Real Estate interview Terms

Basic loan structures

-Interest Only -Constant Payment Loans -Constant Amortization Loans -Graduated Payment Mortgages -Adjustable Rate Mortgages

Cap rate pro's and Con's

-Pro's -easy calculation -comparable across markets and property types •Con's -just one year snapshot in time -market cap rate can be difficult to determine.

two biggest return metrics when talking about RE investments. Lets say on a golf course.

-annual cash of cash return: cash flow to equity divided by equity investment -cumulative equity mulitple undercounted cash out divided equity in.

why are mortgages important?

-more households can own their own homes. -businesses can use their funds for core activities, instead of for initial purchase. -investors can leverage and diversity investments (positive leverage). -homeowners can obtain credit on better terms than consumer debt (home equity credit lines).

fixed rate loans types

1.) level payments 2.) partially amortized (results in a balloon payment for commercial loans (Less risky than fully amortized loans) 3.) non-amortizing, interest only "bullet" loans (no principle is being paid) 4.) Negative amortization

importance of Fannie Mae and Freddie Mac

1.) standardization. 2.) increased liquidity of mortgage markets. 3.) types of loans that GSE buys heavily influences what loans most lenders will make.

what must appraisers know?

1.) supply and demand characteristics 2.) rules and regulations that impact RE zoning, neighborhood plans, building codes, 3.) specific characteristics of the property.

three C's of underwriting

1.)Collateral 2.) creditworthiness: credit report 3.) capacity: abilitiy to pay (2 types of payment ratios)

debt service coverage ratio value meanings

A DSCR greater than 1 means the entity - whether a person, company or government - has sufficient income to pay its current debt obligations. A DSCR less than 1 means it does not. DSCR = Net Operating Income / Total Debt Service

FHA Loan

An FHA loan is a mortgage issued by federally qualified lenders and insured by the Federal Housing Administration (FHA). FHA loans are designed for low-to-moderate income borrowers who are unable to make a large down payment.

Factoring in Leverage with debt

Both lenders and bondholders are interested in a firm's leverage, and this term refers to the total amount of debt a company uses to finance asset purchases. If a business issues more debt, the company needs to generate higher profits in the income statement to service the debt, and a firm must be able to consistently generate profits to carry a high debt load. ABC, for example, is generating excess earnings and can service more debt, but the company must produce a profit every year to service each year's debt service

Constant Amortization Mortgage characteristics

Characteristics High initial payments, declining rapidly as the loan amortizes Payments unlikely to match income patterns Initial payments - principal repayments are a higher percentage of debt service If loan term = amortization, no balloon payment Amortization pattern is well suited to a fixed life asset; not well suited most real estate assets

Breaking down DSCR

DSCR of less than 1 means negative cash flow. A DSCR of .95 means that there is only enough net operating income to cover 95% of annual debt payments. For example, in the context of personal finance, this would mean that the borrower would have to delve into his or her personal funds every month to keep the project afloat. In general, lenders frown on a negative cash flow, but some allow it if the borrower has strong outside income.

Graduated Payment Mortgage risks

Debt Service Reduced default risk in early years due to lowered payment schedule High risk of default if property cash flow does not grow as anticipated Interest Rate - Lender offers fixed rate and assumes interest rate risk Repayment Negative amortization increases risk of default if property values decline Slow initial amortization increases risk of default in the event of decline in property values

Constant Payment Mortgage risks

Debt Service - Fixed payments make debt coverage more difficult in early years of loan Interest Rate - Lender offers fixed rate and assumes interest rate risk Repayment - Slow initial amortization increases risk of default in the event of decline in property values

Constant Amortization Mortgage risks

Debt Service - High debt service makes debt service more difficult for most borrowers Interest Rate - Lender offers fixed rate and assumes interest rate risk Repayment - Rapid amortization Quickly reduces default risk with rapid amortization If fully amortizing over term, no refinancing risk because not balloon payment is required

interest only mortgage risks

Debt Service - Interest only payments reduces debt service, making debt coverage easier Interest Rate - Lender offers fixed rate and assumes interest rate risk (lender takes risk of any interest rate change). Repayment - No amortization Higher risk of default if property value declines Higher risk of default at end of loan term due to refinancing risk of balloon payment

