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Notes on commercial and investment properties for NYS Real Estate exam
Investment Property TypesOffice Building Classes | Class A | newer | | | Class B | | | Class C | lowest condition | | | low-rise | 1-3 stories | | | mid-rise | 3-15 stories | | | high-rise | >=20 stories | Retail Property Types | strip centers | 8000-30000 ft2 | | | neighborhood centers | 30,000-100,000 ft2 | | | outlet centers | 100,000-300,000 ft2 |
Office Building Classes are based on GAAP Key TerminologyNOI | equal to the gross income minus expenses (and sometimes debt service) | Time Value of Money (TVM) | the idea that money available at present time is worth more than the same amount in the future data due to its potential earning capacity | leverage | the use of borrowed capital (mortgage) to increase the potential return of an investment | cash on cash return | a percentage return on money invested in a property by an investor | gross income | the total amt collected from rents & other income producing opportunities | debt service | annual amt to be paid by a debtor on an obligation to repay borrowed money | tax shelter | any method of reducing taxable income resulting in a reduction of the payments to tax collecting entities | before tax cash flow | the net profit/loss calculated by subtracting expenses from income before taxes are paid | after tax cash flow | the net profit/loss realized after taxes are deducted | rate of return | a profit on an investment over a period of time, expressed as a proportion of the original investment | rentable square footage | usable area that can be leased/rented to a tenant |
| | Lease Clause for Tenantscommencement date | contracted date when activities begin | move-in date | the date at which the tenant will move in | estoppel | an instrument executed by the mortgagor setting forth the present status and the balance due on the mortgage as of the date of the execution | lease escalation clause | a contract provision allowing for one to pass an increase in costs to another party |
Pro Forma StatementsPro-Forma statement | an accounting statement that forecasts income and expenses for a period of time, typically 5 or more years | 1. | Gross potential income | 2. | effective gross income | 3. | expenses | 4. | net operating income (NOI) | 5. | before tax cash flow |
Typically used by investors to estimate their rate of return for a particular property
-It often takes longer to find a new tenant for commercial building than a residential building
-Lenders will typically require the buyer to have capital reserves placed in an escrow account SNDASubordination | tenant subordinates lease to mortgage | Non-Disturbance | protects tenants from being thrown out of the property | Attornment Agreement | tenant commitment to allow for ownership to change |
| | Missed/Unsure QuestionsHow will the use of positive leverage benefit a real estate investor? it will allow him to purchase a larger building | How is a multi-family property valued different than an office building? both properties are valued the same way | What is considered a primary commercial property type? industrial properties | What is the term for usable area that can be leased/rented to a tenant? rentable square footage | What is the pricing on residential real estate based in part on? emotion | What is an important aspect of industrial warehouse space? ceiling heights | The amount of cash flow a property produces is used to determine the value of what property type? commercial | In addition to the cash needed for the down payment, what do you also need to run and maintain the property? liquidity | If an owner has enough cash to fund the operations of a commercial investment property while the cash flow becomes stabilized, what is he considered? liquid | What is a common management fee to assume for a large multi-family building? 5% | What type is largest in area? rentable square footage | In which type of lease does the tenant pay a fixed amt in rent, while landlord pays for building expenses? gross lease | Town Brokers have recently signed a lease to occupy an entire office building. What type of lease did Town Brokers most likely sign? NNN lease | In a typical commercial lease, who is given the option to extend a tenant's lease? tenant | How can a utility bill be passed through to the tenant if sub-metering proves unfeasible? rent inclusion | A non-recurring expense is considered what? capital expenditure | What are mortgage payments made up of? principal & interest | What do lenders typically have a buyer place in an escrow account? capital reserves | What is an underlying component of a cap rate? risk, sweat equity, cash | Which property is risky as an investment? duplex apartment house |
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