TAX SHELTER
Property throwing off an income-tax loss that can offset other income., An investment that shields income or gain from payment of income taxes; a term used to describe some tax advantages of owning real property (or other investments), including postponem
BUSINESS RISK
refers to the risk that an investment will not yield the necessary return on investor capital. This may occur as a result of changes in the potential gross income attributable to leasing activities, contract rents, or operating expenses.
PRO FORMA STATEMENT
is an estimation and projection of how much net operating income will be available through the property's income and expense activities in any future periods
NET OPERATING INCOME NOI
The income projected for an income-producing property after deducting losses for vacancy and collection and operating expenses.
TWO TYPES OF BUSINESS RISK
Dynamic risk is uninsurable risk associated with changes in the economy, income taxes, and supply versus demand issues. Static risk is insurable risk associated with events such as accident liability, fire, theft, and vandalism.
CAPITAL RISK
s associated with the investor's ability to secure borrowed funds at affordable rates.
Financial risk
measures the leverage (the use of borrowed funds) that may be comfortably placed on property. This is measured in relationship to investor equity funds. For example, when borrowed funds are used with low equity down payments, any change in the property's
LEVERAGE
The use of borrowed money to finance the bulk of an investment. Leveraging refers to the use of borrowed funds. This is dependent on the availability of funds within the debt credit markets. The ratio of debt to investor equity must be studied carefully.
LIQUIDITY
The ability to sell an asset and convert it into cash at a price close to its true value in a short period of time.
Examples of liquid assets would include investment vehicles such as stocks, bonds, cash, and savings accounts.
TYPES OF INVESTMENT PROPERTIES
Unimproved land
Commercial properties, such as offices, retail stores, shopping centers and malls, and hotels and motels
Residential properties (single-family and multifamily)
Mixed-use properties
Manufacturing properties, such as industrial, light manufa
UNIMPROVED LAND
Land in its natural state without any man-made alterations. DEAD MONEY during the investor holding period because it is non-income-producing
OFFICE SPACE
Commercial office properties, which are occupied by businesses, can be single-tenant or multitenant properties. Depending on location, office buildings come in various sizes. They can be lowrise buildings consisting of 1 to 3 stories above grade, midrise
RETAIL STORES
is broken down into different classes: strip centers, neighborhood centers, shopping malls, regional shopping centers, and outlet malls.
Generative retail sites and product lines are those that consumers have in mind as distinct destinations when beginnin
ANCHOR TENANT
An anchor tenant is defined as a large space user whose presence will attract other tenants with the same or different product lines.
SHOPPING CENTER AND MALLS
Shopping malls are usually midsize complexes. Like regional centers, they are enclosed or contain pedestrian cover to allow the shopper and the retailer immunity from inclement weather. This provides uninterrupted year-round shopping. Also like regional c
STRIP CENTERS
Strip centers (also called strip malls) are usually small in nature. They generally contain 6 to 15 stores that range in services. A strip center will not serve a large radius of residents; rather, it will generally only be known by the immediate resident
NEIGHBORHOOD SHOPPING CENTER
The neighborhood shopping center includes the neighborhood convenience store. Sharing the center's location and population draw will be other service-oriented retailers such as dry cleaners, hardware stores, fast-food chains, restaurants, and others.
FACTORY OUTLET MALLS & CENTERS
Factory outlet malls and centers become the final destination for all unsold articles, which are sold at a fraction of the original cost.
Due to the nature of the goods being sold, inexpensive locations are preferred. Lower rental costs allow the retailer
HOTELS & MOTELS
it is not uncommon to find hotel or motel properties that cater to short-term and long-term stays. For example, a hotel highrise property that consists of 400 rooms could be split into two sections, with the lower portion consisting of traditional short-t
SINGLE/ MULTI FAMILY UNITS
Investors look to multifamily housing to generate income (cash returns on the invested capital) through rental activities. Multifamily housing can be found in the following categories of property construction: lowrise (usually 2 to 6 family dwellings), mi
MIXED USE PROPERTIES
An example of this would be a midrise or highrise property with commercial use in the lower portion and residential use in the upper portion of the building.
