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112 Cards in this Set
- Front
- Back
Income Approach to Appraisal |
Value = Present Value of anticipated income |
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Two Approaches to Income Valuation |
Direct capitalization & Discounted Cash Flows (DCF) |
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Direct Capitalization |
Used with an overall "Cap Rate". Finds the value of NOI with multiples from comparable properties. (Most commonly used approach) |
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Discounted Cash Flow (DCF) |
Projected cash flows for a standard holding period. Youneed the cash flows for each year, you need anestimated discount rate, you need the expected sale of property. |
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Potential Gross Income (PGI or PGR) |
Rental income assuming 100% occupancy |
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Contract Rent |
Rent that is contracted at acertain price :$1000 apartment special market rate @ $1300 |
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Current Market Rent |
Rent is valued at market price |
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Types of Commercial Leases |
Straight Lease, Step Up or Graduated Lease, Indexed Lease, Percentage Lease |
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Straight Lease (most common) |
Your rentis $1000/mo for12 months (generally used) |
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Step Up or Graduated Lease |
Rent raises at a predeterminedschedule and rate |
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Indexed Lease |
Rather than specifying the rentincreases, we specify the dates they are going to up and some measure ofinflation and cause rates to go up. |
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Percentage Lease (Retail Only) |
Your rent is going to be ‘x’ dollars or 3% of your gross sales,whichever is higher |
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Vacancy & Collection Loss |
It’snot just the physical vacancy. For whatever reason that you didn’t receive they money youshould have collected. (Economic occupancy) |
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Natural Vacancy |
Vacancy rate that is expected in a stableor equilibrium market |
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Miscellaneous income |
Thingsthat do not relate to physical occupancy (orrent). (Garage Rentals, Parking Fees, Clubhouse rentals, Laundry & Vending Machines) |
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Operating Expenses |
Ordinary ®ular expenditures necessary to keep a property functioning competitively (maintenance.) Does not include mortgage payments,principle interest on payments. |
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Capital Expenditure |
Any item for which has a long lived value,i.e. multiple years and prolongs useful life.Replacing roofs, air conditions, repavingparking lots, are all capital expenditure. |
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Net Operating Income |
A property's dividend |
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Cap Rates |
A means to capture future growth expectations. Calculated by NOI/Purchase Price |
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Effective Gross Income Multiplier |
Easier to calculate. Quick indicator of value for smallerrental properties. Best used for properties with short-termleases (apartments &rental houses) |
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Two elements of a Mortgage Loan |
The note and the mortgage |
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Note |
The document evidence of a debt and contains exactterms of the financial obligation |
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Mortgage |
Pledgesthe property as security for the note |
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The Note: Adjustable Rate |
Market-determinedrate beyond control of either borrower or lender. Themargin is fixed (whatever the lender makes), butthe rate is comprised of the margin + the index. It’s cheaper due to the buyerbearing the risk of an interest rate change. |
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The Note: Adjustable Rate (Change Rate) |
Date that interest rate changes each timeperiod. Ex: Most common frequency is 1 year.They also have ones that adjust 5:1 or 5:2, fixed rate for 5 years, adjustedrate every 1 or 2 years. |
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Payment Caps |
Yourinterest rate can’t go up more than X% at atime |
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Balloon Loan |
A mortgage that requires a larger-than-usual one-time payment at the end of the term. This can mean your payments are lower in the years before the balloon payment comes due. |
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Bullet Loan |
A loan where a payment of the entire principal of the loan, and sometimes the principal and interest, is due at the end of the loan term. (Interest only balloon loan) |
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Right of Prepayment |
The right given to a debt holder to pay all or part of a debt prior to its maturity or ahead of schedule. |
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Loans with Right of Prepayment |
All“conforming” and FHA/VA loans & homeequity credit lines |
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Types of Prepayment Penalties |
Percentage of outstanding balance, Yield Maintenance, Defeasance |
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Percentage of Outstanding Balance |
Prepayment penalty calculated by taking a percentage of the loan balance owed in addition to full payment of the loan. |
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Yield Maintenance |
A mortgage loan prepayment penalty computed as the present value of interest income to be lost by the lender due to the early prepayment. |
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Defeasance |
Cannot pay loan in full with cash.Only way to pay is buying treasury securities paying the mortgage for the restof the loan. (substitution or simulating continual loan payments) |
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Nonrecourse Loan |
No personal recourse. Common incommercial property only. |
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Acceleration Clause |
Under these circumstances likemissing a payment, they have the right to accelerate all the loans, making theremainder of the balance due all at once. |
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Due-on-Sale clause |
A provision in a mortgage contractthat requires the mortgage to be repaid in full upon a sale or conveyance ofpartial or full interest in the property that secures the mortgage. If you deedthe property you must pay it off. |
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Short Sale |
Where the bank agrees to take lessthan what is fully owed on the mortgage as payment in full. |
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Deed in lieu |
