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RE 3095 > Module 7 > Flashcards

Module 7 Flashcards

1
Q

During the sales comparison approach, what is investigated?

A

Similar buildings and per-square-foot value

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2
Q

When is the sales comparison approach valuable?

A

When there are many similar buildings to compare

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3
Q

What is the most valuable way to value properties?

A

Income-based approach

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4
Q

What is done during the income-based approach?

A

Analyze a set of cash flows to return a value

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5
Q

What is done in a discounted cash flow model?

A

Look at the cash flows to find the net present value

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6
Q

What are the three ways to approach real estate valuation?

A

Cost approach, sales comparison approach, and income-based approach

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7
Q

What is the cost approach to real estate valuation?

A

Looks at the cost of land plus construction costs while excluding depreciation

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8
Q

What are the types of depreciation associated with the cost approach to real estate valuation?

A

Physical deterioration, functional obsolescence, and external obsolescence

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9
Q

What is physical deterioration?

A

Decay

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10
Q

What is functional obsolescence?

A

Problems with style and design

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11
Q

What is external obsolescence?

A

A neighborhood mismatch

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12
Q

When is the cost approach to valuation used?

A

With properties lacking income or similar transactions

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13
Q

What are the main problems with the sales comparison approach?

A

Lack of similar transactions, difficulty in assigning dollar values to attributes, unobserved heterogeneity

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14
Q

What is unobserved heterogeneity?

A

Acknowledging that all differences may not be readily observed

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15
Q

When is the sales comparison approach commonly used?

A

With residential properties

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16
Q

What is net operating income in real estate?

A

The income properties yield after subtracting vacancy and expenditures

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17
Q

What are the two income-based approaches?

A

Discounted cash flow and direct capitalization

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18
Q

What is the process for direct capitalization?

A

Estimate the NOI of the cash flow for the first period, then compare the NOI to those of your neighbors, and then get a rate of return from there

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19
Q

What is potential gross income?

A

The expected income if the entire building is occupied (aka no vacancy)

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20
Q

What is market rent?

A

Renting when a lease is new

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21
Q

What is contract rent?

A

Renting from existing leases

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22
Q

What are the main types of leases?

A

Flat, step-up/escalated, indexed, and percentage

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23
Q

What is a flat lease?

A

A lease with equal rent over the duration of the lease

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24
Q

What is a step-up/escalated lease?

A

A lease with predetermined increases in rent during the lease

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25
Q

What is an indexed lease?

A

A lease where rent increases based on inflation or consumer price index

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26
Q

What is a percentage lease?

A

A lease that is structured with a base rent plus a percentage of revenue/profit

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27
Q

How does occupancy affect valuation?

A

It has an impact on Net operating income. If there is a large amount of vacancy then the PGI will be low which lowers the cash flow.

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28
Q

What are common lease terms?

A

Concessions by landlord, tenant renewal options, leasing commissions, cost recoveries

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29
Q

What is an example of concessions of a landlord regarding free rent?

A

If you come now then you get free rent for a year. This is because the owner knows once the occupants are there it will be hard for them to leave so there will be long periods of future expected cash flows

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30
Q

What is an example of concessions by a landlord regarding improvements?

A

Ask what the tenant wants for improvements (these can be paid by tenants or owners). These improvements will then persuade the occupants to come.

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31
Q

What are tenant renewal options?

A

Define when you will have to discuss renewal can be 3 to 5 years

32
Q

What are the two types of leasing terms in the United States for housing?

A

Month-to-month lease, and annual lease

33
Q

What do leasing commissions say?

A

Tenants and owners may have their own brokers

34
Q

What are the two areas of cost recovery?

A

Operating expenses and common area maintenance

35
Q

What is common area maintenance?

A

It defines the common area of the building and determines who has to pay for them

36
Q

When calculating effective gross income what do you do?

A

Start with potential gross income - vacancy & collection losses + miscellaneous income

37
Q

What percentages are typically used for vacancy and collection losses?

A

5-10%

38
Q

What is a strategy for determining vacancy if you do not use the standard percentage?

