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NY Real Estate > Commercial & Investment Properties > Flashcards

Commercial & Investment Properties Flashcards

1
Q

Net Operating Income (NOI)

A

Equal to the Gross income minus expenses (and sometimes debt service). Also referred to as cash flow.
-does NOT include Capital Expenditures

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2
Q

Residential v Commercial Real Esate

A

Emotion v. Numbers

-The Value of a Commercial property is determined by the net income that it produces

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3
Q

Capitalization Rate (Cap Rate)

A

The percentage which is the sum of the discount rate, the effective tax rate and the recapture rate representing the relationship between net operating income and present value.
Formula: Value (price) = Income / Rate

A way to evaluate what a certain property is worth

The capitalization rate refers to an investor’s return on his/her money if the property is purchased using ALL CASH

The return that a property throws off based on the price you purchased it for without taking into account any leverage.

Underlying components of a Cap Rate: Risk, Sweat Equity and Cash (NOT passive income)

The Cap Rate does NOT take debt service into consideration!

  • Higher Cap Rate means a lower price
  • Lower Cap Rate means a high price (building worth more)
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4
Q

Time Value of Money (TVM)

A

The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.

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5
Q

Risk

A
  • Protect your investment that you’re putting in
  • make sure it’s worth the amount of money you’re paying for it
  • DUE DILIGENCE is critical in understanding the true value of a property! - Starts with the numbers on the building
  • Be a detective on the building
  • Get a better return and the money back that you spent
  • look at TVM
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6
Q

Characteristics of Real Property Investments (Commercial Real Estate)

A
  • Risk
  • Liquidity
  • Leveraging
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7
Q

Liquidity

A
  • real estate is an illiquid investment because it can’t be sold quickly
  • post-closing are you going to have money to deal with issues?
  • You’ll probably have to constantly reinvest into the property
  • bank wants to see you have 10% in cash reserve
  • being liquid is important for owners to get better tenants, to improve the building etc
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8
Q

Leverage

A

The use or borrowed capital (mortgage) to increase the potential return of an investment.
-Can bring in partners or other partners to help fun the equity and provide them with a return on their money

Ex: Mortgage at 4% (int only) 7,500,000 (payments=$300,000/yr)
Cash out of pocket: $2,500,000
Yearly return: $600,000 - $300,000 = $300,000
CoC Return: 300,000 / 2,500,000 = 12%

A good indicator if a deal makes sense is to compare the Interest Rate and the Cap Rate

POSITIVE LEVERAGE: Cap Rate > Interest Rate

NEGATIVE LEVERAGE:
Interest Rate > Cap Rate

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9
Q

Syndication

A

other people’s money

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10
Q

Investment Property Types

A

-getting to an NOI and finding a cap rate

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11
Q

Main Commercial Property Types

A
  • Apartment buildings
  • Office Buildings
  • Shopping Centers
  • Industrial properties (one open area)
  • Low Rise (1-3 stories)
  • Mid Rise (3-15 stories)
  • High Rise (20 stories and above)
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12
Q

Office Buildings

A
  • Class A (newer building)
  • Class B (little bit older)
  • Class C (failing grade - old, 5 story with one elevator)
  • Low Rise (1-3 stories)
  • Mid Rise (3-15 stories)
  • High Rise (20 stories and above)
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13
Q

GAAP

A

General Accepted Accounting Principles (they way you do business)

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14
Q

Residential Buildings

A
  • single-family
  • multi-family (common management fee = 5%)
  • Commercial (5+ units)
  • Mixed-use buildings (retail downstairs/apartments upstairs)
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15
Q

Useable Square Footage

A

Space that can be used or occupied by a tenant. Typically does not include elevators, stairs, mechanical spaces, etc.

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16
Q

Retail Property Types

A

-Strip Centers (8,000-30,000 sq feet) (usually with grocery store)
-Neighborhood Centers (30,000-100,000 sq feet)
Malls: regional or mega mall (3+ national tenants)
-Outlet Centers (100,000-300,000 sq feet) - Typically consists of 1-2 anchor tenants

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17
Q

Leasehold

A

The holding of property by lease

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18
Q

Outparcel

A

Individual retail sites in a shopping center

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19
Q

Net Lease

A

In a commercial real estate, a net lease requires the tenant to pay, in addition to rent some or all of the property expenses that normally would be paid by the property owner. These include expenses such as real estate taxes, insurance, maintenance, repairs, utilities, and other items
-Landlord will maintain the actual structure or the building

