Commercial Real Estate Exam Review Notes

Commercial Real Estate Exam Review Notes

Key Formulas and Definitions

Important Formulas in Commercial Real Estate:
- Gross Income × Cap Rate = Property Value
- Income - Expenses = Net Operating Income (NOI)
- Leverage + Cash = Total Investment
- Revenue - Debt Service = Profit

Concepts in Real Estate Investing

Leverage in Real Estate Investing:
- Definition: Using borrowed money (financing) to amplify investment power.
- Alternative Options:
- A) Physical force to move properties
- C) Better negotiation ability
- D) Having multiple investment properties

Loan-to-Value Analysis

Down Payment Scenario:
- You have a $100K down payment and obtain a loan for 75% of the purchase price (75% loan-to-value or LTV).
- Price Point Calculations:
- A) $100,000
- B) $400,000
- C) $600,000
- D) $1,000,000
- Calculation: If LTV is 75%, then down payment represents 25% of total purchase price.
  - Total Purchase Price = $100K / 0.25 = $400K.

Comparison of Real Estate and Stocks

Key Differences Between Real Estate and Stocks:
- A) Lending institutions may allow borrowing money for real estate
- B) Real estate value does not always appreciate
- C) Real estate has associated risks
- D) Management of real estate is often needed

Real Estate Financial Concepts

Key Concepts Used by Investors:
- Primary concept used by Vanessa for minimal investment in controlling assets: Leverage
PITI in Real Estate:
- Definition: Principal, Interest, Taxes, Insurance
- Other Options:
- B) Property, Investment, Taxes, Income
- C) Purchase, Interest, Taxes, Inspection
- D) Principal, Investment, Title, Insurance

Home Inspection Essentials

Important Home Inspection Components:
- A) Roof
- B) Electrical Systems
- C) Sewer Line (especially if old)
- D) All of the Above
House Hacking Tax Benefits:
- Reason for tax benefits: Mortgage interest is tax-deductible.

Property Rights and Responsibilities

Property Entry Rights for Meter Readers:
- What gives the meter reader right to enter?
- A) Easement
Homeowner Responsibilities:
- Owner responsible for sewer line to where it meets the main line: True

Cap Rate and Risk Relationship

Cap Rate and Risk Association:
- A) High cap rate = lower risk; Low cap rate = higher risk
- B) High cap rate = higher risk; Low cap rate = lower risk

Value-Add Concept in Commercial Real Estate

Definition of Value-Add Concept:
- Increasing NOI through improved management, leasing, or renovations.
- Alternative Definitions:
- A) Immediate refinance without improvements
- C) Buying below-market properties
- D) Purchasing renovated property

Impact of Cap Rate on Property Prices

Impact of Decreasing Cap Rates on Property Prices:
- B) Prices increase

Exploiting Home Field Advantage

Main Message of "Exploit Home Field Advantage":
- Knowing your area deeply gives a major competitive edge.

Niche Markets in Real Estate

Examples of Niche Markets:
- A) Office buildings
- B) Self Storage
- C) Mobile Home Parks
- D) All of the Above

ADU and Proforma Definitions

ADU Definition:
- A) Accessory Dwelling Unit
- Alternative Definitions:
- C) Alternative Development Unit
- D) Advanced Dwelling Upgrade
Proforma in Real Estate:
- Definition: A future-focused estimate showing predicted income, expenses, and returns.
- Other Options:
- A) Actual financial results
- B) A legal document for closing
- D) A type of property insurance

Debt Service Coverage Ratio (DSCR)

Recommended Minimum DSCR:
- C) 1.25 (NOI must be at least 125% of Annual Debt Service)

Due Diligence Requirements

Due Diligence Requirements in Commercial Real Estate:
- Required by the buyer to order, provide, and/or pay for:
- A) Appraisal
- B) Environmental Report
- C) Insurance Binder
- D) All the Above

Bank Perspective on Down Payment and Risk

Higher Down Payment % and Bank Risk:
- A)** Less risk for the bank**

Debt Service Coverage Ratio Calculation

Given: NOI is 110% of Annual Mortgage Payments. What is DSCR?
- A) 1.1
- Correct Calculation: DSCR = NOI / Debt Service = 110% / 100% = 1.1.

Mortgage Refinance Process

What Happens to Existing Mortgage During Refinance:
- C) Current mortgage is paid off by new loan

Economic Indicators Affecting Interest Rates

Economic Signals and the Fed's High Rates:
- B) Persistent inflation

Loan-to-Value Ratio (LTV) in Commercial Lending

Maximum LTV Ratio that Commercial Lenders Rarely Exceed:
- B) 75%

Residential Mortgage Rate Influences

What Affects Residential Mortgage Rates:
- C) Fed Actions affecting the 10-year Treasury yield and mortgage-backed securities

Risks with New Development Projects

Risk in Self Storage Development Projects:
- A) New inventory from competing developments

Competitive Advantages of Mountain Storage Portfolio

Protective "Moats" for Mountain Storage Unit Properties:
- A) Mountain terrain limits buildable land
- B) High land prices make new projects financially difficult
- C) High new construction costs require higher rents
- D) All of the above

Contractual Deadlines in Real Estate Transactions

Examples of Contingency Deadlines in Contracts:
- A) Earnest Money Refundable Conditions
- Events: Inspection Objection, Appraisal Objection, Property Insurance Deadline

Handling Major Issues During Home Inspection

What to do with Major Repair Issues Found in Inspection:
- A) Submit an Inspection Objection document for repairs before closing
- B) Terminate the contract prior to Inspection Termination deadline
- C) Proceed with transaction regardless of repairs
- D) All of the above

Underwriting Challenges

What happens if you do not qualify during underwriting?
- A) Terminate the contract and retain Earnest Money
- C) Explore other loan options, e.g., co-signor
- D) Both A and C are correct

Lender Requirements for Appraisal

Why does the Lender Require an Appraisal?
- A) To protect their substantial loan investment
- B) Loans need to conform to Fannie Mae and Freddie Mac guidelines for secondary market
- C) Both A and B are correct