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Intro to Comm. Real Estate Finance > Quiz 1 > Flashcards

Quiz 1 Flashcards

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1
Q

What are the 5 categories of real estate?

A
  • Residential
  • Commercial
  • Industrial
  • Raw Land
  • Special Use
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2
Q

What is “The Right of Possession”?

A

this is “papered” by the “TITLE” - a legal document that shows exactly who the owner of the asset is

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3
Q

What is “The Right of Control”?

A

the owner of the real estate controls what happens on their property

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4
Q

What is “The Right of Exclusion”?

A

ownership confers the right to restrict who may come on your property…unless they have a warrant.

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5
Q

What is “The Right of Enjoyment”?

A

the right to use your property in a legal manner for your personal enjoyment.

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6
Q

What is “The Right of Disposition”?

A

the right to sell and transfer the title

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7
Q

What is the tax rate for commercial real estate?

A

40%

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8
Q

What is the tax rate for resedential real estate?

A

25%

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9
Q

What are the 4 categories of commercial real estate?

A
  • Office
  • Retail
  • Hospitality
  • Medical
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10
Q

How many square feet are in an acre of land?

A

Acre of land is 43,560 square feet

Remember the “7/11” rule

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11
Q

What is the “FAR” ratio?

A

Floor Area Ratio:
FAR = GSF (Gross Square Footage)/Total Square
Footage

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12
Q

With a FAR of 2, how much could be built on a 1 acre lot?

A

FAR of 2 on a 1 acre lot would be calculated
as: (43,560sf) X 2 = 87,120 maximum square footage
allowed.

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13
Q

What are set-back lines?

A

Set-back lines dictate how many feet from the edge of the property the building envelope can be placed.

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14
Q

What is physical occupancy?

A

Physical Occupancy is pretty straightforward - how many
of my units (Apartments, Hotels) are occupied at any given time. In commercial assets, we look at how many square feet are occupied.

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15
Q

What is economic occupancy?

A

Economic occupancy takes into account the actual amount of rent I am actually collecting.

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16
Q

What are “operating costs”?

A

Operating expenses or “OPEX” are the costs of owning and running a real estate asset.

17
Q

What is the purpose of the “Pro Forma Capital Budget”?

A

Identify cash outlay [Pro Forma Capital Budget]

18
Q

What is the purpose of the “Pro Forma Income Statement”?

A

Predict timing/magnitude of cash inflows [Pro Forma Income Statement]

19
Q

What is the “CAP” rate?

A

Cap Rate (Capitalization Rate) is a key real estate valuation term.

It is the Net Operating Income of the Asset divided by the price of the Asset

R = NOI/P

20
Q

What are “Hard Costs”?

A

HARD COSTS represent the total cost of building the
project. Typically, developers break these down into:

• Development costs - (Site Work) the cost to clear the site, grade it, bring utilities in and have it ready to be built
upon.

•Vertical Costs - the “sticks and bricks” or “steel and glass”- what it actually takes to construct the building.

• Contractor Costs - the fee, contingency, and “general
conditions.” General conditions are items like site trailer,
contractor overhead and the like.

21
Q

What are “Soft Costs”?

A

SOFT COSTS - this is everything else and covers a gamut of expenses that are incurred to bring a project to life. These will include such items as:

• Architecture and Engineering Fees (A & E) - the cost for a professional to design the project. These include
consultants in architecture, civil engineering, structural
engineering, “MP & E” (mechanical, plumbing and
electrical), landscape architecture, sound attenuation.

• Consultants and Lawyers - Zoning and building
inspection consultants, closing attorneys, deal structure
attorneys, accountants, auditors, bank inspectors.

• Financing Costs - all the costs incurred in securing an
equity partner and a bank loan. These can include
guaranty fees paid to a high net worth individual to
guarantee the loan, preferred interest payments, points
on the loan to close etc.

• “FF &E” - Furniture, Fixtures and Equipment - the plants in the lobby to the pool on the roof, the gym equipment
and the podcast studio soundproofing etc.

