CE Investing1 Flashcards
(223 cards)
1
Q
Six characteristics of the real estate market
A
1 - Uniqueness 2 - Immobility 3 - Permanence 4 - Longevity 5 - Highly influenced by government policy 6 - Slow to respond
2
Q
Going-concern value
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The value of the property as a functioning business.
3
Q
Salvage value
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A structure that’s at the end of its useful life may be demolished, but some value can be realized if the improvements are sold.
4
Q
Liquidation value
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If a property is subject to foreclosure or a rapid sale, liquidation value comes into play. When properties are sold this way, it can affect the value of other homes in the neighborhood.
5
Q
Value in use
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The value of a property as it’s currently being used, which may or may not be its highest and best use.
6
Q
Regression
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The principle that says a lower quality property located adjacent to a higher quality property can lower the value of the higher quality property. This is related to the principle of conformity. Progression is the opposite of regression, and is also related to conformity.
7
Q
Progression
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The bump in value that a lower-value property gets by being near a higher-value property. So if your neighbor adds a second story in a quality remodel, the bump in value that your property receives is progression. Progression and regression are in back of the economic belief that it’s better to have the cheapest house in the nicest neighborhood than the nicest house in the cheapest neighborhood.
8
Q
Contribution
A
has to do with how a change in a property impacts the value as a whole. This isn’t the same as the dollar value of the change. For example, adding a restaurant-quality kitchen to an otherwise modest house won’t increase the home’s value by the amount spent to renovate, but updating the countertops and cabinets might.
9
Q
Integration
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Integration is the time period when the property is being developed.
10
Q
Equilibrium
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Equilibrium is the period of a property’s stable use.
11
Q
Disintegration
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Disintegration is the time when the property is deteriorating and needs constant upkeep to maintain its viability.
12
Q
Rejuvenation
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Rejuvenation is when the property is redeveloped with new improvements and often with a different use. This is also known as revitalization.
13
Q
What are tax benefits of restoring historic properties?
A
Investors who renovate historic properties can take a tax credit on up to 20% of the money they spent to renovate the property. Must have designation by the U.S. Department of the Interior and are listed in the National Register of Historic Places and follow renov guidelines.
14
Q
How much in tax credits can an investor get for building to converting property to low-income houses
A
4% –if they are getting federal subsides from FSA or other fed agency; or
9% – if they have no subsidies.
15
Q
A consumer who believes they are the victim of a fair housing violation may file a complaint with HUD within ______of the discriminatory act.
A
one year
16
Q
HUD will investigate any complaint received and determine whether reasonable cause exists to bring a charge of illegal discrimination against the alleged offender, or dismiss the case within ______.
A
100 days
17
Q
conciliation
A
One Option HUD has to address Fair Housing complaints. Conciliation is the process of obtaining assurance that the situation will be remedied from the alleged violator, and to take steps not to have a similar situation occur in the future. If there’s any doubt as to whether the violator will follow through, civil action can be taken to enforce the conciliation agreement.
18
Q
Advantages of local handling of fair housing violations.
A
If state has comparable fair housing law, HUD can refer it there. There’s an advantage to filing locally, which is the response time. Generally, a complainant can expect an answer to a locally filed action within 30 days. At the federal level, an answer may take up to 100 days.
19
Q
Penalty for filing false fair housing convictions
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A person found guilty of falsely filing a fair housing complaint may receive a sentence of up to five years’ imprisonment or be subject to a $10,000 fine.
20
Q
What are possible penalties for fair housing violations when handled by Admin Law Judge? Note: Filing administratively is and alternative to filing with HUD or local gov.
A
These penalties may be $16,000 for a first offense, as much as $37,500 for a second offense within five years, and as much as $65,000 for a third violation within seven years (some people never learn). The administrative law judge may also issue an injunction against the offender, which will require the offender to either do something (such as rent an apartment) or not do something (such as evict a tenant).
21
Q
Where can people file/complain of fair housing violations.
A
HUD or Local Gov
Administrative Law Judge
Judicial Action
Attorney General can file action for people with pattern
22
Q
What are penalties if found guilty of fair housing in a judicial action?
A
There is no limit on the amount of punitive damages The court can also issue injunctions.
23
Q
Penalties if Attorney General finds fair housing violations
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Civil penalties may be imposed up to $50,000 for a first violation, and $100,000 for subsequent violations.
24
Q
How are fair housing complaints filed under the Civil Rights Act of 1866 addressed?
A
They go directly to federal court. Such actions may be filed any time within the state’s statute of limitation for torts. Violators who refuse to comply with a state or federal court fair housing decision may be held in contempt, fined, and held in prison for up to six months.
25
What penalties may a person who is found guilty of falsely filing a fair housing complaint receive?
A sentence of up to five years’ imprisonment or a $10,000 fine
26
What Makes a Residential Property Commercial?
