Final usp 152A study guide

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Chapter 1 & 2: Real Estate Legal Concepts & Financing

Property Rights & Estates

• Real Property vs. Personal Property

• Types of Estates: Freehold (Fee Simple, Life Estate) vs. Leasehold

• Title Assurance: General Warranty, Special Warranty, Bargain & Sale, Quitclaim

• Title Insurance: Owner's Policy, Lender’s Policy

Financing Basics

• Promissory Note Elements: Principal, Interest, Maturity Date, Payment Schedule, Default Provisions

• Mortgage vs. Note: Mortgage secures the loan; Note is the debt agreement

• Foreclosure & Bankruptcy: Judicial vs. Non-Judicial, Chapter 7, 11, 13

Chapter 3: Time Value of Money (TVM)

Key TVM Variables

• i = Interest rate per period

• n = Number of compounding periods

• PV = Present Value

• PMT = Periodic Payment

• FV = Future Value

Formulas

• Future Value (FV):FV=PV×(1+i)nFV=PV×(1+i)n

• Present Value (PV):PV=FV(1+i)nPV=(1+i)nFV​

• Present Value of an Annuity (PVA):PV=PMT×(1−(1+i)−ni)PV=PMT×(i1−(1+i)−n​)

Examples

• Would you invest $10,000 at 7% compounded monthly or 8% annually?

• What is the PV of $1,464,100 received in 4 years at a 10% discount rate?

Chapter 4: Loan Calculations & Mortgages

Mortgage Loan Elements

• Loan Amount (PV)

• Interest Rate (i)

• Term (n)

• Monthly Payment (PMT)

Loan Payment Formula

PMT=PV×i1−(1+i)−nPMT=1−(1+i)−nPV×i​

Examples

• Monthly payment for a $60,000 loan at 12% interest, 30-year term

• Remaining loan balance after 18.5 years on a 7% loan with $2,350 monthly payments

Chapter 12 & 13: Financial Leverage & Risk Analysis

Leverage

• Positive Leverage: Unleveraged BTIRR > Interest rate

• Negative Leverage: Unleveraged BTIRR < Interest rate

• Debt Coverage Ratio (DCR): NOI/ADS (Annual Debt Service)

Risk Types

• Business Risk: Economic conditions, tenant mix

• Financial Risk: Debt structure

• Liquidity Risk: Difficulty selling asset

• Inflation Risk: Unexpected inflation impact

• Interest Rate Risk: Variable debt impact

• Legislative & Environmental Risks

Chapter 14: Disposition & Renovation of Income Properties

Disposition Decisions

• Sell vs. Hold? Evaluate IRR from holding vs. investing proceeds elsewhere.

• 1031 Exchange: Defer capital gains tax by reinvesting in “like-kind” property

• Equity Build-Up: Opportunity cost of not reinvesting equity in new projects

Example

• You net $100,000 from a sale. Future cash flows yield an IRR of 11.82%. Should you sell or hold?

Chapter 16 & 17: Project & Land Development Financing

Financing Structures

• Permanent Loans vs. Construction Loans

• Mini-Perm Loans: Short-term financing until permanent funding is secured

• Loan-to-Value Ratio (LTV): Protects lender from declining property values

• Debt Yield:Debt Yield=NOILoan AmountDebt Yield=Loan AmountNOI​

Land Acquisition Strategies

• Option Contracts: Lock-in price without obligation

• Sales Release & Repayment Schedule: Negotiation between lender and developer

Chapter 18: Joint Ventures & Syndication

Investment Structures

• Sole Proprietorship, Partnerships, LLCs, Corporations

• Syndication: Group of investors pooling capital under a General Partner (GP)

• Capital Stack: Priority of claims (Debt > Preferred Equity > Common Equity)

Joint Venture Components

• Preferred Return: First share of profits paid to investors

• Hurdle Rate (Lookback IRR): Minimum return before profit sharing

• Profit Participation: Splitting of proceeds among partners

More on Cash Flow & Returns

Common Return Metrics

• Yield on Cost: NOI/Total costs

• Cash-on-Cash Return: Specific year of cash flow/initial investment or equity

• Internal Rate of Return (IRR): Discount rate where NPV = 0

• Risk vs. Return Comparison:
  T-Bills < Municipal Bonds < RE < Common Stocks

• Discussion Q&A

Chapter 1: Legal Concepts & Title Assurance

1-1 What is the difference between real property and personal property?

• Real Property: Land and anything permanently attached to it (buildings, trees, mineral rights).

• Personal Property: Movable objects not permanently affixed to land (vehicles, furniture).

1-2 What is meant by an estate?

• An estate refers to the legal interest or right an individual holds in real property.

• Two primary types: Freehold estates (ownership) and Leasehold estates (temporary possession).

1-3 How can a leased fee estate have value transferable to another party?

• A leased fee estate is the ownership interest in a leased property.

• The landlord can sell the right to receive rent payments to another investor.

1-4 What are title records? What is an abstract of title?