Adjustable Rate Mortgage risks

Debt Service - Varies substantially and unpredictably In recessionary periods, low rate short-term monetary policy may help lower debt service ("low floater" loans) In inflationary period, high risk if property rents do not rise with inflation Interest Rate - Borrower assumes interest rate risk, so lender can offer lower overall rates, on average Lender earns the spread between short-term borrowing and lending costs Borrower may face market timing risk, attempting to refinance into longer term, fixed rate debt before short-term rates increase Repayment As with CPM, slow initial amortization increases risk of default in the event of decline in property values Amortizes fully over the specified period

What is debt service

Debt service is the cash that is required to cover the repayment of interest and principal on a debt for a particular period. If an individual is taking out a mortgage or a student loan, the borrower needs to calculate the annual debt service required on each loan, and, in the same way, companies must meet debt service requirements for loans and bonds issued to the public

Adjustable Rate Mortgage characteristics

Essentially, a series of short-term, fixed rate loans, priced similar to short-term debt Advantageous to keep initial payments low when market anticipates inflation/higher rates in the longer term (i.e. steep, positive yield curve) Ex Ante (before the fact) it is impossible to know future payments with certainty Initial payments are generally lower than future payments for 2 reasons Initial rate offered is sometimes below the "index + margin" rate ("Teaser Rate") If originated in low short-term rate environment, future rates are likely to rise

Constant Payment Mortgage characteristics

Flat, predictable payments Payments may not match income patterns Lower payments with longer amortization Initial payments - primarily interest Later payment - primarily principal If loan term = amortization, no balloon payment

net present value scenarios

IF NPV > 0, project exceeds investor's required rate of return. If NPV= 0, expect return equals required rate of return. If NPV < 0, expected return does not meet requirement rate of return. Investors won't invest.

Adjustable Rate Mortgage calculation rules

Interest Rate Changes based on Market Index Interest Rate = Index + Margin Index may be LIBOR or other short-term rate Interest Rate may be subject to caps Annual Interest Rate Increase Cap Lifetime (of loan) Interest Rate Increase Cap Payment Increase Cap (not as common) Adjustment Interval - typically annually, but more frequent is also common Payments Change at Adjustment Interval, New Payment is based on: Adjusted Interest Rate Current Loan Balance Remaining Amortization Period

mixed use property

Mixed Use Property refers to buildings that contain a variety of commercial and/or residential uses where no individual use accounts for more than 50% of the property.

Loan to value (LTV)

Multiply the property value by the LTV to get the loan amount. -Purcahse home for $500,000. LTV=80%. Loan= ($500,000) (.8)= $400,000. lender doesn't fully cover investment b/c the money they put up is their insurance against property costs and depreciation.

cap rate equation

NOI year 1/ property value want to sell at LOW cap rate b/c then property has a high value. -want to buy at low cap rate. -want to own with a high cap rate= high return on property.

taxable income equation

NOI- Deprecaiton expense.

Cap Rate

NOI/ Property Value

annual debt service

NOI/DSCR= DS, monthly payments annualized is debt service.

what two variables do you use with investment decision analysis?

NPV and IRR

NPV decision criteria

NPV>0, project exceeds investors required rate of return. NPV <0 project does not meet investors required returns. NPV=0 project's expected return equals investors required rate of return.

Graduated Payment Mortgage characterisitcs

Negative Amortization - Initial payments typically less than interest, so loan balance increases Useful to facilitate debt service where property cash flow is depressed in early years of loan: Inflationary Environments Workouts Turnaround or re-development

Housing expenses ratio

PITI/GMI (front end ratio) PITI= principal, interest, (property) taxes and insurance. GMI= gross monthly income Max set at 28% for conventional and 29-31% for FHA.

