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96 Cards in this Set
- Front
- Back
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Anticipation |
says that the value of property today is the current valueof the total anticipated future benefits. For instance, say a commercial property is leased for $12,000 per year for 30 years; its property value is based on the future expected income. Conversely, a residential property that finds itself in the path of a planned highway expansion may anticipate a decline in value. |
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Competition |
is related to supply and demand. When there are multiple similar properties on the market, the competition causes a value decrease because the supply exceeds demand. Less competition increases demand and drives pricing upward. |
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Conformity |
says that value is created and maintained when the characteristics of a property conform to its neighborhood. So a new, energy-efficient, seven-bedroom home built in the middle of a neighborhood of older three-bedroom homes would be valued differently than the same house in the middle of a neighborhood comprised of houses similar in age, size, and construction |
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Regression |
is the principle that says a lower quality property located adjacent to a higher quality property can lower the value of the higher quality property. This is related to the principle of conformity. |
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Progression |
is the opposite of regression, and is also related to conformity. Progression is the bump in value that a lower-value property gets by being near a higher-value property. So if your neighbor adds a second story in a quality remodel, the bump in value that your property receives is progression. Progression and regression are in back of the economic belief that it’s better to have the cheapest house in the nicest neighborhood than the nicest house in the cheapest neighborhood. |
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Contribution |
has to do with how a change in a property impacts the value as a whole. This isn’t the same as the dollar value of the change. For example, adding a restaurant-quality kitchen to an otherwise modest house won’t increase the home’s value by the amount spent to renovate, but updating the countertops and cabinets might. |
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Highest and bet use |
describes a property’s most profitable use that’s both legal (conforms to zoning) and economically feasible. For example, a large Victorian home may need refurbishing before it can be lived in. It could be renovated as a single-family residence, or the cost of modifying it in to a multi-unit apartment building may be its highest and best use, due to an influx of college students looking for affordable housing. For most residential properties, the highest and best use is its current use. |
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Substitution |
is a principle that says a property’s value is determined by what it would cost to purchase a similar substitute property. This principle is in operation when collecting information on comparable property sales. If two properties in a particular area very similar to each other, they’re also going to share a similar value. |
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The principle of change: Integration |
is the time period when the property is being developed. |
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The principal of change: Equilibrium |
is the period of stable use |
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The principal of change: Disintegration |
is the time when the property is deteriorating and needs constant upkeep to maintain its viability. |
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The principal of change: Rejuvenation |
is when the property is redeveloped with new improvements and often with different use. This is also known as revitalization. |
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Legal Permissibility |
Physical possibility, financial feasibility, maximum profitability, and this factor are all considerations when determining highest and best use. |
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CBRE http://www.cbre.com |
CBRE (CB Richard Ellis) provides a number of resources on its website, including a semi-annual cap rate survey of all income properties. These are listed by class (A, B, and C) and location (urban, suburban, and rural) in the major markets of North America |
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Global Street http://www.globest.com |
Globe Street provides valuable data and updates on market trends. |
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Marcus & Millichap http://www.marcusmillichap.com/ |
Marcus & Millichap is a real estate investment brokerage. The company is a leading source forresearch about the real estate investment market. |
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Loopnet http://www.loopnet.com Costar http://www.costar.com |
Property listings located on LoopNet and its parent CoStar are excellent not only for finding listed properties, but also as a source for comparable values and rental surveys. |
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National Association of Realtors http://www.realtor.org |
The National Association of REALTORS® (NAR) offers a number of resources for investment property professionals. |
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(IREM) Institute of Real Estate Management http://www.irem.org |
The Institute of Real Estate Management (IREM), anaffiliate of NAR, also offers education and professional designations for income property professionals plus other resources. |
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Estate in severalty: |
Estate in severalty means one person owns the property, and all other interests are severed. |
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Tenancy in common |
Each person is entitled to possession of the whole; if one dies, that person’s ownership is inheritable; it does not necessarily pass to the other owners. |
