Real Estate 410 - Exam 1 UW Madison: Bill Camp

what is real estate?

is used to refer to things that are not moveable such as land and improvements permanently attached to the land.

what is real property?

is used to refer to ownership rights associated with real estate -- real estate with bundle of rights.

why does real estate not include personal property?

personal property is moveable such as cars, furniture, and moveable fixtures. personal property is not permanently fixed therefore it does not fall in the category of real estate

what is meant by an estate?

Estate is used to denote a possessory or potentially possessory interest in real estate. However, not all interests in real property are estates. Ownership can be quite different from possession and a variety of legal factors affect the ownership rights associated with real estate. The economic benefits expected by lenders, investors, and other parties in real estate transaction are affected by these legal factors.

what are property rigths?

the right of a person to the possession, use, enjoyment, and disposal of his or her property

what does interest mean in real estate?

interest is a broad legal term to denote a property right. The holder of an interest in real estate enjoys some right, or degree of control or use, and in return, may receive payment for the sale of such interest.

what is a fee simple estate?

means the complete ownership of rights. Property owner has the complete bundle of rights (i.e. there are no tenants with occupancy rights).

what is a lease?

A contract in which the rights to use and occupy land, space, or structures are transferred by the owner to another for a specified period of time in return for a specified rent

what is leased fee interest?

the ownership interest held by the lessor (landlord), which includes the right to receive the contract rent specified in the lease plus the reversionary right when the lease expires

who has a leased fee interest?

the landlord owns the "leased fee interest " of a rented/leased property. (i.e the underlying "fee interest" except that its subject to the "lease" contract)

what does leasehold mean?

"the right held by the lessee (tenant) to use and occupy real estate for a stated term and under the conditions specified in the lease"

who has a leasehold interest?

the tenant has the "leasehold" interest in real estate (i.e. the tenant "holds" the "leased" property) also known as a "leasehold estate"

what is an easement?

the right to use another's land for a stated purpose

what is a utility easement?

a utility easement allows utility companies to route gas, water, electrical, sewer, cable, internet or other utilities across a property.

what is an access/driveway easement?

an access easement is commonly used for adjacent parcels to share a common access.

what is a restrictive covenant (deed restriction)?

covenants that impose restrictions on land use; created at conveyance of land to a new owner

what are some examples of restrictive covenants?

- height restrictions for structures

- minimum floor area

- no freestanding structures

- no chain-link fences

- no RVs or boats parked in view of the street

- no cars regularly parked in the driveway

- no garage door facing the street

- required architectural review

- no external antenna, satellite dish or clothesline

- required use of professional lawn service

what is a lien?

an interest in the property as security for an obligation.

what does a lien do?

it is a charge against property in which the property is security for payment of the debt. Upon sale of the property, any lienholder's debt is repaid from the sale proceeds first, before any sales proceeds go to the property owner

what are the lien types in order?

1. Property tax lien

2. Mortgage lien

3. Mechanics lien

4. Judgement lien

what is a property tax lien?

also called assessment lien, a tax is placed on real estate for unpaid real estate taxes.

what is a mortgage lien?

mortgage liens provide the lender legal security ("collateral") that makes typical real estate mortgage lending possible.

how do mortgage lenders ensure no other lien takes priority over their lien?

A mortgage lender could enforce a "first mortgage" or "senior debt" which is a loan that has first priority in repayment.

A "second mortgage", or "junior loan", or "mezzanine loans" are filed after the first mortgage, so any claims are repaid only after the first mortgage holder is repaid

what is a mechanics lien?

A contractor who performs construction or other work on a property, can file a mechanics lien as security until receiving payment for the work completed.

what is a judgement lien?

is a lien placed usually as a result of some court action.

who do judgement liens usually relate to?

typically result from something related to the property owner, not something related to the property itself.

what is an example of a judgment lien?

if you lose a lawsuit, but don't have the money to pay the judgement, the court may order that a "judgement lien" be placed on your property to secure eventual repayment.

what is a deed?

a written argument, conveying interest in the property that transfers a title from one property owner to another?

what is a title?

A written agreement, conveying ownership over a property.

what is the difference between a deed and a title?

deed conveys interest, title conveys ownership. A deed transfers the title from one property owner to another.

what is a grantor?

a person or entity conveying (selling) real property.

what is a grantee?

a person buying or recipient of real property.

what is a fixture?

an article that was once personal property but has since been installed or attached to the land or building in a rather permanent manner so that it is regarded in law as part of the real estate.

what are a few rules for determining when something becomes a fixture?

- manner of attachment

- character of the article and manner of adaptation: custom screens or storm windows

- intention of the parties (dominant rule): kitchen appliances in a single-family residence vs appliances in an apartment

- relation of the parties: fences and other agricultural improvements, items installed by tenant in a residence

what are the four types of government powers in real estate?

1. eminent domain

2. police power

3. taxation

4. escheat

what does eminent domain mean?

government can take your property for the benefit of the public welfare

what does police power mean in real estate?

the right to regulate land use. this can be done through zoning rights, health safety standards general public safety, and city planning.

what does taxation mean in real estate?

the right to tax property, in either real estate taxes or impact fees

what does escheat mean?

the right to take ownership when no other owner is identified

define commercial real estate?

commercial real estate produces income... and hopefully generates returns on investment to the owners and other stakeholders

what is property productivity based on?

property productivity is based on the income a property can generate based on: current and future income

what is value based on in real estate?

value is based on the income productivity. Income is rent less expenses, and property appreciation is expected income increasing over time.

what are the four main property types or "food groups" of real estate?

