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RE Fundamentals > Final Exam Review > Flashcards

Final Exam Review Flashcards

1
Q

Zoning Benefits

A
  1. Submarket consistency into the future so owners can project long-term value
  2. Avoid unfavorable or incompatible land use adjacencies
  3. Cities plan for municipal services based on anticipated density
  4. Density-based traffic management planning
  5. Assurance of what you can build “as of right” without deferring to arbitrary or political approvals
  6. Rational and even desirable or consistent urban form (form-based zoning)
  7. Can protect recreational and open space and conserve environmentally sensitive areas
  8. Even playing field for competition
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2
Q

Zoning Drawbacks

A
  1. Requires that all involved property owners relinquish some of their individual property freedoms for the common good
  2. Can discourage some development in some locations
  3. Can increase the cost of building new structures and reduce affordability
  4. Can work against historic mixed use neighborhoods in older communities
  5. Zoning limits the potential of previously existing land uses and structures that do not conform with zoning standards
  6. Properly enforcing a zoning ordinance involves a long-term commitment to a certain level of community spending
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3
Q

SFFA (Simple Financial Feasibility Analysis)

A

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.

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4
Q

Limitations of SFFA

A
  1. Assumes developer will take out largest possible loan upon completion of the building
  2. Assumes land + development costs = market value (ignores NPV and wealth maximization)
  3. Does not compute the value of the completed property.
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5
Q

Net Lease

A

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

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6
Q

Single Net Lease

A

Base rent + pro-rated property taxes

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7
Q

Double Net Lease

A

Base rent + pro-rated property taxes and insurance

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8
Q

Triple Net Lease (NNN)

A

Base rent + pro-rated property taxes, insurance and operating expenses (OpEx)

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9
Q

Benefit of Net Lease for the Tenant

A

Removes the risk of the landlord overestimating operating expenses

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10
Q

Benefit of Net Lease for the Landlord

A

Offers landlords the ability to charge tenants for the actual costs of the building. Most common in markets high demand and high OpEx volatility

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11
Q

Gross Lease

A

Rents are all inclusive and the quoted rental rate does not change throughout the term of the lease

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12
Q

Graduated Rent

A

Lease includes specified step-ups in the rent amount that are determined up front in the contract

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13
Q

Revaluated Rent

A

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)

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14
Q

Indexed Rent

A

Rent is adjusted according to some publicly observable and regularly reported index such as consumer price index (CPI) or producer price index (PPI)

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15
Q

Percentage Rent

A

Rent includes a base rent plus a monthly percentage of revenue above a predetermined breakpoint. Common in retail in highly desirable locations.

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16
Q

Benefits of Short-Term Leases

A
  1. More flexibility
  2. Fewer tenant concessions (TI, free rent)
  3. Landlords enjoy higher rates due to more frequent renegotiation of terms
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17
Q

Benefits of Long-Term Leases

A
  1. More concession options
  2. Landlords secure long-term cash flows
  3. Minimizes releasing costs to landlords
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18
Q

Recourse Debt

A

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)

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19
Q

Non-Recourse Debt

A

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

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20
Q

Non-Recourse Debt

A

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

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21
Q

Loan to Value Ratio Formula

A

= loan amount/appraised property value OR 1 - (1/LR)

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22
Q

Debt Service Coverage Ratio Formula

A

= NOI/total debt service

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23
Q

Default Risk

A

Property returns need to exceed debt service; higher debt levels commit more cash flow to debt service; risk increases with leverage

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24
Q

Debt Service Coverage Ratio (DSCR)

A

Leverage risk ratio that measures current year cash flow available to cover current year debt payments (most lenders require 1.10 or higher).