Instead of going through theforeclosure process, the borrower agrees to “return the keys” to the bank. |
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Foreclosure |
Legal process of terminating allclaims of ownership and all liens inferior to foreclosing lien |
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Equityright of redemption |
Youhave the legal to redeem theproperty up until the judgment is made. |
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Statutory right of redemption |
A law that says you have some timeafter the foreclosure sale to redeem the property (up to 180 days). *farmers inMidwest* |
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Deficiencyjudgment |
Judgmentagainst mortgagor for unrecovered balance. |
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Aquiring Property with Existing Debt |
Subjectto – When you buy the property, and the mortgage is not paid off. “Taking oversomeone’s payments." Theoriginal borrower may be released of liability, but in some situations the newbuyer can come in, but the original borrower is aguarantor. |
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Mortgage Types |
Conventional mortgages, FHA mortgages, VA mortgages, Home equity Loans |
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Conventional Mortgage |
Anystandard home mortgage loan not insured by FHA or guaranteed by Department ofVeterans Affairs |
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Conforming Conventional Home Loan |
Meetsthe requirements for purchase by Freddie Mac or Fannie Mae: Standardnote, Standardmortgage, Standardappraisal, Sizelimit: Currently $417,000 (higher for high cost areas), Interestrate advantage due to liquidity (at least .25%, over 1.00 percent sincemid-2007) |
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Nonconforming Home Loan |
Doesnot meet GSE requirements in some respect. i.e. Jumbo loan:Nonconforming in terms of size |
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FHA Mortgages |
Let people who didn’t have perfectcredit get mortgages. FHA mortgages havea higher foreclosure rate. |
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What does the FHA do? |
FHA is strictly a loan insurance program. |
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Veterans Affairs Guarantees (VA loans) |
Backs loans made by private lenders (banks, savings and loans, or mortgage companies) to veterans who qualify. |
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Primary Mortgage Market |
Where loans are created (retail or street market) |
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Primary Market Players |
Mortgage Bankers, Mortgage Brokers, Banks, Thrifts |
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Mortgage Bankers |
Someone who's going to give you their money toclose a loan with their name. |
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Mortgage Broker |
Matches you up with a lender, whonever closes the loan in their name (earns commissions) |
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Secondary Mortgage Market |
Where existing homes are resold. Government-sponsored enterprises(GSEs)–Fannie Mae & Freddie Mac, Government National MortgageAssociation (GNMA or “Ginnie Mae”), and wholesale mortgage bankers. |
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Private Mortgage Insurance (PMI) |
Insuranceto pay the lender if the borrower fails to do so. •Generallyrequiredfor loans over 80% of value•Protectslender for losses up to 25% - 35% of loan |
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PurchaseMoney Mortgage |
Mortgage given by a property buyersimultaneous with receipt of title In lieu of taking cash for thepurchase, they take back part of the purchase in the mortgage. |
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Reverse Mortgage |
A special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that you built up over years of making mortgage payments can be paid to you. Usually claimed by individuals 65 and older. |
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Interest Only Mortgage (Balloon) |
Hasinterest-only payments for five to seven years, ending with a full repayment ofprincipal. |
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Interest Only Mortgage (Amortizing) |
Hasinterest-only payments for up to fifteen years, then converts to a fullyamortizing payment for the remainder of the term |
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HybridARM |
Interestrate is fixed for some years, then becomes adjustable. Paymentis set to be fully amortizing. Fixedrate period ranges from two to ten years. Fixedrate is higher as its term is longer |
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Negative Amortization |
Occurs whenever the loan payment for any period is less than the interest charged over that period so that the outstanding balance of the loan increases. |
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Three Traditional 'C's of Underwriting |
–Collateral:URAR appraisal –Creditworthiness:Credit report –Capacity:Ability to pay (payment ratios) |
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Housing Expense Ratio (Front End) |
PITI/GMI PITI = Principle, Interest, Property Tax, Insurance GMI = Gross Monthly Income Maximums: 28% for Conventional Loans 29% for FHA loans |
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Total Debt Ratio (Back End) |
Considers Long Term Obligations (PITI + LTO) ÷ GMI Maximums: 36% for Conventional Loans 43% for FHA loans |
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Long Term Obligations |
CarPayments, Credit Card payments, Student Loan payments, Judgment payments.Does not include utilities, cable,groceries, etc. |
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Law of Agency |
Governsrelationship between a principal (client) and someone charged to act onprincipal's behalf |
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Types of Agents |
Universal - Powerto act for principal in all matters General - Powerto act within limits of a business or employment relationship Special - Powerto act in a specific event or transaction (Real Estate Agents) |
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Fiduciary Responsibilities (6 total) |
Disclosure, Confidentiality, Accounting, Obedience, Loyalty, Skill and Care Youhave to act on the best interest of your client, evenif it goes up to harming yourself to do the best thing for your client. |
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Disclosure |
Beingcompletely open and honest |
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Confidentiality |
Neverbetraying confidential information |
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Accounting |
Keepingprincipal informed about financial aspects of assignment |
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Obedience |
Followinginstructions of the principal fully |
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Loyalty |
Neversubordinating the best interest of principal |
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Skilland care |
