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Fina 210 > chapter 9: property finance: equity > Flashcards

chapter 9: property finance: equity Flashcards

1
Q

what are the two aspects of equity that serve to define it as an investment vehicle?

A

First, equity holders own the residual risk (the benefits or losses) from an asset

Second, equity holders are generally given the right to participate in making the critical decisions regarding the operation and disposition of an investment

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2
Q

when do equity holders own the residual risk of an asset?

A

when the more senior classes of security holders have been paid

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3
Q

what do equity holders expect in return of their higher risk?

A

higher returns than debt holders

the chance to earn the highest returns of any class of investor

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4
Q

what can be distributed to the equity holders?

A

the residual cash (if any)

current cash returns

investment’s terminal or liquidation value

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5
Q

current cash returns

A

Periodic distributions from the operating income of a property

so distributions from ongoing cash flow if any

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6
Q

investment’s terminal or liquidation value

A

when the property is sold and converted into cash.

when all of the liabilities have been paid, any residual cash is distributed to the equity investors

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7
Q

what if the cash flow is negative and senior creditors dont get their money first,

what do equity holder have to do?

what is their risk?

A

they have to invest more money if they want the property to keep functioning

they risk losing their entire investment

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8
Q

why do creditors charge lower interest rates for higher levels of equity?

A

From a senior lender’s perspective, equity capital absorbs economic risk

It provides capital that can increase the entity’s economic activity, generating more cash flow, and building asset value

lowers the probability that the entity will default on its debt

the equity plays a valuable role in absorbing risk for the enterprise

lower debt-to-equity ratio

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9
Q

does an equity investment have a fixed term like debt?

A

nah bruv

debt holders can force a sale to get their money back

the equity holder cannot directly demand a sale or liquidation

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10
Q

what can equity holders do if property management bugging?

A

equity holders can act as a group to take over the management of the entity

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11
Q

are equity investors obliged to invest more cash if property is bugging?

A

in the vast majority of cases, nah

In certain circumstances, equity investors may agree in advance to invest further funds if required to support the initial investment

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12
Q

equity investors are subject to assessment

A

when equity investors agree in advance to invest further funds if required to support the initial investment

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13
Q

Private direct investments in real estate or public real estate companies are most liquid?

A

public real estate companies are most liquid

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14
Q

Private direct investments in real estate or public real estate companies can be traded in stock exchange?

A

public real estate companies can be traded on the world’s major stock exchanges

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15
Q

which are expected to liquidate, corporations or partnerships?

why?

A

partnerships are expected to liquidate

Partnerships have a fixed life

Corporations are of infinite life

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16
Q

single proprietorship

A

simplest form of organization

business is owned directly by a single person

owner receives all the profits and is responsible for all of the legal and financial obligations of the entity

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17
Q

liability of a single proprietorship

A

The liability of a proprietor for the actions of a proprietorship is unlimited

extends to the owner’s assets outside of the business

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18
Q

partnership

A

agreement among a group of people who desire to share ownership of an enterprise

Each general partner is responsible for all of the legal and financial obligations of the entity

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19
Q

general partnership

A

partners are all equal

owners are known as general partners

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20
Q

liability of a partnership

A

each general partner is individually responsible for the entire amount of the liability

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21
Q

how do single proprietors and partnerships show the income of their business?

A

show the income directly on their personal financial statements

they do not pay a separate corporate tax

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22
Q

capital call

A

A request for additional funding from existing partners in a partnership

Typically, each partner is asked to invest their pro rata share of the required capital

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23
Q

Cram Down Provisions

A

getting new partners that are willing to invest instead of those not willing to do so in a capital call

the former take massive W with disproportionate share of investment

the latter takes the L

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24
Q

when does a partnership end?

A

when the investment’s value is realized through a liquidation of the partnership’s assets

or when more than 50 percent of the ownership changes hands within a 12-month period

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25
Q

join ventures

A

agreements between financially sophisticated entities to pursue specific goals over a limited period of time

n real estate, joint ventures may be focused on a development project or the ownership of a particular property

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26
Q

how are joint ventures structured as?

