Podcast
Questions and Answers
Why might investors demand a lower property price when interest rates are high?
Why might investors demand a lower property price when interest rates are high?
- High interest rates yield a higher gross income.
- High interest rates contribute to lower Cap Rates.
- High interest rates yield a lower cash flow. (correct)
- High interest rates produce a higher Internal Rate of Return (IRR).
Which agreement commits a tenant to maintaining their lease, even if the property changes ownership?
Which agreement commits a tenant to maintaining their lease, even if the property changes ownership?
- Non-disclosure Agreement
- Estoppel
- Tenant Agreement
- Subordination, Non-Disturbance, and Attornment Agreement (SNDA) (correct)
A property generates $350,000 income, with $110,000 in cash expenses and $55,000 in principal and interest. What is the available cash?
A property generates $350,000 income, with $110,000 in cash expenses and $55,000 in principal and interest. What is the available cash?
- \$165,000
- \$295,000
- \$85,000
- \$185,000 (correct)
Which expense is NOT included in a property's Net Operating Income (NOI) calculation?
Which expense is NOT included in a property's Net Operating Income (NOI) calculation?
A property owner's mortgage payments typically consist of interest and what other component?
A property owner's mortgage payments typically consist of interest and what other component?
Why might an investor be willing to pay more for a property when interest rates are low?
Why might an investor be willing to pay more for a property when interest rates are low?
Net Operating Income (NOI) is best described as:
Net Operating Income (NOI) is best described as:
The amount of rent a landlord actually collects before expenses is referred to as:
The amount of rent a landlord actually collects before expenses is referred to as:
Replacing a roof on a commercial building is generally considered what type of expense?
Replacing a roof on a commercial building is generally considered what type of expense?
Which document shows vacant vs. occupied units in a building?
Which document shows vacant vs. occupied units in a building?
Which line on a pro-forma reflects the actual rent collected by the landlord?
Which line on a pro-forma reflects the actual rent collected by the landlord?
XYZ Company leases 35,000 sq. ft. at $41.50 per sq. ft. What is the annual rent?
XYZ Company leases 35,000 sq. ft. at $41.50 per sq. ft. What is the annual rent?
Tech Company's lease requires them to pay only a fixed rent, with the landlord covering all building expenses. What type of lease is this?
Tech Company's lease requires them to pay only a fixed rent, with the landlord covering all building expenses. What type of lease is this?
Property A (self-storage) has a 5.0% cap rate. Property B (office) has a 5.5% cap rate. If both have the same NOI, which is worth more?
Property A (self-storage) has a 5.0% cap rate. Property B (office) has a 5.5% cap rate. If both have the same NOI, which is worth more?
What is the most common method for valuing commercial real estate?
What is the most common method for valuing commercial real estate?
A lower capitalization rate (cap rate) will typically indicate:
A lower capitalization rate (cap rate) will typically indicate:
Where can the tenant name and apartment number of each unit in a multi-family building be found?
Where can the tenant name and apartment number of each unit in a multi-family building be found?
The annual rent for a 15,000 sq. ft. office space is $360,000. What is the rent per sq. ft.?
The annual rent for a 15,000 sq. ft. office space is $360,000. What is the rent per sq. ft.?
As interest rates increase, what typically happens to capitalization rates (cap rates)?
As interest rates increase, what typically happens to capitalization rates (cap rates)?
Which of the following is a standard lease clause found in most commercial leases?
Which of the following is a standard lease clause found in most commercial leases?
Which agreement involves a tenant subordinating their lease to a mortgage on the building?
Which agreement involves a tenant subordinating their lease to a mortgage on the building?
What underlying component drives an investor's decision regarding an appropriate capitalization (cap) rate for a specific property?
What underlying component drives an investor's decision regarding an appropriate capitalization (cap) rate for a specific property?
Property A (self-storage) has a 6.0% cap rate. Property B (office) has a 6.0% cap rate. If both have the same NOI, which property is worth more?
Property A (self-storage) has a 6.0% cap rate. Property B (office) has a 6.0% cap rate. If both have the same NOI, which property is worth more?
Which type of tenant commonly uses a percentage lease?
Which type of tenant commonly uses a percentage lease?
What clause in a commercial lease allows a landlord to restrict tenants from conducting certain business activities in their space?
What clause in a commercial lease allows a landlord to restrict tenants from conducting certain business activities in their space?
Which type of property is generally considered the most risky investment?
Which type of property is generally considered the most risky investment?
The actual income that a property owner receives before expenses are deducted is known as:
The actual income that a property owner receives before expenses are deducted is known as:
What type of lease is often employed when a single tenant occupies an entire building?
What type of lease is often employed when a single tenant occupies an entire building?
