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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
join ventures
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
26
how are joint ventures structured as?
typically structured as partnerships, with each institution retaining a vote in the affairs of the partnership
27
who uses joint venture structures usually?
used by financial institutions that invest capital with real estate operating companies to acquire properties
28
Limited Partnerships
arrangement between operating and financial partners to share ownership of an enterprise
29
general partner of limited partnerships
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
30
financial partner of limited partnerships
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
31
liability of financial partner of limited partnerships
at risk for only the amount of their investment
32
a waterfall
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
33
how is a limited partnership taxed?
the same way as a general partnership
34
how to limit the risk of a limited partnership?
create a corporation or limited liability company to serve as the general partner
35
corporations
legal entities, owned by their shareholders, that are set up to conduct a business entities apart from their owners and have unlimited lives
36
who elects a corporation's board of directors?
Shareholders
37
what taxes do corporations pay?
required to pay corporate taxes because of their status as separate legal entities
38
when are shareholders taxed?
taxed only when they receive dividends or the proceeds of a liquidation event
39
Limited Liability Company
has the limitations on personal liability of a corporation as well as the pass-through tax attributes of a partnership
40
owners of a Limited Liability Company
members One of the members is selected as the managing member
41
target return
the expected level of return on an investment expected by a financial partner
42
annual cash on cash return
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
what does the target return over the life on an investment typically include'?
combination of annual cash distributions and the proceeds realized on the sale of the asset
44
preferred return
first claim on profits until a target return has been achieved
45
why do preferred returns exist?
when the operating partner wants a financial partner to enter into the partnership
46
NPV (net present value)
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
Internal Rate of Return
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
what does a high Internal Rate of Return mean?
the investment exceeds the investor’s expectation
49
what does a low Internal Rate of Return mean?
the investment decision must be reconsidered
50
unlevered figure of merit
figure of merit calculated prior to taking into account debt
51
unlevered returns
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
levered returns
take into account how well an investor has accessed the capital markets and can be an indicator of financial acumen
53
promoted interest
disproportionate share of profits given to operating partner after financial partners have achieved a given internal rate of return on their capital accounts
54
clawback provision
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
why use clawback provisions?
To further incentivize a financial partner to reach
56
cumulative preferred equity
when the preferred equity holders havent gotten their dividends yet and it accumulates to the next period
57
make whole distributions
Distributions to fulfill prior year deficiencies
58
who makes major decisions in corporations and partnerships? what are thya?
the equity holders strategic decisions
59
tax matters partner
one partner is typically given the discretion to represent the partnership on tax matters
60
who manages tax matters in corporations?
the CFO
61
Right of First Offer
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
Right of First Refusal
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
Sale by Appraisal
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
acquisition fee
a fee for acquiring properties covers the manager’s cost of sourcing the asset and processing the acquisition
65
disposition fee
fee paid for disposition typically a stated percentage of the sales proceeds
66
types of fees
acquisition fee disposition fee financing fee asset management fee property management fee development fee construction management fees fees in joint ventures
67
syndicates
are groups of banks that come together to place an issue of securities with investors
68
securities offering
Syndicates placing an issue of securities with investors
69
Underwriting
reviewing an investment for suitability on behalf of prospective investors
70
Best Efforts Offering
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
which is longer, underwritten offering or a best efforts offering?
a best efforts offering is a longer process and involves a considerable marketing and sales effort
72
Real Estate Investment Trusts (REITs)
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
how are REITs structured as?
as corporations
74
Real Estate Operating Companies (REOCs)
corporations whose primary business is the ownership of equity interests in real property also provide of services to the real estate industry
75
Master Limited Partnerships (MLPs)
invest in real estate and other asset classes partnerships that issue interests known as units
76
are Master Limited Partnerships (MLPs)'s units traded on public securities exchange?
yeeee boyyyy
77
public real estate companies that issue equity securities in public markets
Real Estate Investment Trusts (REITs) Real Estate Operating Companies (REOCs) Master Limited Partnerships (MLPs)
78
private equity investment vehicles in private markets
Entrepreneurial Limited Partnerships Pension Funds and Insurance Companies Private Equity Private REITs Tenancy in Common (TIC)
79
direct investors
Investors that invest directly in property and own an interest in an asset
80
indirect investors
Investors that purchase interests in entities that own assets
81
private equity firms
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
Private REITs
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
why are Private REITs known as non-traded REITs?
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
Tenancy in Common (TIC)
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
benefits of having an institutional equity partner'
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
buy-sell agreement
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
when is a buy-sell agreement typically triggered?
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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