Real Estate Chapter 16 Flashcards

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Questions and Answers

What is Net Operating Income?

Equal to debt service
Gross income minus expenses (correct)
Cash flow before tax
Total income from rents only

What does the capitalization rate represent?

It is the percentage which is the sum of the discount rate, the effective tax rate, and the recapture rate.

What is the Time Value of Money (TVM)?

Money is worth less over time
Future money is more valuable than present money
Money grows with inflation
Money available now is worth more than the same amount in the future (correct)

Define leverage in real estate.

The use of borrowed capital to increase the potential return of an investment. Signup and view all the answers

How is Cash on Cash Return calculated?

Cash Flow / Down Payment Signup and view all the answers

What is Usable Square Footage?

Space that can be occupied by a tenant. Signup and view all the answers

What comprises Gross Income?

Total amount collected from rents and other income-producing opportunities. Signup and view all the answers

What is a Pro-forma Statement?

An accounting statement that forecasts income and expenses. Signup and view all the answers

What is Rentable Square Footage?

Usable area that can be leased or rented. Signup and view all the answers

Define Common Areas.

Spaces in a commercial building shared by tenants or residents. Signup and view all the answers

What is a Net Lease?

A lease requiring the tenant to pay some or all property expenses. Signup and view all the answers

What does a Gross Lease entail?

The lessor meets all property charges incurred through ownership. Signup and view all the answers

What is a Percentage Lease?

A lease where the rent is based on a percentage of sales made on the leased premises. Signup and view all the answers

What is Estoppel?

An instrument executed by the mortgagor stating the present status of a mortgage. Signup and view all the answers

Define Anchor Stores.

A key tenant in retail, typically a large store in a shopping mall. Signup and view all the answers

What is Debt Service?

The annual amount a debtor pays to repay borrowed money. Signup and view all the answers

What does Before Tax Cash Flow represent?

Net profit/loss calculated before taxes are paid. Signup and view all the answers

How is After Tax Cash Flow calculated?

Net profit/loss realized after taxes are deducted. Signup and view all the answers

What is a Lease Escalation Clause?

A contract provision allowing for passing cost increases to another party. Signup and view all the answers

Define Tax Shelter.

Any method of reducing taxable income. Signup and view all the answers

What is Rate of Return?

A profit on an investment expressed as a proportion of the original investment. Signup and view all the answers

What are the timelines associated with a 1031 Exchange?

45 days to identify, 180 days to close (C) Signup and view all the answers

What is Straight-line Depreciation?

A method of calculating depreciation assuming equal value loss each year. Signup and view all the answers

List some types of lease clauses.

Management level, amenities, use clauses, estoppel agreement, sublease assignment. Signup and view all the answers

What defines a loft lease?

Renting out an entire space. Signup and view all the answers

How is a tax deduction calculated?

Loss multiplied by the tax bracket percentage. Signup and view all the answers

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Study Notes

Real Estate Key Terms

Net Operating Income (NOI): Gross income minus expenses; also known as cash flow.
Capitalization Rate: Relationship between net operating income and present value; calculated using the formula: Value = Income / Rate.
Time Value of Money (TVM): Concept that current money has greater value than future money due to earning potential.
Leverage: Use of borrowed funds (e.g., mortgages) to amplify potential investment returns.
Cash on Cash Return: Measures percentage return on investment; calculated as Cash Flow / Down Payment.
Usable Square Footage: Area occupied by a tenant, excluding non-usable spaces like elevators and stairs.
Gross Income: Total revenue from rents and other income sources, such as laundry and storage fees.
Pro-forma Statement: Predictive accounting document forecasting income/expenses over several years, often used by investors for return estimations.
Rentable Square Footage: Total area that can be leased to tenants.
Common Areas: Shared spaces within commercial buildings, including lobbies, corridors, and elevators.
Net Lease: Lease where tenant pays rent plus some or all property expenses like taxes and maintenance.
Gross Lease: Lease in which lessor covers all property expenses.
Percentage Lease: Rental agreement based on tenant sales volume, typically with a minimum rent.
Estoppel: Document confirming the current status and balance of a mortgage.
Anchor Stores: Major retail tenants in shopping centers, such as department stores.
Debt Service: Total annual amount owed to repay borrowed funds.
Before Tax Cash Flow: Profit/loss calculated before deducting taxes.
After Tax Cash Flow: Profit/loss calculated after taxes are deducted.
Lease Escalation Clause: Provision allowing cost increases to be passed to another party, commonly tied to inflation.
Tax Shelter: Techniques to reduce taxable income and subsequently lower tax payments.
Rate of Return: Profit from an investment expressed as a percentage of the initial investment amount.
1031 Exchange: Allows deferment of capital gains taxes by reinvesting proceeds into a similar property; key timeframes include 45 days to identify and 180 days to close on a new property.
Straight-line Depreciation: Methodical depreciation of an asset, assuming equal value loss yearly; residential properties depreciate over 27.5 years, commercial over 39 years.
Lease Clauses: Include management levels, amenities, use clauses, estoppel, subleasing, electric service, and escalation clauses.
Loft Lease: Involves renting an entire space rather than individual units.
Example of Tax Deduction: Loss of $100,000 at a 36% tax bracket yields $36,000 in tax savings (deferred).