1. office

2. industrial

3. retail

4. residential

what are other property types in real estate other than the main four?

lodging, special purpose, healthcare, self storage, infrastructure, recreational

what are two institutional real estate property types that do not generate income?

universities and government buildings

what does the income proforma organize?

a property's productivity into income, expense, net operating income, and cash flow generating statement representing all cash flow for a given property.

draw out a generic income pro forma statement

Gross Rental Income

(+) Expense Reimbursement

(+) Miscellaneous Income.

= Gross Potential Income (GPI)

(-) Vacancy Loss

(-) Credit Loss

(-) Concessions.

= Effective Gross Income (EGI)

(-) Operating Expenses

(-) Real Estate Taxes

(-) Insurance

(-) Management Fee.

=Net Operating Income (NOI)

(-) Tenant Improvements

(-) Leasing Commissions

(-) Capital Expenditures.

= Cash Flow Before Financing (CFBF)

(-) Financing Costs/Debt Service

=Before Tax Cash Flow (BTCF)

(-) Tax Liability.

=After Tax Cash Flow

what does gross potential income (GPI) mean?

it means the maximum income that a property can produce

what is loss to lease?

the difference between the market rent and lease rent

what are some sources of gross potential income?

- rent

- rent escalations (if any)

- expense reimbursements

- miscellaneous income

- parking, pet, vending, cell phone, etc.

vacancy and rent concessions include what?

vacancy, credit/collection loss, free rent, other

what determines effective gross income?

current and expected future market rent, current and future contractual rent, vacancy loss, credit loss, expense reimbrmsnet, miscellaneous revenue.

what are operating expenses in a proforma?

operating expenses are recurring annual cash expenses to operate the property.

operating expenses do NOT include?

mortgage payments,

depreciation or ammortization, capital expenditures

what is the formula for net operating income?

effective gross income (EGI) - operating expenses

why is NOI a critical component in valuing real estate?

NOI helps real estate investors project the income of a given property. It helps investors analyze how returns compare to costs of owning and operating that property.

does commercial property use loss to lease in income proforma?

commercial property does not use loss to lease due to the longer term leases

what are the key differences between gross potential income and gross rental income?

typically the difference between current market rents and in place rents and any reimbursements and/or other revenue.

industry leases are often times what type of leases?

net, double, or triple net leases.

a lease must contain in writing what?

- name of lessor and lesee

- description of premises (SF, unit)

- convey the premises

- lease starting date and term/length

- rental rate

what is a flat rent?

no rent change over lease term

what are step-up rents?

specified rent increases at specified times

what are indexed rents?

periodic rent adjustments (CPI)

how do rents adjusted based on revenue/sales performance work?

landlord may receive a percentage of sales performance, in either breakpoints or overages

what is a gross lease (mostly for apartment leases)?

all expenses are paid by the landlord

what is a modified gross lease/full service (many office leases)?

landlord pays expenses up to the expense stop. expenses are passed through to the tenant thereafter

what is a triple net (NNN) lease (most industrial and retail leases)?

all expenses are paid by (passed through to) the tenant, an exception may be property management or management fee

what is an absolute net lease (mainly used in single-tenant retail leases)?

tenant pays all expenses and capital improvement costs (single tenant leases)

what are the three purposes of a lease?

1. defines property income

2. acts as a risk management tool

3. provides administrative information

in a lease how does it define property income?

rent, other revenue, and expense reimbursements

how does a lease act as a risk management tool?

it defines what payments go where, including expenses, and insurance for example protecting landlord and tenant.

how does a lease provide administrative information?

it spells out hours of operation and tenant and landlord responsibilities

how do leases consider underwriting tenants?

landlords may investigate financial statements, audits, credit ratings, analyst reports, bank relationships and existing obligations

what are the general lease clauses?

- parties, dates, lenght

- base rent

- deposits

- condition

- allowable uses

- restrictions on assignment or subletting

- use of common areas and facilities

- responsibility for maintenance and repair

- restrictions on alterations or improvements

- construction of any expansion

- eminent domain and any consideration

- responsibility for payment of specified expenses by lesee and/ or lesspr

- insurance requirements

- lease renweal options

- estoppel

is a $1 worth more today than it is in a year?

a dollar is always worth more today than from a year from now because the opportunity cost of holding cash instead of investing rise due to inflation.

ordinary annuity begins when?

one period from today or year 1

how do we define "value" in valuation?

value is the most probable price which a property should being in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus

what are conditions for fair value?

- the buyer and seller are typically motivated

- both parties are well informed and well advised and actin in their own best interest

- a reasonable time to allow exposure to the market

- payment is made in terms of cash or other acceptable financial arrangements

- price represents normal conditions

what is a cap rate?

cap rates are a one year yield on your investment

what are the pros to the direct cap approach?

it is easy to calculate, commonly used, and easy to compare

what are the cons to the direct cap approach?

it stops NOI so it does not take into account cap ex, leasing commissions, or tenant improvements

what effect do changes in capital markets have on cap rates and property values?

rising/falling interest rates, change in return expectations, future expectation of real estate value, capital availability.

how does supply and demand for real estate affect cap rates and property value?

occupancy and rental income assumptions, other impacts to revenue, change to risk tolerance.