Introduction to Real Estate Part I

Question 1

What is the definition of real estate?

Answer 1

Real estate is the land along with any permanent improvements attached to the land, whether natural or man-made including water, trees, minerals, buildings, homes, fences, and bridges. Real estate is a form of real property. It differs from personal property, which are things not permanently attached to the land, such as vehicles, boats, jewelry, furniture, and farm equipment.

Question 2

What does land refer to?

Answer 2

Land refers to the earth’s surface down to the center of the earth and upward to the airspace above, including the trees, minerals, and water.

Question 3

What does real property refer to?

Answer 3

Real property - one of the two main classifications of property - is the interests, benefits and rights inherent in the ownership of real estate.

Question 4

What does real estate refer to?

Answer 4

Real estate is the land, plus any permanent man-made additions, such as houses and other buildings.

Question 5

What are the 3 physical characteristics of land?

Answer 5

1) Immobility.
2) Indesctructability.
3). Uniqueness.

Question 6

What are the asset types in real estate? (10)

Answer 6

1) Residential, 2) Offices, 3) Logistics/Industrial, 4) Retail, 5) Shopping malls, 6) Hospitality, 7) Leisure, 8) Sports, 9) Institutional, and 10) Other.

Question 7

List the 4 characteristics of real estate location.

Answer 7

1) Proximity to amenities.
2) Quality of the neighborhood.
3) Local market conditions.
4) Future development.

Question 8

Name an example of a real estate sensitive to income and another one sensitive to costs.

Answer 8

Income sensitive: retail.
Cost-sensitive: warehouse.

Question 9

If a real estate property is more sensitive to income than costs, then the best choice would be to buy an asset in a low or high-density area?

Answer 9

If sensitive to income, buy in a high-density area. If sensitive to costs, buy in a low-density area.

Question 10

What are the 2 approaches we can invest in real estate?

Answer 10

1) Indirectly through financial instruments. REITS stocks are the main source.
2) Directly invest in property.

Question 11

What are the characteristics of an income property?

Answer 11

We buy it to lease/rent. It has a long-term horizon, provides a stable income, and has lower returns. Typically done by RE funds, pension funds, insurance companies, and family offices.

Question 12

What are the characteristics of a development property?

Answer 12

We buy it to build it and sell it. It has a short-term horizon, is more uncertain and riskier and thus provides higher returns. Typically done by developers.

Question 13

What demographic characteristics do we consider when evaluating a real estate property?

Answer 13

Population age brackets,
Immigration,
Composition and geographical distribution,
Home size,
Number of children, single parents, divorce rate.

Question 14

What cultural characteristics do we consider when evaluating a real estate property?

Answer 14

RE is typically perceived as a tangible and safe investment. There is a belief that renting is throwing money away (changing tho) - people want to own RE - that requires discipline (to save money for it).

Question 15

What is land use?

Answer 15

Land use is a process of organizing the use of land to meet occupant’s needs while respecting the capabilities of the land.
Land use planning balances private property rights with the
desired community character.

Question 16

What is zoning?

Answer 16

Zoning defines the rules and laws governing what and where people and institutions can and cannot build in our cities, suburbs, and towns. Zoning is a planning control tool and the way governments regulate the physical development of land based on its usage, purpose, geology, etc.

Question 17

What is a zoning ordinance?

Answer 17

A zoning ordinance is the text specifying the land use of
specific blocks and even each lot within a block, set of blocks, or specific area.

Question 18

Which 6 characteristics are defined in a zoning ordinance? Describe each.

Answer 18

1) Use: This specifies the permitted activities or functions for a particular area, such as residential, commercial, or industrial purposes.
2) Lot size: This defines the minimum area and dimensions that a parcel of land must have to be developed or built upon.
3) Density or bulk: This regulates the amount of building space per unit of land area, often measured in units per acre or floor area ratio.
4) Height: This restricts the maximum allowable height of structures within a specific zone.
5) Building setbacks: These are the required distances between a building and the property lines, streets, or other structures.
6) Floor area ratio: This is the ratio of a building’s total floor area to the size of the lot on which it is built, used to control the scale of development.

Question 19

What is the unit that is common to all real estate asset types?

Answer 19

Price per square meter (€/sqm or any other currency or measurement unit). Calculated by dividing the total property price by its size.

Question 20

What is the gross and net surface area?

Answer 20

Gross: Refers to the total area of a property, including all interior and exterior spaces, regardless of their functionality or accessibility.
Net: This refers to the usable surface area of a property, which excludes areas such as walls and other structural elements.

Question 21

What is the gross and net leasable area?

Answer 21

Gross: Refers to the total surface area of a commercial property that is available for lease/rent. It includes common areas.
Net: represents the leasable space within a property available for generating rental income. It excludes areas such as common areas, corridors, and utility spaces.

Question 22

What does the efficiency ratio measure?

Answer 22

Measures the ratio of net lettable area to gross surface area and indicates how efficiently space within a property is utilized for generating rental income.

Question 23

What is the floor area ratio (FAR)?

Answer 23

Is a zoning regulation that determines the maximum allowable building floor area relative to the size of the lot on which the building is located. It indicates the density or intensity of development permitted on a property.

Example: If a property has a floor area ratio of 2:1, it means that the total floor area of the building(s) on the lot cannot exceed twice the area of the lot itself.

Question 24

What is the saleable area?

Answer 24

Refers to the total area of a property that is available for sale to prospective buyers, typically used in the context of residential developments.
Example:
In a condominium project, the saleable area would include individual units, balconies, and any exclusive-use areas, but would exclude common areas like hallways and recreational facilities.

Question 25

What are the 2 main classifications for the use of real estate?

