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73 Cards in this Set
- Front
- Back
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4 categories for federal tax purposes
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Personal residence
Held for sale to others-dealer property Held for use in a trade or business Investment property |
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Forms of ownership
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Sole proprietorships
Partnerships Corporations Real Estate Investment Trusts (REITs) |
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Active income
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Income earned from salaries, wages, commissions, fees, bonuses
Taxed at ordinary tax rate |
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Portfolio income
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Interest and dividends, capital gains from stocks, bonds, and other financial security investments
Taxed at ordinary or capital gain rate |
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Passive activity income
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Income generated from trade and business activities in which the taxpayer does not "materially" participate
Includes income from real estate rental activities Tax treatment includes several passive loss restrictions and exemptions Ordinary, capital gain, and/or recapture rates Passive loss DOES NOT offset passive gain Passive losses CAN be carried forward to passive gains |
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Avg. Tax Rate
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Total tax/taxable income
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Mortgage interest
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Generally deductible in the year which it is paid
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Local property taxes
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Deductible each year
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Depreciable basis of existing property
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Total acquisition price
-Value of the land -Value of the personal property =Depreciable basis for the real estate |
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Personal property
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May be depreciated over shorter period than real
May be depreciated using “accelerated” methods These advantages provide an incentive to classify as much of the improvements as personal property as possible |
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Cost recovery periods for real property
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27.5 years for "residential" income property
39.0 years for non-residential/commercial income property |
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Cost recovery period for personal residence
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NONE – you cannot depreciate your personal residence
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Straight-line rate
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1 / recovery period
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Fully taxable transactions
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When seller receives full payment in year of sale
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Tax-deferred transactions
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Installment sales
Like-kind exchanges-same as 10-31 exchange |
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Taxable income from property sales
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Ordinary income
Capital gains income Depreciation recapture income |
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Exclusion of Capital Gains Tax for Homeowners
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‘Individuals permitted to exclude $250,000 ($500,000 for married filing jointly) of taxable gain realized on sale of personal residence.
To qualify, taxpayer must have owned and used property as his/her/their personal residence for at least two years during prior five years before sale. |
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Operating expenses
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Cash outflows that reduce net cash flows from operations
Generally tax deductible in the year they were incurred |
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Capital expenditures
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Cash outflows that are used to purchase or replace items that are deemed to be a significant component of the investment and have useful life greater than one year
Depreciated |
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Land
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Not depreciable
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Capital asset
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An asset held for investment purposes
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Cost recovery period
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The period of time over which an asset is depreciated for tax purposes
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Deep tax shelter
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Negative taxable income from operations
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Deferral benefits
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The gain from delaying the payment of taxes until the property is sold
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Partial tax shelter
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Taxable income from operations less than before-tax cash flow
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Original cost basis
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Total costs paid to acquire the property including land, building, and acquisition expenses
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Property management
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Those that deal with day-to-day operations
Rent collection, physical maintenance, tenant relations Paid on a commission basis |
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Asset management
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Those that deal with the physical, financial, or ownership structure
Analyze investment opportunities, assist in acquiring assets, assure assets remain productive, assist in disposition of assets Compensation based on % of assets under management |
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Selecting tenants
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Creditworthiness
Compatibility Performance potential |
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Credit tenants
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The landlord borrows money to finance the property and pledges as security the rents to be received from the tenant. Usually, the financing is structured as nonrecourse debt, and the lease is structured as a triple net lease.
