USP 152A Final

steps of appraisal process

1. ascertain physical & legal identification of property
2. identify property rights to be valued
3. specify purpose of appraisal
4. specify effective date of value estimate
5. gather & analyze market data
6. apply techniques to estimate value

cost approach

determine construction cost of replacing the building & adding it to the cost of land

rationale of cost approach

rational buyer won't spend more than cost of land + cost to build structure

when is cost approach most reliable?

when structure is relatively new & depreciation doesn't present serious complications

sales comparison approach

based on data provided from recent sales of properties highly comparable to the property being appraised

rationale of sales comparison approach

informed investor would never pay more for a property than what other investors have recently paid for comparable properties

income approach

value of a property is related to its ability to produce cash flow

gross income multiplier (GIM)

sales price / gross income

potential gross income

all the potential income you'd make from rent assuming all space is occupied

effective gross income

all the income you'd make from rent of the spaces actually occupied (PGI - vacancies)

direct capitalization method

1.) NOI = GOI - operating expenses
2.) Value = NOI / cap rate

discounted cash flow method

investors will pay no more for a property than the present value of all future NOIs

discount rate

required internal rate of return for a RE investment based on its risk compared w/ returns earned on competing investments & other capital market benchmarks

Ranking of least risky to most risky investments

1. treasury bills
2. municipal bonds
3. mortgage backed securities
4. corporate bonds
5. real estate
6. common stocks

reversion value

resale price; present value of the terminal value

what brings abt lower market cap rates / higher property values?

1. unanticipated increases in demand for RE relative to supply
2. unanticipated decreases in interest rates
3. both 1 & 2

what brings abt higher market cap rates / lower property values?

1. unanticipated increases in supply of RE relative to demand
2. unanticipated increases in interest rates
3. both 1 & 2

cluster home developments

owners share "green space" in outdoor areas

zero lot line developments

contain single-fam & detached units; may be owner occupied or rentals

types of nonresidential properties

office
retail
industrial
hotel/motel
recreational
institutional

operating cash flow

summary of all cash inflows & outflows

base/minimum rent

initial rent that must be paid under the lease contract; specified dollar amount that may stay same of could change during lease term

flat rent

rent remains the same for lease term

step-up rent

rent will increase at specified time intervals and in specific amounts during the term of the lease

indexed rent

specified index used for basis of rent adjustment

percentage rent

rents partially based on tenant's sales volume; base rent + percentage of tenant's sales over certain breakpoint

overage rent

dollar amount by which the total rent exceeds the base rent

gross (full-service) leases

tenant pays rent only & property owner provides all services & pays all operating expenses

modified (full-service) leases

tenant pays rent that is lower than rent payable under a full-service lease. owner provides all services but recovers from tenant specific expenses identified in lease (typically highly variable ones)

non-operating expense pass throughs

ie: property taxes & insurance; owners believe bc they are from 3rd parties property owner can't manage them, so if there's sudden increase they can't recover them by raising rents. so they maintain such expenses should be passed through to tenants

leases w/ op-ex recoveries

tenants agree to pay lower rents than would be for full or modified service in exchange for agreeing to pay greater range of op-ex

single net leases

tenant pays rent & pays for all operating expenses identified in lease

double net / net, net lease

tenant pays rent & all op-ex, & owner passes through non-op-ex ie: property taxes & insurance to tenant

triple net / net, net, net lease

tenant pays rent & all op-ex, as well as property taxes & insurance, & certain recurring capital outlays for repairs, alterations, & modifications to interior of leased bldg space

common area maintenance (CAM)

tenants may pay pro rata share of expenses required to maintain common areas in campus; expenses related to common area maintenance of hallways, lobbies, etc that are usually pro rated & passed on to tenants

rentable area

total area that could be rented to a single tenant-user; total area on all floors & lobby excluding thickness of exterior walls, columns & protrusions, mechanical equipment closets, etc

usable area

if multiple tenants, each occupies own usable area on a floor

load factor

rentable area per floor / usable area per floor

anchor tenants

usually include very large dept stores or other retailers that achieve very high sales volumes & generate considerable amount of customer traffic

in-line tenants

Smaller retailers that hope to generate retail sales as a result of participating in the high shopping traffic, part of which is produced by the anchor tenants

CAM charges to in-line tenants

(total CAM expenses for property - contribution to CAM expenses paid by anchor tenants) / (total rentable area occupied by in-line tenants)

lease termination / "kick-out" clause

tenant must achieve certain level of sales per sq ft within specified period of time otherwise either property owner or tenant may terminate lease

co-tenancy clause

tenant require the continued presence of a certain anchor or other tenant as condition of making lease w/ property owner

anchor tenant & lender approval of major leases

anchor tenant may demand right to approve all major leases being negotiated between property owners new in-line tenants or other anchor tenants

signage clause

confers right to display a name inside and/or outside of the bldg or in the mall ways

exclusivity clause

limits the ability of the property owner to lease space in the building to competitors of existing tenants

non-dilution / radius clause

when exclusivity clause provided to tenants, property owner might require radius clause in exchange; tenants must agree not to lease any additional space in same market/trade area specifically defined within a certain radius of the property

excluded uses

many anchor tenants require that some uses be excluded within specified # of ft from their leased space bc parking/access to their location could be adversely affected

concessions & adjustments

free rents, reduced rents for affordable housing requirements, discounts for corporate accts, etc

