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Leasing is more cost effective and offers greater operating flexibility than owning. Over 80 percent of commerical properties are leased.
Compounding is exactly the opposite of discounting.
The FV is greater if compounded at 8 percent rather than 7 percent. It is also greater if it is compounded semi-annually rather than annualy.
The more frequent the compounding occurs and the higher the compunding percentage, the greater the FV will be.
What happens to the monthly mortgage payment if you adjust the amortization period?
By increasing the amortization period, the monthly mortgage payment will decrease. With an increase in the amortization period, there is more time to pay off the loan which results in lower monthly payments.
A 30 year mortgage has lower payments than a 20 year mortgage.
What happens when you adjust the cap rate?
The higher the cap rate, the lower the value, and the lower the cap rate, the higher the value.
- The higher the cap rate, the weaker the property.
- The lower the cap rate, the stronger the property.
Buyers will want a higher cap rate because they will be able to purchase the property at a lower cost.
Sellers wants a lower cap rate because they will be able to sell their property at a higher cost.
Essentially, High Cap Rates Drive Down Values.
Payment In Lieu of Taxes
Given by IDA's to help make development more feasible and to attract developers to the area.
Determining the Value of a Propety
Net Operating Income Divided By Cap Rate = Property Val.
What is the primary determinant of value?
The Net Operating Income
What is the IRR?
the rate of interest that discounts all future cash flows to equal the initial investment
the rate of interest for discounting such that NPV equals zero
What is NPV?
sum of PV of all future cash flows less the initial investment
What is Percentage Rent?
it is the overage rent paid on sales above a certain level
the tenant pays all expenses.
the rent is all inclusive. A gross lease is riskier for the Landlord than a net lease.
Lower the Effective Rent Income.
Ex) Free Rent for 6 Months
require tenant to pay its share of expenses above the stop. Savings are not passed through to the tenant.
Debt Coverage Ratio
Lenders use the Debt Coverage Ratio to indicate the riskiness of a loan. Normal DCR is 1.2
DCR = Net Operating Income/Yearly Debt Service
Full Recourse Vs. Non-Recourse
In a full recourse loan, the borrower is personally responsible for the loan.
In a non-recourse loan, the lender can only come after the loans collateral.
Corporate Ownership = Double Taxation
General Partnership Vs. LLC
General Partnership = Full Liability
LLC = Limited Liability
means that the equity yield increases with a larger mortgage.
is the responsibility of the buyer and is the research done on a property so that the buyer knows what he is getting.
Typically, a buyer is allowed a certain amount of time after the contract is executed to perform the due dilligence to decide if he wants to go through with the deal. Due Diligence can involve environmental testing, structural analysis, etc.
How to Calcuate Cash-On-Cash/Equity Yield/Dividend Yield
Cash Flow Divided By Equity (Initial Investment) = Cash on Cash
Cash Flow/Equity=Equity Yield
Selling Price at the End of 5 Years - Costs of Sale - Mortgage Balance = Net Proceeds
Loan to Value
Mortgage ÷ Total Project Costs=LTV
Annual Loan Payment / Mortgage = Loan Constant
You give the bank a mortgage, so you are the mortgagor. The bank receives the mortgage (and gives you a loan), so the bank is the mortgagee ...
During a Loan Workout Banks Are ...
Less Likely to Permanently Lower the Interest Rate
Loan Amortization VS Loan Term
Loan term is less than or equal to amortization period but never greater than amortization period.
Long term is always less or equal than amortization period.
What is a Phase 1 Environmental Assessment?
is a report prepared for a real estate holding that identifies potential or existing environmental contamination liabilities. The analysis, often called an ESA, typically addresses both the underlying land as well as physical improvements to the property.
The actual sampling of soil, air, groundwater and/or building materials is typically not conducted during a Phase I ESA. The Phase I ESA is generally considered the first step in the process of environmental due diligence.
Opinion and Estimate of Value ... Not Official.
Effective Gross Income
Potential Gross Income - Less Vacancy = EGI
Net Operating Income
Effective Gross Income - Expenses = NOI
Net Operating Income - Yearly Debt Service = Cash Flow
How to bring feasability to a project?
Cut Costs ... Raise Rents ... Lower Expenses
What are Basis Points?
100 Basis Points = .01 = 1 %
50 Basis Points = .005 = 1/2 %
25 Basis Points = .0025 = 1/4 %
Going In Vs. Terminal Cap Rate
The Going In Cap Rate - is the cap rate based on the NOI and purchases price at the time the buyer purchases the property.
The Terminal Cap Rate - is the same thing but at the time the seller sells the property.
What determines Minimum Rent?
Covering Expenses ... Debt Service .. Equity Yield Promises
Add ALL 3 up and Divide By Square Footage
Meanign Behind a Postive and negative NPV
Positive NPV - means that an investor has obtained an IRR greater than his desired return and that he can invest that much more into the property and stil receive the desired return.
Negative NPV - means he didnt receive his desired return and must invest that much less to receive a positive return.
What happens to the NPV if you adjust the discount rate?
Lowering the Discount Rate Positively Impacts the NPV
Raising the Discount Rate Negatively Impacts the NPV