Midterm-Ashley Flashcards
Define Real Estate
Bundle of Rights, Combination of Tangible (land, buildings) and Intangible Assets (Contracts)
What are the three types of markets that affect real estate?
1) Capital Markets (equity and debt)
2) User Markets (Occupants either owner or tenant)
3) Property Markets (i.e. cap rate, greatly influenced by supply and demand and cost of construction)
What elements of real estate do user markets determine?
Rental Rates and Risk
What elements of real estate do capital markets determine?
Risk Premium
What elements of real estate do property markets determine?
allocation of investments and pace of new construction
Words that describe real estate…
heterogeneous, immobile, local, illiquid, segmented, complex
What are the 5 stages of real estate development?
- Predevelopment
- Construction.
- Start-Up Operations
- Stabilized Operations
- Sale
When is the best time to enter a real estate cycle? Trough, expansion, peak, or decline?
expansion
What are four assets a person may have to equip him/her for development?
- wealth
- land
- potential tenants
- unique experience
T/F. Developer fees includes their profit
False. Should be just overhead and kept low as possible to not draw suspicion from investors that developer is keeping his profit “at-risk” in the investment (not in the fees).
What is purchase an “option” mean in predevelopment?
allows site control for a predetermined price during due diligence.
When determining investment performance, what must all numerical values be converted to?
Net Present Value (NPV)
Why is NPV preferred over cash multiple for feasibility?
It takes into account the time value of money
When would a developer use a mezzanine loan?
When the construction or permanent loan doesn’t cover the full capital need. It is usually at a significantly higher interest rate, but often is less yield than if it was equity.
When do you switch from construction loan to permanent loan in the development process?
once certificate of occupancy (CO) is approved.
Definition of a developer
one who ASSEMBLES the critical resources of land, capital, and labor rather than performing a particular service.
What does the condition “without prior constraints” mean for a developer?
Has no limitation on return or risk from the project. first in line to provide see capital…last in line to receive return.
What are two main ways to classify real estate?
- Tenure (owner-occupied or income property)
2. Land Use
What is the distinctive difference between development vs. an investment?
Development involves a risk of construction and initial occupancy risk as part of the financial decision.
Name 3 activities that occur in predevelopment phase
- Identify property
- Establish initial concept
- Pre-feasibility analysis
- Tie up or control property
- Preliminary design
- Cost analysis
- Feasibility analysis
- Obtain entitlements
- Commitment for equity and debt
- Complete architecture and design
- Obtain building permit
Name 3 activities that occur in construction phase
- Equity funding
- Obtain building permit
- Grading
- Foundation
- Shell construction
- Construction loan funding and draws
- Initial marketing/pre-leasing
- Initial tenant improvements (retail/office)
Temporary certificate of occupancy or initial
occupancy
Name 3 activities that occur in start-up operations phase
- Active marketing and leasing
- Tenant improvements for new tenants*
- Move-in for new tenants*
- Continued construction loan draws
- Fund permanent loan
- Pay off construction loan
- Initiate ongoing property management
Achievement of stabilized occupancy level; e.g., 95%
Name 3 activities that occur in stabilized operations phase
- Ongoing property management
- Turn-over leasing
- Turn-over tenant improvements
- Periodic structural maintenance
- Continuing service of permanent financing
- Plan presentation of property for eventual sale
Name 3 activities that occur at the sale phase
- Evaluate market and property
- Develop marketing plan (retain broker)
- Develop and distribute marketing
materials - Locate buyer and open escrow
- Remove escrow contingencies
- Close escrow
Name two ways you can tie up or control a property during due diligence without buying.
a. Enter escrow with deposit and long time to close
b. Buy option preferably with provisions for extension and
application of option fees to purchase
c. Enter partnership or joint venture with property owner
d. Do not buy or commit to buy since feasibility is yet to be proven
When in the predevelopment phase do you make key go/no go decisions?
Feasibility analysis. Pre-feasibility analysis is more of a “what-if” analysis with crude estimates for soft and hard costs.
Name two steps in predevelopment that overlap
Entitlements and Commitment to equity and debt.
When does the majority of equity kick in during the development process?
After obtaining building permit.
What does “By-right” mean in terms of land use control?
Falling in the line of all current planning regulation, so no additional entitlements needed.
What are two examples of land use alternations that would require entitlement approval?
