Chapter 20 - Commercial and Investment Property 2

Question 1

Before Tax Cash Flow

Answer 1

Gross amount of income available before taxes.

Question 2

Capitalization Rate

Answer 2

Amount of return an investor expects on their investment (%).

Question 3

Cash Flow

Answer 3

Measurement of income and expense items associated with operating the property, used by investors to objectively evaluate a property.

Income (rent and miscellaneous) 
= Effective Gross Income (EGI)
- Expenses
= Net Operating Income (NOI)
- Annual Debt (Principal and Interest)
= Cash Flow

Question 4

Cash-on-Cash Return

Answer 4

Ratio of income generated by property to the cash investment - Cash flow / purchase costs = cash on cash return.

Question 5

Debt Service

Answer 5

Amount of money required to pay interest and principal on long-term debt.

Question 6

Effective Gross Income

Answer 6

Income brought in by property - rents as well as miscellaneous income (laundry, parking, storage, antennas, etc)

Question 7

Fixed Expenses

Answer 7

Occur on regular basis with regular payment amounts - property insurance payments, service contracts, not tied to level of occupancy

Question 8

Variable Expenses

Answer 8

Expenses that vary based on occupancy levels. Necessary to maintain income stream of property and provide services to tenants - utilities, maintenance, etc.

Question 9

Gross Income

Answer 9

Total income received before expenses are paid out.

Question 10

Leverage

Answer 10

Effect that borrowed funds have on investment returns. Positive leverage = borrowed funds are invested at a higher rate of return than cost of funds so borrower makes profit on borrowed funds. Negative leverage = borrowed funds are invested at lower rate of return so there’s a loss on the borrowed funds.

Question 11

Liquidity

Answer 11

Ability to turn asset into cash quickly without losing principal

Question 12

Market Value

Answer 12

What a property can be expected to earn in the current market - relative to time and place

Question 13

Net Operating Income

Answer 13

EGI minus operating expenses. Anything from maintenance and utilities to property management costs, reserve, advertising.

Question 14

Operating Statement

Answer 14

Used by property owners to illustrated revenues generated and expenses for given period to evaluate property’s performance.

Question 15

Pro Forma

Answer 15

Hypothetical projection of income and expenses for first full year of ownership. Prepared from previous owner’s operating statement with adjustments for new ownership.

Question 16

Rate of Return

Answer 16

Rate at which an investor recaptures their investment.

Question 17

Return of/on Investment

Answer 17

Preservation of capitol invested in property. Investor expects there will be a return OF their initial investment, as well as that there will be profits made while that investment is tied up (return ON investment)

Question 18

Risk

Answer 18

Degree of probability that rate of return earned will differ from expected rate of return when investment was made.

Question 19

Space market risk

Answer 19

Demand for space will affect rate of return

Question 20

Capital market risk

Answer 20

Changes in the market will affect real estate value

Question 21

Financial risk

Answer 21

Debt is used to finance an investment - may expect positive leverage and market changes may make it negative

Question 22

Environmental risk

Answer 22

Investment affected by outside factors that affect the owner’s ability to develop their property

Question 23

Legislative risk

Answer 23

Changes in laws/regulations affect value of property

Question 24

Management risk

Answer 24

Property management can affect property’s performance