Real Estate Question Review

A building owner charges net rent of $20 in the first year, $21 in the second year, and $22 in the third year, but is providing six months of free rent in the first year as a concession. Using a 10 percent discount rate, what is the effective rent over the three years?

$17.28 https://quizlet.com/331815848/ch-9-flash-cards/

What is the effective net rent associated with this schedule assuming a discount rate of 10%? Choose one from:

$18.19

Expenses for a 1,000 square foot office space are $6.00 per square foot. The lease specifies an expense stop of $5.40. What is the total expense paid by the landlord?

$5,400

A 1,500 square foot office space is leased at $12.00 square foot. The space is vacant one month out of the year. Office expenses are $6.50 per square foot and an expense stop is set at $6.00 per square foot. What is the annual net operating income?

$7,500 Calculation: Expense: $6 x 1500sqft /12months *12 months = 9000 Rent: $12 x 1500sqft /12months *11 months (vacant one month) = 16500 $16500-$9000 = $7500

The limitations of cap rates for valuation

- Property that is not comparable - Property that is not stabilized

Four major indicators to consider

1. Absorption (take-up) of new space (demand) 2. Quantity of new construction starts/completions 3. Vacancy rate (combination of demand and supply) 4. Market rent (also equilibrium variable, price of space)

You have the following information about a property and its mortgage. • NOI=$3M • DSCR=1.25 • Annual Operating Expenses=$0.75M • Property Gross Income=$4M • Average Market Occupancy=93% (7% vacancy) Calculate the Break even ratio for the property and determine whether it would make a good investment based on this ratio.

1. Calculate the debt service using the DSCR. a. DSR=NOI/Debt Service b. 1.25=$3M/Debt service. Debt service=$2.4M 2. Solve for Break Even Ratio a. BER=(Debt Service+Op. Expenses)/Property Gross Income b. BER=(2.4M+0.75M)/4M c. BER=78.75% 3. Evaluate whether the property is a good investment a. The property is a good investment based on this metric, as it's breakeven ratio is still less then 100%-(market vacancy+5% buffer), which would be 88% in this situation

Jones Property Trust reports the following financial info, on a per share basis: • GAAP NI (EPS) = $5 • Depreciation and Amortization = $3.50 • Dividend Paid = $6.00 • Debt = $60, with the average interest rate of 7% • Estimated share price premium to NAV = 10%, based on estimated private property market cap rate of 8% (weighted average firm level cap rate) 1. Determine the minimum dividend the firm must pay to shareholders to comply with REIT regulations 2. Calculate FFO 3. Determine aggregate NOI 4. Determine market price of a share of Jones stock

1. Minimum dividend is 90% of US GAAP net income 90% = $5 in this case 2. Funds from operations US GAAP net income + Depreciation = $5 + $3.5 = $8.5 (per share) Dividends are paid out of REIT cash flow, not accounting earnings 3. Aggregate NOIFFO ≈ NOI - Interest NOI ≈ FFO + Interest NOI ≈ $8.5 + ($60)(7%) = $12.7 4. NAV = Estimated private market property value - liabilities Property value = NOI/Cap rate = $12.7/8% = $158.75 NAV = $158.75 - $60 = $98.75 Stock price @ 10% premium = $98.75(1.10) = $108.63

Example of FFO, AFFO, NAV • Middlepoint Industrial Property Trust reports the following financial information, on a per-share basis: - GAAP Net Income [Earnings per share, EPS] = $4.00 - Depreciation and Amortisation (GAAP) = $3.00 - Dividend paid = $4.75 - Debt = $50, with and average interest rate of 7% - Estimated share price premium to NAV = 10%, based on an estimated private property market cap rate of 8% (weighted average firm level cap rate)

1. Minimum dividend is 90% of US GAAP net income90% ($4) = $3.60 (per share) 2. Funds from operations US GAAP net income + Depreciation = $4 + $3 = $7 (per share) Dividends are paid out of REIT cash flow, not accounting earnings 3. Aggregate NOIFFO ≈ NOI - Interest NOI ≈ FFO + Interest NOI ≈ $7 + ($50)(7%) = $10.50 4. NAV = Estimated private market property value - liabilities Property value = NOI/Cap rate = $10.50/8% = $131.25 NAV = $131.25 - $50 = $81.25 Stock price @ 10% premium = $81.25(1.10) = $89.38

Waterfall system of PE investing in real estate can be summarized as follows

1.) Return capital to fund investors; 2.) Pay preferred return to fund investors (e.g. 9%); 3.) Split any remaining profits 70-30 until the first hurdle rate has been reached; 4.) Split any remaining profits 80-20 until the second hurdle rate has been reached; 5.) Etc.