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20
Q

Gross Income

A

The total amount collected from rents and other income producing opportunities (washing machines, storage, etc.).
-how much tenants pay landlord

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21
Q

Gross Potential Income

A

What he would collect if all the units were full

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22
Q

Effective Gross Income

A

Gross Potential Income minus the vacancy

income being earned by the property before any expenses are being expensed to run the property
-The amount of rent that a landlord actually collects, before expenses

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23
Q

Actual Expenses

A
  • Management fee (5%)
  • Utilities
  • Repairs and Maintenance
  • Landscaping
  • Contract Services
  • Insurance
  • Real Estate Taxes
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24
Q

Cap Ex

A

Capital Expenditures = Capital Improvements (ex. put in new roof or new boiled, renovating the lobby
-Non recurring expenses

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25
Q

Net Operating Income (NOI)

A

Gross operating minus effective gross income??

before the mortgage is paid or any capital improvements are made

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26
Q

Mortgage Payments

A

Principal (paying down loan) and Interest (earned by bank)

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27
Q

Cash on Cash Return

A

A percentage return on money invested in a property by an investor.
Formula: Cash Flow / Down Payment.

Available Cash (NOI) / Cash Invested = Return (%)

  • Looking at how much cash the owners have to take out of their pocket in order to acquire this property (the closing cost, lawyer fees, appraisal fees, taxes, etc.)
  • How much of a return did I make on the cash investment out of pocket
  • Goes down when cap rate goes down
  • If interest rates go up, cash on cash goes down

Ex: you have your Cash Invested (closing cost after loan, plus other monies needed) and the Available Cash (income minus actual cash expense minus principal and interest)

28
Q

Rentable Square Footage

A

Usable area that can be leased/rented to a tenant. (includes common areas)
-Greater than usable square footage because it includes common areas, wall thicknesses and circulation.

29
Q

Common Areas

A

Spaces in a commercial building shared by the tenants or residents of the building. Common areas include lobbies, corridors, stairs, elevators, etc.

30
Q

Usable Square Footage

A

Space that can be used or occupied by a tenant. Typically does NOT include elevators, stairs, mechanical space, etc

31
Q

Total Square Feet

A

Total square feet including space that cannot be charged for rent

32
Q

Carpetable Area

A

Usable Area (place you can stand on that has some kind of flooring - carpet, tile, wood)

33
Q

Gross Lease

A

A lease of property whereby the lessor is to meet all property charges regularly incurred through ownership.

  • fixed rent, but not paying any expenses of operating, landlord pay that
  • higher than Net Lease
34
Q

Percentage Lease

A

A lease of property in which the rental is based upon the percentage of the volume of sales made upon the leased premises, usually provides for minimal rental.

  • Tenant pays owner a certain % of revenue (which is in addition to a base rent)
  • Under this type of lease, the tenant is given a greater opportunity to reach profitability as the business gets started
  • Initially the tenant gets a lower rent, then which he achieves profitability, the landlord starts to make more
35
Q

Leases for Commercial Spaces

A
  • Net Lease

- Gross Lease

36
Q

N Lease - Net Lease

A

Tenant is responsible for real estate taxes only, while the owner pays the rest of the expenses
-Landlord will maintain the actual structure or the building

37
Q

NN Lease - Double Net Lease

A

The tenant is responsible for both property taxes and premiums for insuring the building

38
Q

NNN Lease - Triple Net Lease

A

Tenant is responsible for all expenses; real estate taxes, insurance, maintenance, repairs, utilities, and other items
-often used when a large, single tenant occupies the entire building

39
Q

Commercial Leases

A
  • Office Leases
  • Retail Leases
  • Loft Lease
40
Q

Loft Lease

A

Renting out an entire space or floor

41
Q

Lease Clauses

A
  • LEASE DURATION CLAUSE (# yrs the lease is valid) When analyzing a deal, it’s important to look carefully at the lease expiration date
  • Commencement Date (date lease starts)
  • Move-in Date (landlord has to be able to deliver the space and keys by this date)
  • FREE RENT CLAUSE
  • LANDLORD WORK CLAUSE (ex. painting walls, changing doors, fixing doors etc)
  • TENANTS’S FUTURE WORK CLAUSE
  • NOTICE CLAUSES (what does landlord have to do to give notice to come into the tenant’s space?)
  • TENANT OPTIONS - ex. option to extend
  • RESTRICTIONS ON WHO THE LANDLORD CAN RENT THE OTHER SPACES TO - most common in retail spaces
  • MANAGEMENT LEVEL - onsite or offsite?
  • AMENITIES
  • USE CLAUSES restricts use of certain businesses
  • ESTOPPEL AGREEMENT
  • SUBLEASE / ASSIGNMENT (most leases don’t allow assignment)
  • ELECTRIC SERVICE CLAUSE
  • LEASE ESCALATION CLAUSE (how much it goes up)
42
Q

Estoppel (agreement)

A

An instrument executed by the mortgagor setting forth the present status and the balance due on the mortgage as of the date of the execution of the certificate. (the lease is accurate. lease is in place, that the tenant has paid rent up to date in a letter)
-if tenant doesn’t sign this, landlord will have a hard time getting a loan.