• Title Records: Public documents showing property ownership history.

• Abstract of Title: A summarized history of all recorded interests (deeds, mortgages, liens) on a property.

1-5 What is a deed? How is it different from a title?

• Deed: A legal document transferring ownership from one party to another.

• Title: The legal right to own and use the property.

1-8 Name the three general methods of title assurance and briefly describe each.

1. Title Abstract with Attorney’s Opinion: A lawyer reviews public records to ensure clear ownership.

2. Title Insurance: A policy protecting against title defects or claims.

3. Torrens System: A government-issued title certificate ensuring clear ownership.

Chapter 2: Financing, Notes & Mortgages

2-3 Can borrowers pay off loans anytime they desire?

• Depends on loan terms. Some loans allow prepayment, while others charge prepayment penalties.

2-4 What does non-recourse financing mean?

• A loan where the lender can only seize the collateral property if the borrower defaults, but cannot pursue personal assets.

2-5 What does assignment mean and why would a lender assign a mortgage loan?

• Assignment transfers loan rights from one lender to another, allowing banks to sell loans to investors.

2-7 What does default mean? Does it only occur when payments are missed?

• Default is failing to meet loan terms (not just payments but also insurance, property taxes, etc.).

2-8 When might a borrower want another party to assume their mortgage liability?

• When selling a property, a borrower may want the buyer to assume the mortgage if interest rates are rising.

2-11 How can mechanics’ liens achieve priority over first mortgages?

• If work began before the mortgage was recorded, mechanics’ liens can have legal priority.

2-12 Name mortgageable interests in real estate and their risks.

• Fee Simple Interest (low risk)

• Leasehold Interest (moderate risk)

• Easements (high risk, limited marketability)

2-13 What is mortgage foreclosure, and what alternatives exist?

• Foreclosure: Legal process where a lender repossesses property due to default.

• Alternatives: Short Sale, Deed in Lieu, Loan Modification, Forbearance.

Chapter 3: Time Value of Money (TVM)

3-4 What does the time value of money (TVM) mean?

• Money today is worth more than the same amount in the future due to earning potential.

3-7 What is an annuity? How is it defined? Difference between an ordinary annuity and an annuity due?

• Annuity: Series of equal payments at regular intervals.

• Ordinary Annuity: Payments occur at the end of each period.

• Annuity Due: Payments occur at the beginning of each period.

3-8 How must one discount a series of uneven receipts to find PV?

• Discount each individual cash flow separately using PV formula:PV=FV(1+r)nPV=(1+r)nFV​

3-10 What is IRR? How does it relate to compound interest?

• IRR (Internal Rate of Return): The discount rate where NPV = 0.

• Related to compound interest as it calculates return by considering reinvestment of earnings.

Chapter 4: Mortgage Loans

4-6 Why do lenders charge origination fees, especially discount points?

• To cover loan processing costs and increase their effective yield.

4-7 Connection between Truth-in-Lending Act (TILA) and APR?

• TILA requires lenders to disclose the Annual Percentage Rate (APR), which includes interest + fees.

4-13 What is negative amortization?

• When loan payments are less than interest due, unpaid interest is added to the loan balance.

4-14 What is partial amortization?

• A loan where only part of the principal is paid over time, with a balloon payment due at the end.

Chapter 9: Leases & Market for Space

9-1 How do leases shift the risk of rising expenses from landlord to tenant?

• Through net leases where tenants pay a portion of operating expenses.

9-2 Difference between base rent and effective rent?

• Base Rent: Stated lease payment.

• Effective Rent: Adjusted for concessions, escalations, and inflation.

9-3 Usable vs. Rentable space?

• Usable Space: Tenant’s actual leased area.

• Rentable Space: Includes common areas shared with other tenants.

9-4 What are CAM charges?

• Common Area Maintenance (CAM) Charges: Tenant contributions to shared costs (e.g., hallways, parking lots).

Chapter 10: Property Valuation

10-1 What is the economic rationale for the cost approach?

• Based on the principle that a buyer won’t pay more than replacement cost.

10-2 What is the rationale for the sales comparison approach?

• Uses comparable property sales to estimate value, assuming market competition.

10-14 Is a cap rate the same as an IRR? Which is greater?

• No, IRR includes property appreciation and reinvestment of cash flows. IRR is generally higher than the cap rate.

Chapter 18: Partnerships & Syndications

18-1 Difference between IRR preference and IRR lookback?

• IRR Preference: Preferred return paid to investors before sponsors earn profit share.

• IRR Lookback: Investors get all profits up to an agreed IRR before sponsor participation.

18-2 Advantages of a Limited Partnership in real estate syndications?

• Limited liability for investors.

• Pass-through taxation (avoids double taxation).

18-5 Difference in taxation between partnerships & corporations?

• Partnerships: Pass-through taxation (no corporate tax).

• Corporations: Double taxation (corporate and dividend taxes).

18-9 Risk differences for general vs. limited partners?

• General Partner: Full liability.

• Limited Partner: Liability limited to their investment amount.