• Developer Fees - while these vary depending on the size and local market rate, a good rule of thumb is that the developer will earn around 4% of the total Hard Costs.

22
Q

How do you calculate NET OPERATING INCOME ?

A

NET OPERATING INCOME this is equal to the REVENUE minus the OPERATING EXPENSES.

23
Q

What are the 4 phases of the real estate cycle?

A

THE FOUR PHASES OF THE REAL ESTATE CYCLE:

PHASE 1 - RECOVERY: Vacancies are declining, rents are
beginning to increase.

PHASE 2 - EXPANSION: New construction begins, rent
increases and vacancy decreases accelerate.

PHASE 3 - HYPER SUPPLY: Rents start to decline, concessions pick up, vacancies tip up.

PHASE 4 - RECESSION: Construction tapers off, rents decline, vacancy goes up.

24
Q

What is a “Single Net Lease”?

A

In a “SINGLE NET LEASE,” the tenant pays rent
AND pays for all operating expenses identified in the lease agreement. There are no non-operating expenses passed through to the tenant.

25
Q

What is a “Double Net Lease”?

A

In a “DOUBLE NET LEASE,” the tenant pays their rent and pays all the operating expenses directly. In addition, the
owner “passes through” items like property taxes and
insurance to the tenant

26
Q

What is a “Triple Net Lease”?

A

In this arrangement, the tenant pays everything in the DOUBLE NET LEASE agreement. AND, in
addition, they will pay for recurring capital outlays for
repairs and modifications to the INTERIOR of the building.

27
Q

How are property taxes calculated?

A

Valuation X 40% (Commercial rate) X Mileage Rate

(expressed as a percent) = Annual Property Taxes

28
Q

Albert deposits $10,000 in a savings account paying 10%
per annum interest.

How much will he have if he leaves this money on deposit for 20-years (compounded
annually)?

A

$10K PV, 10% i, 20 n,FV

• $67,275

29
Q

Malcolm wishes to save for a down payment on a house.

He will need $50,000 in 3-years. How much must he save each year if he makes a deposit at the end of every year and he receives 6% per annum on his money
(compounded annually)?

A

$50K FV, 3 n, 6% i, 0 PV, PMT

• $15,705

30
Q

Lucille is considering investing in a parking lot. The tenant is the government, which pays an annual rental rate of $4,000.

In 20- years the lot will revert back to the government and will have no residual value.

How much should she pay for the lot if she requires a
10% per annum return on her investments (compounded annually)?

A

$4K PMT, 20 n, 10 i, o FV, PV

• $34,054

31
Q

Linda has the option of making a $25,000 investment that will earn interest at the rate of 5% compounded semiannually or 4.5% compounded quarterly.

Which would you advise?

A
    1. Choose a time horizon to compare – 3 years
    1. Semiannually n = (32) or 6; Quarterly n = (34) or 12
    1. Interest rate adjust - 5%/2 = 2.5%; 4.5%/4 = 1.125%
  • $25K PV, 2.5% i, 6 n, FV
  • $28,992
  • $25K PV, 1.125% i, 12 n, FV
  • $28,592
  • Compounded semiannually is better.
32
Q

An investor can buy a tract of farmland today that he believes will sell for $150,000 in 5-years.

His required rate of return is 10% per annum compounded monthly.

How much should he pay for the land today? (assume not taxes or other holding costs)

A
  • Interest to monthly – 10%/12 = .8333% (put in i)
  • Term to monthly – 5 * 12 = 60 (put in n)
  • $150000 – FV, PV
  • $91,168.29
33
Q

Larry is considering the purchase of an apartment project for $100,000. He estimates that he will receive $22,000 at the end of
each year for the next four years and $25,000 for the following three years.

If he purchases the project, what will be his IRR?

A

$100,000 CHS, g CF0 (blue g), $22K g CFj, $22K g CFj, $22K g CFj, $22K
g CFj, $25K g CFj, $25K g CFj, $25K g CFj
• Press the f key and IRR
• 13.51%

Intro to Comm. Real Estate Finance (2 decks)

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