Lesson 2 Flashcards
Gross Potential Income
Total income attributable to real property at full occupancy (includes rental income and other income), before vacancy and operating expenses are deducted
Vacancy and Collection Loss
An allowance for reductions in potential gross income attributable to projected vacancy (physical or economic) and potential collection loss considerations. Vacancy is an expected loss in income as a result of periodic vacant space attributable to unrented space and tenant turnover. Credit loss considers nonpayment of rent and can include units rented at below-market rates (also known as lag vacancy).
Effective Gross Income (EGI)
The anticipated income from all operations of the real property (rental and other) after an allowance is made for vacancy and collection losses.
Traditional accounting statements generally include (IBIC):
Income sheet, balance sheet, income tax statement, cash reconciliation
Tools for analyzing NOI
Ratio Analysis, Break-even analysis
Operating Expense Ratio (OER)
OER= TOE (total operating expenses) ÷ EGI
Gross Income Multiplier (GIM)
GIM = Sale or Purchase Price ÷ EGI
Break-even Point
OE = FE ÷ (erpu - vepu)
Before-tax Income for income statement analysis
NOI - Interest - Depreciation
Before-tax Cash Flow for cash flow analysis
NOI - Interest - Principal
NOI - mortgage payments
After-tax Income for income statement analysis
BTI - income tax payable
After-tax Cash Flow for cash flow analysis (ATCF)
BTCF - income tax payable
Equity Dividend for Appraisal
Stabilized NOI (NOI - Replacement Allowance) - Principal - Interest. Stabilized NOI less mortgage payments
Income Tax Payable
(NOI - Interest - CCA) x Tax Rate
Before-tax Reversion
Sale price - Commission/Legal Fees - OSB on debt
Net sale price - OSB on debt
GAAP vs IFRS
Accounting standards in Canada changed in 2011 from GAAP to IFRS. IFRS is mandatory for publicly-traded companies, government entities, and some private corporations. Key change for real estate is reporting asset value on the balance sheet at fair market value rather than depreciated cost.
Cash vs accrual basis of recording
If statements are maintained on a cash basis, then revenues and expenses are recognized only when received or paid. If records are maintained on an accrual basis, then revenues and expenses are recognized when they are earned or incurred. Therefore, accrued statements may not necessarily reflect the changes in the cash position of the venture.
Balance sheet
The balance sheet is a summary, at one point in time, of the assets and liabilities of the entity
Income statement
The income statement measures the performance of the firm for a particular period of time. Also called the profit and loss statement.
Cash Reconciliation
Cash reconciliation summarizes what has happened to the cash available to the firm
Initial steps for analyst or appraiser when forecasting cash flow statement
- Forecast of the rental for properties rented under lease conditions expected to prevail for the subject property
- Forecast of expenses borne by the landlord under the lease contract
- Forecast of debt servicing costs and income taxes
- Forecast of capital expenditures (as opposed to operating expenses)
- Analysis of refinancing decisions
Escalator clause
An escalator clause enables the landlord to increase the rent payable during the lease term by the same amount as the increase in the cost of the items covered by the escalation clause (often made in respect of property taxes, but it can also be applied to other services that the landlord has agreed to supply)
Fixed vs variable expenses
Fixed expenses are costs that, in the short run, remain constant throughout the period independent of the level of occupancy. Variable expenses are are outlays that vary directly with the level of occupancy.
Operating leverage
Degree of operating leverage is a structural risk characteristic of an investment which indicates the sensitivity of the break-even point to variation in rental income and ratio of variable to fixed expense
2 elements of tax faced by an investor upon disposition of a real estate asset
- Tax on capital gains
2. Tax on the recapture of excessive capital cost allowances
Net Sale Price
Gross sale price - real estate commission - legal fees
Overall Capitalization Rate (OCR)
OCR = Net Operating Income ÷ Sale or Purchase Price
Value
NOI ÷ OCR
Degree of Operating Leverage (DOL)
DOL = n (erpu - vepu) ÷ n (erpu - vepu) - FE
Constant vs cyclical outings
Constant outgoings are those which are of the same relative magnitude each year, whereas cyclical outgoings are those items of expense
which do not arise every year or which vary substantially in amount from one year to another.