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Joint tenancy |
Equal ownership with undivided rights of possession. This form of ownership requires unity of four separate conditions: all owners must have the same type of interest in the property; all must receive their title at the same time from the same source; all must have the same percentageof ownership; and all must have the right to undivided possession in the property. This form of ownership includes the right of survivorship. When one joint tenant dies, that person’s share automatically goes to the other surviving joint tenants. |
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Tenancy by the entirety |
Similar to joint tenancy in that it has the right of survivorship. Often used with married couples, this form of ownership includes unity of time, title, interest, possession,and marriage. |
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Termination of joint tenancies |
A joint tenant may sell that tenant’s share of ownership. However, the buyer of that share does not become a joint tenant, because the required four unities do not exist. The new buyer did not receive title at the same time as the other tenants, so the unity of time is destroyed. Therefore, the new owner is a tenant in common. The remaining tenants continue as joint tenants, with the right of survivorship shared between them. The new buyer, as a tenant in common, has an inheritable share. |
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Termination of co-ownership by partition |
Remember that in a tenancy in common, each person is entitled to possession of the whole. But what if you hate the person you’re tenants with? In that case, you may want to bring legal action to have the property partitioned, which would allow each tenant to have a specific, divided portion (partition) of the property exclusively. In the case of an equitably divided piece of land, each tenant would receive title to a separate tract according to that person’s share of interest. In cases where it is impossible to do an equitable split, a court may order the sale of the property and determine the appropriate share of proceeds to be distributed to the tenants in common. |
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Freehold Estate |
Individuals purchase a property: Ownership is for an undetermined length of time ("free" of an end date) |
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Fee Simple Estate Absolute |
Inheritable freehold estate Must pass through the probate process before legal distribution to heirs. (If held in another state, ancillary probate proceedings would be initiated in that state also.) ° Survivorship and inherited rights vary according to state and local laws, and by how title is held (joint tenancy, tenancy by the entirety, tenancy in common, community property, etc.) ° Some states offer dower and curtesy rights to widows and widowers, while others offer elective shares to spouses of the deceased |
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Sole Proprietorship ei.. estate in severalty |
This is the simplest business type—a business of one owner. The owner operates under their own name or acquires a DBA (doing business as) to operate under a trade name, and bears sole responsibility for the risks and rewards of doing business. That includes taxes, because sole proprietorships are taxed as individuals. |
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Partnership |
The partnership form of business is designed for two or more people who wish to engage in business for profit. There are two primary types of partnerships: general and limited. Both business types take responsibility for the risks and rewards of the business, but limited partners assume less risk, and receive less reward. Note: if you and your best friend buy a parcel of real estate, you may choose to own it as a partnership under a tenancy in common agreement. With a tenancy in common, either of you may sell your interest or pass your interest down to heirs. This type of ownership doesnʼt include the right of survivorship. You could instead own as joint tenants, which would include the right of survivor-ship. If you die, your partner gets full ownership, or if your partner dies, you get full ownership. |
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General partnership |
A general partnership conveys personal liability to part-nership debts that exceed the partnership assets. General partners are jointly and separately liable for these debts. So if youʼre in a general partnership and one of your partners absconds with all the partnership funds, leaving behind creditors, you and all other general partners are liable to those creditors. Creditors donʼt care who took the money—theyʼll hold all partners responsible. |
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Limited partnership |
A limited partnership always has one or more general partners who assume liability. The other limited partners are limited in their liability and authority by the amount of money theyʼve contributed. To protect their immunity from partnership debts, they may not participate in managing the partnership. Limited partners who do act as a manag-er may become generally liable. Limited partnerships are a common form of holding real estate. Usually the general partner is the one who discovers the investment opportuni-ty and brings in limited partners for their funds. The gener-al partner does the work, and the limited partners see a profit or loss from their investments according to the partnership agreement, and the success or failure of the project. Partnerships are created by a contract called the partner-ship agreement. It spells out the ownership terms and contributions. Both limited and general partnerships are taxed as partnerships. |
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Corporations |
A corporation is an independent legal entity defined bylaw and owned by shareholders. Most corporationsʼ profits are taxed to the corporation when earned, and taxed to the shareholders when distributed as dividends. Corporations have centralized management and separate liability. obligation of the corporation, not of an individual owner or set of owners. This provides a “legal shield” to protect the owners. Ownership is conveyed through shares or stocks in the company. |