You are a real estate developer in the Ithaca market, considering a new office development. You observe that office properties currently trade at a 6% cap rate. Your cost of developing an office property is approximately $300 per square foot. Rents are currently $20 per square foot. By what percentage can rents fall before it becomes unprofitable for you to proceed with the planned development project?

10% Explanation: Cap rate= NOI/Value of Property 6% = NOI/300 NOI = $18 18%*1.1 = 20 Ps: Higher cap rate represents higher risk

Determine the minimum dividend the firm must pay to shareholders to comply with REIT regulations, when GAAP NI (EPS) is $5 and GAAP Depreciation and Amortization is $3.

90% * $5 = $4.50 per share

A borrower takes out a 30-year mortgage loan for $250,000 with an interest rate of 5%. What would the monthly payment be?

=PMT(0.05/12,30*12,250000,0) c. 1342

What is one result of prepayment penalties? a. The yield to the lender increases b. The yield to the lender decreases c. The tenant needs to pay a larger proportion of the loan earlier than later d. The lender has the jurisdiction to change the interest rate of the loan .

A

Example of growth rate

A property is expected to sell for $20,000 in 5 years with the buyer's u=.14 and g=.05. For years 1-5, what is the owner's expected cash flow growth rate given CF1 = 1,000? CF6 = (20,000)(.09) = 1,800 CF5 = 1,800/1.05 = 1,714 (at new investor's growth rate) Expected CF5 = (1,000)(1+g)^4 = 1,714 g = .1442 (implied growth rate for original investor)

Which of the following are characteristics of REITs? (select all that apply) a. Taxable of income is passed through the shareholder level b. Revenue must come primarily from real estate investments c. As operating companies, REITs must develop and manage commercial real estate d. Required to distribute 50% of taxable income as dividends e. Are commonly valued using FFO and NAV

A, B, E

AFFO

AFFO ("Funds Available for Distribution") Start with FFO, then: Deduct: Recurring capital improvement expenditures Adjust for: Fluctuation in rents Deduct: Amortization of debt principal

Which of the following is TRUE for a net lease?

All expenses are paid by the tenant

Given that every other factor is equal, which of the following ARMs will have the lowest expected cost?

An ARM with no caps or limitations https://quizlet.com/324561349/chapter-5-flash-cards/

In order to calculate the APR for an ARM, you must,

Assume the worst case scenario and use interest rates at their highest possible point over the life of the loan

Which of the following is not a reason to use an adjustable-rate mortgage to finance real estate acquisitions? a. Ability to stretch equity across multiple properties b. Having constant periodic payments c. Leverage debt to achieve higher returns d. Ability to afford more expensive property

B. Because adjustable rate mortgages change periodically based on the implied forward rate. Fixed-rate, fixed-payment mortgages are preferred by many because the periodic payments do not change in value form period to period.

John works at a bank that is considering lending a CRE investor. He is tasked with calculating the debt service coverage ratio (DCR) for the investor. Which formula should he use and what is the commonly required value when underwriting the loan? a. DCR = Debt service / NOI; DCR ≥ 1.2 b. DCR = Debt service / NOI; DCR < 1.2 c. DCR = NOI / Debt service; DCR ≥ 1.2 d. DCR = NOI / Debt service; DCR < 1.2

C

To arrive at FFO from GAAP NI, you must do all the following except: a. Add back depreciation expense b. Add back preferred stock dividends c. Deduct fluctuation in rents d. Deduct net gains from property sales

C

Which is NOT true regarding REITS? a. They are chartered as a corporation or trust b. Their revenue must primarily come from real estate investments c. They are required to distribute at least 80% of their taxable income d. All these statements are correct

C

Which of the following is NOT true of a REIT? a. REITs have a value based on business model b. They can be public or private c. Most REITs are mortgage REITs d. Tax code provides them with a pass through vehicle

C

Which of the following is not a reason why debt is used in real estate? a. Spreads investment cost over time b. Lower equity commitments upfront c. Lower interest payment d. Tax shield

C

Example

CF1 = $1,000 u-owner = .14 g-owner = .05 Holding period = 5 years What will the property sell for in 5 years assuming u and g are the same for buyer and seller? CF6 = 1,000(1.05)5 = 1,276 PV5 = CF6/(u-g) = 1,276/.09 = 14,178 What if the property sells for $18,000 and the buyer's discount rate is 15% - what is the implicit expected growth rate? PV5 = CF6/(u-g) u-g = 1,276/18,000 = .0709 0.15 - 0.0709 g = 7.91%