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25
Q

Debt Yield Ratio Formula

A

NOI/Loan Amount

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26
Q

Debt Yield Ratio

A

Provides a measure of risk that is independent of interest rate, amoritization period and market value; lower debt yield = higher leverage and higher risk (riskier) and vice versa

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27
Q

Positive Leverage

A

Asset produces more income than the cost of borrowing; debt that increases overall rate of return

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28
Q

Negative Leverage

A

Cost of borrowing is greater than the investment return; debt that decreases rate of return; could occur in adjustable rate mortgages in a period of rising interest rates

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29
Q

Debt Capacity

A

The max amount of debt (and other fixed charge financing) that a firm can adequately service

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30
Q

Vacancy Allowance

A

(1-probability of renewal) x (market rent) x expected vacancy in months/12

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31
Q

Debt

A

Contractual interest payments that must be paid before any equity dividends can be issued; no ownership claims to profits beyond loan amount (exception is mezzanine financing); first to be repaid in the event of a default

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32
Q

ALV Calculation on HP12c

A
  1. Calculate cash flows
  2. Calculate lease present value (LPV) by solving for NPV
  3. Save lease present value as PV, enter i and n and solve for PMT = ALV
    (Net rent = ALV when cash flows are the same)
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33
Q

Absorption Budget

A
  1. Marketing costs and advertising
  2. Leasing expenses (commissions)
  3. TI expenditures
  4. Working capital during lease-up until break-even
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34
Q

Gross Lease

A

Rent is all inclusive; quoted rental rate does not change throughout the term of the lease; landlord pays all or most property expenses, including expense increases over time

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35
Q

Full Service Lease

A

Generally, landlord is responsible for covering property’s OpEx up to a certain point (typically first year) then tenant pays for a portion of expenses above the base year expense amount

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36
Q

Construction Soft Costs

A

The portion of the investment other than the actual cost of improvements (loan fees, construction interest, legal fees, environmental studies, land planner fees, A/E fees, marketing and advertising costs, leasing and sales commissions)

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37
Q

Lease Goals - Landlord’s Perspective

A
  1. Maximize NPV
  2. Secure highest quality tenant credit
  3. Minimize parking required
  4. Synergize tenants to maximize productivity (retail)
  5. Shift OpEx to tenants
  6. Diversify expiration risk by term and tenant size as percentage of property
  7. Minimize interlease risk
  8. Renewals at market or close to it
  9. Local flavor and diversity (retail)
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38
Q

Lease Goals - Tenant’s Perspective

A
  1. Minimize NPV of lease
  2. Minimize total occupancy costs
  3. Minimize unexpected pass through expenses or significant increases
  4. Minimize upfront or releasing costs
  5. Maximize flexibility and the need to expand, downsize or exit with the least possible penalties
  6. Renew on favorable terms
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39
Q

Capital from an owner’s perspective - Debt

A
  1. Interest expense paid on borrowed capital
  2. Presents a contractual fixed expense
  3. Deductibility of interest expense from earnings
  4. Cost of debt typically has a lower cost than cost of equity
  5. Reduces financial flexibility and adds default risk
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40
Q

Capital from an owner’s perspective - Equity

A
  1. Claim on earnings of investment for ownership interest
  2. No obligation to make regular payments to equity holders
  3. Expected cost of equity is higher than expected cost of debt
  4. Offers more financial flexibility
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41
Q

Zoning Envelope

A

Use-specific and denominated in gross SF. Does not establish building envelope but does limit it (building configuration and design have to be based on it)

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42
Q

Mezzanine Financing

A

Senior to equity but subordinated to other debt that is senior to it hence the nickname “Middle” financing; can take the form of debt or equity including:
-Junior debt (such as a 2nd mortgage)
-Preferred equity
-Convertible debt
-Participating debt
Typically accounts for 10-15% of the funding and assumes medium/high risk and return

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43
Q

Parking Requirements

A

Ratio requirements delineated in spaces per 1,000 SF for commercial space or spaces per unit for residential

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44
Q

Capital Structure

A

The mix or proportion of a firm’s long-term financing represented by debt, preferred equity and common equity