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Non-Profit Corporation |
can be organized similarly to for-profit corporations, with distinct tax advantages |
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General or “C” Corporation |
A C corporation is the most common form. Elected officers govern the company's affairs, while the designated licensed broker is directly responsible for the real estate transactions. Corporations have a perpetual existence. Legally, corporations canʼt die until theyʼre dissolved or the state revokes the corporate charter for non-compli-ance or other reason, The shareholders in a C corporation see double taxation: once at the corpo-rate level, and again at the shareholder level. |
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Close Corporation |
A close corporation is one in which the companyʼs stock-holders, directors, and officers are typically the same people. |
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Subchapter S Corporation |
Corporations may also be Subchapter S (permitted to function as a corporation but taxed as a partnership). Subchapter S corporations donʼt pay corporate income taxes, so they avoid double taxation. In addition, share-holders in a Subchapter S may deduct losses on their income taxes representing their share of the corporationʼs losses. |
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Limited Liability Companies (LLCs) |
An LLC combines the tax advantages of a partnership with the legal shield offered to corporations. An LLC is actually a non-corporate entity. As with partnerships, LLC owners participate in the businessesʼ profits and losses without taxation to the company.LLCs donʼt need a board of directors, and their owners (called members, not shareholders) can participate direct-ly in the management of the company or they may elect officials to handle day-to-day business operations. LLC owners canʼt be held personally liable if their co-own-ers or employees commit wrongful acts during the course of conducting business. If an LLC is found liable for the actions of its owners or employees, the LLCʼs money or property can be taken to pay off the debt, but the LLC owners canʼt be held personally liable. LLCs are popular forms of business structure for real estate brokers and brokerages. |
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Limited Liability Partnerships (LLPs) |
LLPs are a form of partnership that has no general part-ners. Partners share the company profits equally and report them as income on their individual tax returns. All partners have an equal say in how the business is man-aged, and each has limited personal liability for business debts. An LLP protects each partner from debts against the partnership arising from professional malpractice lawsuits against another partner. LLPs tend to be formed by profes-sionals, such as accountants, lawyers, and architects. |
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Real Estate Syndicates |
Real estate syndicates are organizations with many investors who jointly participate in a real estate investment. When they meet the definition of “dealing in securities,” they must adhere to the rules and regulations of the Securities and Exchange Commission. An investment is a security, as defined by the Federal Securities Act of 1933, if itʼs: - An investment of money • A group enterprise • Intended to make a profit, and that profit is solely derived from the management effort of others |
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Joint Ventures |
Joint ventures arenʼt a business structure, per se, but are a business arrangement similar to a partnership—a temporary organization formed by two or more parties to invest in real estate (or other investments). Participants may be corporations, partnerships, LLCs, or other entities, or the parties may hold title as joint tenants or tenants in common. Each party is responsible for the profits, losses, and costs associated with the project. |
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Trustor |
Person Creating the trust |
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Trustee |
The person established in charge of carrying out the terms of the trust. |
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Beneficiary |
The person on who's behalf the trust is being created. |
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Real Estate Investment Trusts (REITs) |
A REIT is a specific investment trust that meets the IRS requirements to avoid the double tax burden imposed on corporate earnings. |
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Real Estate Mortgage Trusts (REMTs), or Mortgage REITs |
REMT's, sometimes just referred to as a Mortgage REITs, donʼt buy properties, but instead invest in real-estate debt. Some used to make loans, but now most primarily buy commercial and residential mortgage-backed securities. Many focus on buying mortgage securities backed by Freddie Mac and Fannie Mae. REMTs make money by incurring short-term debt to acquire longer-term mortgage securities, earning the spread between the two rates. During periods when the Fed keeps short-term interest rates low (to stimulate the economy), mortgage REITs are popular investments because they reduce the REITʼs borrowing costs |
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Equity REITs |
Equity REITs, on the other hand, do purchase properties. They make money primarily from their propertiesʼ rents. Usually when you hear about a REIT, itʼs an equity REIT. Equity REITs tend to specialize in owning certain building types (such as apartments, regional malls, self-storage, office buildings or hotels). |
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Hybrid REITs |
Hybrid REITs combine equity and mortgage REITs. Hybrid REITs get their income from property sales, rent, and interest earned from mortgages and mortgage-backed securities. |
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Real Estate Mortgage Investment Conduit (REMIC) |