Graduated Payment Mortgage

Payment Structure Lender allows initial payments to be below full interest and principal amortization to allow property cash flow to grow and stabilize. Initial payments generally defined based on expected property cash flow.

Constant Payment Mortgage

Payment Structure Interest rate is constant for the term of the loan Payments are constant every period Payments calculated to fully amortize (repay) the loan over the specified amortization period.

interest only mortage

Payment Structure Payment = Interest Rate * Loan Amount Characteristics Flat, predictable payments Payments may not match income patterns Lower payments - no amortization component Requires full loan repayment at end of loan term

Constant Amortization Mortgage

Payment Structure Principal is a fixed amount each period; calculated to fully amortize the loan over the term. Interest is calculated each period based on the rate and loan balance

4 rules of mortgage math

Rule 1) Interest owed in each period = Interest Rate * Loan Balance Rule 2) Principal amortized (repaid) in each period = Loan Payment - Interest Owed Rule 3) Principal Balance at end of period = Principal Balance (prior period) - Principal Amortized Rule 4) Initial Outstanding Principal Balance = Initial Balance as specified in loan

total debt ratio

TDR= (PITI+LTO)/ ( GMI) (Back end ratio) LTO: Long term obligation 36% for conventional loans and 41% FHA.

Define asset management

The broad objective of asset management is to maximize property value and investment returns. This means reducing expenditures when possible, finding the most consistent and highest sources of revenue, and mitigating liability and risk, among other things.

How the Debt Service Coverage Ratio Works

The debt service coverage ratio is defined as net operating income divided by total debt service, and net operating income refers to the earnings generated from a company's normal business operations. Assume, for example, that ABC Manufacturing makes furniture and that the firm sells a warehouse for a gain. The income generated from the warehouse sale is non-operating income because the transaction is unusual. Assume that operating income totaling $10 million is produced from ABC's furniture sales and those earnings are included in the debt service calculation. If ABC's principal and interest payments due within a year total $2 million, the debt service coverage ratio is ($10 million income / $2 million debt service), or 5. The ratio indicates that ABC has $8 million in earnings above the required debt service, which means the firm can take on more debt.

Net operating income

a company's revenue minus its operating expenses, not including taxes and interest payments. It is often considered equivalent to earnings before interest and tax (EBIT). Some calculations include non-operating income in EBIT, however, which is never the case for net operating income.

debt service coverage ratio

a measure of the cash flow available to pay current debt obligations. The ratio states net operating income as a multiple of debt obligations due within one year, including interest, principal, sinking-fund and lease payments.

uneven cash flow stream

a series of payments that do not constitute an annuity. -NOIs are uneven in value but occur over fixed intervals.

adjustable rate (ARM)

adjusted based on index, margin and caps.

negative easement

allows no intrusion by servant parcel -light and air easement, scenic easement- can't obstruct view w/ new structure.

liens

an interest in a property as security for an obligation (usually debt).

zoning

areas of land are divided by appropriate autohroies into zones within which various uses are permitted. -classifications include: residential , commercial, and industrial.

general liens

arise from events unrelated to the property

specific liens

arise from ownership and use of the property. 1.) mortgage 2.) Mechanics lien: didn't pay your mechanics bill 3.) property tax, or assessment lien.

debt financing

bank, city, funds. Debt is cheapest to fund.

Real estate taxation: Mill Rate

based on amount of money needed to run an entity. -city budget (minus funds from other sources) divided by total assessed value in city (minus exemptions). -example: assume $8,200 paid in property taxes on a house assessed at $350,000. Mill Rate: 8,200/ 350,000= .02343 (1000)= 23.43 per 1000 of assessed value. Tax Rate: 8,200/ 350,000= .02343 (100)=2.343% of assessed value.

mortgage broker

brings borrower and lender together for a fee. (Never owns the loans).

cash flow from operations

calculate NOI, subtract the annual debt service to get BTCF, subtract income taxes to get ATCF.