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45
Q

Height Limitations

A

May limit the ability to build a tall building and will be different for different use types but does not exist in all markets (may be different for the building street-front areas versus a certain setback distance); max height density = FAR/site coverage ratio

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46
Q

Coverage Ratio Formula

A

Building footprint/site area

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47
Q

Coverage Ratio

A

How much of the site you can cover with your building footprint

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48
Q

Setbacks

A

The distance from the property line within which you cannot build

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49
Q

Easements

A

Covenants in the property title giving usage rights to portions of your property to others

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50
Q

Variations to the FAR Formula

A
  1. 1 acre = 43,560 SF = 4046.86 SM
  2. Site size = total lot area
  3. Total building area = floor area = gross floor area of building
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51
Q

Floor Area Ratio (FAR) Formula

A

Gross Floor Area/Total Lot Area

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52
Q

Floor Area Ratio

A

The ratio of floor area to lot area, metric regulating the number of SF that can be developed on a parcel

53
Q

Potential Gross Income (PGI)

A

The sum of all rents assuming the property is 100% leased; price per SF x rentable SF + percentage rent (if applicable) + recoveries (if applicable)

54
Q

Property Before Tax Cash Flow (PBTCF) Calculation

A

NOI - expenses - leasehold improvements - reserves -leasing commissions = PBTCF

55
Q

Zoning Entitlements

A

What produces the most value has to be in compliance with zoning; the use you can build

56
Q

Due-on-sale

A

Mortgage must be repaid in full upon sale

57
Q

Public Market Equity Assets

A

Stocks, REITs, mutual funds, exchange-traded funds

58
Q

Private Market Equity Assets

A

Real property, private equity, hedge funds, private REITs

59
Q

Public Market Debt Assets

A

Bonds, mortgage-back securities, money instruments, mutual funds, exchange-traded funds, CMBS

60
Q

Private Market Debt Assets

A

Bank loan, whole mortgages, venture debt/leveraged buyout

61
Q

WACC Formula

A

(equity/value) x cost of equity + (debt/value) x cost of debt x (1 - effective tax rate)

62
Q

Effective Rental Income Calculation

A

= GPI - vacancy - collections - concessions

63
Q

Effective Gross Income Calculation

A

Effective Rental Income + Misc. Income

64
Q

Proforma NOI Calculation

A

Effective Gross Income - Total Expenses

65
Q

Reserves

A

Funds placed in reserves for unexpected expenses; would be treated as a deductible expense on taxes; below NOI is standard practice; if funds are considered as part of NOI, property price will be lower

66
Q

Effective Rental Income Calculation

A

= PGI - vacancy - collections - concessions

67
Q

Cash Flow from Operations

A

= NOI - TI - Capital Improvements - Leasing Commissions

68
Q

NOI

A

Derived by subtracting all expenses from Effective Gross Income for a property; ignores irregular expenditures (leasing commissions, TI and larger capital expenditures)

69
Q

Interim Cash Flows

A

A projection based on forecasted budget and escalation of revenues and expenses (can be estimated as historical or forecasted as % of NOI)

70
Q

Terminal (Reversion) Value

A

Can be determined using: cap rate, comp value using price/SF or replacement cost

71
Q

Reasons to Borrow

A
  1. Increased purchasing power
  2. Diversify assets
  3. Enhanced equity returns
  4. Tax benefits of interest payments
72
Q

Leverage Ratio Formula

A

= Property value/equity or 1/(1-LTV)

73
Q

Loan to Value

A

A lending risk ratio that lenders examine before approving a mortgage. Typically assessments with LTVs of 80% or more are seen as higher risk

74
Q

Construction Hard Costs

A

Direct cost of the physical components of the construction project:

  1. Land cost
  2. Site prep
  3. Shell costs of existing structure in rehab projects
  4. Permits
  5. Contractor fees
  6. Overhead and project management
  7. Materials and labor
  8. Rental equipment
  9. Tenant finish
  10. Developer fees
75
Q

