final exam Flashcards
Reversion refers to:
Lessor’s right to recover the property
The discount or other benefit offered by a landlord to induce a prospective tenant to enter into a lease is a/an:
Rent Concession
One of the reasons landlords offer rent concessions is to:
Keep rental rates higher for future rental purposes
The discount rate for lease interests is:
Impacted by risk
The value of the leased fee added to the value of the leasehold:
Seldom equals fee simple
A freehold (ownership interest) where the possessory interest has been granted to another party by creation of a contractual landlord-tenant relationship is called
A Leased Fee Interest
A contract providing for regular payments of predictable amounts. Regular payments are those that occur at a constant periodic rate, such as monthly, quarterly, or annually. Predictable amounts include those that are level, that escalate based on the Consumer Price Index, that step up, or that can be predicted in any other way.
Annuity
A technique in which the capitalization rates attributable to components of an investment are weighted and combined to derive a weighted-average rate attributable to the total investment (i.e., debt and equity, land and improvements).
Band of investment
A capitalization technique in which the net operating income attributable to improvements is isolated and capitalized by the building capitalization rate (RB) to indicate the improvements’ contribution to the total property value. When the improvements’ value is added to the land value, a total property value estimate is produced.
Building residual technique
A method of developing a discount rate or capitalization rate using the basic elements of risk.
Built-up method
The return of investment capital, expressed as an annual rate; often applied in a physical sense to wasting assets with a finite economic life; used interchangeably with amortization rate to express investors’ desire to recover their equity investment over a specified time period; also called capital recapture rate.
Capital recovery rate
An analytical process in which the sale price of a transaction with nonmarket financing or financing with unusual conditions or incentives is converted into a price expressed in terms of cash or its equivalent.
Cash equivalency analysis
The ratio of net operating income to annual debt service (DCR = NOI/IM), which measures the relative ability of a property to meet its debt service out of net operating income; also called debt service coverage ratio (DSCR). A larger DCR typically indicates a greater ability for a property to withstand a reduction of income, providing an improved safety margin for a lender.
Debt coverage ratio (DCR)
In mathematics, change in a variable, symbolized by the upper case Greek letter delta. For example, x means “change in the variable x.”
Delta
A method used to convert an estimate of a single year’s income expectancy into an indication of value in one direct step, either by dividing the net income estimate by an appropriate capitalization rate or by multiplying the income estimate by an appropriate factor. ________________employs capitalization rates and multipliers extracted or developed from market data. Only one year’s income is used. Yield and value changes are implied but not explicitly identified.
Direct capitalization
Conversion of benefits received in the future (e.g., periodic incomes, cash flows, reversion) to present value. 2. Money paid at the beginning of a time period for the use of capital during that period; commonly deducted from the principal when the funds are advanced.
Discounting
The portion of net operating income that remains after total mortgage debt service is paid but before ordinary income tax on operations is deducted; also called equity cash flow.
Equity dividend
The annualized yield rate or rate of return on capital that is generated within an investment or portfolio over a period of ownership. Alternatively, the indicated return on capital associated with a projected or pro forma income stream.
Internal rate of return (IRR)
A method of estimating land value in which the net operating income attributable to the land is isolated and capitalized to produce an indication of the land’s contribution to the total property.
Land residual technique.
A method used to convert future benefits into present value by 1) discounting each future benefit at an appropriate yield rate, or 2) developing an overall rate that explicitly reflects the investment’s income pattern, holding period, value change, and yield rate.
Yield capitalization
A rate of return on capital, usually expressed as a compound annual percentage rate. A yield rate considers all expected property benefits, including the proceeds from sale at the termination of the investment. Yield rates include the interest rate, discount rate, internal rate of return (IRR), overall yield rate (YO), and equity yield rate (YE).
Yield rate (Y).
When an appraiser determines the cash flow after debt service but before income and capital gains taxes, it is referred to as the:
Equity dividend
You are working with your HP12C. Suddenly you notice a flashing (*) on the register. What does that mean?
The battery needs to be replaced
A fundamental difference between direct capitalization and yield capitalization is:
Direct deals with current year’s income and yield with future benefits
The debt coverage ratio measures a property’s ability to meet its debt service requirements out of _____________
Net operating income
What is the process of converting income to value?
Capitalization
On the HP12c calculator, the key with the x with a line over it is used to:
Calculate the mean
You are working on a six functions of a dollar problem and need to change the sign of an entry. Which key on the HP12c would you use?
[CHS]
The difference between the abbreviations BTCF and ATCF is:
One is before and one is after
What is the abbreviation for land value?
VL (V sub L)
The abbreviation OER stands for:
Operating expense ratio
In reconciling to a final value; an appraiser places 50% of the weight on the Income Approach, 25% of the weight on the Cost Approach and 25% of the weight on the Sales Comparison Approach. This is an example of:
Weighted mean
Analyzing data to determine variances from the mean is called:
Standard deviation
The process of retiring a debt or recovering a capital investment, typically through scheduled, systematic repayment of the principal; a program of periodic contributions to a sinking fund or debt retirement fund.
