Real Estate Midterm

Appraiser

private, third-party, hired by banks or insurance companies, used for loans

Assessor

government/town/city, give value to calculate real estate taxes

Annual Tax=

(price /1,000) x Tax Rate

Common Area Maintenance (CAMS)

landscaping, plowing, lights, parking lot repairs; if your space represents 25% of entire commercial space, you pay 25% of total charges

Limited Liability Corp (LLC)

Unlimited number of “members” allowed, entity is not taxed, instead members report their share of profits/losses on their personal tax return

Conforming (zoning)

matches all current local zoning rules

Nonconforming (zoning)

does not follow current zoning rules

Grandfather status

allowing you the current zoning or building construct, even thought the law or zoning has changed

Seller’s market

demand is high, but supply is low; prices increases

Buyer’s market

demand is low, but supply is high; prices decrease

Initial equity

What comes out of your pocket

Ancillary Income

laundry, parking, vending machines, signage, etc.

Turnover rate=

vacancy/units (average= 40%)

Effective gross income=

gross revenue - vacancy adjustment + ancillary income

Net operating income=

revenue - expenses (before the mortgage)

debt service coverage ratio=

NOI / annual debt service (higher is better)

Loan to value =

Loan / value (lower is better)

Commercial banks minimum DSCR

1.2, “wiggle room” to pay back debt, <1.00 DSCR pay out of pocket to make mortgage

Class A building

newest, modern, high-quality, offices: management, security, parking garages, multifamily: gym, pools, outdoor space

Class B building

<4 stories, sacrifice amenities without sacrificing location and function, may have been class A when built

Class C buildings

functioninal, but rough finishes, basic amenities, older buildings, few modernizations/renovations

Class D buildings

multifamily: dangerous, high crime, poor schools, significant repairs “war zone”

Appreciation property

little cash flow, but high appreciation value in high quality areas, good tenants, Class A, Portsmouth

Cash Flow properties

Cash flow well, but don’t appreciate over time, need work, tough tenants, Class C/D

Cap Rate=

NOI/Market Value (cap rate increase, sale price decrease)I

IRR

discount rate that makes NPV=0

Commercial loan units

5+, office, industrial, multifamilu

Residential loan units

4 units or less, single family, multi less than or equal to 4

Residential loan typical term

30 year fixed

Conventional loan

not insured by federal government; PMI needed if down payment is <20%

Jumbo loan

higher price, wealthier loan above threshold, need strong credit more cash, larger down payment, higher rates

Private Mortgage Insurance (PMI)

insurance for the bank if you stop making payments on your loan; 0.25-2% of loan balance

ARM

fluctuating interest rates with fixed component, that go up/down with market conditions; level of risk invovled

Commercial loan typical term

25 years; 20-25% down

Balloon payment

occurs at year 10, owe remaining principal payment, and need to refinance

Recourse

the bank can go after personal assets if you fail to make payments

Nonrecourse

banks can take property and that is it; big companies, LLC

Payback period=

renovation cost/annual additional income

Rate of return=

annual additional income/renovation cost

Commercial NNN Lease

tenant pays the taxes, tenant also pays landlord insurance, also pays CAMS

Equity

ownership in property

Debt

ownership in mortgages or loans

Built to suit

secure long-term tenant before construction (low leasing risk)

Spec project

few/no leasing commitments before starting construction (high leasing risk)

Participation rent

the % of sales over break even point that the tenant has to pay in addition to the base rent

Natural break even point=

base rent / participation %

Depreciation basis for residential

27.5 years

Depreciation basis for commercial

39 years

Before tax cash flow=

NOI - annual debt service

After tax cash flow =

before tax cash flow - income taxes