MANUFACTURING PROPERTIES
THREE PRIMARY TYPES Heavy industrial properties are the places where raw materials are converted into useful objects through manufacturing processes. The assembly and distribution of product lines occurs in light manufacturing facilities. Loft or warehous
FEE SIMPLE OWNERSHIP VS LEASEHOLD PROPERTY
Whereas fee simple ownership (ownership in the land) is always preferred, it is not always possible for the land to be purchased. In this event, individuals and legal business entities enter into long-term ground leases. The purpose behind the long-term l
THREE PHASES OF FINANCIAL ANALYSIS & PROPERTY OWNERSHIP
acquisition: involves conducting financial analysis to determine the feasibility of an investment project and the impact of acquisition.
holding: financial analysis is conducted to determine whether the property owner should sell the asset, hold the asset
TIME VALUE OF MONEY
Deals with and is based on the purchasing power of the dollar when received., Money's potential to grow in value over time. The relationship between time, money, a rate of return, and earnings growth.
DISCOUNTED CASH FLOW
This compares the value of the future cash flows of the project to today's dollars using time value of money techniques.
CASH WORLD VS TAX WORLD
In the cash world, properties are bought and sold, which establishes their market value. The tax world involves the tax consequences resulting from a property's income operations, which establish a property's book value.
GROSS INCOME
Total income from property before any expenses are deducted.
CASH FLOW
The net spendable income from an investment., Income produced by an investment property after deducting operating expenses and debt service.
RECONSTRUCTED INCOME/EXPENSE STATEMENTS
are created annually to reflect upward or downward changes in the income stream of a property, as well as the expenses attributable to the running of the property. They are also used to formulate a property's annual budget.
POTENTIAL GROSS INCOME
The gross rent roll or gross receipts attributable to the rental activities of a property if that property were 100 percent leased.
VACANCY & COLLECTION LOSS
which is always expressed as a percentage figure, represents a percentage of loss attributable to vacancy and collections; this figure is subtracted from the PGI. For example, an investor applies a 5 percent vacancy and collection loss against the PGI of
OTHER INCOME
Income that is not derived from the main activity of the property. For example, a highrise apartment building may contain commercial spaces or may generate additional income through retail space, garage rent (if leased to a private operator), parking inco
EFFECTIVE GROSS INCOME
The income attributable to a property after deductions have been made for vacancy and collection losses and after adding any other income derived from that property., The anticipated income resulting from the estimated potential gross income from a rental
MATH FORMULA FOR EGI
Potential gross income (PGI)
- Vacancy and collection loss (V&C)
+ Other income (OI)
= Effective gross income (EGI)
OPERATING EXPENSE ANALYSIS
Every property experiences expenses associated with the running of that property. Operating expenses are broken down into three basic categories of expenses: fixed expenses, variable expenses, and reserves for replacements.
FIXED EXPENSES
Fixed expenses can be defined as expenses that do not vary as a result of a property's occupancy rate. Fixed expenses consist of only property taxes and property insurance.
VARIABLE EXPENSES
Expenses that will fluctuate upward or downward with the property's leasing activities. Variable expenses consist of property maintenance, repairs, payroll, utilities, trash removal, and management fees
RESERVES FOR REPLACEMENT
Reserves for replacements can be defined as available cash on hand to effectuate any anticipated or unanticipated major capital improvement to the property, for example a new roof, new mechanical equipment, or facade restoration.
MATH FORMULA FOR NOI
Effective gross income (EGI)
- Operating expenses (OE)
= Net operating income (NOI)
NET OPERATING INCOME
I represents the cash flow attributable to the property after deducting all property related expenses but before deducting any debt service (mortgage payments) or federal income taxes (which would include items such as mortgage interest, depreciation allo
CAPITALIZATION RATE
The rate of return a property will produce on the owner's investment., The rate of return a property will produce on the owner's investment.
