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FINA 210- REAL ESTATE > class 6: Equity and Capital Structure > Flashcards

class 6: Equity and Capital Structure Flashcards

1
Q

which steps of the investment rocess is this?

A
  1. Apply decision-making criteria

5. Make an investment decision

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2
Q

equity holder

A

anyone who has a stake in the ownership of a property

ultimate decision makers

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3
Q

what do equity hold regarding cash flows?

A

They own the residual rights to all cash flows and liquidation proceeds after the creditors have been paid

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4
Q

how much liability do equity holders have?

A

they could lose their investment, but they could make infinite profit if possible

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5
Q

as an equity holder, do you have a set maturity date to get your money?

A

nah bruv

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6
Q

as an equity holder, do you have a set cash flow stream?

A

nah bruv

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7
Q

how to calculate equity?

A

asset - debt

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8
Q

Proprietorship and Co-ownership

A

Property is owned directly by one or more individual

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9
Q

what is the liability of a Proprietorship and Co-ownership?

A

Unlimited liability which extends to the owners’ other assets

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10
Q

how are Proprietorships and Co-ownerships taxed?

A

Income of the property is taxed in the hands of the owners

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11
Q

Partnership

A

formal agreement among a group of people or companies to share ownership

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12
Q

General partners

A

Unlimited liability which extends to the partners’ other assets

Income of the property is taxed in the hands of the partners’

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13
Q

Limited partners

A

Only at risk for their investment

Income of the property is taxed in the hands of the partners

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14
Q

are financial partners usually involved in day to day management of the property?

A

nah bruv

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15
Q

Corporations

A

Legal entities, owned by shareholders but separate from their owners

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16
Q

who selects the corporation’s board of directors?

A

shareholders

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17
Q

who selects the corporation’s management?

A

Board of Directors

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18
Q

what taxes do corporations pay?

A

Pay corporate taxes

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19
Q

how is corporate income distributed?

A

through dividends, if declared, which are taxed in the shareholders’ hands

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20
Q

shareholder risk

A

Shareholders are only at risk for their investment

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21
Q

can corporations be Private or Publicly traded?

A

yeee

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22
Q

Real Estate Operating Companies (REOC’s)

A

Corporations whose primary business is investing in or operating real estate projects

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23
Q

Real Estate Investment Trusts (REIT’s)

A

Legal entities whose primary business is real estate investment

Must be publicly traded (can be private in the U.S.)

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24
Q

how much of the total fair market value of all trust properties that canadian REIT hold must be in canada?

A

At least 75%

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25
Q

how much do qualified REIT properties account for?

A

At least 90%

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26
Q

how much of the REIT’s revenue must come from rent or mortgage interest and capital gains from real or immovable properties in Canada?

A

At least 90%

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27
Q

REIT level of distribution?

A

High level of distributions (approximately 90%)

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28
Q

what are the The two main financial metrics used in decision making for equity investors ?

A

Net Present Value (NPV)

Internal Rate of Return (IRR) (we look 90% of the time at this)

29
Q

what do Net Present Value (NPV) ab¡nd Internal Rate of Return (IRR) have in common?

A

Both of these use the cash flows we’ve built so far (NOI and Debt service payments)

Both of these metrics use the cash flow model of the property, or real estate investment, developed as part of the financial analysis

30
Q

The NPV

A

sum of the present values of the cash flows generated by the investment MINUS the initial investment

Highly dependent on the discount rate

31
Q

is the rate of return a positive NPV bigger or smaller than the discount rate?

A

bigger than the discount rate

32
Q

Hurdle Rate

A

the rate of return required by the investor

The discount rate applied

The minimum return we are willing to accept

33
Q

If the NPV returns a value greater than zero, the investment generates a rate of return greater or smaller than the hurdle rate?

A

greater than the hurdle rate

34
Q

true or false

The greater the NPV the more attractive the investment.

A

truuue

35
Q

The NPV calculated using cash flows before interest

A

unlevered NPV

you gotta worry about equity holder and the debt holder

will generally use a risk adjusted weighted average cost of capital (WACC)

36
Q

The NPV calculated using cash flows after interest

A

levered NPV

you only need to worry about the equity holder now

will generally use a risk adjusted required equity return

37
Q

is the hurdle rate the same for unlevered NPV and levered NPV?

