Final Exam Review Flashcards
Zoning Benefits
- Submarket consistency into the future so owners can project long-term value
- Avoid unfavorable or incompatible land use adjacencies
- Cities plan for municipal services based on anticipated density
- Density-based traffic management planning
- Assurance of what you can build “as of right” without deferring to arbitrary or political approvals
- Rational and even desirable or consistent urban form (form-based zoning)
- Can protect recreational and open space and conserve environmentally sensitive areas
- Even playing field for competition
Zoning Drawbacks
- Requires that all involved property owners relinquish some of their individual property freedoms for the common good
- Can discourage some development in some locations
- Can increase the cost of building new structures and reduce affordability
- Can work against historic mixed use neighborhoods in older communities
- Zoning limits the potential of previously existing land uses and structures that do not conform with zoning standards
- Properly enforcing a zoning ordinance involves a long-term commitment to a certain level of community spending
SFFA (Simple Financial Feasibility Analysis)
Computes whether it is possible to take out a permanent loan to finance most of the development costs. Traditional method for the financial feasibility analysis of a small development project based on the inputs utilized in commercial mortgage market.
Limitations of SFFA
- Assumes developer will take out largest possible loan upon completion of the building
- Assumes land + development costs = market value (ignores NPV and wealth maximization)
- Does not compute the value of the completed property.
Net Lease
Tenant pays base rent plus costs associated with operations of the building, landlord typically pays the actual expenses as due then bills tenants as a cost reimbursement
Single Net Lease
Base rent + pro-rated property taxes
Double Net Lease
Base rent + pro-rated property taxes and insurance
Triple Net Lease (NNN)
Base rent + pro-rated property taxes, insurance and operating expenses (OpEx)
Benefit of Net Lease for the Tenant
Removes the risk of the landlord overestimating operating expenses
Benefit of Net Lease for the Landlord
Offers landlords the ability to charge tenants for the actual costs of the building. Most common in markets high demand and high OpEx volatility
Gross Lease
Rents are all inclusive and the quoted rental rate does not change throughout the term of the lease
Graduated Rent
Lease includes specified step-ups in the rent amount that are determined up front in the contract
Revaluated Rent
Specifies in the lease contract the times when rental payments may change but exact change is based on property appraisal (in some leases rent can only increase and in others rent can increase or decrease based on appraisal)
Indexed Rent
Rent is adjusted according to some publicly observable and regularly reported index such as consumer price index (CPI) or producer price index (PPI)
Percentage Rent
Rent includes a base rent plus a monthly percentage of revenue above a predetermined breakpoint. Common in retail in highly desirable locations.
Benefits of Short-Term Leases
- More flexibility
- Fewer tenant concessions (TI, free rent)
- Landlords enjoy higher rates due to more frequent renegotiation of terms
Benefits of Long-Term Leases
- More concession options
- Landlords secure long-term cash flows
- Minimizes releasing costs to landlords
Recourse Debt
Holds the borrower personally liable; can either be full or limited, gives the lender the ability to take assets of the debtor, beyond any collateral, up to the full amount of the debt (less risk to lenders)
Non-Recourse Debt
Does not allow the lender to pursue anything other than collateral (lender can only foreclose on the property); even if the collateral value is less than the loan amount; higher rates than recourse debt
Non-Recourse Debt
Does not allow the lender to pursue anything other than collateral (lender can only foreclose on the property); even if the collateral value is less than the loan amount; higher rates than recourse debt
Loan to Value Ratio Formula
= loan amount/appraised property value OR 1 - (1/LR)
Debt Service Coverage Ratio Formula
= NOI/total debt service
Default Risk
Property returns need to exceed debt service; higher debt levels commit more cash flow to debt service; risk increases with leverage
Debt Service Coverage Ratio (DSCR)
Leverage risk ratio that measures current year cash flow available to cover current year debt payments (most lenders require 1.10 or higher).