Cap Rate

Cap rate = Annual net operating income / Property price Three major factors determining a cap rate: 1. Opportunity cost of capital 2. Growth expectations 3. Risk

Cap rate

Cap rate = discount rate - growth rate Cap Rate = NOI / Price

Estimating Value using Cap Rates

Capitalization Rates (almost always called "cap rates") are calculated as: Cap Rate = first year cash flow / purchase price which can be rearranged into a valuation formula: Value = first year cash flow / cap rate Value = NOI / cap rate

Rank the yields to the lender from highest to lowest. Assume the same loan criteria for each and that each loan does not have any loan fees. 1. Loan is repaid quarter-way to full term with 3% prepayment penalties 2. Loan is repaid half way to full term 3. Loan is repaid at full term 4. Loan is repaid quarter-way to full term a. 3,2,4,1 b. 3,2,1,4 c. 4,1,2,3 d. 1,4,2,3

D

Which of the underwriting criteria is not recommended? a. LTV should be below 75% b. Earnings before tax cash flow should always be positive c. DSCR should be higher than 1.2 d. BER should be above zero

D

Which of the following is false about REITs? a. They are required to distribute at least 90% of their taxable income b. They perform like small cap stocks in the short term c. They are typically valued using FFO and AFFO multiples d. The size of the REIT market in the US is about 500 REITs and about $2 trillion in market capitalization

D - actual market size is about 220 REITs w. market cap at about $1 trillion

Debt Coverage Ratio

DCR = NOI / Debt Service

Choose one from the options below. A basic lease resembles a

Debt contract: A series of predetermined payment amounts

The primary objective of the underwriting process is to evaluate:

Default risk

Which of the following is not an argument against international investment in RE

Exporting real estate expertise

FFO

FFO ("Funds From Operations") Start with GAAP net income, then Add back: Real property depreciation expense. [Add back:Preferred stock dividends and distributions to OP unit-holders.] [Deduct: Net gains from property sales and extraordinary items.]

A property has $100 million in NOI, a cap rate of 5%, a tax rate of 35%, and $5 million in debt at 8% yield. What is the FFO?

FFO = Net Income + Depreciation + Preferred Stock Dividends - Net Gains from Property Sale Property value = NOI/Cap rate NOI = $100 million NOI ≈ FFO + Interest $100 million = FFO + 5*0.08 FFO=99.6 million

Consider the financial statements for a REIT, given below. Price multiples for comparable REITs are about 10 times current funds from operation (FFO). What price does this suggest for the REIT's shares if 1,000,000 shares are issued? Net Revenue $ 20,000,000 Less: Operating expenses 9,800,000 Depreciation and amortization 4,400,000 Income from operations 5,800,000 Less: Interest expense $ 1,280,000 Net income $ 4,520,000

FFO = Net Income + Depreciation + Preferred Stock Dividends - Net Gains from Property Sale FFO = $ 4,520,000 + $4,400,000 FFO = $8920000 Share Price = FFO x (Price multiples for comparable REITs are about X times current funds from operation) / # of shares Share price = $8920000 x 10 / 1,000,000 =$89.2

Company Facts: • GAAP Net Income (EPS) = $10.00 • GAAP depreciation and amortization = $2.00 • Debt of $100 with average interest rate of 5% • Preferred stock dividends = $1.00 • Net gains from property sale = $5.00 Calculate (1) FFO and (2) Aggregate NOI

FFO = Net Income + Depreciation + Preferred Stock Dividends - Net Gains from Property Sale FFO = $10 + $2 + $1 - $5= $8 Aggregate NOI: FFO + Interest AFFO: $8 + $100*0.05 = $13 FFO = NI + D&A + Preferred Stock Dividends - Net Gains from Property Sale FFO = 10 + 2 + 1 - 5 = $8 Aggregate NOI = FFO + Interest Aggregate NOI = 8 + (100*5%) = $13

Prepayment penalties increase the lender's mortgage yield and discount points decrease it.

False

The effective interest rate on a mortgage will always be higher than the stated rate of the loan

False

The sales comparison approach to appraisal is preferred because it is the only objective appraisal approach.

False

Value-added funds invest in properties with stable rent roll and with moderate NOI upside potential.

False

International RE investments are inherently more risky than domestic. Therefore investors need to apply a lower discount rate to value these investments.