43
Q

Subordination, Non-disturbance & Attornment Agreement (SNDA)

A

Subordination: You as the tenant subordinates lease to the mortgage. Bank has rights to the property. Your rights as a tenant does not supersede the right of the lessee.

Non-disturbance: Protects tenant from being thrown out of the property if paying

Attornment Agreement: Tenant commitment to allow for ownership to change. Allow the tenant to continue at property

44
Q

Anchor Stores

A

A key tenant in retail. Typically one of the larger stores in a shopping mall, usually a department store or a major retail chain (Macys, Nordstrom, etc.). Tenant that draws the crowd.

45
Q

Debt Service

A

Annual amount to be paid by a debtor on an obligation to repay borrowed money.
-How much does it cost to service my debt? How much do I put away to pay my debt?

46
Q

Before Tax Cash Flow

A

The net profit/loss calculated by subtracting expenses from income before taxes are paid.

47
Q

After Tax Cash Flow

A

The net profit/loss realized after taxes are deducted.

48
Q

Lease Escalation Clause

A

A contract provision allowing for one to pass an increase in costs to another party. Escalation clauses are usually related to influences beyond both parties control, such as inflation.
-What will transpire where the tenant will have to pay more to the landlord

49
Q

Pro-Forma Statement

A

An accounting statement that forecasts income and expenses for a period of time, typically five or more years. Pro-forma statements are typically used by investors to estimate their rate of return for a particular property.

  • What the building will look like for the next 12 months?
  • This document is used by investors to estimate how a property will perform in the future
  • conducted by a real estate investor when evaluating a potential property to buy
  • The Effective Gross Income line includes the actual amount of rent collected by the landlord
50
Q

Tax Shelter

A

Any method of reducing taxable income resulting in a reduction of the payments to tax collecting entities, including state and federal governments.

51
Q

The order on an Income and Expense Statement

A
  1. Gross Potential Income
  2. Effective Gross Income
  3. Expenses
  4. Net Operating Income
  5. Before Tax Cash Flow
52
Q

The value of commercial property is determined by

A

the net income it produces

53
Q

What is a primary focus of a commercial property owner, as opposed to a residential owner?

A

Stability of cash flow

54
Q

Due diligence

A
  • is critical to understanding the true value of the property
  • A thorough review of a commercial investment property’s financials are conducted during this process?
  • Goal of an investor when conducting their due diligence on a potential commercial property: is to Minimize the risk of the deal, Identify value-add opportunities, Answer all of the investor’s questions
55
Q

Rent Roll

A
  • The monthly rent that each tenant pays in a multi-family building can be found in this document
  • The tenant name and apartment number of each unit in a multi-family building can be found in this document
56
Q

If a tenant sublets their space to a sub-tenant, who is responsible for the lease

A

The tenant

57
Q

If a landlord would like to pass a utility bill on to his/her tenants, what type of metering would be required?

A
  • Direct Metering
  • Rent Inclusion
  • Sub-Metering
58
Q

Which of the following is an example of a ‘contract services’ expense?

A

Elevator maintenance services

59
Q

Which of the following is an example of a ‘Deduction for Taxes’…?

A

Interest paid on a mortgage

60
Q

Mortgage payments made by a property owner typically consists of interest and what…?

A

Principal

61
Q

The taxable basis of a property is equal to?

A

Net Operating Income - Total Deductions

62
Q

What do lenders typically have a buyer place in an escrow account?

A

Capital Reserves

63
Q

Which of the following properties would be considered the least risky as an investment?

A

100 unit multi-family building

NOT duplex apartment or 50 unit multi family building

64
Q

When will investors demand paying a lower price for a property?

A

When interest rates are high?

65
Q

common expense found in most commercial buildings

A
  • Management Fees
  • Utilities
  • Real Estate Taxes
66
Q

The price/sq.ft. described in a commercial lease is typically represented on what basis?

A

Annual

NY Real Estate (21 decks)

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