Unit 5 - 8 Flashcards
Market analysis is a process undertaken to accomplish all of the following activities EXCEPT:
A. Establishing the professionalism of the investor.
B. Evaluating environmental legislation at the local market.
C. Considering local regulations as they apply to a market.
D. Reviewing community trends and activities.
Correct Answer: A. Establishing the professionalism of the investor.
In developing a feasibility study, you attempt to determine the boundaries of the neighborhood. You look first for:
A. ZIP code areas.
B. Census tract areas.
C. Central business districts.
D. Natural and artificial boundaries.
Correct Answer: D. Natural and artificial boundaries.
In a feasibility study, you find what appears to be a high vacancy rate in new office properties. You investigate further to determine:
A. The relation of this vacancy rate to retail sales.
B. The internal rate of return for these office properties.
C. The break-even point for these properties.
D. Whether there is a technical or an economic oversupply.
Correct Answer: D. Whether there is a technical or an economic oversupply.
All of the following properties built prior to 1978 would require the Federal Lead-Based Paint regulations to be followed EXCEPT:
A. An owner-occupied, detached, single-family home.
B. An apartment complex.
C. A four-plex.
D. A small office building.
Correct Answer: D. A small office building.
When analyzing the physical conditions of a building for investment, all of the following items should be considered EXCEPT:
A. Existing leases.
B. Its visual image.
C. Deferred maintenance.
D. The presence of hazardous construction materials.
Correct Answer: A. Existing leases.
Come out of the Ground
A phrase that describes the construction of new properties.
Deed Restrictions
Private restrictions on land use placed on property through provisions in a deed.
Deferred Maintenance
Postponed maintenance on property that results in increased physical depreciation (wear and tear).
Destination Store
Retail stores that combine several attributes to make them very attractive to consumers.
Due Diligence
An investigation to find all facts of material interest to an investor.
Environmental Protection Agency (EPA)
A federal agency that sets standards, determines how much pollution is tolerable, establishes timetables to bring polluters in line with its standards, and enforces environmental laws.
Feasibility Analysis
A market or financial analysis of a proposed investment with emphasis on attainable income, probable expenses, and the most advantageous use and design.
Innocent Landowner Defense
Applied to a property purchased after 1986, assuming the owner “did not know and had no reason to know” about contamination at the time of purchase.
Market Study
A study that analyzes market demand for a particular product or service.
Minimum Housing Standards
Minimum building and housing codes adopted by many communities to protect public health and safety.
Overlay
Micro-requirements in zoning codes that impose specific aesthetic or density requirements in some areas.
Pro Forma Profit and Loss
A standard profit and loss statement, also called POL, income statement, earnings statement, or expense statement.
Remediation
Corrective action to clean up an environmentally contaminated site to eliminate contamination or reduce it to an acceptable level.
Phases of environmental assessments: Phase I
Engineering reports regarding the possibility of environmental contaminants.
Phases of environmental assessments: Phase II
Reports identifying types and amounts of actual contaminants.
Phases of environmental assessments: Phase III
The Phase III assessment details how an environmental cleanup is to be performed, the last phase before actual cleanup begins.
Phases of environmental assessments: Phase IV
The environmental remediation plan selected by an investor and engineers, serving as a roadmap for remediation.
Phases of environmental assessments: Phase V
An investor obtains Environmental Protection Agency approval for a Phase IV environmental cleanup plan.
Phases of environmental assessments: Phase VI
Gathers all necessary data to obtain regulatory approval that a cleanup site now meets all environmental standards post-remediation.
Site Selection
The process of determining the best location for a project.
Setback Requirements
Local zoning and building code specifications stipulating the open space to be preserved in front, rear, and side yards.
Rooftops
Holds demographic data gathered from census studies and local chambers of commerce about residents within an area.
Stabilized Occupancy
Concept used to estimate the future value of a property once it reaches reasonable occupancy potential.
Variance
An allowance in zoning codes that leaves zoning in place but allows a particular nonconforming use of the property.
Subdivision Restrictions
Restrictions often created by a city, placing minimum requirements for any subdivision within that city’s jurisdiction.
Traffic Counts
Data tracking peak and low traffic volume by the number of vehicles crossing a specific street point.
Active income includes all of the following EXCEPT:
A. Wages.
B. Profits from sale of real estate.
C. Profits from business.
D. Rental revenue.
Correct Answer: D. Rental revenue.
This year, your office building shows a gross annual revenue of $200,000, operating and deductible expenses of $185,000, and depreciation of $30,000. The net effect is:
A. A loss of $15,000.
B. A taxable income of $15,000.
C. A cash flow of $10,000.
D. No income and no loss.
Correct Answer: A. A loss of $15,000.
A married couple earns taxable income on an existing real estate investment. If an additional investment provides a tax loss, they can:
A. Not net the income against the loss.
B. Treat one investment as passive and the others as active.
C. Elect to be taxed as a corporation.
D. Net the income against the loss.
Correct Answer: D. Net the income against the loss.
Which properties do NOT qualify for a like-kind exchange?
A. Office building and fast food restaurant.
B. Rental house and strip center.
C. Condo and land acquired for condo development.
D. Industrial property and apartment complex.
Correct Answer: C. Condo and land acquired for condo development.
Active Income
Income acquired in the pursuit of a taxpayer’s main occupation.
Calculating the taxes due on the sale of investment real estate involves determining:
A. Net sales price, basis, depreciation, and total interest deductions.
B. Gross sales price, goodwill, and adjusted basis.
C. Purchase price, sales price, and sale expenses.
D. Gross sales price, deductible sale expenses, adjusted basis, and recaptured depreciation.
Correct Answer: D. Gross sales price, deductible sale expenses, adjusted basis, and recaptured depreciation.