Property A is an office building with a going cap rate of 6.5%. Property B is a multi-family building with a going cap rate of 4.7%. If both properties produce the same NOI, which property is worth more?
Property A is an office building with a going cap rate of 6.5%. Property B is a multi-family building with a going cap rate of 4.7%. If both properties produce the same NOI, which property is worth more?
If the annual rent on a 10,500 sq.ft. office space is $546,000, what is the rent per sq.ft....?
If the annual rent on a 10,500 sq.ft. office space is $546,000, what is the rent per sq.ft....?
The gross potential income refers to what...?
The gross potential income refers to what...?
Which of the following lease types will typically have a higher rent...?
Which of the following lease types will typically have a higher rent...?
What is the most common index used to determine rent increases in a lease escalation clause...?
What is the most common index used to determine rent increases in a lease escalation clause...?
When is a pro-forma conducted by a real estate investor...?
When is a pro-forma conducted by a real estate investor...?
When do commercial property owners typically experience a tax loss on their investment...?
When do commercial property owners typically experience a tax loss on their investment...?
If the rent for a 15,550 sq.ft. office space is $25 per sq.ft., what is the annual rent for the space...?
If the rent for a 15,550 sq.ft. office space is $25 per sq.ft., what is the annual rent for the space...?
Louis purchased a $6,200,000 office building at a 5.5% cap rate. What is the NOI on the building...?
Louis purchased a $6,200,000 office building at a 5.5% cap rate. What is the NOI on the building...?
A letter provided by the tenant to the landlord, which assures that their lease is binding, accurate, and being paid upon, is known as what...?
A letter provided by the tenant to the landlord, which assures that their lease is binding, accurate, and being paid upon, is known as what...?
Usable area is also known as what...?
Usable area is also known as what...?
In what type of lease, is the rent is based upon the percentage of the volume of sales made upon the leased premises...?
In what type of lease, is the rent is based upon the percentage of the volume of sales made upon the leased premises...?
Mark purchased a multi-family property for $3,250,000. If the NOI on the property was $235,000, at what cap rate did Mark purchase the property...?
Mark purchased a multi-family property for $3,250,000. If the NOI on the property was $235,000, at what cap rate did Mark purchase the property...?
If a tenant assigns their lease to a new tenant, who is responsible for maintaining the lease...?
If a tenant assigns their lease to a new tenant, who is responsible for maintaining the lease...?
Kevin is a real estate investor looking to buy a multi-family building. If other investors in the market are willing to accept a 7.5% return on their money, how much should Kevin pay for a property that yields an NOI of $220,000...?
Kevin is a real estate investor looking to buy a multi-family building. If other investors in the market are willing to accept a 7.5% return on their money, how much should Kevin pay for a property that yields an NOI of $220,000...?
The annual return an investor would achieve on a property that was purchased using all cash is equal to what...?
The annual return an investor would achieve on a property that was purchased using all cash is equal to what...?
Abby purchased a $3,250,000 shopping center at a 7.25% cap rate. What is the NOI on the building...?
Abby purchased a $3,250,000 shopping center at a 7.25% cap rate. What is the NOI on the building...?
Renting out the entire floor in a building is commonly known as this type of lease...?
Renting out the entire floor in a building is commonly known as this type of lease...?
What is the available cash that a property yields if the income is equal to $720,000, the cash expenses equal $350,000, and the principal and interest amount to $75,000...?
What is the available cash that a property yields if the income is equal to $720,000, the cash expenses equal $350,000, and the principal and interest amount to $75,000...?
If the going cap rate for a multi-family building in a particular market is 5.0%, what will the purchase price be if the NOI on a property is $90,000...?
If the going cap rate for a multi-family building in a particular market is 5.0%, what will the purchase price be if the NOI on a property is $90,000...?
Start-up Company recently signed a lease on 15,000 sq.ft. of office space at $21.50 per sq.ft.. What is the annual rent paid by Start-up Company...?
Start-up Company recently signed a lease on 15,000 sq.ft. of office space at $21.50 per sq.ft.. What is the annual rent paid by Start-up Company...?
If a tenant sublets their space to a sub-tenant, who is responsible for the lease...?
If a tenant sublets their space to a sub-tenant, who is responsible for the lease...?
Flashcards
Capitalization Rate (Cap Rate)
Capitalization Rate (Cap Rate)
The return rate an investor requires or expects to receive on an investment property.
SNDA (Subordination, Non-Disturbance, and Attornment Agreement)
SNDA (Subordination, Non-Disturbance, and Attornment Agreement)
An agreement where the tenant maintains their lease even if the property changes ownership.