- Conditionally permitted uses
- Prohibited uses
- Required setbacks
- Maximum lot coverage
- Minimum open space
- Maximum height
- Maximum density
- Minimum off-street parking
- Special requirements; e.g., affordable housing, rent control, historic
preservation
General Plan amendments change the general plan of the city which could change the ____ designation of the project site.
land use
Who approves GPAs?
planning commission, city council or board of supervisors.
How often are GPAs processed?
Less than four times per year
GPAs and Zoning approvals are _____ acts as compared to conditional use permits and variances which are _____ approvals.
legislative acts
quasi-judicial (not requiring legislative approval)
What must you prove to acquire a variance?
Evidence of practical difficulties and unnecessary hardships inconsistent with the general purpose and intent of the zoning regulations. (property size, topography, location, etc.)
What are one of the ways a project can be “vested” meaning the city cannot change or revoke entitlements?
- substantial construction has commenced
- vesting tentative map has been issued
- statutory development agreement
What is the disadvantage of a developer agreement for the developer?
Usually involves the developer doing something extra for the city.
What are the two types of subdivision maps?
- Parcel map
2. Tentative Map
What are site plan/design reviews for?
allow a planning department administrator
or planning commission to review and approve,
or conditionally approve, the site planning and
design of development, subject to appeal.
Define “Exaction”
An exaction is a requirement for either a dedication of land,
an improvement of land, or a fee imposed by a local agency
as part of a development approval. Dedication most common. Must meet the Nexus requirement of related to development’s give/take.
Define “Impact Fee”
imposed to mitigate impacts of development over a larger area such as the whole city, not as
an alternative to a land dedication and improvement.
What are the three broad questions of project feasibility?
- Market- does anyone want it?
- Economic- is the price high enough to pay for it?
- Financial- can you find money to build it?
If a developer produces a property worth $10M at completion. Based on the amount of profit required, how much can he spend on developing it?
$8 Million (based on 20% profit)
If an apartment building had an NOI of $50,000 and is at a 5% cap rate, what would the value of the property be? What would be the maximum amount of cost to develop the project and still achieve a 20% profit? What if the cap rate changes to 6%?
@ 5%
$1,000,000.
$800,000.
@6%
$833,000.
$666,400.
Total Development Costs (TDC) must be ____ than supportable private investment (SPI)
less
How do you calculate the amount of supportable private investment for a project (SPI)?
NOI/required return
Required return is ____ proportional to SPI.
inversely
What are four key factors that affect discount or interest rate when determining TVM?
- Risk-free investment rate (Treasury)
- Inflation
- Opportunity Cost
- Risk Premium
In TVM, higher risk means ____ discount/interest rates.
higher
In TVM, higher discount rate means _____ present value
lower (investor will invest less to achieve a higher return)
Define Internal Rate of Return (IRR)
A discounted cash flow rate of return. (investment yield not including external factors like inflation).
Low cap rate is a ____ (high/low) risk investment and is a _____ (buyer/seller) market.
low risk, sellers market.
High cap rate is a ____ (high/low) risk investment and is a _____ (buyer/seller) market.
high risk, buyers (investor) market.
Cap rates _____ (increase/decrease) with interest rates
Increase
Returns are equal to risk-free investment + ______.
risk premium.
Construction financing has a _____ interest rate
variable
Permanent Loan is funded on a _________ basis.
lump sum
Construction loans interests are _____
accrued, added to balance
Construction loans are paid off by ________.
a single payment
Difference between debt and equity?
Debt is a repayment of a loan based on a defined interest rate. Equity is a purchase of claims on residual cash flows and is the riskier therefore demands higher returns.
Leverage is _____ when project IRR exceeds interest rate on debt.
positive
When leverage (amount you borrow relative to equity) increases, debt service/interest rates _____.
increase. There is a risk that the developer could become negatively leveraged.
Does the borrower or lender gain from interest rates rising?
Lender
How do lenders mitigate the risk of rising interest rates?
Shorter loan terms. Most are 7-10 years.
Who bears the liquidity risk in a deal?
Lender
The difference between ____ and cash yield determines whether you have positive or negative leverage.
return on equity. (lecture 4.2)
Loan constant is greater than cap rate, you have ____ leverage.
negative.
If the interest rate is defined as Base Rate (Libor) + spread and base rate is 25 basis points and spread is 350 basis points, the total rate is ___ basis points or ___%.