Amortization
A rate of return on capital used to convert future payments or receipts into present value; usually considered to be a synonym for yield rate.
Discount rate
A yield capitalization method that provides a formulaic solution for developing a capitalization rate for various combinations of equity yield rates and mortgage terms. The formula is applicable to properties with stable or stabilized income streams, properties with level-equivalent income streams, or properties with income streams expected to change according to the J- or K-factor pattern.
Ellwood formula
Money paid for, or earned by, the use of capital; a return on capital as distinguished from a return of capital. 2. A property right in land.
Interest
A factor that reflects the present worth of $1 (or other unit of currency) per period for a given number of periods, discounted at a given discount rate; obtained by calculation or from standard compound interest tables and used to discount an annuity to present worth; also called Inwood coefficient.
Inwood factor
A type of annuity in which cash flows are paid at the end of each period; also known as an annuity in arrears.
Ordinary annuity
A capital sum invested; a payment that represents partial or full repayment of the capital loaned or invested, as distinguished from the payment of interest; the unrecovered capital remaining in a loan or investment.
Principal
A lump-sum benefit that an investor receives or expects to receive upon the termination of an investment; also called reversionary benefit.
Reversion
A rate of return on capital, usually expressed as a compound annual percentage rate. A ______ considers all expected property benefits, including the proceeds from sale at the termination of the investment.
Yield rate (Y)
“Money paid for, or earned by, the use of capital; a return on capital as distinguished from a return of capital” defines
interest
According to Webster’s Dictionary, “interest paid on both the principal and on accrued interest” is the definition of
Compound interest
The numbers in the compound interest tables are rounded to 6 decimal places. This is an example of:
Table accuracy
An effective tool for bringing older numbers and data to current time frames is the use of:
Ratios
Using 10 year old data, an appraiser concluded a ratio of 25%. Would it be appropriate to use this ratio in a current market appraisal?
Yes, in the absence of evidence to the contrary, the appraiser can assume the ratio is still appropriate
The actual rental income specified in a lease.
Contract rent
Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat.
Fee simple estate
A contract in which the rights to use and occupy land, space, or structures are transferred by the owner to another for a specified period of time in return for a specified rent. See also gross lease; modified gross lease; net lease.
Lease
One of the real property interests that results from the division of the bundle of rights by a lease; i.e., the leased fee estate or the leasehold estate.
Lease interest
The ownership interest held by the lessor, which includes the right to receive the contract rent specified in the lease plus the reversionary right when the lease expires.
Leased fee interest
The right held by the lessee to use and occupy real estate for a stated term and under the conditions specified in the lease.
Leasehold interest
The most probable rent that a property should bring in a competitive and open market reflecting all conditions and restrictions of the lease agreement, including the rental adjustment and revaluation, permitted uses, use restrictions, expense obligations, term, concessions, renewal and purchase options, and tenant improvements (TIs).
Market rent
An inducement for a tenant to lease space, sometimes, but not always, observed in overbuilt markets, which can include above-standard TIs, free rent, moving cost reimbursement or credit, and buyout of the tenant’s existing lease. Concessions are an integral part of the definition of market rent. Also called rent offset.
Rent concession
Owner’s right to obtain return of the property rights granted to a tenant upon termination of a lease. The term can also apply to termination of a temporary easement, abandonment of a right of way, extinguishment of a life interest or estate for years, violation of a condition in a deed, or the end of the life of, or abandonment of, improvements.
Reversionary Right
It is common for leases to include a clause that prohibits the Lessor from leasing another unit in a shopping center or office complex to another tenant in the same type of business. For example: if one bicycle shop is in the center, leasing to another bicycle shop would be prohibited. Should the Lessor violate that provision, it could drastically impact the first bicycle shop owner’s business and the value of that lease to that Lessee.
Competition Clauses
Most commercial leases contain some sort of escalation clause keyed to actual increases in the Lessor’s costs or, in some cases, tied to some index such as the Consumer Price Index (CPI). Depending on the nature of these escalation provisions, they can in some cases increase rents significantly and the impact on value can fluctuate from very little to quite significant. Sometimes stops or caps are included to set a maximum for a given period, which is something tenants often try to negotiate into the lease agreement.
Escalation Clauses
Escape clauses allow Lessees to cancel a lease under abnormal conditions, such as provisions in a damages clause that allow the Lessee to cancel the lease if it negatively impacts business operations. That clause also may allow the Lessor a time period in which to cure the adversity and waive rents during the correction period.
Escape Clause
allows a Lessee with a long-term lease to cancel that lease if business revenues have not reached a pre-set level after a certain pre-set time frame (e.g., one year, three years); or if an anchor tenant is not replaced; or some other pre-determined trigger tied to the Lessee’s business volume at that particular location. This could weaken the value of a lease interest.
Kick-out Clauses
Many smaller tenants in shopping centers, especially those in smaller complexes where there is just one anchor tenant and six to ten other shops, are concerned that the anchor may close its store and not renew the lease, also known as “going dark.” One remedy is to negotiate a “go dark” clause that allows the Lessee to close its store or receive significant rent reductions if that anchor, or even a specified number of other smaller tenants, go dark.
