Lesson 2

Question 1

Gross Potential Income

Answer 1

Total income attributable to real property at full occupancy (includes rental income and other income), before vacancy and operating expenses are deducted

Question 2

Vacancy and Collection Loss

Answer 2

An allowance for reductions in potential gross income attributable to projected vacancy (physical or economic) and potential collection loss considerations. Vacancy is an expected loss in income as a result of periodic vacant space attributable to unrented space and tenant turnover. Credit loss considers nonpayment of rent and can include units rented at below-market rates (also known as lag vacancy).

Question 3

Effective Gross Income (EGI)

Answer 3

The anticipated income from all operations of the real property (rental and other) after an allowance is made for vacancy and collection losses.

Question 4

Traditional accounting statements generally include (IBIC):

Answer 4

Income sheet, balance sheet, income tax statement, cash reconciliation

Question 5

Tools for analyzing NOI

Answer 5

Ratio Analysis, Break-even analysis

Question 6

Operating Expense Ratio (OER)

Answer 6

OER= TOE (total operating expenses) ÷ EGI

Question 7

Gross Income Multiplier (GIM)

Answer 7

GIM = Sale or Purchase Price ÷ EGI

Question 8

Break-even Point

Answer 8

OE = FE ÷ (erpu - vepu)

Question 9

Before-tax Income for income statement analysis

Answer 9

NOI - Interest - Depreciation

Question 10

Before-tax Cash Flow for cash flow analysis

Answer 10

NOI - Interest - Principal

NOI - mortgage payments

Question 11

After-tax Income for income statement analysis

Answer 11

BTI - income tax payable

Question 12

After-tax Cash Flow for cash flow analysis (ATCF)

Answer 12

BTCF - income tax payable

Question 13

Equity Dividend for Appraisal

Answer 13

Stabilized NOI (NOI - Replacement Allowance) - Principal - Interest. Stabilized NOI less mortgage payments

Question 14

Income Tax Payable

Answer 14

(NOI - Interest - CCA) x Tax Rate

Question 15

Before-tax Reversion

Answer 15

Sale price - Commission/Legal Fees - OSB on debt

Net sale price - OSB on debt

Question 16

GAAP vs IFRS

Answer 16

Accounting standards in Canada changed in 2011 from GAAP to IFRS. IFRS is mandatory for publicly-traded companies, government entities, and some private corporations. Key change for real estate is reporting asset value on the balance sheet at fair market value rather than depreciated cost.

Question 17

Cash vs accrual basis of recording

Answer 17

If statements are maintained on a cash basis, then revenues and expenses are recognized only when received or paid. If records are maintained on an accrual basis, then revenues and expenses are recognized when they are earned or incurred. Therefore, accrued statements may not necessarily reflect the changes in the cash position of the venture.

Question 18

Balance sheet

Answer 18

The balance sheet is a summary, at one point in time, of the assets and liabilities of the entity

Question 19

Income statement

Answer 19

The income statement measures the performance of the firm for a particular period of time. Also called the profit and loss statement.

Question 20

Cash Reconciliation

Answer 20

Cash reconciliation summarizes what has happened to the cash available to the firm

Question 21

Initial steps for analyst or appraiser when forecasting cash flow statement

Answer 21

1. Forecast of the rental for properties rented under lease conditions expected to prevail for the subject property
2. Forecast of expenses borne by the landlord under the lease contract
3. Forecast of debt servicing costs and income taxes
4. Forecast of capital expenditures (as opposed to operating expenses)
5. Analysis of refinancing decisions

Question 22

Escalator clause

Answer 22

An escalator clause enables the landlord to increase the rent payable during the lease term by the same amount as the increase in the cost of the items covered by the escalation clause (often made in respect of property taxes, but it can also be applied to other services that the landlord has agreed to supply)

Question 23

Fixed vs variable expenses

Answer 23

Fixed expenses are costs that, in the short run, remain constant throughout the period independent of the level of occupancy. Variable expenses are are outlays that vary directly with the level of occupancy.

Question 24

Operating leverage

Answer 24

Degree of operating leverage is a structural risk characteristic of an investment which indicates the sensitivity of the break-even point to variation in rental income and ratio of variable to fixed expense

Question 25

2 elements of tax faced by an investor upon disposition of a real estate asset

Answer 25

1. Tax on capital gains

2. Tax on the recapture of excessive capital cost allowances

Question 26

Net Sale Price

Answer 26

Gross sale price - real estate commission - legal fees

Question 27

Overall Capitalization Rate (OCR)

Answer 27

OCR = Net Operating Income ÷ Sale or Purchase Price

Question 28

Value

Answer 28

NOI ÷ OCR

Question 29

Degree of Operating Leverage (DOL)

Answer 29

DOL = n (erpu - vepu) ÷ n (erpu - vepu) - FE

Question 30

Constant vs cyclical outings

Answer 30

Constant outgoings are those which are of the same relative magnitude each year, whereas cyclical outgoings are those items of expense
which do not arise every year or which vary substantially in amount from one year to another.