Representingprincipal as agents would represent themselves |
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Anti-Discrimination Laws |
TitleVIII of the Civil Rights Act of 1968 prohibits discrimination by race, color,religion, national origin, sex, familial status, and handicap |
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"Blockbusting" |
Approachinga seller and saying “Do you know so and so is moving in, do you want to selleryour home?” |
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Types of Listing Contracts |
Right of sale, Exclusive Agency, Open "Pocket" listing |
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Right of Sale |
If the property sells at all, theagent will get paid their commission regardless (including friends, familywithout relators) |
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Exclusive Agency |
That agent will get paid if they orany other licensed real estate agent sells the property. |
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Open "Pocket" Listing |
The seller verbally agrees to havesomeone show the home and if someone buys, I’ll pay a (agreed upon) commission.You can theoretically give an open listing to multiple agencies and whoeversells first gets the commission discussed. |
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Single Agent Duties |
–Dealinghonestly and fairly –Loyalty –Confidentiality –Fulldisclosure |
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Transaction Broker |
–Dealinghonestly and fairly –Limitedconfidentiality –Disclosingall known facts…affecting value… that are not readily observable to buyer |
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Statute of Frauds |
The old english lawthat serves as the basis for contract law in most states, impose therequirement of writing on some types of contracts in order for them to beenforceable |
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Legal Title |
Ownershipof a freehold estate |
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Equitabletitle |
Rightto obtain legal title when you sign a contract |
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Contingent contract |
Obligationof a party to perform depends on one or more conditions being met |
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Assignment |
Oneparty’s contractual rights and obligations are transferred to someone else |
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Remedies of Buyer and Seller |
•Suitfor damages: Always an option to both parties •Specificperformance: Buyer can force seller to convey title •Liquidateddamages (seller): Seller can retain deposit if buyer backs out •Rescission:Mutual agreement to cancel |
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InvestmentValue |
Maximum price an investor is willing topay for ownership interest in real property or mortgages |
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Realestate valuation |
–Estimate all future net cash flows –Convert into estimate of present value |
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Required Yields/IRRs |
–Highquality, safe real estate investments: 8% or less –Development:30% or more |
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Lender's Yield |
Implicitinterest rate received on a loannalsolender’s expected IRR on loan isbased on: - Actualcash loaned out by lender - Actualcash payments received by lender |
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Effective Borrowing Cost |
Third-partyexpenses: up-front expenses incurred by borrower but not paidto lender: –Mortgageinsurance premium –Taxeson the loan –Lender’stitle insurance –Appraisal –Survey |
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Alternative Amortization Schedules |
•Interest-only mortgage –Seldom with home loans (at least untilrecently) –Often with income property loans •Partially amortized mortgage –Maturity is shorter than amortizationperiod–Results in “balloon” payment •Early payment mortgage |
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Commercial Mortgages |
• Commercialmortgages ¬es for existing properties not as standardized as home loans • Documentsare longer & morecomplex • Notes are negotiable (rate & terms) |
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Restrictions on Prepayment |
•Lock-out: Prohibition against prepayment for upto, say, 5 years on permanent •Prepaymentpenalties: –Percentage of loan:Say, 2-4% of loan balance –Yield maintenance penalty:Borrower must pay lender PV of losses due to prepayment –Defeasance penalty: Borrowermust replace mortgage loan with a set of U.S. Treasury securities that producecash flows equivalent to those on the paid-off mortgage |
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Three Main Underwriting Ratios |
Debt Coverage, Loan to Value, DebtYield |
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Debt Coverage Ratio |
•Indicatorof “cash flow cushion” from lender’s perspective •Lender’swant DCR to be as high as possible, but typically 1.35 or higher |
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Loan-To-Value Ratio |
•An indicator of borrower’s incentive tomaintain the loan (i.e., not default) Protects from default, typical residential 80%,commercials at a lower LTV due to lower risk 65% |
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Debt Yield |
•Indicator of lender’s mortgage “return” Moreoften than not, this is the binding constraintchosen. |
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Two types of REITs |
Equity REIT & Mortgage REIT |
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What is a REIT? |
If acompany can meet the four tests of a REIT, they do not have to paycorporate taxes. |
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Four REIT Tests |
Ownership Test, Asset Test, Income Test, Dividend or Payout Test |
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Ownership Test |
At least 100 shareholders |
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Asset Test |
75% of assets invested in Real Estate(Owned Mortgage, Equity positions, land, buildings) |
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IncomeTest |
75% of gross income must come from RealEstate assets |
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Dividendor Payout Test |
Mustpass out 90% of taxable income in dividends. (Practically, this is the easiestone to deal with.) |
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Funds From Operations (FFO) |
Taking net income and turning it into a measure ofcash flow. It’s the measure of cash flow that theoretically could be paid outor reinvested. |
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Net Asset Value |
NAVis equal to estimated total market value of a REIT’s underlying assets, lessall liabilities including mortgages |
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Net Asset Value (Premium and Discounts) |
• Iftotal stock market capitalization > its NAV, REIT is said to be selling fora “premium” to NAV • Conversely,REITs selling at “discounts” to NAV may signal buying opportunities forinvestors |