RATE OF RETURN
The ratio between earnings and the cost of the investment. ROI is defined as annual profit (based on a prescribed interest rate) sought by the investor on the overall cost of acquisition. It is based on the purchase price.
INCOME RATE VALUE FORMULA
INCOME= RATE * VALUE
RATE= INCOME/ VALUE
VALUE= INCOME/ RATE
When the income and rate amounts are known, we divide to obtain the value.
When the income and value amounts are known, we divide to obtain the rate.
When the rate and value are known, we multip
DEBT SERVICE
Mortgage payments, including principal and interest on an amortized loan. is defined as the incremental cost of periodic (usually monthly) principal and interest payments required to pay back the borrowed funds.
BEFORE TAX CASH FLOW --BTCF
The cash flow attributable to a property after deducting the annual cost of debt service.
Net operating income (NOI)
- Annual debt service (ADS)
= Before-tax cash flow (BTCF)
EQUITY DIVIDEND RATE
The equity dividend rate is defined as the percentage of profit that the investor receives only on the cash he or she invested in the property (commonly referred to as cash-on-cash return).
Before-tax cash flow � Equity = Equity dividend rate
CASH ON CASH RETURN
Cash-on-cash return is another term for equity dividend rate.
AFTER TAX CASH FLOW -ATCF
After-tax cash flow is the amount of remaining cash flow after deductions are made from the before tax cash flow for income taxes resulting from the property's income activities.
Before-tax cash flow (BTCF)
- Income taxes (IT)
= After-tax cash flow (ATCF)
DOWN PAYMENT FORMULA FOR DESIRED EQUITY DIVIDEND
Before-tax cash flow � Equity dividend rate = Required down payment
TAX WORLD--
NET OPERATING INCOME NOI
+RESERVE FOR REPLACEMENT RR
-MORTGAGE INTEREST MI
-ANNUAL DEPRECIATION AD
-CARRY OVER SUSPEND LOSSES, IF ANY CSL
=TAXABLE INCOME TI
X MARGINAL RATE
=INCOME TAX
CASH WORLD
POTENTIAL GROSS INCOME
- VACANCY & COLLECTION LOSS
+ OTHER PROPERTY INCOME
=EFFECTIVE GROSS INCOME
-OPERATING EXPENSES
=NET OPERATING INCOME
- ANNUAL DEBT SERVICE
=BEFORE TAX CASH FLOW
- INCOME TAX
=AFTER TAX CASH FLOW
RENTABLE AREA
Rentable area is the total area or square footage of a floor or unit of space in an office building (as determined by the property owner) to be used for the purposes of calculating the annual rent.
LOSS FACTOR
The difference between rentable square footage and usable square footage, Rubber Ruler: The difference between rentable square footage and usable square footage. It is measured as % of space not useable (R/U).
Loss factor = (Rentable area - Usable area) �
USABLE AREA
Usable are is the area obtained by subtracting the loss factor from the rentable area.
Usable measurement can be calculated from the inside tenant wall (separating the common areas from the office) to the window line, but methods for establishing this fig
CARPETABLE ARE
is not a term used by property owners, but it can be defined as the usable space measurement minus columns, convectors, walls, and floor obstructions of all types within a given space. It is the area that you could lay carpet down or walk on. It is an ess
LEASE TYPES
Gross lease:
Net lease
Percentage lease
Loft lease
GROSS LEASE
In a gross lease, the lessee (tenant) pays the lessor (landlord) basic rent. The base rent is inclusive of all property charges at that time. In essence, the lessor bears financial responsibility for furnishing all services associated with the tenancy. Ge
NET LEASE
In a net lease, the lessee (tenant) pays the lessor (landlord) a net rent. It is termed net rent because the amount does not include any consideration for the property operational costs and taxes. It represents the NOI to the property owner or, in other t
PERCENTAGE LEASE
Percentage leases can be gross or net leases. They are commonly used in retail lease transactions. In a percentage lease, the lessee (tenant) pays the lessor (landlord) a minimum base rent plus a percentage of the merchant's sales over a natural breakeven
LOFT LEASE
Loft properties are used for storage and warehousing. Due to the nature of this type of use, property owners have no need to offer services that would normally be required in an office building
USE CLAUSE
The landlord has a legal right to place restrictions on the use of the property, as long as they are in compliance with the law.