4 questions of cash flow analysis

1. How much does it cost?
2. When do we pay it?
3. How much do we make?
4. When do we get it?

rules of cash flow analysis

1. more is better than less
2. sooner is better than later

5 elements of cash flow

1. interest rate (i)
2. number of compounding periods (n)
3. lump sum present value (PV)
4. periodic payment at equal periods (PMT)
5. lump sum amount received in future at end of last period (FV)

compounding

calculating cash flows into future
(1+interest)^n divided by period.

discounting

calculating PV today
1 / (1+interest)^n (period)

4 elements of mortgages

1. periodic interest rate (i)
2. number of compounding periods (n)
3. lump sum present value amount (PV)
4. periodic payment at equal periods (PMT)

nominal interest rate

the interest rate as usually reported without a correction for the effects of inflation

real interest rate

the interest rate corrected for the effects of inflation

ordinary annuity

payments or receipts occur at end of period

fully amortizing loan

pay rate > accrual rate
fully repaid at maturity

partially amortizing loan

pay rate > accrual rate
loan not fully repaid at maturity
making smaller incremental principal payments
pmts exceed interest due but not by enough to reduce amount owed to zero at maturity; portion of debt is paid w/ regular monthly pmts but on loan's maturity date, there is still outstanding balance so large lump sum pmt is made at maturity as well

interest only loan

pay rate = accrual rate
loan balance = amount borrowed (at maturity)

negative amortizing loan

pay rate < accrual rate
loan balance > amount borrowed (at maturity)
loan balance owed increases over time bc pmts made are < interest due

gross scheduled income (GSI)

gross revenue (all rent earned) + misc income

gross operating income (GOI)

gross scheduled income - vacancy & credit losses

net operating income

gross operating income - operating expenses

value formula

value = NOI / cap rate

cap rate

NOI / value (purchase price)
relationship between current NOI & present value; usually IRR is > cap rate

if cap rate goes down, value

goes up

if cap rate goes up, value

goes down

cash flow before taxes

NOI - annual debt service

debt service coverage ratio

NOI / annual debt service

cash on cash return

cash flow before taxes / equity

full service gross lease

landlord pays for pretty much everything; tenant only pays for utilities, common area maintenance, & insurance on personal property

triple net (NNN) lease

tenant pays for utilities, common area maintenance, & insurance

free & clear

no loan on property; no debt

levered income

includes annual debt service

unlevered income

all cash

soft costs

permits, fees, fluffy consultants; not actually bldg -- support system: architects, engineers, permits, insurance, property taxes, developer fees

Hard Costs

construction costs

contingency

unforeseen costs

financing cost

construction loan interest

yield on cost (NOI on cost)

NOI / total costs

internal rate of return (IRR)

- it's the rate of return that is earned on each dollarthat remains at risk in an investment.
- Calculation:

- calculated when NPV = 0

- tells investor what compound interest rate the return on a investment being considered is equivalent to;

real property

ownership rights associated w/ realty (land & all things permanently attached); real estate + bundle of rights

personal property

movable, personal possessions; ownership rights associated w/ personalty (all things, tangible, intangible that are movable; includes all things that are not realty)

estate

all that a person owns
based on rights, possession, & use
denote a possessory or potentially possessory interest in real estate.

freehold estate

complete ownership

fee simple estate

most complete form of ownership; holder is free to divide, sell, lease, or borrow against them as he/she wishes; little risk to lenders bc owner of estate or life of some other person

life estate

freehold estate that lasts as long as life of owner of estate or some other person; bc of uncertainty revolving around duration of life estate, marketability & value severely limited

remainder

exists when grantor of a present estate w/ less ownership rights than his/her own conveys to a 3rd person the reversionary interest he/she or his/her heirs would otherwise have win the property upon termination of the grantee's estate

reversion

- Exists when holder of an estate in land (grantor) conveys to another person (grantee) a present estate in the property that has less ownership rights than his/her own estate & retains for himself/herself or his/her heirs the right to take back at some time in future the full estate which he/she enjoyed before the conveyance.

- Can be sold or mortgaged bc is actual interest in property.

leasehold estate

An estate that gives the holder (tenant/renter) a temporary right to possession, without title

lessee

receives right to use property under a lease

interest

right or claim on real property, its revenues, or production

easement

non-possessory interest in land; right is for use of land for special purpose (Ex: rights of way for road access & utility lines; view easements)

abstract of title

summary of publicly recorded documents

title chain

previous owners of property

deed

the official physical document transferring ownership from grantor (seller) to grantee (buyer)

general warranty deed

Deed that offers the most protection in which grantor fully warrants:

- covenant that grantor has good title

- covenant that grantor has right to convey property (grantor actually owns it)
- covenant to compensate grantee for loss of property or eviction as result of a superior claim

- no encumbrances on title except those noted

- grantor warrants that the title he/she conveys to the property is free & clear of all encumbrances other than those that are specifically listed in deed

special warranty deed

limits covenant to ownership duration of current grantor
no guarantees on ownership of prior grantors