A

typically structured as partnerships, with each institution retaining a vote in the affairs of the partnership

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27
Q

who uses joint venture structures usually?

A

used by financial institutions that invest capital with real estate operating companies to acquire properties

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28
Q

Limited Partnerships

A

arrangement between operating and financial partners to share ownership of an enterprise

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29
Q

general partner of limited partnerships

A

operating partner of a limited partnership

has unlimited liability for the operations and liabilities of the partnership

responsible for making all operating decisions

responsible for any decisions that affect the tax position of the partnership

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30
Q

financial partner of limited partnerships

A

those who contribute cash rather than expertise to the venture

limited partners

not allowed to participate in the day-to-day operation of the partnership

may have a say in major decisions

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31
Q

liability of financial partner of limited partnerships

A

at risk for only the amount of their investment

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32
Q

a waterfall

A

The allocation of the economic benefits in a limited partnership

economic benefits of the partnership to be reallocated in favor of those partners that contribute additional capital if the partnership requires it

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33
Q

how is a limited partnership taxed?

A

the same way as a general partnership

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34
Q

how to limit the risk of a limited partnership?

A

create a corporation or limited liability company to serve as the general partner

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35
Q

corporations

A

legal entities, owned by their shareholders, that are set up to conduct a business

entities apart from their owners and have unlimited lives

36
Q

who elects a corporation’s board of directors?

A

Shareholders

37
Q

what taxes do corporations pay?

A

required to pay corporate taxes because of their status as separate legal entities

38
Q

when are shareholders taxed?

A

taxed only when they receive dividends or the proceeds of a liquidation event

39
Q

Limited Liability Company

A

has the limitations on personal liability of a corporation as well as the pass-through tax attributes of a partnership

40
Q

owners of a Limited Liability Company

A

members

One of the members is selected as the managing member

41
Q

target return

A

the expected level of return on an investment expected by a financial partner

42
Q

annual cash on cash return

A

target return stated as an annual return from operating cash flow

the amount distributed to the investor each year as a percentage of the amount invested

43
Q

what does the target return over the life on an investment typically include’?

A

combination of annual cash distributions and the proceeds realized on the sale of the asset

44
Q

preferred return

A

first claim on profits until a target return has been achieved

45
Q

why do preferred returns exist?

A

when the operating partner wants a financial partner to enter into the partnership

46
Q

NPV (net present value)

A

metric used to evaluate the performance or return on an investment over its life

the sum of the discounted cash flows returned from an investment less the amount of the initial investment

47
Q

Internal Rate of Return

A

discount factor that equates the NPV of the cash flows returned from an investment to the amount of the investment itself

can be compared to the investor’s desired rate of return

48
Q

what does a high Internal Rate of Return mean?

A

the investment exceeds the investor’s expectation

49
Q

what does a low Internal Rate of Return mean?

A

the investment decision must be reconsidered

50
Q

unlevered figure of merit

A

figure of merit calculated prior to taking into account debt

51
Q

unlevered returns

A

look at how well an asset is performing without regard to how it is financed

may be an indicator of astute property acquisition and management skills

52
Q

levered returns

A

take into account how well an investor has accessed the capital markets and can be an indicator of financial acumen

53
Q

promoted interest

A

disproportionate share of profits given to operating partner after financial partners have achieved a given internal rate of return on their capital accounts

54
Q

clawback provision

A

agreement to give up a certain portion of operating manager’s share of return to the financial partner if agreed-upon return thresholds have not been achieved

55
Q

why use clawback provisions?

A

To further incentivize a financial partner to reach

56
Q

cumulative preferred equity

A

when the preferred equity holders havent gotten their dividends yet and it accumulates to the next period

57
Q

make whole distributions

A

Distributions to fulfill prior year deficiencies

58
Q

who makes major decisions in corporations and partnerships?

what are thya?

A

the equity holders

strategic decisions

59
Q

tax matters partner

A

one partner is typically given the discretion to represent the partnership on tax matters

60
Q

who manages tax matters in corporations?

