Lesson 15 - Commercial & Investment Properties

Question 1

Leverage

Answer 1

-The use of borrowed capital (mortgage) to increase the potential return of an
investment.
-“Other people’s money”

Question 2

Pro-forma Statement

Answer 2

-An accounting statement that forecasts income and expenses for a period of time, typically five or more years.

Question 3

Cap Rate

Answer 3

-NOI / Purchase Price

Question 4

Liquid

Answer 4

-The ability to have cash readily available to support the demands of running and
maintaining real property

Question 5

Gross Income

Answer 5

-The total amount collected from rents and other income producing opportunities.

Question 6

Gross Lease

Answer 6

• In a gross lease, the landlord pays all expenses. These include property taxes, insurance and maintenance.
• The residential lease is a common example of a gross lease.

Question 7

Net Lease

Answer 7

• In a net lease, the tenant pays some or all of the expenses.
• For example, in a triple net lease, the tenant pays all of the expenses in addition to the rent.
• A net lease, in particular a triple net lease, is commonly used by commercial tenants.
• A large company may have a triple net lease and rent an entire office building.

Question 8

Percentage Lease

Answer 8

• A lease of property in which the rent is based upon the percentage of the volume of sales made upon the leased premises, usually provides for minimal rent.
• A percentage lease is typically used with retail tenants.

Question 9

Ground Lease

Answer 9

• A ground lease is a long-term lease of unimproved land, usually for construction purposes.
• A ground lease is also known as a land lease.

Question 10

Loft Lease

Answer 10

• A loft lease is for the rental of floor space this is not generally divided into rooms.
• A loft lease is typically for an open, unfinished space.

Question 11

Graduated Lease

Answer 11

• A graduated lease is a lease in which the rent changes from period to period over the lease term.
• The lease contract specifies the change in rental amount, which is usually an increase in stair-step fashion.

Question 12

Escalation Clause

Answer 12

-An escalation clause allows landlords to raise rents during the term of the lease.

Question 13

Use Clause in a Commercial Lease

Answer 13

-A use clause defines how the tenant can and cannot use the space.

Question 14

Usable Square Footage

Answer 14

• Usable square footage is the area contained within a building that is actually occupied by a commercial tenant.
• Usable space typically does not include elevators, stairs, mechanical spaces, etc..

Question 15

Rentable Square Footage

Answer 15

• Rentable square footage is the total area of a space, some of which cannot be used.
• Rentable square footage equals the entire space, including the usable square footage and the tenant’s pro rata share of the building’s common areas, such as the lobby, hallways, and restrooms.

Question 16

Loss Factor

Answer 16

-The difference between the rentable and usable area in a commercial space

Question 17

Pro Forma

Answer 17

-A pro forma is 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.

Question 18

Debt to Equity Ratio

Answer 18

Debt is what the investor owes.
Equity is how much cash the investor has in the property.

If a property is valued at $1,000,000, and the total debt is $600,000, then the debt ratio of 60%.
The equity ratio would be 40% ($1,000,000 - $600,000 = $400,000, which is 40% of $1,000,000).

Question 19

Net Operating Income (NOI)

Answer 19

-The net operating income is equal to the gross income from a building minus operating expenses.
NOI is essentially the cash flow from a property before paying any debt service (mortgage payment) or taxes.

Question 20

Cap Rate

Answer 20

-The capitalization rate is the annual return that an investor expects to receive from a commercial property.
-The formula for Capitalization Rate is:
Net Operating Income / Value = Capitalization Rate

Question 21

Return on Investment (ROI) / Cash-on-Cash Return (COC)

Answer 21

• ROI is a percentage return on money invested in a property by an investor. ROI, like COC, is usually calculated on a yearly basis, meaning you must multiply the monthly cash flow by 12 and divide it by the down payment.
• Formula: Cash Flow (on a yearly basis) / Down Payment.

Question 22

Liquidity

Answer 22

-Real estate is considered an illiquid asset because it cannot quickly or easily be sold.

Question 23

Time Value of Money

Answer 23

-Time value of money is 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.

-It is a process that calculates the value of an asset in the past, present, or future.
It is based on the idea that the original investment or principal increases in value over a certain time.