Commercial residential = Five or more dwelling units (still multi-family residential, but also commercial residential)
27
Tenant's right of first refusal
, does one of two things. It lets the tenant have the first crack at another vacant space in the building before another party. This right says that the tenant can match an offer from that other party for that vacant space, and the clause is most commonly seen in leases where the tenant anticipates needing to expand in the future. Or it allows the tenant the opportunity to purchase the property if the owner has decided to sell it
28
Periodic estate termination
A periodic estate automatically renews itself for successive tenancy unless one party terminates. This is also an inheritable leasehold estate, which means that if either the owner or the tenant dies, the lease does not automatically terminate. The period involved may be any negotiated period of time—even for a single week or month.
29
Estate at will notice of termination
An estate at will may be terminated at will by either party. An estate at will is not inheritable, which means that upon the death of either party to the lease, the leasehold automatically terminates.
30
Constructive Eviction
Constructive eviction is when the tenant is prevented from the quiet enjoyment of the premises. If the premises have become unlivable due to a breach of warranty of habitability, a tenant may vacate and not be held responsible for lease payments. To claim constructive eviction, the tenant must actually leave while the conditions that make the premises uninhabitable exist. The lease is then terminated, and no rents are due; however, the tenant may have to go to court to prevail against a claim of unpaid rent.
31
When is a condo considered a security an not real estate
Second-home condo investments that are purchased with a money-back guarantee and lock-in management agreement are generally considered by the SEC to be securities
32
How make sure condo is not considered a security
make sure management agreement and condo purchase agreement are viewed as separate transactions.
33
Publicly assisted cooperatives provide rent and mortgage interest subsidies and two types of low-down-payment FHA loans:
FHA Section 213: Provides up to 97% insured financing for certain qualified cooperative projects.
FHA Section 221(d)(2): provides up to 100% insured financing, and is specifically designed to meet the needs of certain inner-city housing shortages.
34
condop
To get by 80/20 rule. This is essentially a mixed-use building where the developer retains ownership of the 20% of the building used for commercial purposes, and the remaining 80% is the residential portion, operating as a cooperative. Cooperative shareholders under a condop structure have flexibility in selling and subletting similar to that of condominium owners.
35
80/20 rule for coopss
There used to be an 80/20 rule restricting co-ops from receiving passive income greater than 20% percent of their operating budget in any given year. If they did, their not-for-profit tax status was in jeopardy.
36
80/20 rule replaced in 2007: Cooperative housing must now meet one or more of the following requirements for the taxable year in which the taxes and interest are paid or incurred:
1- 80% or more of the gross income must be derived from tenant-shareholders
2 - 80% or more of the total square footage must be for residential purposes, or purposes related to residential use (such as residential facilities)
3 - 90% or more of the expenses of the cooperative corporation are paid or incurred for the purchase, construction, management, maintenance, or care of the corporation’s property for the benefit of the tenant-shareholders.
37
Which document includes the size of units, construction, floor plans, amenities, recreation facilities, make and model of appliances, windows, how the landscaping of the property will be maintained, and the actual land on which a condominium building is situated?
Offering Plan
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Which document details the duties of the condominium board and the scope of its power?
Bylaws
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Condo declaration is
A declaration of condominium is recorded and typically includes a legal description of the condominium property, a description of all the units and common areas, the percentage interest and voting rights of each unit owner, and the CC&Rs. Each unit owner will receive a unit deed, which is also recorded.
40
What is another name for a super-regional mall?
Mega Mall
41
Blane owns a barbershop. He polls his customers and learns that they tend to come from less than a mile away. That's probably because Blane's store is in which type of location?
Strip malls tend to offer goods and services for a very local area of one mile or less.
42
Length of a strip mall lease
strip mall leases run three to five years and include the option to renew. The renewal option protects the tenants, since it's unlikely that a business with steady clientele from the surrounding area will want to relocate. After the initial three- to five-year lease period expires, many businesses will continue to renew their leases indefinitely.
43
Most common strip mall leases
most strip center leases establish a base rent, but also include rent increases in their renewal options to offset rising operating costs, including utilities, insurance, maintenance, and property taxes.
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lease renewal option
he investor/landlord is agreeing to give up control of the property for the term of the lease and for the potential renewal period (also known as the option period). When there's an option period in play, the lease can be renewed at the sole discretion of the tenant. The landlord has no say in whether the option will be exercised.
45
What is the average length of a strip store lease?
3-5 yrs
46
Neighborhood shopping center
1- Services people within a three-mile area, and typically serves a local population of 5,000 to 40,000. 2 - This type of shopping center is usually built on a four- to 10-acre lot.
3- Usually a major tenant—usually a supermarket, but sometimes a discount drug store—that occupies approximately 30% to 50% of the center’s gross leasable space.
4- about 20 tenants
4 - One central, off-street parking
47
What is the bonus in leases for neighborhood shopping centers
Under the terms of this lease, each commercial tenant is required to pay a fixed minimum rental amount. Then, either in addition to or against this fixed minimum, the commercial tenant agrees to pay a certain percentage of their gross sales
48
What is a noncompete clauses in shopping center?
non-compete clauses, in which the property manager agrees not to lease to a business that competes with the contracted tenant. For example, the lease for Tan-U-Fast might include a non-compete clause in which the landlord agrees not to lease to any other tanning facilities.
49
Which type of shopping centers are often converted to condos?