cash flow from reversions

calculate NSP, subtract OLB to get BTCF, subtract capital gains and deprecation recapture tax rate to get ATCF

cons of debt investments

capped returns: debt investments entail less risk, but one major downside is returns are limited by the interest rate of loan. Higher fees: the crowdfunding platform usually takes a percentage off the top before any interest is paid out, which eats at returns. There may be separate loan origination fee thats passed on to investors.

proformas

cash flow projections. provides a detailed look at the financial performance of a property. -forecasts how you think the property will perform based on two components: 1.) cash flow from operations. 2.) cash flow from reversion.

annual cash of cash return

cash flow to equity divided by equity investment

Alt-A loans

classification of mortgages where the risk level falls between that of prime and subprime. standard conventional loans with one underwriting criteria relaxed. high LTV, no document of earning.

future value

compounding money we have today to find the value of the investment in the future.

soft costs

construction industry term but more specifically a contractor accounting term for an expense item that is not considered direct construction cost. costs include architectural, engineering, financing, and legal fees, and other pre and post construction expenses. (Usually 30%)

valuation approaches

cost approach, income approach, and market comparison approach

deeds

created to smooth the transfer of ownership. -special form of written contact used to convey a permanent interest in real property. Must follow certain requirements

debt capacity ratio

current balance/ credit limit lower is better.

total debt service definition

current debt obligations, meaning any interest, principal, sinking-fund and lease payments that are due in the coming year. On a balance sheet, this will include short-term debt and the current portion of long-term debt.

change date

date that interest rate changes each time. -teaser rate: initial, temporarily reduced interest rate. Lower than basis rate.

restrictive covenants

deed restrictions -convnetants that pose restrictions on land use.

net present value (NPV)

difference between cash inflows and outflows -allows us to calculate the PV of a series of cash flows, based on the discount rate (rate of return) Cash flows are not consistent, they are variable payment amounts.

non conforming conventional home loans

does not meet at lease one of GSE's standards

non rentable area

doesn't earn revenue but you can expense these. -lobby/atrium/ elevators, mail rooms, public or shared bathrooms.

effective interest rate (lenders yield)

doest include other fees. only points. when solving for lenders yield, only subtract points from PV, no closing costs.

who benefits from easement?

dominant party

rentable area

earns revenue, private area, private bathroom.

Ginnie Mae (1968)

empowered to guarantee "pass through" mortgage backed security based on FHA, VA and RHS loans

debt coverage ratio (DCR)

first years NOI/ ADS (annual debt service)

adjustable rate mortgages (ARMS): shifts interest rate risk to borrower. (borrowers payments rise or fall based on change in interest rate)

fixed period: interest rates initially fixed at typically lower rates than during adjustable period. Also called teaser rates. adjustable period: index+spread (margin above index). -caps: changing interest rate susceptible to caps. limit to how much it can change.

Freddie Mac (1970)

formed to purchase and securitize conventional home loans from savings association.

affirmative easement

gives dominant parcel some part of servant parcel. -driveway, sewage lines, common wall, ect.

amortization

gradual elimination of a liability in regular payments over a specified term

VA loans

guarantees loans from private lenders for veterans. Guarantees percentage of loan for a fee. Can also make direct home loans to vet borrowers. mortgage loan program established by the United States Department of Veterans Affairs to help veterans and their families obtain home financing. The Department of Veterans Affairs does not directly originate VA loans; instead, they establish the rules for those who may qualify, dictate the terms of the mortgages offered and insure VA loans against default. VA loans offer up to 100% financing on the value of a home. To qualify for a VA loan, borrowers must present a certificate of eligibility, which establishes their record of military service, to the lender.

sources of capital structure

higher risk pieces pay first and are paid last (bank pays last and is paid first because of higher amount). Limited partner accepts lower interest rate returns.