375 basis points or 3.75%
In a lender agreement, an _____ clause states that the loan will be non-recourse except for “springing recourse events” in which the borrow and/or guarantor is held responsible for the loan.
exculpation
Name three items that would be in a borrowing agreement with a lender.
• Property description • Borrower • Lender • Purpose • Loan amount • Future funding • Term • Extension option(s) • Interest rate • Interest rate protection • Base rate floor • Collateral • Origination fee • Exit fee • Prepayment • Good faith Deposit/underwriting fee • Exculpation • Tests Net operating income (NOI) • Capital improvements • In balance • Reserves • Cash management • Additional financing • Assumability • Equity transfers • Property management • Approval of operating budgets and leases • Reporting • Closing • Secondary market transactions • Other (not all inclusive)
Municipal bonds have the advantage that the bond and the interest earned is ______.
tax-free
Developers can utilize tax-exempt bonds for their private project by having public acquire these bonds for ________.
infrastructure.
Private lending is secured through _______ whereas public bonds are secured through a pledge of _____
claim on owner’s assets/foreclosure.
pledge of future revenues.
How do you calculate a bond yield/coupon rate?
Coupon payment/face value of the bond. ($1000 bond with $100/yr payments is 10%)
Name two people involved in municipal bonds issuances.
Issuer, bond counsel, underwriter, consultants, financial advisor, trustee, rating agency, bondholders, credit enhancers,
What are the two ways municipal bonds could be sold?
PUBLIC SALE (competitive, better rates, SEC regulates) or PRIVATE SALE (higher rates, harder to sell, no SEC)
Types of Bond Repayments
General Obligation, Revenue bonds, Structured Bonds, Private Activity Bonds.
Name two types of community development bonds.
Assessment Districts (ADs), Mello-Roos Community Facilities Districts, Tax Increment Financing (TIF)
Name six ways in which land use regulations have an impact on development and design
- density
2, other physical restrictions like height, setbacks. etc. - parking
- Exactions, dedications, fees to this project.
- Exactions, dedications, and fees generally applied to
new development - Social/demographic/aesthetic requirements
Which land use type is a primary target for imposing traffic demand management programs (bus passes, car pool parking, etc.)?
office
What can cost as much as $30-$40,000/unit for new housing development?
Traffic and school impact fees
Which land use would inclusionary zoning affect?
Housing development
What is the recommended entity to own the property that is being developed?
Single-purpose entity (SPE). e.g. LLC
What are the three elements of “price” that vary on loan products?
- Interest spread + fees
- Leverage (loan to cost, debt yield)
- structure (guarantees, etc.)… most negotiation here
(more or less)
During a boom and lending is competitive, price is ______, leverage is ________, structure becomes _____ stringent.
less, more leverage, more stringent
When the debt-fueled asset bubble bursts, worst exposed ______ go under and surviving ____ pause.
lenders, lenders.
(more/less)
During recovery, lending is ______ expensive
more
_____ and ______ provide apartment capital in the US.
Fannie May and Freddie Mac
Effective Borrowing Cost is the IRR (lenders yield) + _____
closing costs
What are some types of amortization?
fixed rate + partially amortized (most common), interest only + balloon payment, early payment mortgages
What is the typical amortization for land purchase for spec development?
Interest only
What is the name for the document that is used to create legal debt?
“Note.”
Lists amount/timing of payments, late penalties, etc.
What is an “A.R.M” and how do they work?
Adjustable rate mortgage. initial interest rates that increase over time. May have a cap.
Who would benefit from a sale-leaseback development arrangement?
good for owners/users not in the business of real estate.
What is included in the loan submission package from borrower before the lender can conduct their due diligence?
title insurance, current survey, evidence of zoning + building code compliance, certified operating statements, rent roll, existing leases, appraisal, environmental report, good faith deposit (1-2%), legal fees.
What are some characteristics of land acquisition, development and construction loans?
PERSONALLY LIABLE (recourse loan), floating interest rate, typically interest only, prepayment at any time w/o penalty.
NOI defines how much you can _____ and the _____ of the property
borrow, value
what is a typical IRR expected for conventional risk? What about premium properties?
