FINA 210 Midterm Notes

Flashcards based on FINA 210 Midterm Notes, covering real estate industry, market analysis, accounting, tax, cash flow modeling, property valuation and investment process.

Personal property

Moveable, attached to owner, not land.

Real estate property

Permanently affixed to land.

Fee simple interest

Absolute ownership to utilize volume of property, only subject to government limitations

Leasehold interest

Right to use a property for a discrete period.

Zoning

Map designating property restrictions.

Eminent domain

Government can claim right to take property for their use from any landowner after compensation.

Easements

Right to access/transit property, granted by landlord (ex: utility).

Condominium ownership

Undivided ownership of common elements through tenancy in common (fee simple).

Office - Commercial Real Estate

Single-tenant or multi-tenant (ex: place Ville Marie).

Retail - Commercial Real Estate

Shopping (ex: rockland), power (large-format, medium-sized, value- oriented, ex: Wal-Mart), lifestyle centres (ex: Dix30), and street retail (ex: downtown).

Industrial - Commercial Real Estate

Warehouses, distribution centres, manufacturing, specialty.

Hotel - Commercial Real Estate

Classified by location, usage, level of services, amenities.

Direct Ownership - Single owner/proprietor

No separation between business and individual, unlimited liability (debts).

Co-ownership - Tax implications

Each owner can report their share of income/loss from property independently of co-owners.

Indirect Ownership

Entity holds title, ownership passes through entity, undivided interest.

Limited Partnership

Structure limits liability of partners + general partner who has unlimited liability.

Corporation

Owned by shareholders, BOD, no liability, double taxation.

REIT (Real Estate Investment Trust)

Entities organized as corporations limited in their investment program to real estate or mortgages, who provides tax benefits if you distribute more than 90% of cash flows.

Special-purpose entities (SPEs)

Holds/isolates single properties from an owner’s assets to protect.

Asset Management

Develop plan to maximize property value, exit strategies.

Portfolio Management

Buy and sell real estate to form a portfolio.

Brokerage

Matching buyers with sellers, marketing material.

Private Ownership - Syndications

Limited partnerships with unrelated investors or syndicators.

Public Ownership

REITS (aggregate property on behalf of public shareholders), and Real Estate Operating companies (REOCs, public companies that invest w/o using REIT structure).

Real Estate Investment - Goals

Risk vs. high return, sweat equity vs. turn-key, L/T vs. S/T, steady vs. high- growth.

Real Estate Investment - Constraints

Funds, willingness to borrow, time, level of expertise, partners.

Financing Environment - Types of Loans

Construction loan, mortgage loan, corporate loan.

Seller’s Market

More buyers than sellers so the price go up.

Buyer’s Market

More homes than buyers so prices drop.

Balanced Market

Buyer and sellers are equal, houses sell for fair value.

Occupancy Rate

% of space in use.

Vacancy Rate

Of space not in use.

Multi-family housing – Economic influences

Young adults, empty nesters, frictional needs.

Retail properties – Economic influences

Affected by consumer confidence, UE levels, credit accessibility.

Office space – Economic influences

Affected by GDP growth, economic activity, job creation.

Warehouse space – Economic influences

Affected by level of inventories + shipment of goods.

Hotels – Economic influences

Affected by GDP growth, corporate profitability, gasoline prices.

GDP (Gross Domestic Product)

Total economic output.

Net Operating Income (NOI)

Rental income (rent, expense recovery, fees) + ancillary income – op. expenses.

Rent

Periodic payment received from tenants for use of real property.

Percentage Rent

Rental payment based on sales/income earned by tenant.

Breakpoint

Certain level of sales/income in which % rent begins.

Expense Participation

Tenant pays proportionate share of op. expenses of property.

Gross Lease

Rent is all-inclusive, landlord pays all/most expenses out of rents received from tenants.

Single Net Lease

Tenant responsible for base rent + pro-rata share of property taxes.

Double Net Lease

Tenant responsible for base rent + pro-rata share of property taxes/insurance.

Triple Net Lease

Tenant responsible for base rent + pro-rata share of property taxes/insurance, and all other property op. expenses.

Tenant Inducements

Landlord concessions in lease negotiations. Free rent at beginning as incentive to tenant.

Ground Lease

Party other than owner of building owns land on which building is built.

Positive Leverage

Cost of debt payment (%) is lower than annual return on assets.

Negative Leverage

Cost of debt payment (%) is higher than annual return on assets.

Market Value

Most probable selling price, assuming “normal” sales conditions.

Investment Value

Value to the investor.

Transaction Price

Price paid.

Direct Capitalization

Value of property = stabilized NOI / cap rate.

Terminal Value

Value at end of investment period (based on NOI at the time).

Comparable Sales Approach

Value determined by analyzing sales prices of similar properties.

Cost Approach (Replacement Cost)

How much would it cost to rebuild this building?

Potential Gross Income (PGI)

Rental income assuming 100% occupancy.

Effective Gross Income Multiplier (EGIM)

Sale price / Effective Gross Income.