Active Participation
Owned at least 10% of a rental property and made management decisions or arranged for others to provide services in a significant and bona fide sense.
Alternative Minimum Tax (AMT)
Required if its application to the taxpayer’s special preference items exceeds the regular tax amount.
Adjusted Basis
The starting basis of property, adjusted over time to calculate the capital gain profit.
At Risk Rule
A rule disallowing deductions exceeding an investor’s actual invested amount.
Boot
Money or property given to make up any difference in value or equity in a 1031 exchange.
Capital Gains Income
Taxable profit from the sale of a capital asset.
Dealer
A person who buys and sells real estate as part of their business.
Cost Recovery
Depreciation as an allowable tax deduction for investment recapture.
Deferred Exchange
A time-delayed trading of like properties.
Passive Income
Income from real estate rentals where the owner does not actively manage.
Exchange
To trade like properties, thus avoiding income tax liability under IRS 1031.
Passive Activity Loss Limitation
All rental income is passive. Passive losses can offset passive but not active income.
Depreciation
The loss of value due to physical or economic obsolescence; also an allowable tax deduction.
Pyramiding
Acquiring additional properties by refinancing equities.
Portfolio Income
Income from interest, dividends, and royalties.
Real Estate Professional
A licensee who legally conducts the business of real estate.
Realized Gain
Amount by which an asset’s sale price exceeds its purchase price.
Recaptured Depreciation
The portion of an asset’s sale price above its book value and below its initial purchase price.
Recognized Gain
Profit from an investment sale that is taxable in the current year.
Straight Line
Depreciation of real property in equal amounts over the property’s allowed tax life.
Tax Credit
A credit applied directly against taxes due.
Taxable Income
Income amount used to calculate tax owed.
Tax Shelter
A term describing the tax advantages of real estate, such as deductions for depreciation, interest, and other expenses.
What is the minimum data necessary for a PV calculation?
A. FV and discount percentage.
B. Term, pmt, rate, and FV.
C. Term, pmt, and rate.
D. Term, rate, and FV.
Correct Answer: D. Term, rate, and FV.
What is the minimum data necessary for a FV calculation?
A. IVM and rate.
B. PV and compounding percentage.
C. Term, rate, and PV.
D. Term, pmt, rate, and PV.
Correct Answer: C. Term, rate, and PV.
An investment has a NPV of 5. This indicates it:
A. Will yield a 5% return, which might or might not meet investor expectations.
B. Almost exactly meets investor expectations.
C. Exceeds investor expectations.
D. Is meaningless without a stated time element.
Correct Answer: C. Exceeds investor expectations.
The correlation between risk and time can best be illustrated by use of the correct:
A. Interest rate.
B. Discount rate.
C. Valuation model.
D. Base comparison investment.
Correct Answer: B. Discount rate.
For proposed rental income development projects, an important component of the time value of money calculations is the anticipated date of:
A. Full occupancy.
B. Break even occupancy.
C. Stabilized occupancy.
D. Reliable occupancy.
Correct Answer: C. Stabilized occupancy.
Net Present Value (NPV) is the present value of an investment’s expected cash inflows minus the costs of acquiring the investment.
A. True
B. False
Correct Answer: A. True
Stabilized Occupancy is a concept used to estimate the future value of a property or project once it reaches its reasonable occupancy potential.
A. True
B. False
Correct Answer: A. True
Using a GRM of 8, what is the indicated value of each property?
A. $1,104,000 and $1,080,000
B. $920,000 and $900,000
C. $845,000 and $826,000
D. $717,600 and $648,000
Correct Answer: A. $1,104,000 and $1,080,000
In estimating a value, what cap rate would you likely use?
A. 6
B. 35
C. 15
D. 1
Correct Answer: A. 6
Which NOI is going to yield the most favorable results for the seller?
A. Most recent tax return
B. Pro forma
C. Last calendar
D. Trailing twelve
Correct Answer: B. Pro forma
Annual Property Operating Data (APOD)
A form that lists a property’s gross income, individual operating expenses, and net operating income.
Capitalization of Income
The capitalization of income model takes a snapshot of only one year of operating revenue and expenses. Subtracting expenses from the revenue yields a number called the NOI, which is expressed as an annual number.
Using a cap rate of 11, what is the indicated value of each property?
A. $1,265,000 and $1,237,500
B. $1,254,454 and $1,227,273
C. $815,455 and $736,364
D. $1,518,000 and $1,485,000
Correct Answer: C. $815,455 and $736,364
Capitalization Rate
The rate of return, based on purchase price, that would attract capital.
Cash on Cash
The ratio of annual before-tax cash flow to the total amount of cash invested, expressed as a percentage.
Gross Rent Multiplier (GRM)
A capitalization method used for calculating the approximate value of an income-producing commercial property based on the property’s gross rental income.
Internal Rate of Return (IRR)
The rate at which the present worth of an annuity plus reversion exactly equals the investment price.
Income
What is left after one subtracts expenses from revenue.
Net Operating Income (NOI)
The income left after all operating costs are paid.
Present Value (PV)
The current value of a future sum of money or stream of cash flows given a specified rate of return.
Pro Forma NOI
The standard form that shows calculations for income left after all the operating expenses have been paid.
Recasting The Financials
The process of carefully inspecting, and perhaps changing, some of the seller’s profit and loss numbers.
Revenue
A measure of how much raw income a company is bringing in from sales of its products or services.
Trailing 12
NOI calculated for the immediately preceding 12 full months.