Available Cash
Available Cash
The cash flow a property generates after deducting all operating expenses and capital expenditures.
Gross Lease
Gross Lease
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Rent Roll
Rent Roll
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Effective Gross Income
Effective Gross Income
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Use Clause
Use Clause
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Estoppel Letter
Estoppel Letter
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Percentage Lease
Percentage Lease
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Loft Lease
Loft Lease
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Consumer Price Index (CPI)
Consumer Price Index (CPI)
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Pro-forma
Pro-forma
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Percentage Lease
Percentage Lease
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Study Notes
- Investors may demand a lower property price when interest rates are high to compensate for the reduced cash flow due to increased debt service.
- A tenant commits to maintaining their lease even if the property changes ownership through a Subordination, Non-Disturbance, and Attornment Agreement (SNDA).
- Available cash from a property is calculated by subtracting cash expenses, principal, and interest from the income.
Net Operating Income (NOI)
- Capital expenditures are not included in NOI but are eventually subtracted from it.
- Mortgage payments typically consist of interest and principal.
- Investors may pay more for a property when interest rates are low because the amount owed for debt service decreases, freeing up more cash flow.
- NOI is equal to effective gross income minus expenses.
Gross Income
- Effective gross income refers to the amount of rent a landlord actually collects before expenses.
Expenses
- Replacing a roof is a capital expenditure.
Rent Roll
- It shows which units in a particular building are vacant and occupied.
- Effective gross income includes the actual rent collected by the landlord.
- A company leasing 35,000 sq. ft. at $41.50 per sq. ft. will pay $1,452,500 annually.
Gross Lease
- It requires the tenant to pay fixed rent, with the landlord covering all building expenses.
- Property
Awith a lower cap rate, is worth more if both properties produce the same Net Operating Income (NOI). - Cap rates is used to quickly value income-producing properties by most real estate professionals
- A lower cap rate yields a higher purchase price.
Rent Roll
- It contains tenant names and apartment numbers in a multi-family building.
- Office space that rents for $360,000 annually for 15,000 sq. ft. has a rent of $24 per sq. ft..
- Cap rates increase as interest rates go up due to their direct relationship.
Commercial Leases
- Most include lease duration, free rent, and tenant's future work clauses.
- A tenant agrees to subordinate their lease to a mortgage on the building with a SNDA.
- An appropriate cap rate is determined by the amount of risk associated with the deal.
- Properties with equal NOI have the same value if equal cap rates.
- Retail tenants typically have percentage leases.
Types of clauses in commercial leases
- Landlords can restrict certain business activities in their space with a use clause
- Generally, larger buildings are less risky investments
- Effective gross income is the actual income an owner collects before expenses.
- NNN lease, which is used when a large single tenant occupies the entire building
Leases
- Property B is more valuable given cap rates of 6.5% and 4/7% respectively
- Rent on a 10,500 sq. ft. office space is $52 per sq. ft. when the annual rent is $546,000
- Gross potential income is how much rent can be collected if 100% occupied
- Gross leases typically have higher rent
Indices
- Consumer Price Index is used for rent increases within escalating lease clauses
- Real estate investors conduct pro-formas when evaluating potential properties to buy.
- Commercial property owners typically experience a tax loss on their investment in the first few years due to mortgage interest.
- Space that has a rent of $25 per sq. ft. for 15,550 sq, ft has an annual rent for the space of $388,750
Calculations
- A $6,200,000 office building at a 5.5% cap rate has NOI on the building of $341,000
- A letter when being paid, assures that the lease is binding, is known as an Estoppel letter
Areas
- Usable area is know as carpetable area
- Percentage lease is based upon the volume of sales made upon the leased premises
- Multi-family property worth $3,250,000 with NOI of $235,000 has CAP Rate of 7.2%
- The new tenant are responsible maintaining the lease
Investing Calculations
- If other investors accepted a 7.5% return with NOI of $220,000, the investor should pay of $2,933,333
- Investments using cash will equal to capitalization rate
- Shopping center worth $3,250,000 with cap rate of 7.25% has NOI of $235,625
- Loft leases have the renting of the entire floor
Cash Flow
- When income equals $720,000, expenses equal $350,000 and principal and interest equals $75,000, the available cash is $295,000
- Building with a NOI of $90,000 and a 5% cap rate can be purchased at $1,800,000
Company leases:
- 15,000 sq. ft at $21.50 per sq. ft has an annual rent of $322,500
- The tenant has responsibility for the lease if a sublet occurs
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Description
Explore real estate finance concepts including the impact of interest rates on property prices and cash flow. Understand tenant lease agreements (SNDA) during ownership changes. Learn about Net Operating Income (NOI), gross income, and expense considerations in real estate investments.
