Chapter 16 - Commercial & Investment Properties
Income Statement
1. Gross Potential Income 2. Effective Gross Income 3. Expenses 4. Net Operating Income 5. Before Tax Cash Flow
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.
A lower price
A higher cap rate will yield what...?
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.
A higher price
A lower cap rate will yield what...?
Cash on Cash Return
A percentage return on money invested in a property by an investor. Formula: Cash Flow / Down Payment
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.
Worth more
According to the 'Time value of money' concept, $1 today is worth what, as compared to $1 in the future...?
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.
The risk involved in the deal
As a commercial real estate owner, what should be your primary focus...?
5 units or more
At what size does a bank treat a residential building as commercial...?
Commercial property's value is based on this
Cash Flow or Net Income
Class A
David works in a newly built, high-rise office building. David most likely works in what Class of building...?
Rent roll
Document that shows which units are occupied and which are vacant
Leverage
Ely is a real estate syndicator. He pools together a group of investors to buy commercial investment properties. Ely's use of other people's money is an example of what...?
Net Operating Income
Equal to the Gross income minus expenses (and sometimes debt service). Also referred to as cash flow.
Net Operating Income - NOI
Equal to the Gross income minus expenses (and sometimes debt service). Also referred to as cash flow.
Higher Cap Rates
Higher interest rates will yield what...?
Positive Leverage
Interest Rate Lower than Cap Rate
Lower Cap Rates
Lower interest rates will yield what...?
3 or more
Mega malls consist of how many anchor tenants...?
Leverage allow an investor to
Purchase a larger building
Loft lease
Renting out the entire space or entire floor of a commercial space
These types of properties typically do NOT provide a strong return on an investor's money...?
Residential
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.
SNDA (Subordination,
Subordination - protects the landlord, tenant's rights will not supercede the rights that the bank has as the mortgagee of the building Non-disturbance - protects the tenant, if the lender would foreclose on the property, the bank would allow the tenant to stay on in the building Attornment - tenant allows the landlord to change ownership, tenant agrees to stay on the lease through the transfer
Commercial
The amount of cash flow a property produces is used to determine the value of this property type...?
Debt Service
The annual amount to be paid by a debtor on an obligation to repay borrowed money is known as what...?
Move-in Date
The commencement date is typically earlier than this date...?
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 is known as...?
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.
Move-in Date
The landlord must be prepared to turn over the space to a new tenant by this date...?
Before Tax Cash Flow
The net profit/loss calculated by subtracting expenses from income before taxes are paid.
After Tax Cash Flow
The net profit/loss realized after taxes are deducted.
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
Capitalization (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 Inverse rektionship between cap rate and sales price Cap = NOI / Purchase Price Purchase Price = NOI / Cap Rate NOI = Purchase Price * Cap Rate
Emotions
The pricing of residential real estate is based, in part, on which of the following...?
Triple Net Lease
The tenant is responsible for all property expenses including real estate taxes, insurance, maintenance, repairs, utilities etc.
Double Net Lease
The tenant is responsible for property taxes and premiums
Gross Income
The total amount collected from rents and other income producing opportunities (washing machines, storage, etc.)
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.
Use clause
This clause in a commercial lease allows the landlord to restrict tenants from conducting certain business activities in their space, which may affect other tenants in the building....?
Commencement Date
This is the contracted date when the lease of a new tenant begins...?
Neighborhood Centers
This retail property type is typically 30,000 - 100,000 sq.ft...?
Outlet Centers
This retail property type typically consists of 1 - 2 anchor tenants...?
Strip Center
This retail property type typically consists of 8,000 - 30,000 sq.ft....?
Rentable Square Footage
Usable area that can be leased/rented to a tenant.
Anchor tenant
Walmart serves as the primary tenant in a large shopping center. Walmart can also be referred to as what...?
The amount of sweat equity needed to run the property successfully
What is an underlying component that contributes to an investor's decision as to what capitalization rate is appropriate for a particular property...?
Cash Flow / Down Payment
What is the formula for determining cash on cash return...?
Speak with a broker who specializes in that use Review recently signed leases for that use Research the asking rents of competing properties
When conducting their due diligence on a commercial property, how can an investor verify the market rents for a particular use...?
When the interest rate on the mortgage exceeds the cap rate
When does an owner have negative leverage in a deal...?
Cap Rate > Interest Rate
Which of the following equations will yield positive leverage in a deal...?
Risk
Which of the following is a primary characteristic of real property investments...?
Rentable square footage
Which of the following is the largest in area...?
The rentable square footage includes common areas The rentable square footage includes wall thicknesses The rentable square footage includes circulation
Why might the rentable square footage be greater than the usable square footage...?
Capitalization rate
calculate an investor's cash-on-cash return if the property is purchased using all cash
If an owner has enough cash to fund the operations of a commercial investment property while the cash flow becomes stabilized, he is considered this...?
liquid?