Construction Loan

A

A short-term loan used to finance construction that does not requires repayment until the construction is complete; provided by a commercial bank; typically lender won’t approve construction loan until permanent lender has conditionally approved a “take-out” loan

76
Q

Features of Predevelopment Phase

A

Land optioning and assembly, permitting, design; characterized by very high risk (40% OCC) and small investment; sources of financial capital include developers and other private entrepreneurial equity providers, including sometimes private equity funds of the opportunistic style

77
Q

Features of Construction Phase

A

Includes land/site purchase (listed as Time 0) design completion and construction of shell; characterized by high risk (20% OCC) and bulk of the financial investment; sources of financial capital include commercial banks for the construction loan debt capital and the developer and/or joint venture partners for the equity, including private equity funds (opportunistic style), REITs, sometimes institutions such as pension or endowment funds or foreign investors

78
Q

Features of Lease-Up Phase

A

Includes lease-up, TI, rent and escalations (listed as Time T1 at shell completion); characterized by moderate risk (10% OCC) and less capital; bridge loan; sources of financial capital are similar to the construction phase plus value-added funds

79
Q

Features of Stabilized Operation

A

Includes property management and asset management, re-leasing, reposition and disposition (listed as Time T2 or Time T); characterized by low risk (8% OCC) and less capital; sources of financial capital include permanent mortgage financing life insurance companies, commercial mortgage-backed securities (CMBS), and other conservative institutions, REITs, pension funds, private equity core funds, foreign investors, and sometimes corporate end-users

80
Q

Permanent Loan

A

Provide long-term debt financing of the property; traditionally made only on stabilized properties and face much less credit loss risk than construction loans, but more interest rate risk (if they are fixed-rate loans). Typical permanent lenders include life insurance companies or CMBS

81
Q

Fixed Proforma Expenses

A

Remains the same regardless of occupancy; includes property taxes and insurance

82
Q

Variable Proforma Expenses

A

Expenses vary with occupancy; includes janitorial and management fees

83
Q

Capital Expenditures

A

Major expenditures that result in long-term improvements to the physical property (not specific to one tenant); typically expressed as a $/SF figure

84
Q

Load Factor Calculation

A

= 1 - (USF/RSF)

85
Q

Load Factor

A

AKA loss or core factor; ratio between usable and rentable square footage of a building expressed as a percentage

86
Q

Add-On Factor

A

Common area calculated as a percentage of the usable area

87
Q

Add-On Factor Calclulation

A

= (Rentable SF/Usable SF) - 1

88
Q

Efficiency Reduction

A

Difference between gross building area and rentable area as a percentage; typically 94% in US; (GBA/RSF) - 1

89
Q

Lease-Up Risk

A

Risk that forecasted absorption volume will not be realized

90
Q

Interlease

A

Prior to or between lease signings the future rent is more uncertain or risky, hence, a higher “inter‐lease” discount rate is appropriate; rent may be expected to increase between leases, but not within

91
Q

Intralease

A

Cash flows from the lease payments are relatively low risk, hence a low “intra‐lease” discount rate is appropriate

92
Q

Gross Building Area

A

Total area of building’s footprint based on exterior dimensions excluding below-grade space; GBA = RSF x (1 + Efficiency Reduction); used for zoning, permitting, whole building construction contracts and pricing, RE tax assessments

93
Q

Rentable Area (RSF)

A

The area of the enclosed interior space of the building other than holes in the floor, such as stairwells, and elevator and mechanical duct space. If it’s floor that you can stand on, it is rentable space; RSF = GBA/(1 + Efficiency Reduction); used for purchase, sale, leasing financing and partnership transactions

94
Q

Usable Area (USF)

A

All floor area in a tenant space; USF = [RSF x (1-Load Factor)]; used for planning and TI construction pricing