A

the CFO

61
Q

Right of First Offer

A

a departing partner may trigger the sale of an asset, but it must offer the remaining partners the right to make an offer to purchase the asset before it is offered for sale to the public

also known as a first look

62
Q

Right of First Refusal

A

less advantageous to the departing partner than the right of first offer

must offer the remaining partner the opportunity to buy the asset at any price agreed to by a bonafide third party

63
Q

Sale by Appraisal

A

common method for price setting between a departing and remaining partner is to have a price set by appraisal

partners are willing to transact

Each party to the transaction hires an appraisal firm to determine fair value

If the two appraisers cannot agree on a value, they choose a third independent appraiser, who sets the price

64
Q

acquisition fee

A

a fee for acquiring properties

covers the manager’s cost of sourcing the asset and processing the acquisition

65
Q

disposition fee

A

fee paid for disposition

typically a stated percentage of the sales proceeds

66
Q

types of fees

A

acquisition fee

disposition fee

financing fee

asset management fee

property management fee

development fee

construction management fees

fees in joint ventures

67
Q

syndicates

A

are groups of banks that come together to place an issue of securities with investors

68
Q

securities offering

A

Syndicates placing an issue of securities with investors

69
Q

Underwriting

A

reviewing an investment for suitability on behalf of prospective investors

70
Q

Best Efforts Offering

A

a banker agrees to place an issue of securities but makes no guarantee that the securities will actually be sold

accepts no market risk

71
Q

which is longer, underwritten offering or a best efforts offering?

A

a best efforts offering is a longer process and involves a considerable marketing and sales effort

72
Q

Real Estate Investment Trusts (REITs)

A

entities whose primary business is the ownership of debt and equity interests in real property

limit their investments to real property

operate within certain parameters

73
Q

how are REITs structured as?

A

as corporations

74
Q

Real Estate Operating Companies (REOCs)

A

corporations whose primary business is the ownership of equity interests in real property

also provide of services to the real estate industry

75
Q

Master Limited Partnerships (MLPs)

A

invest in real estate and other asset classes

partnerships that issue interests known as units

76
Q

are Master Limited Partnerships (MLPs)’s units traded on public securities exchange?

A

yeeee boyyyy

77
Q

public real estate companies that issue equity securities in public markets

A

Real Estate Investment Trusts (REITs)

Real Estate Operating Companies (REOCs)

Master Limited Partnerships (MLPs)

78
Q

private equity investment vehicles in private markets

A

Entrepreneurial Limited Partnerships

Pension Funds and Insurance Companies

Private Equity

Private REITs

Tenancy in Common (TIC)

79
Q

direct investors

A

Investors that invest directly in property and own an interest in an asset

80
Q

indirect investors

A

Investors that purchase interests in entities that own assets

81
Q

private equity firms

A

Investment firms that raise opportunistic capital from high-net-worth individuals and financial institutions

make investments in real property either directly or through joint ventures with property companies

interested in taking greater risk in order to achieve higher returns

82
Q

Private REITs

A

invest in property with the goals of creating significant appreciation prior to finding an exit in the public markets or through liquidation

known as non-traded REITs

83
Q

why are Private REITs known as non-traded REITs?

A

Shares in these REITS are typically sold to individual investors through networks of financial planners

their shares are not listed on public stock exchanges and have limited liquidity

84
Q

Tenancy in Common (TIC)

A

ownership structure in which group of investors each own fractional interests in an investment property

each owner has a direct interest in real property

85
Q

benefits of having an institutional equity partner’

A

can accelerate the growth of any entrepreneurial real estate business

can lend credibility to the entrepreneur and bolster its financial position in the eyes of business partners, property sellers, and debt sources

86
Q

buy-sell agreement

A

in the event that either partner decides to exit the investment, the other partner is often given the initial right to purchase the seller’s interest

87
Q

when is a buy-sell agreement typically triggered?

A

when there is a disagreement regarding the future of the investment between the institutional partner and the entrepreneur

Fina 210 (28 decks)

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