Quiz 2 Flashcards
What is the bottom-line of the income statement?
The end-product of the income statement is the NOI or Net Operating Income
How do you calculate NOI?
NOI = Effective Gross Income - OPEX
What is a “SPONSOR”?
The originator of the project, typically the developer.
What are some tax benefits of commercial real estate?
Expense deductions
Depreciation
Capital gains Tax Rates both short and long term
What is an “EXPENSE DEDUCTION”?
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.
What is “DEPRECIATION DEDUCTION”?
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!
What is the benefit of “CAPITAL GAINS TAX RATE” ?
These rates are typically lower than the income tax brackets and can help facilitate the growth of individual net worth.
What is “PASSIVE INCOME”?
Passive incomes are those that come from a source that the taxpayer is not materially involved in.
What are EXAMPLES of “PASSIVE INCOME”?
This includes rental income (unless the taxpayer is a real estate professional), dividends, interest, capital gains and any other incomes not considered active.
Can Active Income losses offset Passive Income losses?
Active incomes or losses and passive incomes or losses cannot off-set each other.
What is a benefit of real estate losses?
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.
What are “SHORT TERM” capital gains?
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.
What are “LONG TERM” capital gains?
Long-term capital gains: this is a tax applied to assets held for longer than one year.
What is “NET TAXABLE INCOME”?
CASH FLOW AFTER FINANCING
+ Replacement Reserves and other allowances (Brokerage)
+ Mortgage Amortization (Amount of principle paid)
- Depreciation
= NET TAXABLE INCOME
Can “LAND” be depreciated?
A key concept, however, is that land CANNOT be depreciated - only the physical asset on the land can be.
Describe “INDIVIDUAL OWNERSHIP” of an asset.
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
Describe “JOINT TENANCY” of an asset
Joint Tenancy where two or more people have equal ownership and survivability
Describe “TENANCY IN COMMON” of an asset
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
Describe “TENANCY BY ENTIRETY” of an asset
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.
What is a “GENERAL PARTNERSHIP”?
General Partnership two or more co-owners run a business
What is a “LIMITED PARTNERSHIP”?
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
What is a “LIMITED LIABILITY PARTNERSHIP”?
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
What are the two most common corporate structures in commercial real estate?
Limited Liability Corporation (LLC)
Real Estate Investment Trust (REIT)
What is “DIRECT INVESTING”?
An investor purchases an interest in (or whole) property and is responsible for its operation.
What is “INDIRECT INVESTING”?
Indirect Investing expands the market to facilitate greater investment in real estate through some form of securitization.
What is the “CAPITAL STACK”
The total capital assembled for a real estate transaction is known as the “Capital Stack”
What is the order of capital in a capital stack from highest risk to lowest risk?
COMMON EQUITY
PREFERRE DEQUITY
MEZANNINE DEBT
SENIOR DEBT
What is “CH7 BANKRUPTCY”?
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.
What is “CH11 BANKRUPTCY”?
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.
What is the process flow for commercial real estate?
- Find Property
- Do Due Diligence
- Estimate construction budget aka hard costs
- Estimate other related costs aka soft costs
- Develop Capital Stack Needs
- Develop Pitch Book
- Meet with Investors
- Get Term Sheet
- Start Project
What is a “MORTGAGE BOOT”?
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.
What are “LIKE AND KIND EXCHANGES”?
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.
