Commercial and Investment Properties Exam Prep

A property is generating $100,000 in income and has expenses of $25,000. The investor pays $3,000 toward mortgage principal each year and $32,000 toward interest, plus another $4,000 in income taxes. What is the before-tax cash flow?

$40,000 To arrive at before-tax cash flow, subtract from income ($100,000) expenses ($25,000) and debt service ($3,000 + $32,000 = $35,000). So $25,000 + $35,000 = $60,000. Then $100,000 - $60,000 = $40,000. Income taxes of $4,000 are not subtracted.

John wants to do a 1031 tax exchange. He just sold his property. How many days does he have to close on a new property?

180

Tyrell and Barb bought a commercial investment property in 2009 during the real estate market downturn. Through what year will they be able to depreciate the investment?

2048 Depreciation may be taken for 39 years for commercial non-residential properties.

Gary, your investor client, has an annual net income of $50,000. His annual debt service is $12,500. What is his debt coverage ratio?

4 To get the debt coverage ratio, divide the net income by the debt service ($50,000 ÷ $12,500 = 4). The higher the debt coverage ratio, the more profitable the enterprise.

real estate investment trust (REIT)

A business owned by shareholders who invest in properties or mortgages Ex. Craig's favorite REIT invested in mortgages.

Which of the following belongs in the commercial category referred to as retail?

A gift shop in a shopping center

leasehold mortgage

A leasehold mortgage is another option if a freehold mortgage isn't possible. The leasehold is a long-term estate for years pledged to the lender instead of the property. In other words, this is an option for those times when the developers don't own the land. For example, they may own a mall, but they're only leasing the land. The collateral on the loan is a leasehold—the funding institution gets the lease on the building if the developers default on the loan.

participation mortgage

A participation mortgage allows the lender to participate in the project by investing funds and realizing a return. Another type of participation mortgage is one in which two or more lenders each fund a portion of the loan.

What type of professional must an investor use to conduct a tax-deferred exchange?

A qualified intermediary

The sales price, acquisition costs, and capital improvement costs (such as renovations or additions) of a property combine to make up what?

Basis Basis is the cost of a property and includes the sales price, acquisition costs, and capital improvement costs (such as renovations or additions).

Which of the following is an example of a residential property?

Condo

Real estate investing may be done individually, in partnerships, or through what other means?

Corporations

Malcolm purchased an old convenience store, and after renovations will open a small vegan grocery. He paid $517,000, of which $417,000 was for the building, and renovations cost him $107,000. What does the amount $524,000 represent?

Depreciable basis The acquisition cost of an investment property plus any improvements or renovations is the investment's depreciable basis.

John sells his single-family home and purchases a new home for his family to reside in.Marcus owns a single-family home, but rents it out to a co-worker while he is on an extended two-year military tour overseas.Donald sells an apartment complex and purchases a new complex in a different part of the city.Which of these consumers is most likely to take advantage of a 1031 tax-deferred exchange?

Donald Remember, the property must be held for investment or business purposes to qualify for a 1031 tax-deferred exchange.

Which method to estimate a business's value examines the ability of the business to generate income?

Income Analysis

mortgage REIT

Invests in real estate debt, including mortgage-backed securities Ex. Alistair invested in both mortgage REITs and equity REITs.

What is a leasehold mortgage?

It is a long-term estate for years where the interest in the estate is pledged to the lender instead of the property.

What is borrowing money to finance an investment known as?

Leverage

Sam recently purchased some investment property by borrowing money to fund most of the purchase. What is Sam's investment?

Leveraged

Daniel purchased a home in January of 2010 and then sold the property in October of 2014 for a gain of $5,500. What type of capital gain is this?

Long-term

Which type of retail space usually has businesses offering general merchandise and fashion and is typically enclosed with inward-facing stores connected by a common walkway?

Mall

illiquidity

Not easily converted to cash Ex. One feature of real property is its illiquidity; unlike other assets, it is not considered a liquid asset because it cannot be sold quickly in the event that cash is needed.

Flynt has a loan for a shopping center and is required to pay not only his mortgage payment but a percentage of the income he earns from the shops. What kind of a mortgage is this?

Participation A participation mortgage allows the lender to participate in a project by investing funds and realizing a return.

What type of real estate investment must distribute 95% of its income to beneficiaries?

Real estate investment trust

What type of investment strategy is most similar to a 1031 tax-deferred exchange?

Rolling over funds from one IRA into another The 1031 exchange is similar to rolling over retirement funds the investor rolls over the capital gains from the sale of one property into the purchase price of the next property, deferring (but not avoiding) taxes on that gain.

1031 tax-deferred exchange

Section 1031 of the Internal Revenue Code allows the owner of real property to sell that property and then reinvest in a "like-kind" property and defer paying any capital gains taxes; strict IRS rules regulate this type of exchange Ex. Real estate investors can take advantage of the 1031 tax-deferred exchange to defer capital gains taxes when selling a property, provided the money is rolled into another "like" purchase

Blane owns a barbershop. He polls his customers and learns that they tend to come from less than a mile away. That's probably because Blane's store is in which type of location?

Strip Mall

liquidity

The ease with which an asset is converted to cash Ex. The asset with the greatest liquidity is cash because it doesn't need to be converted in order to be spent.

You have a new investor client who wants to purchase a high-rise downtown. Which of the following items related to financing is the LEAST important for the two of you to consider?

The operating hours of the financial institution you'll use