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Fina 210 > chapter 3: accounting and tax > Flashcards

chapter 3: accounting and tax Flashcards

1
Q

what are the two types of accounting in Real estate?

A

cash accounting

Generally Accepted Accounting Principles (GAAP)

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2
Q

Generally Accepted Accounting Principles (GAAP)

A

based upon accrual accounting

financial transactions are recorded in the period in which they have economic effect regardless exchanged cash

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3
Q

Cash accounting

A

transactions only recorded when the effect the cash account directly

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4
Q

which accounting type is used the most in real estate? Why?

A

Generally Accepted Accounting Principles (GAAP)

it is a more accurate depiction of economic activity that took place at a certain period than cash accounting

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5
Q

what are three main classes of revenues that real estate allow you to have?

A

rent

expense reimbursement (tenant’s payment towards operating costs)

income from exploitation of the asset for uses other than leasing of space

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6
Q

how must one record rent if the rent changes over time?

A

using the straight line method

this averages the lease payments of the life of the lease

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7
Q

what is percentage rent?

A

only used by some landlords

they receive extra rent calculated as a percent of their tenant’s sales revenue

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8
Q

natural breakpoint (from percentage rent)

A

rent / participation percentage

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9
Q

what are expense reimbursements?

A

sometimes, tenants are expected to cover part of all the operating expenses associated with the property they occupy

include amounts need to cover operation of tenant’s own space

include Common Area Maintenance (CAM)

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10
Q

Common Area Maintenance (CAM)

A

contribution to the cost of the common area of the building

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11
Q

ancillary income

A

the revenue generated that’s not from a company’s core products and services

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12
Q

where can ancillary income come from?

A

can come from multiple sources

depends on the type of transactions that the landlord has constructed

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13
Q

early termination fees

A

paid by tenants when they leave prematurely by their own choice

exist to compensate landlords for the absence of expected cash flow

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14
Q

what do the termination fees depend on?

A

depend on the remaining lease term

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15
Q

Net Operating Income

A

property income

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16
Q

selling, general, and administrative expense

A

Costs of managing assets and enterprise

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17
Q

what are all the amortization and capitalized costs?

A

leasing commissions

tenant allowances

depreciation

interest

earnings before taxes

income taxes

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18
Q

leasing commissions

A

fees paid to real estate brokers for identifying and negotiating the business terms of the leases

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19
Q

tenant allowances

A

the costs of preparing space for new occupants

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20
Q

tax pass through entities: what do they do and give examples?

A

help you pay less taxes without avoiding

partnerships

limited liability corporations

REITs

REMICS

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21
Q

net income

A

the profit after all expenses and taxes have been subtracted form operating revenue

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22
Q

dividends

A

some of the net income (profits) distributed to asset owners

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23
Q

what is the most significant asset held by a real estate company?

A

property portfolio

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24
Q

long term real estate assets

A

investments in real estate

landlord being a lender to lower-credit tenants

above/below market leases

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25
explain a landlord being a lender to lower-credit tenants
he gives loans to his tenants that they will then repay through rent
26
what are short term assets in real estate?
cash A/R prepaid expenses
27
what are long term liabilities in real estate?
bank line of credit (LOC) notes and bonds mortgages
28
bank line of credit (LOC)
a revolving credit agreement with a bank that functions as a corporate credit card borrower can draw money against the line then repay it at will bank demands fee for borrowing and if you fail to pay it all, there will be interest
29
mortgages
long-term borrowings secured by an interest in real property
30
what is the most common form of mortgage loan?
fixed-rate self-amortizing loan
31
fixed-rate self-amortizing loan
loan that require you to pay interest every month as well as part of the principal if you pay it all on time, by then end of the principal payment due, there should be no more principal due
32
what are short term liabilities in real estate?
A/P tenant deposits
33
tenant deposits
amounts placed in escrow with the landlord that are pledged against tenant's performance of its obligations under a lease agreement If tenant performs, deposits will be released at end of lease term
34
net worth accounts
net worth accounts record the owner's equity in the entity includes owner's investments and retained earnings also known as shareholder's equity or partner's capital (in partnership)
35
owner's investment account
stores equity contributed to the enterprise by owners
36
working capital
current assets - current liabilities
37
historical costs
costs at which you acquired the assets
38
market value
the current value of the asset regardless of historical cost
39
what does component depreciation do?
allocates part of the real estate purchase to land divides the acquisition costs of asset across the physical components of a structure gives more accurate depreciable lives to each of these components
40
asset impairment
asset is worth less than what it is stated in the book balance historical cost - accumulated depreciation
41
is there a income tax account in a partnership? why or why not?
nah cause partnerships don't pay income taxes
42
what is the difference between distributions and dividends
corporations pay dividends partnerships pay distributions
43
distributions
distributions can take the form of cash or property reduced from partner's capital account
44
what is part of cash flow from operations?
net income depreciation and amortization change in working capital (short term assets and liabilities)
45
how does an increase in short term assets affect cash flow from operations?
it reduces cash flow from operations cause its like a use of cash
46
how does an increase in short term liabilities affect cash flow from operations?
it increases cash flow from operations cause its like you got cash (that you owe after)
47
what is part of cash flows from investments?
change in long term assets (like buying more properties or selling them) capital expenditures (major repairs) and tenant allowances
48
what is part of cash flows from financing?
change in long-term liabilities (debt you owe) changes in equity (people investing in you)
49
what are funds from operations?
same thing as cash flow from operations, so funds from operations is created (FFO) it is a cash flow metric
50
what is the adjusted funds from operations (AFFO)?
also known as fund available for distribution includes non-revenue generating major capital expenditures such as major repairs analysts believe its the true depreciation expense
51
what are the necessary coverage ratios to know?
fixed charge coverage ratio dividend coverage ratio
52
fixed charge coverage ratio
the ability of an entity's income stream to pay for its fixed charges, such as interests and principal payments due on long-term liabilities (earnings before interests, tax, depredation, and amortization) / (interest expense + periodic principal amortization)
53
dividend coverage ratio
ability of a real estate enterprise to pay out distributions to investors FAD / dividends paid
54
what does a higher fixed charge coverage ratio mean?
the entity will better be able to manage its debt load
55
what does a higher dividend coverage ratio mean?
the enterprise will be able to maintain or increase its dividends
56
income taxes
taxes paid on income earned from trade or business
57
taxes due on sale
when a property is sold, government taxes any property made on the sale profit = sale price - adjusted basis
58
what is a basis price?
purchase price for a property and anything paid in transactions is considered a basis any improvements or anything paid to improve to property become part of the adjusted basis depreciation lowers the adjusted price
59
what is the recapture tax?
if the property sells for more than the adjusted basis price, part of depreciation is recaptured and is subject to recapture tax
60
capital gains tax?
taxes made on the profits if the property sells for more than adjusted basis only for capital gains of a property held over a year if sold in less than one year, will be subject to ordinary income tax
61
use and occupancy tax
charge tax on users of real property for allowing them to use and occupy the asset
62
property tax
taxes based on percentage pf value of the asset paid in installments over the course of each year
63
transfer taxes
tax on the transfer of ownership of asset
64
deed and mortgage recording taxes
tax for recording the ownership of a property on the local register of deeds tax for recording the lien of a secured creditor against a property by maintaining these records, government affords owner and lender certain rights and protections
65
how can tax deferrals motivate people to invest in RE?
it may encourage owners to hold assets longer they will be happy to know they will pay less taxes
66
what are types of tax deferrals?
refinance vs sale exchange vs sale contribution to tenants in common vehicle contribution to real estate investment trust

Fina 210 (28 decks)

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