A real estate mortgage investment conduit (REMIC) is an entity used to pool mortgage loans and issue mortgage-backed securities. REMICs hold commercial and residential mortgages in trust, and then issue interests of varying classes in these mortgages to investors. REMICs are similar to collateralized mortgage obligations (CMOs), which may be a more familiar term to you, and are treated like a partnership for federal income tax purposes, with income passed through to interest holders. REMICs have been around since 1987 when they were introduced as a vehicle to secure residential mortgages in the U.S |
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Elements of a Lease |
Offer Acceptance Legal capacity Legal purpose Consideration Mutual assent |
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Cooperatives |
A cooperative is a joint venture with its shareholders formed for their benefit and governed by them. It’s usually, though not always, a not-for-profit corporation(trust-type cooperatives will be discussed shortly). All cooperativeshave specific criteria for residents. |
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Co-op FHA Section 213 |
Provides up to 97% insured financing for certain qualified cooperative projects. |
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Co-op FHA Section 221(d)(2) |
provides up to 100% insured financing, and is specifically designed to meet the needs of certain inner-city housing shortages. |
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Type of - Low-Rise Office Buildings |
Neighborhood Offices Medical Office Buildings Homogeneous Tenants - Doctors and other medical professionals aren’t the only groups that mayjoin together in a relationship that allows them to share common expenses, such as parking, a reception area, common administrative staff, and other office amenities. Just as medical tenants offer similarand oftencomplementary services, so doother business people in service professions. |
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Non-Productive Square Footage |
Total square footage x efficiency rate = non productive space |
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Productive Square Footage |
Total square footage –non-productive square footage = productive space |
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Determine Monthly Rental Rate |
To determine monthly rental rate, multiply the number of productive square feet by the rental rate and then divide that by 12. |
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Net Lease |
is one in which the tenant pays some or all of theproportionate expenses for taxes, insurance, and utilitiesseparately. |
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Double Net Lease |
the tenant also pays for maintenance expenses |
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Triple Net Leases |
is one in which the tenant pays all expenses related to the property in addition to the rent and common area maintenance (CAM Charges) which include all expenses involved in maintaining common areas, such as water/sewer, trash, restrooms, landscaping, parking lots, fire sprinklers, the roof, or anything else that all tenants share. In addition to these costs, atriple-net lease sometimes requires a tenant to pay the interest payments on the lessor’s mortgage on the property. hese charges are in addition to base rent. Triple-net leases are most frequently used for free-standing office buildings. |
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Strip store buildings |
are small stores that run along the busiest streets in communities. They offer a variety of shops, services, and commodities—from florists and delis to card shops, novelty stores, boutiques, specialty shops, and many others. Strip stores serve both the local community and the larger city/county. |
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Strip Store Leases |
strip store leasesrun three to five years, and include options to renew, which isdesigned to protect the tenants. Steady clientele, less likely to relocate. |
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Graduated lease |
is one in which the lease payment increases incrementally from one period to the next throughout the lease term. Because building owners must make sure the rental income accounts for inflation and cost increases, ownersoften build rent escalation provisions into their leases. One way this is done is through a graduated lease. However, evengraduatedleases may contain escalation clauses. |
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A gross lease is the simplest lease form |
With a gross lease, all expenses related to the property are part of the lease payment and are paid by the landlord. |
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Full service leases, referred to as “FS |
include the base rent, the nets, utilities and janitorial expenses in one price per square foot lease rate, which allows the base rent to remain stable over time. |
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Modified gross leases are often referred to as “MG |
Here, all (or part) of the nets are included as part of the base rent (not as a separate charge). Unlike a triple net lease, this agreement includes one, two or all three of the nets as part of the base rent. It’s important to define what part of the nets have been included or modified. Typically, a modified gross lease will include all the nets in the base rent, but not utilities or janitorial. |
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Loft leases provide for rental of floor space |
for wide open loft type spaces. Because there are no (or few) roomdividers, the tenant may wish to divide the space. Loft leases, however, generally preclude the tenant from making structural changes or any changes that could impact utility services. |
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Estoppel certificate |
An estoppel certificate simply verifies facts that are in writing, and “stops” a party from later disavowing the facts. “Yes, I agreed to these terms.” The estoppel certificate is often used when the property is changing hands and the new landlord wants to verify the terms under which the current tenants are leasing the property. |