ATTORNMENT CLAUSE
Attornment is the section within the lease that describes the party that the tenant is required to pay rent to as well as the only party that the landlord will accept the rent from.
A landlord will not accept payment of rent from any individual or entity
ESTOPPEL CLAUSE
An estoppel certificate is a legal form that states that the unpaid balance due on a lease, loan, or other agreement to receive monies as of a specified date is in full force and existence. Estoppel certificates are used in two frequent types of transacti
SUBLEASE/ ASSIGNMENT CLAUSE
the part of most standard leases that requires the tenant to obtain the landlord's permission before allowing someone else to live on the premises and pay all or part of the rent
SUBORDINATION CLAUSE
The subordination clause in a lease deals with the leaseholder's rights in relation to other lien positions or encumbrances within that property and sets forth the priority that a lease takes in relationship to the rights of a ground (land) owner or a len
TYPES OF ELECTRIC DELIVERY SERVICE
1. DIRECT METERED
2.SUBMETERED
3.RENT INCLUSION
DIRECT METERED ELECTRIC SERVICE
each unit is hooked up to and serviced by the utility company responsible for that area. The energy consumer receives direct billing from the utility company and is responsible for paying for only the actual consumption measured by a meter reading.
SUB METERED ELECTRIC SERVICE
Submetering occurs when a property owner purchases electricity in bulk for the entire building. The property owner is responsible for paying one master bill for service to the entire property (common areas as well as offices and/or resident units). The ut
RENT INCLUSION METERED ELECTRIC SERVICE
The term rent-inclusion does not mean that the electric service is included in the quoted rent figure. Instead, it is added to the rent figure. The formula for calculating the annual base electric charge is as follows:
Annual base electric charge = Proper
LEASE ESCALATION CLAUSE
The lease escalation clause is used to protect the commercial property owner against the increased cost in operations that arises from inflation.
PROPORTIONATE SHARE
refers to tenant space as a percentage of the gross rentable area of the building. The formula for determining the proportionate share is as follows
Proportionate share = Tenant rentable area � Building gross rentable area
BASE YEAR
The year chosen as a point of reference or basis of comparison for prices in other years; the benchmark year.
OPERATING STOP/ REAL ESTATE TAX STOP
is the prescribed dollar-per-square-foot amount in annual property operating expenses that it is a landlord's responsibility to cover. Any overage incurred to operate the property is borne by the tenant and paid as additional rent to the landlord.
REAL PROPERTY TAX CLAUSE
The landlord and tenant negotiate the base year as a beginning point for future increases to be passed through to the tenant and also negotiate and establish the proportionate share of tenant space relative to the total area of the building. This share is
DIRECT ESCALATION CLAUSES
is defined as the property's annual dollar increase over the base year amount, which translates to a rent increase to each tenant according to the tenant's proportionate share. This pass-through comes in the form of an annual operating statement. The stat
PORTER'S WAGE ESCALATION FORMULA
Ties the rent escalation to the wages of the buildings cleaning and building maintenance personnel(Called "porters")
Rent increase = Rentable area of tenant space � Wage rate increase over the base rate
FRINGE BENEFITS
include paid vacations, sick days, and health insurance, for example.
FIXED PERCENTAGE INCREASES
During lease negotiations, landlord and tenant agree on a fixed percentage that is applied annually to the fixed rent. The formula is as follows:
Annual fixed rent increase = Fixed annual rent � Annual percentage increase
CONSUMER PRICE INDEX
is an index that acts as a measure of the purchasing power of the U.S. dollar as it relates to the purchase of a basket of goods, services, and products.
Step 1: Determine the percentage change in the CPI over the base month or year
Percentage change in C