15-18% IRR, 10% IRR
What is the default period for a proforma
10 years
What are some disadvantages to municipal bonds for investors?
less liquid, might be harder to sell, issuer can buy back bonds at a certain price (“callable”)
What are the steps in New Market Tax Credits?
- CDE applies to CDFI for NMTC
- NMTC’s are approved and go to the CDE
- CDE sells the credits to an investor
- investor provides capital (QEI) to the CDE
- CDE makes a qualified low-income investment in a low-income community.
What are private activity bonds?
municipal bonds for activities in the public interest such as affordable housing, industrial development, and non-profit organizations.
What is a dirt bond?
a taxing district to finance a specific piece of land.
What should a proforma “sensitize” to?
construction costs, contingencies, cost escalation, schedule impact on lease-up, concessions for TI, broker incentives, disposition timing. The way these are layered will determine the strength of the proforma analysis.
What are some risk mitigation strategies in development?
- lock in construction contracts, materials shortly after entitlements are approved.
- get tenant credit reports, good relationship with brokers.
- buy caps to protect interest rate rise.
- understand the business health of large tenants.
What are the three parts to a waterfall structure?
- Intro, “pref” level
- “promoted interest”
- Back-ended split
Describe the return structure of the “pref” level in a waterfall structure
the first stage of returns where everyone receives an equal return proportionate to their % equity.
Describe the return structure of the “promoted interest” level in a waterfall structure
middle stage of returns where there can be anywhere from 1-5 levels of disproportionate allocation to the developer.
Describe the return structure of the “backended split” level in a waterfall structure
last stage of the returns where the largest split occurs usually in favor of the developer (e.g. 30-35% to developer)
What are the two metrics that could be used to set the waterfall split?
IRR or equity multiple
What are important characteristics to consider in a waterfall structure to make sure the investors and developers are in alignment?
- Transparency of fees and net returns.
- Simple structure that could be based on to others in the firm during development process without room for confusion. Attorneys must write into legalese.
What type of proforma are most construction projects done in?
waterfall proforma
What are the three types of leasing methods?
- Full service gross
- Modified gross
- Triple Net
In a triple net lease what is charged to the tenants in addition to rent?
property taxes, insurance, utilities, maintenance, cleanup, and CAM charges.
What are the elements to a multifamily sale package?
- intro
- property description
- regional trends
- market overview
- rent comparables
- sale comparables
- financial analysis
What are the elements to a office offering package?
- executive summary
- property overview
- area overview
- market overview
- tenant overview
- financial overview
What are the three types of tenants in a large retail center?
Anchor, Junior Anchor, and Small Shop
Of the types of tenants in a large retail center, which does not pay CAM charges?
Anchor
Before effective real estate market research can be achieved, relevant _____ must be examined
market segmentation. “exclude the irrelevant” (ch. 6)
It is recommended that the first step in evaluating any property is to write a _________
market-defining story (ch. 6)
What three additional estimates are needed to conduct a DCF analysis of a property beyond what is provided in the Direct Capitalization Models?
1) net cash flows over entire expected holding period.
2) net cash flow at the sale of the property
3) an estimate of the required return to discount all future cash flows.
What is the difference between contract rent and market rent?
Contract rent is what is currently contracted with existing tenants. Market rent is what the potential rent could be for new tenants.
When capital expenditures are subtracted in the calculation of NOI, this is referred to as the ________ treatment.
“Above the line”
What is an expense stop clause?
in office properties where landlords are responsible for most expenses, an expense stop clause stipulates that the owner will pay expenses up to a certain $/SF with the tenant paying a pro rata share for the remaining expenses.
What is “quiet enjoyment” for tenant rights?
As long as the tenant complies with the lease, owner must provide uninterrupted use of the property.
What is a percentage rent provision?
owner receives a prespecified percentage of tenant sales.
For each, define what additional expenses are placed on the tenant.
Net Lease
Net-Net Lease
Net-Net-Net Lease
Property Taxes
Property Taxes and Insurance
All Operating Expenses
What is “effective rent?”
level monthly payment over entire lease that balances out concessions or other changes in rent to a standard $/SF/year to compare with other properties.
Define the following according to BOMA calculations
“usable area”
“rentable area”
“usable area” is the SF of the space bounded by the walls seperating one tenant’s space from the other.
“rentable area” is equal to the usable area + tenants prorated share of any common areas.
Gross Leasable Area is to retail, as _______ is to office
usable area
