SU # 64__Commercial Property Financial Analysis

Question 1

Define cash flow

Answer 1

The cash received minus the cash paid out over a given period of time.

Question 2

What is before-tax cash flow?

Answer 2

Before-tax cash flow is the measure of the cash received after the net operating income has been calculated and any mortgage-related expenses are paid, but before taxes are taken into consideration.

Question 3

How is an investor’s tax liability derived?

Answer 3

An investor’s tax liability from a property is based on taxable income rather than cash flow. Taxable income is net operating income minus all allowable deductions, including the amount allowed for annual depreciation on the property.

Question 4

What is a tax shelter?

Answer 4

A tax shelter is any investment designed to reduce or avoid income taxes.

Question 5

How does an operating statement differ from a typical income statement?

Answer 5

Unlike at typical income statement which shows operating revenues when they are earned and operating expenses when they are incurred, a real estate operating statement usually presents cash inflows and outflows from operations and is broadened to include non-operating cash flows, such as those that come from debt service, income taxes, and capital expenditures.

Question 6

What is gross rental income?

Answer 6

The amount of revenue a property would generate if it had no vacancies.

Question 7

What is debt service?

Answer 7

Debt service is the principal and interest payments made on a debt over a period of time.

Question 8

What is the equity dividend rate?

Answer 8

The ratio of annual before-tax cash flow to the total amount of cash invested, expressed as a percentage. Equity dividend rate is also known as cash-on-cash return.

Question 9

What is the two-step process for estimating current operation costs?

Answer 9

Identify comparable properties.

Compare data to published sources.

Question 10

What does a debt coverage ratio measure?

Answer 10

The investor’s ability to pay the property’s monthly mortgage payments from the cash generated from renting the property

Question 11

How does a pro forma income statement differ from an historical income statement?

Answer 11

It projects the future rather than tracks the past.

Question 12

What is a capitalization rate designed to do?

Answer 12

To reflect the recapture rate of an investor’s original investment over the economic life of the investment to give that investor an acceptable rate of return on his or her investment.

Question 13

If an investor has a property that has an income of $100,000, expenses of $16,000, and a debt service of $25,000, what is that property’s before tax cash flow?

Answer 13

$59,000

Question 14

What is the profit that an investor actually receives from income-producing property?

Cash flow

Before-tax cash flow

Net operating income

After-tax cash flow

Answer 14

After-tax cash flow

Question 15

What is the gross operating income for a property that has potential rent income of $85,000, vacancy losses of $4,000, extra income of $2,500 and operating expenses of $12,000?

$66,500

$71,500

$78,500

$83,500

Answer 15

$83,500

Question 16

If the annual income for a property is $180,000 and the capitalization rate is 9 percent, which of these figures is an accurate estimate of the property’s value?

$2,500,000.00

$2,000,000.00

$1,850,000.00

$1,620,000.00

Answer 16

$2,000,000.00

Question 17

How is the taxable income of a property derived?

Gross income minus expenses plus land and building depreciation

Gross income minus expenses minus land and building depreciation

Gross income minus building depreciation plus land depreciation

Gross income minus building depreciation minus other allowable expenses

Answer 17

Gross income minus building depreciation minus other allowable expenses

Question 18

What do we call an assessment of how well a property does the job it is supposed to do?

Functional obsolescence.

Physical durability.

Functional efficiency.

Physical effectiveness.

Answer 18

Functional efficiency.

Question 19

All of the following factors will affect the market rent on an office building except which one?

How likely it is that new firms will locate to the area.

Median income of families in the building’s location.

Number of employees that are currently employed or will be employed in the near future.

Amount of space the firm needs for its employee to do their job.

Answer 19

Median income of families in the building’s location.

Question 20

Which of the following is considered a variable expense?

Real estate taxes

Utilities

Advertising

Insurance

Answer 20

Utilities

Question 21

What do we use to express the relationship between price and either gross or net income?

Operating ratio.

Income multiplier.

Break-even ratio.

Debt coverage ratio.

Answer 21

Income multiplier.

Question 22

The ratio of annual before-tax cash flow to the total amount of cash invested is called what?

Return on investment

Cash-on-cash return

Operating ratio

Return on equity

Answer 22

Cash-on-cash return

Question 23

What is the net operating income for a company that has a potential rent income of $102,500, vacancies worth $4,500, extra income of $3,000 and operating expenses of $16,700?

$84,300

$98,000

$101,000

$105,500

Answer 23

$84,300

Question 24

All of the following factors will affect the market rent of an apartment except which one?

Median income of families in the property’s location

Demographic makeup of the area’s population

How likely it is that shopping will locate to the area

Availability of homes or condominiums to purchase in the local area

Answer 24

How likely it is that shopping will locate to the area

Question 25

Which of the following factors will not affect the market rent on an apartment?

Availability of homes or condominiums to purchase in the local area.

Cost of available homes or condominiums.

Median income of families in the property’s location.

Percentage of income families in the area usually spend on the purchase of goods and services.

Answer 25

Percentage of income families in the area usually spend on the purchase of goods and services.

Question 26

A building is producing an annual net operating income of $17,050 and has a capitalization rate of 6.2%. What is the value of the building?

$105,710

$275,000

$284,167

$392,857

Answer 26

$275,000

Question 27

Which of these factors does not affect net operating income?

Amenities

Vacancies

Market rent

Expenses

Answer 27

Amenities