False Higher risk needs a higher discount rate to protect lenders

Origination fees are tax deductible as an interest expense

False https://quizlet.com/267863699/chapter-4-flash-cards/

Because REITs can be classified as either a corporation or a business trust, they must pay corporate taxes on their taxable net income.

False - taxation on income generated from REITs is passed through the shareholders who pay taxes on that income based on their tax bracket. This allows them to avoid double taxation.

You are looking to acquire an office building. You take out a $1 million loan for 10 years amortizing over a 30-year period with monthly payments. The interest rate is 5%. What is the OLB after 3 years?

First, solve for PMT. To get this, PMT (5/12, 30*12, 1M,0)=-$5,368.21 Then, get PV after 3 years, PV(5/12,360-3*12,-5368.21,0)=$953,434.8

The Asset Market

For the ownership of the real property the property market Supply: Investors wanting to sell Demand: Investors wanting to buy Yield Property prices and Cap rates the property price = the present discounted value of all future rents

The Market for Space

For the usage (or right to use) the real property the rental market Segmentation: property type and location Supply: Property Owners(Landlords) Demand: Property Users(Tenants) Yield Rents (e.g. $/SF) and Occupancy

REIT has an NOI of $15 per share and currently pays a dividend of $10 per share. The dividend is projected to increase by 4 percent by next year and continue to increase by 4 percent per year thereafter. Assuming that the blended cap rate is 9.75 percent and the required rate of return is 10.5 percent, what value would the Gordon Dividend Discount Model provide?

Gordon Dividend Discount Model Price = D0 x (1+g)/ (Rs - g) =current dividend x (1 + increased percentage) /(rate of return - increased percentage) Price = 10 x (1 + 0.04)/ (10.5% - 4%) = $160

Which of the following is not an argument to invest in international RE?

Information costs

Which of the following is TRUE concerning the capitalization rate?

It expresses relationships between income and property value at a specific point in time

IRR Pitfalls Disadvantage

It ignores the actual dollar value of comparable investments. It does not compare the holding periods of like investments. It does not account for eliminating negative cash flows. It provides no consideration for the reinvestment of positive cash flows.

What does net absorption mean in the context of a real estate market analysis?

It measures the amount of new leases signed during a time period, net of moves within the same market.

Loan to Value Ratio

LTV = Mortgage amount / purchase price

Most large Equity REITs are vertically integrated firms:

Land acquisition -> Development -> Ownership ->Operation -> Tenant services

You are an investment analyst researching acquisition opportunities in Manhattan. Which major indicator would factor most into your recommendation to find the property with the strongest demand side activity?

Market rent

The threshold values for underwriting commercial mortgages are typically as follows:

Maximum 75% LTV DSCR(DCR) of 1.2 or more BER less than 100% minus (market vacancy + 5% buffer), EBTCF>0

Find the mortgage payment: Loan amount: 1 M Loan term: 10 years Partially amortizing over 25 years 6% annual effective rate Quarterly payments What is the quarterly loan amount?

N=25*4=100 I/Y=6/4=1.5 PV=-1M FV=0 Cpt PMT Answer=$19,370.57

What determines u? How does it relate to g?

No growth u = l + i + RP where u = required return (discount rate), l = compensation for liquidity and i = compensation for inflation Non-zero growth rate u = K + g and K = l + i + RP where K = initial yield (cap rate) and g = growth Valuation: Value0 = PV0 = CF1/(u - g)

Operating Expense Ratio

OER = Operating Expenses / EGI

Growth PV calculation

PV0= CF1/(u-g)

No growth PV calculation

PV0= CF1/u

A borrower takes out a 30-year mortgage loan for $250,000 with an interest rate of 5% and monthly payments. What portion of the first month's payment would be applied to interest?

Payment = Interest + Principle =PMT(0.05/12,30*12,250000,0) Number of periods remaining = 30*12 - 1 =PV(0.05/12, 359 ,C28,0) =250000-PV first month Difference between monthly payment and principles $1042

Net Operating Income

Potential Gross Income - Vacancy - Fixed and variable operating expense

The supply of space is: (A) Inelastic in both the short run and the long run (B) Elastic in both the short run and the long run (C) Relatively inelastic in the short run, and highly elastic in the long run (D) Relatively elastic in the short run, and highly inelastic in the long run

Relatively inelastic in the short run, and highly elastic in the long run

Consider a building with a very long economic life. Assume at the end of year 6, NOI will be $80,000 and is expected to grow at a rate of 2 percent per year. Your company's required rate of return is 12 percent. As part of your analysis, you must calculate the reversion value (Sales Price) at the end of year 5, which would be

Sales Price = NOI/(u-g) Year 6: CF6 = $80,000 u=12% g=2% PV5 = CF6/(u-g) PV5 = $80,000/(10%) PV5 = $800,000

Effective rent calculation

Step 1: Compute net present value (NPV) Step 2: Convert to annuity (PMT) Don't forget to divide the rate and times the terms by the payment frequency (monthly, quarterly)

A borrower takes out a 30-yr mortgage loan for $100,000 with an interest rate of 6% plus 4 points. What is the effective annual interest rate on the loan if the loan is carried for all 30 years?

