Quiz 2

Question 1

What is the bottom-line of the income statement?

Answer 1

The end-product of the income statement is the NOI or Net Operating Income

Question 2

How do you calculate NOI?

Answer 2

NOI = Effective Gross Income - OPEX

Question 3

What is a “SPONSOR”?

Answer 3

The originator of the project, typically the developer.

Question 4

What are some tax benefits of commercial real estate?

Answer 4

Expense deductions
Depreciation
Capital gains Tax Rates both short and long term

Question 5

What is an “EXPENSE DEDUCTION”?

Answer 5

Ownership of investment property allows you to deduct from your personal taxes the expenses directly tied to the operation and management of the asset.

These include items like property taxes and insurance, mortgage interest, management fees, building maintenance, marketing and the like.

Question 6

What is “DEPRECIATION DEDUCTION”?

Answer 6

Depreciation is the erosion of an asset’s value over time due to the assumed wear and tear.

That incremental loss can be set against personal income.

Beware though, at the sales event, you will face depreciation recapture!

Question 7

What is the benefit of “CAPITAL GAINS TAX RATE” ?

Answer 7

These rates are typically lower than the income tax brackets and can help facilitate the growth of individual net worth.

Question 8

What is “PASSIVE INCOME”?

Answer 8

Passive incomes are those that come from a source that the taxpayer is not materially involved in.

Question 9

What are EXAMPLES of “PASSIVE INCOME”?

Answer 9

This includes rental income (unless the taxpayer is a real estate professional), dividends, interest, capital gains and any other incomes not considered active.

Question 10

Can Active Income losses offset Passive Income losses?

Answer 10

Active incomes or losses and passive incomes or losses cannot off-set each other.

Question 11

What is a benefit of real estate losses?

Answer 11

Rental losses will accrue until income offsets it, at property sale the unused accrual can be used against income from the sale, and depreciation can be used against passive income.

Question 12

What are “SHORT TERM” capital gains?

Answer 12

Short-term capital gains: for assets that have been owned for less than a year, any profits made by that sale will be taxed at regular income tax rates.

Question 13

What are “LONG TERM” capital gains?

Answer 13

Long-term capital gains: this is a tax applied to assets held for longer than one year.

Question 14

What is “NET TAXABLE INCOME”?

Answer 14

CASH FLOW AFTER FINANCING
+ Replacement Reserves and other allowances (Brokerage)
+ Mortgage Amortization (Amount of principle paid)
- Depreciation
= NET TAXABLE INCOME

Question 15

Can “LAND” be depreciated?

Answer 15

A key concept, however, is that land CANNOT be depreciated - only the physical asset on the land can be.

Question 16

Describe “INDIVIDUAL OWNERSHIP” of an asset.

Answer 16

The asset is owned by an individual, typically in the individual’s name. The individual may choose to place the asset in a trust, but it is still considered individually owned

Question 17

Describe “JOINT TENANCY” of an asset

Answer 17

Joint Tenancy where two or more people have equal ownership and survivability

Question 18

Describe “TENANCY IN COMMON” of an asset

Answer 18

Tenancy in Common is a condition where two or more entities own separate and possibly unequal portions of an asset with no right of survivorship

Question 19

Describe “TENANCY BY ENTIRETY” of an asset

Answer 19

Tenancy by the Entirety is a form limited to a married couple with equal right of possession during their lives and the right of full inheritance in the event of the death of one of the spouses.

Question 20

What is a “GENERAL PARTNERSHIP”?

Answer 20

General Partnership two or more co-owners run a business

Question 21

What is a “LIMITED PARTNERSHIP”?

Answer 21

Limited Partnership will still have a General Partner that is assuming all the liability. The LPs are involved in the business, but typically do not receive the same returns as the GP

Question 22

What is a “LIMITED LIABILITY PARTNERSHIP”?

Answer 22

There is still the General Partner assuming the risk and there are Limited Partners. This organization, however, allows the limited liability partner to be more active in the business which could convert their earnings and losses into an active status versus the passive

Question 23

What are the two most common corporate structures in commercial real estate?

Answer 23

Limited Liability Corporation (LLC)

Real Estate Investment Trust (REIT)

Question 24

What is “DIRECT INVESTING”?

Answer 24

An investor purchases an interest in (or whole) property and is responsible for its operation.

Question 25

What is “INDIRECT INVESTING”?

Answer 25

Indirect Investing expands the market to facilitate greater investment in real estate through some form of securitization.

Question 26

What is the “CAPITAL STACK”

Answer 26

The total capital assembled for a real estate transaction is known as the “Capital Stack”

Question 27

What is the order of capital in a capital stack from highest risk to lowest risk?

Answer 27

COMMON EQUITY
PREFERRE DEQUITY
MEZANNINE DEBT
SENIOR DEBT

Question 28

What is “CH7 BANKRUPTCY”?

Answer 28

Chapter 7 Bankruptcy the business or individual is caput…it is the end of the world as we know it. The Bankruptcy Court will appoint a trustee that will sell all the assets necessary and attempt to settle obligations that have been incurred by the debtor.

Question 29

What is “CH11 BANKRUPTCY”?

Answer 29

Chapter 11 Bankruptcy allows the company to restructure and potentially get back into business. A key concept to remember - Bankruptcy law trumps contractual law and leases.

Question 30

What is the process flow for commercial real estate?

Answer 30

1. Find Property
2. Do Due Diligence
3. Estimate construction budget aka hard costs
4. Estimate other related costs aka soft costs
5. Develop Capital Stack Needs
6. Develop Pitch Book
7. Meet with Investors
8. Get Term Sheet
9. Start Project

Question 31

What is a “MORTGAGE BOOT”?

Answer 31

A mortgage boot takes place when the property you buy has a mortgage debt of lesser value than the mortgage debt on the property you sold. That difference is subject to taxation.

Question 32

What are “LIKE AND KIND EXCHANGES”?

Answer 32

In the United States, a vehicle known as “LIKE KIND EXCHANGES” or “1031 EXCHANGES” are available. Under this provision of the Federal tax code, an investor can sell the asset free of state and federal taxation and purchase a similar property of relatively equal value.