A

nah boyyy

The hurdle rate will be different under both scenarios

38
Q

weighted average cost of capital (WACC)

A
  1. Find percentage of the asset that is for debt and equity
  2. Find multiply the one for debt proportion by interest rate and multiply the equity proportion by the return the equity holders expect to make

the combined proportional cost of the debt and equity used to finance a property or entity

39
Q

WACC formula

A

(equity / (equity + debt)) * cost of equity
+
(debt / (equity + debt)) * cost of debt

40
Q

WACC formula If the entity is subject to tax

A

(equity / (equity + debt)) * cost of equity
+
(debt / (equity + debt)) * cost of debt * (1 - tax rate)

41
Q

The IRR

A

the rate of return of the investment

discount rate which will give an NPV of zero

The IRR is compared to the hurdle rate of the investor

the most widely used investment metric in real estate

42
Q

then investment is made when the IRR > Hurdle rate or the IRR < Hurdle rate?

A

IRR > Hurdle rate

The greater the IRR the more attractive the investment

43
Q

a levered IRR will be compared with a levered or unlevered hurdle rate?

A

levered hurdle rate

44
Q

an unlevered IRR will be compared with a levered or unlevered hurdle rate?

A

unlevered hurdle rate

45
Q

the most widely used investment metric in real estate

A

the IRR

46
Q

Preferred returns

A

when an investor has first claim on profits (or a specified distribution formula) until he has achieved a certain target IRR

Often given as an incentive for a financial partner to invest

47
Q

Promote

A

when an investor earns a disproportionate share of the profits

48
Q

to whom a promote usually applied?

A

Often given to the investment manager or operating partner as a form of bonus for achieving a higher IRR

Generally applies to profits after the financial partner has achieved his targeted IRR

49
Q

Clawback

A

when an investor gives up a portion of his return to another investor if a certain IRR is not met

50
Q

to whom is a clawback usually applied?

A

Applies most often to the operating partner or investment manager

51
Q

do all investors always want to sell at the same time?

A

naaah

Not all investors in a project may want to exit (sell) at the same time

52
Q

strategies that can be used to make the exit of one or more investors easier and less contentious

A

Right of First Offer

Right of First Refusal

Sale by Appraisal

Shotgun Clause

53
Q

Right of First Offer

A

the departing investor sets his selling price but MUST offer the remaining investors the chance to purchase the asset at that price before offering it in the market

54
Q

Right of First Refusal

A

the departing investor MUST offer the remaining investors the chance to purchase the asset at any price agreed upon with a third party

55
Q

Sale by Appraisal

A

when investors agree to transact, the value will often be set by one or more independent appraisers

56
Q

Shotgun Clause

A

an investor offers to buy the share of the other investor at a price he determines

The other investor must either sell his investment at that price OR buy the offering investor’s share at the same price

57
Q

the capital stack

A

the hierarchy of who gets money first and who gets the most risk

58
Q

The lower in the capital stack, the greater or lower the expected return of the investor?

why?

A

the greater the expected return of the investor

because higher risk

59
Q

the capital stack hierarchy

A

Secured debt (mortgage)

Wrap-around (2nd mortgage)

Mezzanine debt (high LTV)

Unsecured debt

Preferred equity

Common equity

60
Q

Secured debt (mortgage)

A

guaranteed by a specific asset (mortgage)

61
Q

Wrap-around (2nd mortgage)

A

2nd rank on a mortgaged asset

When the first mortgage reaches maturity the new lender will advance additional funds to repay it and becomes the 1st ranked lender on the asset

62
Q

Mezzanine debt

A

subordinated to the first and second mortgage

it offers a higher LTV for a higher rate

63
Q

Unsecured debt

A

Secured only by the corporate credit and not one specific asset

64
Q

Preferred Equity

A

receives dividends and liquidation proceeds before the funds are paid to common equity holders

65
Q

what is the total cost of capital dependent on?

A

dependent on the weight of each element and its cost

66
Q

Sale Leaseback

A

Property owner sells his asset and then leases it back from the buyer

67
Q

Ground Lease

A

Land-owner provides a long-term lease on the land

permits the lessee to build on the land

68
Q

Pad Sale

A

The segregation and sale of a small portion of a property (Pad)

69
Q

Sale of rights

A

the selling of air, mineral, water, oil and gas rights

FINA 210- REAL ESTATE (17 decks)

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