HUD

housing and urban development.

fee simple estate

implies absolute ownership. (all sticks in the bundle)

difference between deed and normal contract?

in normal contract all parties must be legally competent. -in deed only grantor has to be.

two types of trade lines

installment loan: fixed payment every month. (example, home mortgage or car loan). revolving loan: variable payments every month (credit card)

Federal housing administration (FHA)

insures loans from private lenders, allows lower down payment. targets borrowers who are financially weaker. insures 100$ of loan (after foreclosure, title is transferred to housing and urban development (HUD)

catch up returns

investor that is paid after the preferred investor. Typical catch up return is equal to the preferred return.

margin

lenders make up 200 to 300 basis points (2-3%) avg about 275 basis points.

payment cap

limit of payment changes rather than on interest rate changes. -can result in negative amortization: unpaid interest added to the balance.

interest rate caps

limit on changes in interest rate charged. -period cap: from one change date to the next. lifetime cap: permanent

pre secondary mortgage market (pre 1970s)

limited and informal. Lack of standardization (large differences in home mortgage interest rates) rising interest rates could shut down home mortgage lending through disintermediation.

Equity financing: Limited and managing partners

limited partner: risk is limited to only what their investment is. LP invests certain amount of money into deal, nothing more. Doctor and lawyers and business partners in town. They just supply the capital. (Pay most money and take on less risk but don't have expertise) Managing partners: risk is unlimited. They manage deal and expertise, but not as much money goes into deal because they are the brain. If it fails, they run largest risk of not getting money back. (pay in low money but are experts that manage property and take on more risk. They are paid last but paid a higher interest rate).

loan to value ratio

loan amount/ appraisal amount

LTV

loan amount/ asset property value

recourse loan

loan that allows a lender to seek financial damages if borrower defaults.

subprime loans

loans lent at higher interest rates than the prime rate. usually ARM, negative amortization and substantial payment increases.

prime loan

loans lent at interest rates that are prime. Lent to customers with the best credit history.

index rate

market controlled rate beyond control of either the lender or the borrower (the "moving part") Market determined fluctuations.

conforming conventional home loans

meets the requirements for purchase by freddie mac and fannie mae. (GSE's standards for purchase)

cons of equity investments

more risk: investors are second in line when it comes to receiving a payback on their investment, and if the property fails to live up to its performance expectations, that can easily translate to a loss. Longer hold period: equity investors are looking at a much longer time frame compared to debt investors. Hold times can stretch out over five or even ten years.

Non depository

mortgage bankers and mortgage brokers make mortgage to sell in secondary market to fund.

do you want occupancy to increase as the years go on?

most people think occupancy increases as the years go on, but in reality if occupant is going up, it is true that competition will come in and try to steal your market. (for example, the hub had high occupancy and the "james" was created to match and take people from market. You ideally want to be somewhere in the of the market because you will be safest there away from competition.

Net operating income

most widely used indictor of a buildings financial performance/ profitability (Objective) NOI= Operating income-operating expenses. Potential gross income- vacancy allowance (5% ideal)+ other income= effective gross income >> effective gross income- operating expenses (fixed and variable)= NOI

mortgage backed securities (MBS)

multiple mortgage loans in a single pool or fund. security entitles investors to pro rata (proportional) share of all cash flows. The lower the yield of securities, the more liquid.

pros of equity investments

no cap on returns: it is possible to see annualized returns ranging from 18-25%. Since there is no cap, however, the sky is the limit from an investors perspective. tax benefits: one perk of owning an investment property is being able to deduct certain expenses associated with its ownership such as depreciation and the cost of repairs. With equity crowdfunding, deals are normally structured through an LLC, which is treated as a flow-through entity for tax purposes. That means that investors can reap the benefits of the depreciation deduction without having to own property directly. lower fees: rather than paying upfront fees and monthly service fees, investors may pay a single annual fee to maintain their position in the property. Fee is calculated as a percentage of the total amount invested and often runs between 1-2%.

Gross area

non rental area+ rentable

mortgage banker

not a bank-accepts no deposits. originates loans to sell. Do not actually have money. They provide loans and then sell them in order to fund.

waterfall

o Allocating of uses of capital to debt and equity investors o payment to debt investors o payment to equity investors ♣ How you pay back debt. ♣ Debt investors are paid first then you pay equity investors ♣ Limited partners get paid first and get less return. While MP gets bigger percentage, but takes on more risk. (once LM is at lets say 10%, the remaining profits will be given to MP. They want to give you incentive to keep working hard for property.

