Chapter 16 - Commercial and Investment Properties

Rentable Square Footage

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

The effective gross income is equal to the gross potential income minus what...?

Vacancies

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 Tenant

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.). - Tenant that draws the crowd

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.

Cash on Cash Return

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

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. - how much is the mortgage payment?

A non-recurring expense is considered what...?

Capital Expenditure

As opposed to residential property, commercial property is valued based on this...?

Cash flow

The value of this property type is based primarily on an investor's return on their money...?

Commercial

What is the most common index used to determine rent increases in a lease escalation clause...?

Consumer Price Index

Commencement Date

Contracted date when activities begin

Capitalization rates do NOT take what into consideration...?

Debt service

As interest rates go down, cap rates do what...?

Decrease

Which of the following is an example of a qualified deduction an owner can take to reduce the amount of taxes owed on a property...?

Depreciation

Which of the following is an example of a 'contract services' expense...?

Elevator Maintenance Service

As interest rates go up, cap rates do what...?

Increase

David is looking to buy a commercial investment property. In addition to the cash needed for the down payment, David also needs this to run and maintain the property...?

Liquidity

Renting out the entire floor in a building is commonly known as this type of lease...?

Loft Lease

Why may investors be willing to pay more for a property when interest rates are low...?

Low interest rates yield higher cash flows

This retail property type is typically 30,000 - 100,000 sq.ft...?

Neighborhood Centers

Individual retail sites in a shopping center are referred to as what...?

Outparcel

John is looking to buy a multi-family building. As part of his due diligence, he estimates what the income and expenses of the building will be during the first 5 years of ownership. What document will show these numbers...?

Pro-forma

This document is used by investors to estimate how a property will perform in the future...?

Pro-forma

How can a utility bill be passed through to the tenant if sub-metering proves unfeasible ...?

Rent inclusion

Which of the following is the largest in area...? Rentable square footage Usable square footage Common area square footage Net square footage

Rentable Sq ft

In this agreement, the tenant commits to maintaining their lease, even if the property changes ownership...?

SNDA

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.

In a typical commercial lease, who is given the option to extend a tenant's lease...?

Tenant

Who is typically responsible for paying utilities in a newly constructed, large multi-family building...?

Tenants

Time Value of Money

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.

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

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.