions from multiple pension funds to purchase multiple properties
  • allows for better diversification
  • closed end or open end
  • popular in the 80s and still common today
  • front end and back end fees
24
Q

real estate private equity funds

A
  • didnt exist before 90s
  • have a finite life (7-10 years)
  • finite life forces fund manager to DISPOSE of assets and return investors capital
  • include some degree of side-byside investment by fund manager
  • fee structures are richer and more complex than CREFs
  • fund manager is GP of fund, investors are LPs
  • manager contributes 1% of funds equity
  • once LP returns exceed an amount, GP earns an excess of 20% (the promote) as well as other compensation
25
Q

full platform operating company

A

instead of being a passive investor in commercial real estate by means of placing money with an investment advisor, this strategy involves starting or acquiring and operating a real estate company itself

26
Q

institutional vs. non institutional equity investors

A

12% held by institutional

88% held by investors from private equity funds and local syndications

27
Q

real estate investment trusts

A
  • mutual funds for investing in RE
  • shareholders have same limited liability as in C corps
  • a corporation or trust that uses the pooled capital of many investors to purchase and manage income property (equity REIT) and/ or mortgage loans (mortgage REIT)
  • not taxed at corporate level if they:
  • 100+ shareholders
  • 75% of assests must be RE, cash or gov securities
  • 75% of income must come from RE assests
  • 90% of REIT taxable income must be paid out in dividends each year
28
Q

equity REITs

A

invest and operate commercial properties

29
Q

mortgage REITs

A

purchase mortgage obligations and thus become real estate lenders

30
Q

sources of commercial real estate debt

A

74%, 2.4 trillion (out of 3.2) comes from

  • commercial banks
  • savings associations
  • life insurance companies
  • freddie & fannie
  • state & local govs
  • 26% is publically traded
31
Q

umbrella partnership REIT (UPREIT)

A

the REIT is a managing partner and typically majority owner in a single large umbrella partnership, which in turns owns all or part of individual property partnerships

  • section 1031 of IRC allows “like-kind” tax deferred exchanges which REITs use to acquire properties
  • owners transferring LP into OP receive units in OP w/o triggering taxable sale (unlike REIT stock or cash)
  • recipients of OP units receive dividends
  • REIT is GP & majority owner of OP units
32
Q

funds from operations (FFO)

A
  • often used instead of accounting net income to measure current performance
  • a supplemental measure of REITs operating performance
=net income (excluding gains and losses)
\+ depreciation
\+ amortization of leasing expenses
\+ amortiztion of tenant improvements
- gains/losses from infrequent & unusual events

-different from GAAP bc comm RE maintains value much better, tax depr is greater than econ depr

33
Q

how are REIT stocks valued?

A
  • management quality
  • current dividend yield
  • anticipated total return from stock
  • capital sources
34
Q

how are total returns estimated

A

attempt to forecast the dividends REIT will pay out over time
-this projected dividend stream is converted into a present value

35
Q

net asset value (NAV)

A

the estimated total market value of a REITs underlying assets - all liabilities having a prior claim to cash flow including mortgages

  • if total stock market capitalization is > than NAV, the REIT is selling for a premium
  • a stock price in excess of per share NAV may mean a REIT is overpriced
  • REITs selling at discounts to NAV may mean buying opportunities for investors

Finance 331 (10 decks)

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