IRR internal rate of return

o IRR captures the return on an investment over the entire investment holding period. o The rate of return that discounts future cash flows that PV of cash inflows (benefits) equals the PV of cash outflows (costs) o In other words, IRR equals the discount rate when NPV=0 o Use the same cash flow setup as the NPV calculation.

preferred returns

one investor is paid ahead of another. The investor being paid ahead is known as preferred investor.

operating income and expenses

operating income: rent, parking, service fees. operating expenses: insurance, property management, utilities, property taxes, ect. Not included in NOI: before income taxes, loan payments, capital expenditures, and depreciation. Always use forward looking NOI-- this makes a property look more successful and attractive to buyers.

time value of money

opportunity cost of money. Basic premise: a dollar today is worth more than a dollar in the future. -can invest that dollar and the interest will result in you having more money in the future.

return on capital

original investment amount returned to investor

balloon loans

partially amortized loans. lenders lie this because reduces interest rate risk and keeps monthly payments affordable, useful for short term financing, non amortizing.

full amortization

payments are such that the loan balance is zero after the final payment. typical for residential mortgages.

outstanding loan balance

payments consist of principal and interest. -solving for outstanding loan balance is similar to solving for FV after year 1. Solving for principle: original OLB- New OLB= Principal. Solving for interest in year 1: total payments- principle= interest in year 1.

outstanding loan balance

principle owed at the end of hold period.

conduits

private firms that pool mortgage (lehman, wells fargo, Countrywide). grew out of the market for non-conforming "jumbo" loans.

underwriting

process of determining whether the risks of a loan are acceptable

Title VIII (8) of civil rights act of 1968

prohibits discrimination based on race, color, religion, nationality, sex and handicap. seller cannot refuse: to sell or rent, offer varying terms for different people, selectively advertise, blockbusting, deny loans, deny RE service, or coerce. blockbusting: convincing seller to lower price to sell fast out of fear of different race trying to buy the property.

pros and cons of cap rate

pros: easy to calculation and comparable across markets. cons: just one year snapshots and a lot of room for error, can be difficult to determine.

capitalization rates (Cap Rates)

relationship between NOI and value. Measure of risk. -higher cap rate>> Higher the risk>> higher the return needed to invest. Ideal range 12% (+) or 5% (-) Driven by perceived risk and potential NOI growth.

building efficiency

rentable area/ gross area

fixed interest rates

residential -monthly charge is 1/12 of annual charged rate. -multiplied by the beginning of the month balance.

primary mortgage market (where mortgages are created, originated)

retail or street market. Players include: 1.) mortgage bankers. 2.) mortgage brokers. 3.) commercial banks. 4.) thrifts (savings and loan associations). 5.) credit unions

easement

right to use land for a specific and limited purpose (driveway example)

depository (portfolio lenders)

savings association and commercial banks have actual money that they can loan out.

annuity

series of equal cash flows occurring over equal intervals. -Payments (PMT) are a type of annuity. Constant and even with respect to time.

annuity

series of equal cash flows occurring over equal intervals. payments are a type of annuity

uneven cash flow stream

series of payments which do not constitute an annuity

who is constrained by easement?

servant party

Pros of debt investments over equity?

shorter hold time: Deal may have a hold time between six and 24 months. (good for people who don't want to invest long term) Lower Risk: loan is secured by the property, which acts like an insurance policy against repayment for the loan. If sponsor defaults, investor can seek recoup of loss through foreclosure. Steady income: More predictable in terms of the amount and frequency of return payouts. (Although every deal is different, it is not unusual for investors to earn yields ranging from 8-12% annually).