Tenant Going Dark
A flat rent lease has a specified rental amount that remains constant for the duration of the lease. What is another term used to describe a flat rent lease?
Level payment lease
A lease interest in which the tenant has possession for an unspecified time period at the mutual convenience of the parties is a:
Leasehold at will
A benefit to a step-up lease is:
The tenant pays less rent in the beginning, which can help when starting a new business
Another term for tenant improvements is
Leasehold improvements
In order to increase the occupancy of his office building, the landlord offered one month free rent. Without the concession, the annual rent would be $12,000. With the concession, the annual rent is $11,000. What is another term for the $11,000 annual rent?
Effective rent
“Excess rent” is that which is:
The amount contract rent exceeds market rent
If rents show the convenience store rental should be $3,000 per month rather than the $2,000 contracted for the full 5 year term of the lease, and you use the same 9% rate, what is the value of the leasehold interest assuming the payments were made IN ADVANCE each month?
$48,534.67
In the I/RV formula, what does the “I” generally represent?
Net Operating Income
The agencies that regulate Federal Financial Institutions use a market value definition that begins with:
“The most probable price…”
TOE is deducted from Effective Gross Income to arrive at Net Operating Income. What does TOE stand for?
Total Operating Expenses
In valuing the leased fee interest, the appraiser utilized:
Actual rents
Potential gross income (PGI) presumes ___________ income:
Annual
The proceeds received by an investor at the end of the holding period are known as:
Reversion
The Potential Gross Income for an office building is $100,000. 6% of the PGI is lost annually to vacancy and collection. What is the dollar amount of the vacancy and collection loss?
$6,000
The value of intangibles related to an on-going concern is known as:
Business Value
- Unrented space. 2. The measurement of the amount of unoccupied or unused space or land in a defined market or property; can relate to a class of properties, a submarket, or a single multitenant property. 3. Sometimes used as shorthand for vacancy and collection loss.
Vacancy
A deduction from potential gross income (PGI) made to reflect income reductions due to vacancies, tenant turnover, and nonpayment of rent; also called vacancy and credit loss or vacancy and contingency loss.
Vacancy and collection loss
- The relationship between the amount of vacant space and total space in a building or market; expressed as a percentage. 2. The relationship between the rent estimated for vacant building space and the total rent estimated for all the space in the building.
Vacancy rate
Because the subject has below market rents, it is consistently 100% occupied. Competing properties are charging market rents and have occupancies of about 95%. In determining the market value of the subject property, what vacancy rate would be appropriate?
5%
Calculate the Vacancy and Collection Factor for a 12 unit apartment building based upon the following information: Scheduled Rents: 6 units @ $675 per month 6 units @ $725 per month Actual Rent: $93,800
6.9%
The relationship between the amount of vacant space and total space in a building is the:
Vacancy rate
The potential gross income is $50,000. The actual rent is $40,000. What keystrokes on the HP 12c would be used to calculate the vacancy and collection loss?
50,000[ENTER], 40,000 [delta%]
To calculate the percentage of Vacancy and Collection Loss on the HP-12C, the appraiser keys-in the dollar amount of the PGI and presses [ENTER], then keys in the:
Actual Income [delta%]
Landlord rights to re-rent a property after a tenant “skips”:
Are governed by local or state jurisdiction
The subject property has an actual vacancy and collection loss factor of 3%. All comparables have factors of 6%. Your analysis is based upon market rents, therefore, the appropriate vacancy and collection loss factor is:
6%
Vacancy and Collection Losses are typically “lumped together” because:
The data received by the appraiser is provided that way by market participants
“The anticipated income from all operations of the real estate after an allowance is made for vacancy and collection losses and an addition is made for any other income.”
Effective Gross Income
The periodic expenditures necessary to maintain the real estate and continue production of the effective gross income, assuming prudent and competent management.
Operating expenses
Operating expenses that generally do not vary with occupancy and that prudent management will pay whether the property is occupied or vacant
Fixed Expenses
What type of expense is one that accountants use but appraisers do not?
Depreciation
Which type of management agent/company compensation arrangement do owners tend to prefer?
Percentage of income
The operating expense figures assume that management is:
Prudent and competent
Miscellaneous expenses often require footnoting as a means of identification. These expenses are also referred to as:
Other
Scrutiny of repair and maintenance information provided by the owner is important so that the appraiser can:
Identify inappropriate expenses
Precautions are strongly recommended when researching repairs and maintenance costs to ensure that:
Receipts for repairs on other properties are not included
To avoid inappropriate expense allocation, the appraiser should:
Analyze leases to determine who pays for what
An allowance that provides for the periodic replacement of building components that wear out more rapidly than the building itself and must be replaced during the building’s economic life;
Replacement allowance
The appraiser’s research and reporting need to be as detailed as:
The appraiser’s peers would have done
How to weight on hp12c
100 enter
.20 [£+]
(g)(xw)