A

Use comparables on the market to find the vacancy rates of similar property types

39
Q

What are the two types of operating expenses?

A

Fixed and variable

40
Q

What are fixed operating expenses?

A

Expenses not dependent on the property

41
Q

What is an example of a fixed operating expense?

A

Property taxes

42
Q

What are examples of variable operating expenses?

A

Utilities, ordinary maintenance, common area maintenance, security

43
Q

Tenants responsibility for operating expenses can vary from a _ lease to a _ lease

A

Gross, Triple Net

44
Q

What happens during a gross lease?

A

The tenant does not pay any operating expenses

45
Q

What happens during a net lease?

A

The tenant pays for the property taxes

46
Q

What happens during a net-net lease?

A

The tenant pays for the property taxes and insurance

47
Q

What happens during a triple-net lease?

A

The tenant pays for all operating expenses

48
Q

What are capital expenditures?

A

Non-recurring expenses that lead to an increase in the value of the property

49
Q

What are examples of capital expenditures?

A

Replacing the roof or mechanical systems (HVAC) and other tenant improvements

50
Q

Capital expenditures can be funded through _

A

Reserve accounts

51
Q

What are reserve accounts?

A

Accounts that collect annual payments where savings build up to pay for expenses that are expected in the future

52
Q

What are the categories used to define the condition/potential of the property?

A

Classes A through C

53
Q

What is the description of a class A property?

A

In the best location, is very high quality, and is built to last

54
Q

What is the description of a class B property?

A

An older building that is in a good location

55
Q

What is the description of a class C property?

A

Run-down properties

56
Q

What is an example of a class C property?

A

Strip malls

57
Q

How is the cap rate calculated?

A

Net operating income you can get next period / what you have to pay for it

58
Q

Why does a cap rate typically drop?

A

An increase in prices

59
Q

Which category has higher cap rates? Class A or Class B?

A

Class B because the selling price for Class B is lower than the selling price for Class A

60
Q

What are the main types of commercial real estate?

A

Office, retail, hospitality, industrial, recreational, institutional, multifamily

61
Q

What are examples of institutional real estate?

A

Hospitals and prisons

62
Q

Why is the sales-comparison approach to valuation common for residential real estate but not commercial real estate?

A

There are many properties to compare in residential real estate, but not many in commercial real estate

63
Q

_ should be lower than _ for projects that you want to invest in

A

MIRR, IRR

64
Q

Why do you want MIRR to be lower?

A

IRR assumes that you are reinvesting your cash flows at the same rate of return as your project. The alternative rate of return will be lower than the return of your project and that is what you will actually be reinvesting your cash flows into

65
Q

The finance rate of _ cash flows will not change the _ when there are no negative cash flows in the future

A

Negative, MIRR

66
Q

What does IRR assume about cash flows?

A

That they are reinvested at the same rate as IRR

67
Q

What does MIRR assume about positive cash flows?

A

That they are reinvested at the cost of capital

68
Q

When do CAP rates increase in unanticipated markets?

A

When there is an increase in supply/demand or interest rates

69
Q

When do CAP rates decrease in unanticipated markets?

A

When there is a decrease in supply/demand or interest rates

70
Q

What is Cash-on-cash (COC)?

A

The measure of first-year cash flow as a ratio of upfront developer equity

71
Q

What does the COC calculation ignore?

A

Income taxes, Loan amortization, and terminal cap rates

72
Q

What is the Internal Rate of Return?

A

The calculation of interest-rate when the net present value of all cash flows equals zero

73
Q

What are the assumptions with IRR?

A

All positive cash flows are reinvested and all negative cash flows are borrowed at the same interest rate the property itself generates

74
Q

How is Net Present Value (NPV) calculated?

A

Subtract the present value of costs from the present value of benefits of making a decision today

75
Q

What are the key assumptions of Net Present Value?

A

The opportunity cost of equity is often unclear and ignores a potential value in delaying the decision until more info is available

76
Q

What are the three ways to estimate net sales proceeds?

A

Buyer assumes a constant rate of appreciation, Buyers conduct DCF analysis, Buyers conduct Direct CAP analysis

RE 3095 (4 decks)

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