real estate chapter 16

Cap Ex

Capital Expenditures= capital improvements

Gross Income

The total amount collected from rents and other income producing opportunities (washing machines, storage, etc.).

Leverage

The use or borrowed capital (mortgage) to increase the potential return of an investment.

NNN Lease

Triple net lease Tenant is responsible for all expenses: real estate taxes, insurance, maintenance, repairs, utilities, and other items

outparcel

individual retail sites in a shopping center

capitalization rate (cap rate)

the percentage which is the sum of the discount rate, the effective tax rate and the recapture rate representing the relationship between net operating income and present value Formula: Value= income/rate

property types:

-single family -multi family -commercial (5+ units) mixed- use buildings

Retail property types

-strip centers (8,000-30,000 sq ft) -neighborhood centers (30,000-100,000 sq ft) -malls: regional or mega mall -outlet centers (100,000-300,000 sq ft)

SNDA

-subordination tenant subordinates lease to the mortgages -non-disturbance protects tenant from being thrown out of the property -attorney agreement tenant commitment to allow for ownership to change

Cash on Cash Return

A percentage return on money invested in a property by an investor. Formula: Cash Flow / Down Payment.

Rate of Return

A profit on an investment over a period of time, expressed as a proportion of the original investment.

Pro-forma Statement

An accounting statement that forecasts income and expenses for a period of time, typically five or more years. Pro-forma statements are typically used by investors to estimate their rate of return for a particular property.

Estoppel

An instrument executed by the mortgagor setting forth the present status and the balance due on the mortgage as of the date of the execution of the certificate.

Debt Service

Annual amount to be paid by a debtor on an obligation to repay borrowed money.

Tax Shelter

Any method of reducing taxable income resulting in a reduction of the payments to tax collecting entities, including state and federal governments.

Net Operating Income

Equal to the Gross income minus expenses (and sometimes debt service). Also referred to as cash flow.

Example: Tax deduction

Loss: $100,000 Tax bracket: 36% Savings: $100,000 x 36% = $36,000 (deferred tax)

Cap rate

NOI: $60,000 Cap rate: 6% $60,000/0.06= $1,000,000 (property value)

N Lease

Net Lease Tenant is responsible for real estate taxes only, while the owner pays the rest of the expenses

Usable Square Footage

Space that can be used or occupied by a tenant. Typically does not include elevators, stairs, mechanical spaces, etc.

Common Areas

Spaces in a commercial building shared by the tenants or residents of the building. Common areas include lobbies, corridors, stairs, elevators, etc.

Time Value of Money (TVM)

The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.

Before Tax Cash Flow

The net profit/loss calculated by subtracting expenses from income before taxes are paid.

Capitalization Rate

The percentage which is the sum of the discount rate, the effective tax rate and the recapture rate representing the relationship between net operating income and present value. Formula: Value = Income / Rate

Rentable Square Footage

Usable area that can be leased/rented to a tenant.

Lease clauses

- lease duration clause -free rent clause -landlord work clause -tenants future work clause -notice clauses -tenant options -restrictions on who the landlord can rent the other spaces to

1031 Exchange:

-45 days to identify a new property - 180 days to close on a new property

Main commercial property types

-apartment buildings -office buildings -shopping centers -industrial properties

Office building classes

-low rise (1-3 stories) -mid-rise (3-15 stories) high-rise (20 stories and above)

lease clauses

-management level -amenities -use clauses -estoppel agreement -sublease/assignment -electric service clause -lease escalation clause

commercial leases

-office leases -retail leases

square footage types

-rentable -usable space -common area

characteristics of real property investments

-risk -liquidity -leveraging

Lease Escalation Clause

A contract provision allowing for one to pass an increase in costs to another party. Escalation clauses are usually related to influences beyond both parties control, such as inflation.

Anchor Stores

A key tenant in retail. Typically one of the larger stores in a shopping mall, usually a department store or a major retail chain (Macys, Nordstrom, etc.).

Percentage Lease

A lease of property in which the rental is based upon the percentage of the volume of sales made upon the leased premises, usually provides for minimal rental.

Gross Lease

A lease of property whereby the lessor is to meet all property charges regularly incurred through ownership.

Net Lease

A lease that requires the tenant to pay, in addition to rent, some or all of the property expenses that normally would be paid by the property owner. These include expenses such as real estate taxes, insurance, maintenance, repairs, utilities, and other items.

Straight-line Depreciation

A method of calculating the depreciation of an asset which assumes the asset will lose an equal amount of value each year. - A residential property is depreciated over a 27.5 year period. - A commercial property is depreciated over a 39 year period.

NN Lease

Double net lease The tenant is responsible for both property taxes and premiums for insuring the building

After Tax Cash Flow

The net profit/loss realized after taxes are deducted.

commencement date

contracted date when activities begin

A good indicator if a deal makes sense is to compare the interest rate and the cap rate

positive leverage: cap rate > interest rate negative leverage: interest rate > cap rate the lower the capital rate the more the building is worth

Example: COC return without leverage

purchase price: $1,000,000 (cash purchase) NOI: 60,000 Cash on cash return: 60,000/1,000,000= 6%

loft lease

renting out an entire space

leasehold

the holding of property by lease

carpetable area

usable area