Step 1: PMT =PMT(0.06,30,100000,0) Step 2: Rate =RATE(30,B36,96000,0) =6.4% https://quizlet.com/372610465/ch-4-real-estate-investments-flash-cards/

A borrower has a 30-yr mortgage loan for $200,000 with an interest rate of 6% and monthly payments. If she wants to pay off the loan after 8 years, what would be the outstanding balance on the loan?

Step 1: PMT =PMT(0.06/12,30*12,200000,0) Step 2: PV =PV(0.06/12,(30*12)-(12*8),PMT,0) =$175,545 175,545

Which of the following is NOT part of the data on new supply that you need in a real estate market analysis?

The amount of space that has been completed two years ago.

For which of the following reasons would a business prefer to own space rather than lease it?

The business demands specialized or unique facilities

Which of the following closing costs DO NOT increase the lender's effective loan yield?

Title insurance charges

What is one reason a lender may want an adjustable rate mortgage?

To manage interest rate risk

A "catch-up" provision is a form of promoted interest designed to achieve a certain split of return between GP and LPs after a preferred interest has been provided.

True

Demand for retail space depends on total population, its composition, and on purchasing power

True

With a negative amortizing loan, the borrower will end up with a loan balance at the end of the loan that is greater than the original loan balance

True

Which of the following is not a reason why lenders like to lend against real estate collateral:

Upside potential from uplift in property value

The difference between the existing stock of space and the equilibrium occupancy is known as:

Vacancy

Current rent averages $16 per square foot. Building cost is $300 per square Capitalization rates are 6%. Should the developer build? Explain your answer with reference to the replacement cost level of rent.

Value: $300 NOI: $16 Cap rate: 6% Value = NOI / cap rate $300 = NOI / 6% NOI = $18 No

Choose one from the options below. Which is NOT a typical lease structure we discussed in class:

Variable rent

Assuming all APRs equal, the effective interest rate on a loan is highest when:

d) Points are charged and the loan has a 30-year maturity but is prepaid in five years

Which loan in the above table does the lender have the lowest interest rate?

https://quizlet.com/373006069/ch-5-real-estate-investments-flash-cards/

Major REIT constraints: U.S.

• Five or fewer rule: no five or fewer individuals may own more than 50% of the equity, and at least 100 shareholders. • Real Estate Pure Play: 75% or more of the assets must be real estate, mortgages, cash, or government bonds, and 75% of the gross income must be derived directly or indirectly from real property. • Passive investment: income must be derived from primarily passive sources rather than the sale of properties. Sales of properties that have been held by for 4 years and are less than 10% of the assets are exempt. • Earnings payout requirement: >=90% of the REITs income must be distributed as dividends.

Why create CMBS?

• Mortgage lender originates loans until their capital base is exhausted • What to do? - Lender then packages a bundle of these loans together - Each loan meets certain standards and requirements regarding LTV, DCR, no prepayment, fully amortizing, 5-year terms etc. - That package of loans is then sold to a third party, ownership interests traded in the secondary market - Mortgage lender can use sale proceeds to originate new loans

• Lender has $100 million capital • Can make 10 mortgages of $10 million each, for 5 years • Assume you receive 8% interest ($8 million) each year for the next 5 years, when your capital will be returned • So you sit and wait for 5 years... • Or you take that mortgage pool and sell it on... booking sales proceeds which can be used to originate more loans

• What if you can sell the loan pool at 7%? • Net Profit = Sale Price - Loans Made - Costs (say 1.5% of sale price)= $104.10 m - $100.000 m - $1.56 m ≈ $2.54 million • Do this every quarter: - Annual profit: $2.54*4 ≈ $10.15 million - Quadruples origination fees over the year for $400 million of loan originations at 20 basis points = additional 800,000 • So packaging yields approximately $10.95 million per year (10.15 million + extra 800k in fees for new loans) versus $8.2 million year 1, considering origination fees, and $8.0 million thereafter for holding the simple mortgage pool