EXAM 1

classical land economincs value

is dervived from an asset’s utility and its scarcity

classical land economins periodic payment for space

determined by the cost of labor and capital in production

Neoclassical tradition value

determined by the intersection of supply (cost) and demand (utility)

neoclassical economist

Alfred marshall

value is greatly effected by

institutional arrangements imposed by governements

governement instititonal arrangements

land use codes, building codes

private groups

neighborhood covenants and restrictions

real estate investment and valuation decisions require

market analysis and the application of advanced financial techniques

real estate values are affected by

market and social instititutions

financial assets

stocks , bonds, and cash

real estate is a

finanical asset

real assets are

tangible assets (jewelry, housing)

real estate represents ? of the worlds wealth

50%

residential real estate represents ? of the U.S. wealth

75%

examples of alternative value concepts

market value, investment value, and mortgage value

market value

price a typical buyer would pay if the property were placed on the market

investment value

the price a particular investor is willing to pay, given the investors unique tax situation, financing oppurtunities , required rate of return , and expectations of the property’s future cash flows.

mortgage value

the present worth of the lenders rights to recieve a series of expected mortgage payments from the borrowers over a specific period, given then interest rate on the loan.

the vlaue of real estate is affected by

the expected future cash flows.

investors expect cash flow from

operations and the sale of the property.

value is affected by property

magnitude , timing , and the riskiness of the expected cash flows

risk defnintion

the possibility that actual outcomes will vary from what is expected.

risk averse

require greater expected returns for their willingness to bear more risk

risk neutral

require no additional compensation for additional risk

risk seeking

investors require less return as risk increases

ordinary annuity

mortgage payment

annuity due

monthly rental payment

net present value

present value of a projects cash inflows, minus the present value of cash outflows

cash flows are discounted at

the investors required rate of return

if NPV>0

the project exceeds the investors required rate of return

if NPV

th eproject does not meet the investors required rate of return

if NPV=0

the projects expected return equals the investors required rate of return.

internal rate of return

is the discount rate at which the present value of the cash inflows equals the present value of cash outflows

if the IRR is greater than the investors required return

the investment may be accepted

lenders yield

is the IRR that equates the loan amount with the present value of the payments to be recieved

the borrowers effective cost of borrowing is the

mirror image of the lenders yield

overall capitalization rate

the ratio between a propertys net operating income and its value

time-value-of-money

undestanding that individuals require compensation to forego receiving and using their money at an earlier date

time line

indicates the time periods , magnitude of the cash flows, and whether the cash flow is an inflow or outflow

amortization schedule

application of the fixed mortgage payment to interest and principal\`

investment strategy

is a plan that guides the investor

components of the investment strategy

investment philosophy , investment objectives, investment polices

charteristics of income property investments

property type, rental income , purchasers as investors, geographic scope

property type

apartments , hotels, office buildings , shopping centers, industrial buildings

income producing properties generate income for

their owners

contract rent

the rent specified in a lease

market rent

rent that can be obtained on the open market

potential gross income

total income , prior to expenses , that the property would produce in a year if fully rented

effective gross income

results if the reductions in income due to a propertys vacant space and collection losses are subtracted from the PGI

operating expenses

expenses owners typiclly incur each year in operating their property

net operating income

the amount of money left over after paying the expenses of operation but before paying the mortgage payment and income taxes

capital expenditures

non recurring expenses ( roof replacements and tenant improvements )

leasing cost

fees associated with releasing space

net sales proceeds ( reversion)

expected sales price

\-selling expenses

net present value NPV

expected cash inflows

\-expected cash outflows

NPV>= 0

accept

NPV

reject

capitlaization rate

NOI year 1 / inital investment

internal rate of return

discount rate at which the present value of the cash inflows equals the present value of the cash outlfows

when a mortgage loan is obtained the equity payment required at closing

is equal to the acquitsition price minus the loan amount

operating expenses ratio

operating expenses/ effective gross income

NOI

PGI

X vacancy rate

\-----------------

=EGI

\- operating expenses

\------------------------

\

stimulating real estate investments has been viewed as

economically desirable

stimulating home ownership has been viewed as

socially desirable

classes pf real property

personal residence, dealer property, trade or business property, investment property

dealer property

buying land and then selling it

investment property

unimproved land and property subjects to a net lease

types of income

active , portfolio, passive activity

active income

earned from wages, salaries, commisions, fees and bonuses

portfolio income

interest, dividends, and capital gains from stock, bonds and other financial security investments

passive activity income

income generated from trade and business activities it which the tax payer does not “ materially” participate

operating expenses are usually

tax deductible in the year they are incurred

capital expenditures

cash outflows that are used to purchase

or replace items that are deemed to be a significant component of the investment ( useful life greater than 1 year)

cost recovery period

period over which property improvements and personal property can be depreciated.

residential income property

27\.5 years

nonresidential income property

39 years

personal property

any tangible property , not permanently attached to the buildiing structure

straight-line rate

= 1 / recovery rate

tax credits

are allowances that are deductible directly from th etaxes owned

tax shelther

when cash recieved is not taxed due primarily to mortgage interest and deprication deductions to the taxable income.

a partial shelther

occurs when the taxable income is less than the before-tax cash flow

deep shelter

occurs when the taxable income is negative

capital gains

under 1997 tax rules are subject to a maximum 20 percent rate

ordianry income rate

maximum 39.6 percent rate

mehtods of deferring taxes on dispositon

installment sale, like-kind exchange, tax factors effecting home owners

installment sale

the seller allows the buyer to pay the purchase price over a number of years

like-kind exchange

owners may exchange their properties and aviod paying capital gains at the time of transaction

three requirements for a like-kind exchange

properties must by business or investment properties, be like-kind properites , and cash or personal property used to equalize the transaction is identified as boot

tax factors effecting home owners

tax exclusion is allowed each time a taxpayer sells a principle residence and meets the eligibility requirments

perfectly competitive market charterisitcs

product homogeneity, fre markets , perfect knowledge, indivual buyers and sellers cannot influence market prices, products can be divided and are mobile

market imperfections

such as high transaction cost, cause prices to often deviate from their market values

efficent markets

markets where investors quickly and accuratly include new relevant information when pricing the assets

most productive users can

afford the highest cost location

bid rent curve

rent recived relative to the distance from the market activity center

the most productive firms

are able to acquire the most desirable locations by bidding up the price

functions of the space market

allocate existing space among those who demand it

expand or contract space to meet changing conditions

determine new uses for land

vacancy

supply - demand

natural vancany

the long-run vacany rate in which supply and demand forces are in balance.

factors of demand housing

new household formation

age compostion

household incomes

mortgage credit conditions

prices of subsitute units

ownership cost

expectations for the future

seaonality

factors of supply housing

price of factors of production in construction

productivity

number of builders in the market

demolished property

credit conditions