95
Q

3 Investment Objectives

A
  1. Growth (appreciation): relatively long-term horizon, no immediate need for cash, more risk tolerant
  2. Income or Yield (Current CF): Short-term, ongoing need for cash, risk averse
  3. Total return (hybrid of growth and income)
96
Q

Advantages of RE in Balanced Portfolios

A
  1. Income producing asses with appreciation potential
  2. Provides diversification in a balanced portfolio with low correlations with other asset classes
  3. Lower volatility than marketable securities
  4. Potential inflation protection
  5. Cyclical hedge
  6. Tax shelter
97
Q

Disadvantages of RE in Balanced Portfolios

A
  1. Illiquidity
  2. Long-term horizon
  3. Use of debt
  4. Rising interest rates
98
Q

REIT Qualifications

A

Must be an entity that is taxable as a corporation, came out of a desire small investors access to the ownership of income producing assets, must pay at least 90% of taxable income to shareholders through dividends; more volatile on an interest rate level because of 90% payout

99
Q

Core Strategy

A

Stable tenants; long-term holding period; 90-100% occupancy rate; buy and hold strategy; 7-10% return expectation; less than 50% leverage

100
Q

Core Plus Strategy

A

Light renovations and release strategy, 80-95 % occupancy, 11-13% return expectation, low risk; 50-65% leverage

101
Q

Value Add Strategy

A

Heavy renovations; medium risk; few stable tenants; less than 80% occupancy; 14-17% return expectation; 60-75% leverage

102
Q

Opportunistic Strategy

A

Ground up development and/or major rehab; high risk’ ; no stable tenants; 0-50% occupancy; 18%+ return expectation; over 70% leverage

103
Q

Investor Qualifications - Private Funds

A

Private funds are governed by a host of intersecting federal laws that impact who can invest in these fund, including the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, and the Investment Company Act of 1940. The type and character of each investor affect, among other things:
1) whether an investor qualifies to invest,
2) whether the fund would be required to register with the Securities and Exchange Commission
(SEC), and
3) the fee that can be charged

104
Q

Regulation D - Rule 506

A

Provides exemptions from registration for companies when they offer and sell securities. Companies relying on the Rule 506 exemptions can raise an unlimited amount of money. Under Rule 506(c), a company can broadly solicit and generally advertise the offering and still be deemed to be in compliance with the exemption’s requirements if:

  1. The investors in the offering are all accredited investors; and
  2. The company takes reasonable steps to verify that investors are accredited investors
105
Q

Accredited Investor

A

As defined in Regulation D under the 1933 Act:
• Net worth test ‐ A natural person whose individual net worth exceeds $1,000,000
• Income test ‐ A person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years
Requirements for Entities:
• An entity, owned exclusively by accredited investors; or
• is not formed for the specific purpose of acquiring the interest in the fund and has total assets in excess of $5,000,000.

106
Q

Qualified Purchaser (QP)

A

An investor that meets any of the following criteria:
• an individual or family‐owned business not formed for the specific purpose of acquiring the interest in the fund that owns $5,000,000 or more in investments;
• a trust not formed for the specific purpose of acquiring the interest in the fund which is sponsored by and managed by qualified purchasers;
• an entity not formed for the specific purpose of acquiring the interest in the fund which owns and invests at least $25,000,000 in investments (or someone who is acting on account of such a person); or
• an entity, of which each beneficial owner is a qualified purchaser

107
Q

Qualified Clients

A

An individual or entity is a qualified client if he, she, or it:

  • Has $1M or more of assets under management with the investment advisory after the investment in the fund
  • Has a net worth of $2.1M prior to the investment in the funds (excluding the value or his or her primary residence)
  • Is a “qualified purchaser”
  • Is an officer or director of the fund manager or is an employee who participates in the investment activities of the the investment adviser and has been doing so for 12 months
108
Q