Fannie Mae (1968)

spun off HUD to become primary purchasers o FHA and VA loans

hard costs

tangible assets that you need to acquire to complete your construction project. Usually hard costs are easily quantifiable and can be determined with such certainty that usually they are detailed by an experienced estimator. . usually 70% of costs

depreciation recapture tax

tax that IRS makes you pay after you sell an asset to get a part of the depreciation tax shelter.

types of loan defaults

technical default: any violation of terms. Substantive default: three missed payments (90 days). Can lead to foreclosure but it is very costly and time consuming so there are many non-foreclosure responses to default.

what is a equity investment?

the investor is a shareholder in a specific property, and their stake is proportionate to the amount they have invested. Returns are realized in the form of a share of the rental income the property generates, less any service fees paid to the crowdfunding platform. Investors may also be paid out a share of any appreciation value if the property is sold.

how debt investments work?

the investor is acting as a lender to the property owner of the deal sponsor. -The loan is secured by the property itself and investors receive a fixed rate of return thats determined by interest rate of loan and how much they have invested. In a debt deal the investor is at the bottom of the capital stack which means they have priority when it comes to claiming a payout from the property.

property management

the operation, control, and oversight of real estate as used in its most broad terms. Management indicates a need to be cared for, monitored and accountability given for its useful life and condition.

Internal rate of return (IRR)

the return on an investment over the entire investment holding period. -INvestors pay most attention to IRR when deciding whether or not to invest. IRR= Discount rate when NPV is zero. If IRR is greater than discount rate, investors will invest. (NPV will also be positive).

amortization

the spreading out of liability over time. Gradual elimination through regular payments over time. Full amortization: payments wehre loan balance is zero after the final payment. FV=0 Partial amortization: payments are less than sufficient to pay off a loan in the specified term. ( required balloon payments at the end of the term and typically used in commercial mortgages).

implied Bid- rent curve

time is money and people are willing to pay for proximity/ access. Bid rent(value) on x axis and distance from central point on Y axis (miles). -Closer you are, the higher bid rent, and further away the lower bid rent.

pari-passu returns

two investors are paid their pro rate share of the cash flows side by side, no investor has priority to the cash flows

cumulative equity multiple

undercounted cash out divide equity in.

joint ventures

usually between developers and a pension fund, REIT, or life insurance company. lenders role: provides the loan, additional equity investment and receives mortgage interest and equity cash flows. borrowers role: provides the project and expertise and management.

present value

what to invest today to get a certain amount in the future. -Discounting an amount in the future to get the value of investment today.

Explain the relationship between "IRR", "NPV" and the "discount rate.".

when IRR is qual to the discount rate, NPV is zero.

promoted returns

when an investor is paid a disproportionate share of the cash flow above their equity ownership.

partial amortization

when payments are less than sufficient to pay off a loan in a specified term typical for commercial mortgages

leased fee and leasehold estates

when property is leased, the right to use/occupy is transferred to the leaser for a fee that is called rent. -tenant has a leasehold interest -landlord has a leased fee interest.

secondary mortgage market (where existing home loans are resold)

wholesale market among lenders. government sponsored enterprises (GSEs) are largest purchasers of residential mortgages. ( Fannie Mae and Freddie Mac) (both fannie Mae and Freddie mac were created in sept 08)

Net present value (NPV)

with investments we have project cash inflows (benefits) and project cash outflows (costs) -Cash flows are not consistent- variable payment amounts. -NPV allows us to calculate the present value of a series of cap flows, based on discount rate. -discount rate: required rate of return on an investment. PV (Net cash flows)- investment

What growth rate of NOI do you want?

you want NOI growth rate to be growing between 2-3% a year for it to be very profitable. NOI growth is important because increased NOI means increased valuation.

NOI

• The most widely used indicator of a building's financial performance/ profitability. • Operating income o rent, parking, service fees • Operating expenses o insurance, property mgmt., utilities, property taxes, ect. • NOI= operating income- operating expenses

Capitalization rates

• relationship between NOI and value • cap rate= NOI year 1/ Property value • Property value= NOI year 1/ cap rate • driven by perceived risk and potential NOI growth o liquidity, market, financing