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HEAVY MANUFACTURING |
buildings are specialized buildings used to convert raw materials into useful objects. These buildings are generally capital and labor intensive. Examples include steel mills, automobile factories, and petroleum refining or chemical manufacturing plants |
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LIGHT MANUFACTURING |
Light manufacturing buildings are typically where assembly and distribution processes occur, and they involve items produced for consumers. Theyʼre are typically cheaper to develop than heavy industrial properties, because they donʼt require as much expensive equipment. They include apparel, home accessories, food, cloth-ing, furnishings, computers, and electronic device manufacturing, as well as research laboratories. |
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LOFTS |
Vertical style manufacturing buildings, or lofts,are built to fit inside crowded downtown areas and used by light manufacturing industries. Movement of goods is often achieved through the use of large freight elevators. |
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SELF-STORAGE FACILITIES |
Self-storage facilities offer individual lockable units for storage usage. These facilities are often climate controlled, and allow 24/7 access. Self-storage units are often rented at short-term monthly rates. Theyʼre primarily used by residen-tial property owners with little space on their current property, or by commercial and industrial firms that only need small spaces or are seeking to save on traditional warehousing costs. |
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WAREHOUSE BUILDINGS |
Technological advancements have led to increased development of open layout warehous-es by commercial and industrial firms. These buildings are used to store large quantities of raw materials and excess inventory goods. The large, open floor plans allow greater mobility in trans-ferring goods from one area to another than previous vertical layouts allowed. |
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Surface Rights
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include land and water rights
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Subsurface Rights |
Pertain to the right to use underground resources such as natural gas and minerals. These are often referred to as mineral rights. |
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Air Rights |
involve the right to use the open space above buildings up to a height established by law. |
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Reservation |
Indentifies and interest such as mineral rights that the seller will retain in conjunction with a specification of access for the removal of the minerals. |
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3 Types of Water Rights |
Riparian Rights - are granted to landowners whose land abuts a river or stream. Littoral Rights - are granted to landowners whose land borders closed bodies of water, such as lakes and oceans. Ground Water - also known as percolating water, is water found below the earths' surface, usually an aquifer. |
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Local Economic Data |
Visit the local Chamber of commerce for economic data about business and local growth and decline. |
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Full Capacity Income of Property |
= Potential gross income |
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Effective Gross Income |
Potential gross Income - vacancy and credit losses = effective gross income |
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Net Operating Income |
Effective Gross Income - operating expenses = net operating income |
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Net Taxable Income |
Net Operating Income - Interest deductions = net taxable income |
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Residential Gross Rent Multiplier |
One to four units: Sales price divided by monthly gross rent = gross rent multiplier |
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Gross Income Multiplier , future income |
Five + units: Sales price divided by annual gross income = gross income multiplier |
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Capital |
The risk an investor cannot secure financing at an affordable rate |
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Time Value of Money |
Money gains or loses over time |
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Financial Risk |
The risk that is directly related to leverage |
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Business Risk |
The risk that the required return on investment capital will not be met is called |
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Business Risk |
The risk that the required return on investor capital will not be met |
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Time Value of Money |
The idea that $100 gains or loses over time |
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Dynamic |
Economic, Tax, and market changes |
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Static Risk |
Insurable - Accident liability, fire theft, and vandalism |
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Uninsurable Business Risk |
Dynamic |
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Cap |
Capitalization Rate Calculations: Income (Multiple Cap Rate by Value) R x V=I Value (Divide Income by Rate) I / R = V Rate (cap rate) Divide Income by Value I / V=R (remember to multiple decimal by 100 to get percentage |
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Principal of Anticipation |
foundation to the income capitalization approach |
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Cash on Cash Return |
the ratio of annual before tax cash flow to the amount of cash they've invested, and it's expressed as a percentage So if an investor had an annual before tax cash flow of 9000 and had put 350,000 down on the property, the cash on cash investment would be 2.6% ei... 9,000/350,000 |