Answer 25

1) Residential (single and multi-family)
2) Non-residential (office, retail, hotel/motel, warehouse/industrial, recreational, institutional).
There is a possibility of mixed-use.

Question 26

What does residential real estate refer to?

Answer 26

Residential real estate refers to a kind of property that is used for housing individuals or families.
This can include single-family homes, multi-family homes (such as apartments or condos), and other types of dwellings. Residential real estate is typically classified according to the number of units or dwellings that are contained on the property.

Question 27

Define a single-family residential property.

Answer 27

Designed as a dwelling for one family, this type of property doesn’t share walls with neighboring residences or common areas. However, the property might be a part of a homeowners association (HOA) that provides access to community amenities such as a pool, tennis courts, or clubhouse.

Question 28

Define a multi-family residential property.

Answer 28

Multi-family properties are buildings with multiple housing units. Multifamily structures can be anything from apartments to townhouses. From a residential perspective, multi-family properties, although typically more expensive, are often more attractive to both investors and banks as they are viewed as less risky since the income generated isn’t coming from a single tenant.

Question 29

Define a vacation residential property.

Answer 29

Also known as a second home, a vacation home is a residence that typically is used as a seasonal
accommodation (beach house or ski cabin).
These residences can be a single-family home, condo, or townhouse, and can be rented out when not in use by the owner.
It’s worth noting that financing is usually more expensive than a primary single or multi-family residence.

Question 30

Describe a Build-to-Rent (BTR) strategy.

Answer 30

A Real Estate Developer builds a multifamily residential project to lease out all units, instead of selling them one by one.
Income-generating properties.

Question 31

Describe a Build-to-Sell (BTS) strategy.

Answer 31

Traditional Real Estate business where a developer purchases a piece of land develops a residential asset with one or multiple units and sells them one by one.

Question 32

What does commercial real estate refer to?

Answer 32

Commercial real estate (CRE) is a property that is used exclusively for business-related purposes or to provide a workspace rather than as a living space.
Most often, commercial real estate is leased to tenants to conduct income-generating activities.
Unlike residential real estate, commercial real estate is considered to be a type of investment property, as it is used to generate income through the leasing of space to businesses.

Question 33

What are the 5 types of commercial real estate?

Answer 33

Office buildings, industrial, logistics, shopping malls, and retail stores.

Question 34

What is a single-net lease?

Answer 34

A lease where the tenant is responsible for paying property taxes.

Question 35

What is a double-net (NN) lease?

Answer 35

A lease where the tenant is responsible for paying property taxes and insurance.

Question 36

What is a triple-net (NNN) lease?

Answer 36

A lease where the tenant is responsible for paying property taxes, insurance, and maintenance.

Question 37

What is a gross lease?

Answer 37

A lease where the tenant only pays rent. The property owner is responsible for the property tax, insurance, and maintenance.

Question 38

What is a flat rent?

Answer 38

A rent that stays the same as agreed initially in the contract. Typical for apartment leases.

Question 39

What is a step-up rent?

Answer 39

A lease/rent agreement that has a step-up clause that specifies that rent will increase at specific time intervals for a specific amount during the term of the lease.

Question 40

What is an indexed rent?

Answer 40

A lease/rent agreement that states that rent will be adjusted according to an index (typically inflation/CPI). This approach is used together with a step-up rent.

Question 41

What is a rent adjusted based on revenues/sales performance?

Answer 41

In some retail leases, rents also may be fully or partially determined by an indicator of retail sales performance.

Question 42

What is an office building?

Answer 42

Office buildings are typically multi-story structures that contain a large number of individual offices or workspaces, as well as common areas such as conference rooms, lobbies, and restrooms.
They may also have amenities such as on-site parking, elevators, and food service facilities.

Question 43

Describe a class A office building.

Answer 43

A-buildings have a prime central location with exceptional accessibility and are usually of significant size. Prime Rents and super low vacancies.

Question 44

Describe a class B office building.

Answer 44

Compete for a wide range of users with rents in the average range for the market. Fully-functional buildings but don’t typically boast the same high-end fixtures, architecture, and striking lobbies as Class A buildings.

Question 45

Describe a class C office building.

Answer 45

Usually sold as fixer-uppers for investors who want to move them up to Class B status, but they’re also for tenants on a budget who need functional space at rents below the average for the area.

Question 46

Describe a single-tenant office building.

Answer 46

These are buildings that are occupied by a single tenant or business.

Question 47

Describe a multi-tenant office building.

Answer 47

These are buildings that are occupied by multiple tenants or businesses.

Question 48

Describe a flexible office building.

Answer 48

These are office buildings or spaces that offer short-term, flexible leasing arrangements for businesses that need space on a more temporary basis.

Question 49

Describe a virtual office building.

Answer 49

These are office buildings or spaces that offer services such as mail and phone handling but do not provide physical workspace for employees.

Question 50

Describe a traditional use office building.

Answer 50

Employees usually work in a cubicle and executives in built-out offices. Common areas:
Reception, Private offices, open area for cubicles, conference rooms, printer room.

Question 51

Describe a creative-use office building.

Answer 51

Open floorplans, no cubicles nor minimal private offices.
Open ceilings and exposed ductwork. Collaborative spaces and conference rooms.
Kitchen, game rooms, lounge areas.

Question 52

Describe a co-working office building.

Answer 52

Co-working offers rentable office space or desks and adds common areas. It is more affordable for individuals and small companies, flexible, and limited in time. Co-working costs are all-inclusive, meaning utilities, common areas maintenance, etc.

Question 53

Describe an executive suite office.

Answer 53

The more traditional version of Co-working. Often leased by small law firms and other professional service firms.
Receptionist, conference rooms, mailing address, printers and private offices.