Typical Private Equity Fund Life Cycle - Investment Period

A

Returns are often negative in the early years as the funds call capital to make investments and charge management fees on the committed capital amount

109
Q

Typical Private Equity Fund Life Cycle - Harvest Period

A

The period during which the investment is returned and profits are generated

110
Q

J-Curve

A

Visual representation of the typical private equity fund life cycle depicting a downward curve during the investment period and the upward‐sloping part of the “J” comes later in the fund’s life as each of its investments are sold, ideally at a significant profit

111
Q

Internal Rate of Return (IRR)

A

Returns consider time value of money, so timing of cash flows are important and assumes reinvestment at same discount rate

112
Q

European (Global) Distribution Waterfall

A

LP friendly, GP receives carry only after LPs receive all contributed capital (plus preferred return if applicable) so GP receives carry later in the life of the fund

113
Q

American (Deal by Deal) Distribution Waterfall

A

GP friendly, GP receive carry after each profitable investment is realized so GP receives funds earlier in the life of the fund; GP can be paid too much, which must be paid back to the fund (clawback clause)

114
Q

Distribution Waterfall

A

The order in which a private equity fund makes distributions to limited (LP) and general partners (GPs); describes the method by which capital is distributed to a fund’s investors as underlying investments are sold

115
Q

Carried Interest/Promote

A

Performance fee rewarding the manager for enhancing performance, typically ranges between 5‐30% of profits

116
Q

Private Equity Structure - Single LLC

A

GP or Sponsor contributes its co‐investment into the same entity as all LPs; the sponsor’s co‐investment is treated equally to LP equity since it is contributed into
the same entity; helps to cleanly delineate what cash flows go to the sponsor as payment of its promote versus what cash flows go it as a co‐investor in the deal

117
Q

Private Equity Structure - Class B Member

A

Sponsor contributes its co‐investment into the Class B Member entity instead of contributing it alongside LPs as an additional Class A Member; key distinction here is that the term “all equity” is no longer valid since now 90% of equity is contributed as Class A Members and 10% of the equity is contributed as Class B members with different treatment of those members; all equity is not treated equally and the differences are noted in the waterfall structure

118
Q

Private Equity Structure - JV LLC

A

From a cashflow perspective, nearly identical to the Class B co‐investment contribution structure (previously outlined) but this structure employs a total of three LLCs with a JV LLC taking title to the property

  • The GP and LP each join the JV LLC via its own LLC. LPs are now housed in their own distinct LLC
  • All control provisions between GP’s and LP’s are now encased in the JV LLC Agreement. There are no longer Class A or Class B Members
119
Q

Default

A

Occurs when borrower violates clause or covenant in the mortgage agreement

120
Q

Workouts

A

Some, often creative, combination of rescheduling or forgiveness of debt; often results in higher long term yields or equity participation by lender

121
Q

Foreclosure

A

Forced sale of collateral property. Proceeds used to satisfy loan obligation to lender; considered an action of last resort – expensive and slow process and a blemish to both parties; deficiency Judgement allows lender further payment by borrower if foreclosure sale does not provide sufficient funds (recourse loans)

122
Q

Bankruptcy

A

Borrower protection where lenders are forced to accept a restructuring of debt (usually at a loss)

123
Q

Exculpatory Clause

A

Limits lender liability to the property only; present in non-recourse loans

124
Q

Promise to Pay

A

Borrower promises to pay the principal, interest and penalties in promissory note

125
Q

Order of Application of Payments

A

The order payments will be applied to the various components of the debt

126
Q

Borrrower’s Right to Reinstate

A

Allows borrower to stop the acceleration of the loan under default

127
Q

Release Clause

A

Borrower is released from debt and lender returns mortgage deed and extinguishes lien on the property when the loan is paid off

128
Q

Prepayment Clause

A

Gives the borrower the right to pay off the loan prior to maturity

RE Fundamentals (2 decks)

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