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Assignment
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Transfers the lessee's rights to new lessees
ALL rights and obligations are transferred |
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Sublet
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Involves the sale of part of the lessee's rights
Only a subset of rights are transferred Original lessees become lessors and form a sandwich leasehold |
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Lease
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Legal contract between tenant (lessee) & owner (lessor) for use & possession of RE (land and/or improvements)
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Benefits of longer leases
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Minimize transaction costs
Provide rental rate security for tenant & owner Decrease tenant & owner flexibility |
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Percentage rent
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Base rent+percentage rent
Percentage rent=percentage of gross sales in excess of x amount |
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Gross lease
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No operating expenses
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Net lease
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Tenant pays property taxes
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Net-net lease
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Tenant pays property taxes and insurance
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Triple net lease
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Tenant pays all operating expenses
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How tenant can pay operating expenses
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Pay them directly
Reimburse landlord Reimbursements show up in CF pro forma as expense reimbursement revenue |
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Effective rent
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Captures monetary aspects of lease
Allows leases to be compared on a more “apples-to-apples” basis Also called equivalent level rent (ELR) |
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Lease options
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Contract provisions that give holder the right--but not the obligation--to do something
Lease renewal, cancellation, expansion, relocation |
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Class A property
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Commands highest rents because they are most prestigious in their tenancy, location, & overall desirability
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Class B property
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Rents usually less than Class A buildings because of a less desirable location; fewer amenities; less impressive lobbies, elevators, etc
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Class C property
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Usually once Class A or B
Are older & reasonably well maintained But are below current standards for one or more reasons |
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Rentable area
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Gross area- "vertical penetrations"
How rent is generally quoted |
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Usable area
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rentable area - common areas
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Neighborhood center
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Contains retail establishments offering mostly convenience goods (e.g., groceries) & services (e.g., barber shop, video rental, & dry cleaning)
Often achored by grocery store |
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Community center
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Larger version of a neighborhood center
GLA is usually three times that of a neighborhood center Often anchored by discount department store |
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Power center
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Dominating feature is high ratio of anchors to ancillary tenants
Typically contain three or more giants in hard goods retailing (toys, electronics, home furnishings, etc.) |
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Regional center
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Usually at least two anchor tenants that are major department stores (e.g., J.C. Penney’s)
At least 200,000 square feet of GLA devoted to nonanchor tenants. |
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Retail properties
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Rents are quoted on basis of gross leasable area
GLA is amount of space occupied & controlled by tenant |
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Development
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The continual reconfiguration of the built environment to meet society’s needs
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Process of development
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1. Establishing site control
2. Feasibility analysis, refinement, and testing 3. Obtaining permits 4. Design: Architect and other professionals 5. Financing 6. Construction 7. Marketing and leasing 8. Operation |
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Establishing site control
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Land is the entry ticket: No site? No development
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Option
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Right (not obligation) to purchase in future by a certain date, at a predetermined price
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Joint venture
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Landowner puts land into development in return for share of profits
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Feasibility
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Does the value, when built, exceed the cost?
“Slam dunk”: Go ahead No go: Move on, don’t look back In between: Obtain more information and refine analysis |
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Architect
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Compensation: Hourly fee (for predesign services)
Percentage of construction cost Fixed fee Criteria: Relevant experience Reputation Goals compatible with developer Able to communicate with developer |
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Land planner
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Creates development layout or “map”
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Landscape architect
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Shapes topography, soils, vegetation, and other objects around a structure to harmonize with and enhance it
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Civil engineer
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Designs on-site utilities, streets, parking, and site grading
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Mechanical engineer
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Determines specifications for HVAC and other building systems
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Mezzanine debt
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Problem: Banks usually lend only 70 – 80% of construction costs
Multiple lenders |
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Miniperm loan
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Short-term financing used to pay off income-producing construction or commercial properties, usually payable in three to five years.
Combines construction loan and short-term postconstruction financing |
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General contractor
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Oversees, controls project
Compensation by fixed-price bidding, cost plus fee, or maximum cost plus fee (cost overruns shared with developer) |
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Construction manager
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Liaison and representative of developer during construction
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Capital gains tax
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A tax charged on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower price.
Stocks, bonds, property |
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Depreciation recapture
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Collecting income tax on a gain realized by a taxpayer when the taxpayer disposes of an asset that had previously provided an offset to ordinary income for the taxpayer through depreciation
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Rent concessions
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Benefits offered by the landlord to his tenants to draw tenants to vacant properties
Ex. lowering rent |
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Ground lease
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A long-term lease of land in which the tenant is allowed to occupy and develop the land during the lease period. After the lease expires, the land with all improvements, buildings and other structures will be restored to the owner
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Negotiated lease provision
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Any restrictions on operation of tenant’s business
Restrictions on alterations or improvements to property |
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Indexed lease
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A landlord makes an index lease with initial rent at $10,000 per year, adjusted annually by the consumer price index (CPI)
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