Neighborhood shopping centers: If the owner wants to sell before the conversion, selling individual buildings rather than the entire shopping center as a single purchase will bring in the most profit. The current tenants may first be offered the opportunity to purchase their units and receive an interest in the parking spaces within the center’s common area.
50
Hale plans to develop a neighborhood shopping center. What size lot will he need?
A neighborhood shopping center typically serves a local population of 5,000 to 40,000 people within a three-mile trade area, and is usually found on a four- to 10-acre lot.
51
Community Shopping Center
1 - Designed around one or more major dept store (Walmart/target) known as anchor/magnet
2 -Known as large neighborhood centers
3 - Large range of products
4 - 15-40 stores serves serves a three- to six-mile area.
5 - sites that range from 10 to 40 acres
6 - Some are all outdoor/Some covered
7 - Cross between regional shopping mall and neighborhood center
52
Common lease terms for community shopping centers
1 - don't have non compete clauses
2 - last 15 to 20 years
3 - usually have “right of first refusal” clause.
4 - New busns usually incl cancellation clause if the business is unable to pull in a certain gross volume
5 - Prop manger right to audit books of businesses
6 - Percentage leases that allow annual adjustments
7 - Community fees to tenants upkeep common areas (lots and sidewalks) and for animadverting the center
53
Typical tenant mix in regional shopping centers
50% general merchandise stores
25% service and related businesses
15% clothing and shoe stores
10% dry goods shops.
54
Regional Shopping Centers
1 - Designed around one or more major dept store (Macy's/JCPen) known as anchor/magnet
2 -Known as Malls
3 - Draw trade 5-15 miles
4 - 40-80 stores
5 - sites that range from 40 to 100 acres
6 - Enclosed most of the time
7 - 400,000-800,000 sq feet
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Super Regional Shopping Centers
* Also known as megacenters or megamalls
* Includes office buildings and apartment buildings that buffer the shopping center
* 800,000+ leaseable square feet
* 60 to 120 acres, and serve a trade area of five to 25 miles.
* Designed in a relatively compact way, so expansions tend to grow up (or down)
* 3 or more anchor stores
* self-contained consumer market
56
Lease types for Regional Shopping Centers and Super Regional Shopping Centers
percentage and net leases.
57
What is the average gross leasable square feet for a super-regional shopping center?
1.2 million
58
Gross lease
With a gross lease, all expenses related to the property are part of the lease payment and are paid by the landlord.
59
Full service leases (type of gross lease)
landlord handles all of the maintenance and utilities, taxes, etc., so tenants can focus on growing their busines
60
Modified gross leases
referred to as “MG.” Here, all (or part) of the nets are included as part of the base rent. Unlike a triple net lease, this agreement includes one, two or all three of the nets as part of the base rent. It’s important to define what part of the nets have been included or modified. Typically, a modified gross lease will include all the nets in the base rent, but not utilities or janitorial.
61
Net leases (3 kinds)
triple net lease -- tenant pays rent + all expenses (T.I.M.: taxes, insur, maintenence); shares CAM (common area maintenance) with other tenants
Single net (N) or double net (NN) lease, the tenant pays one or two of these expenses, but not all three.
Absolute net -- Rare, Triple Net Lease where no legal defenses if a tenant fails to meet lease payment obligations. ex. still pay if property goes to eminent domain proceeding.
62
Loft leases
Loft leases provide for rental of floor space for wide open loft type spaces. Because there are no (or few) room dividers, the tenant may wish to divide the space. Loft leases, however, generally preclude the tenant from making structural changes or any changes that could impact utility services.
63
Percentage lease
Tenant pays a base rent plus an additional charge that is a percentage of the tenant’s GROSS SALES. \
often the tenant begins by only paying the base rent, with the percentage rent kicking in after a specific amount of gross sales are met, which is the break-even point. The natural “breakpoint” or break-even point, is calculated by dividing the base rent by the established percentage. The percentage charged is stepped up gradually as the tenant’s business grows.
64
Rent set-off
A tenant’s right to set off rent if the landlord hasn’t paid a utility bill, for instance, and under what conditions a set-off is allowed
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Five lease clauses
1 - Use - how the tenant may and may not use the space.
2 - Subordination Tells tenant lease is subordinate to the mortgage.
3 - Nondisturbance No evict if terms met.
4 - Attornment -tenant agrees if owner is forclosed, they remain tenant for new owner
5 - Estoppel Certificate - verifies facts that are in writing.
6 - Sublease/Assignment -- most say no assign/sublease
66
Build to Suit
* Landowner builds to satisfy the needs of a specific buyer, or, if holding onto the property, a long-term tenant, such as a business.
* Usually done for commercial, industrial, or office space, rather than residential.
67
Plottage
Plottage refers to the increase or decrease in land value that occurs when several parcels are combined into one large plot, as that value compares to their combined total value if sold individually
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Assemblage
The process of combining separate adjacent parcels into one piece.
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Excess Land
Can be excised (separated) from land and sold separately without harming the ability to develop the original parcel. Excess land should be valued separately in an appraisal.
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Surplus land
Surplus land, in contrast, is more land than is needed for the planned development, but not enough land to carve out for another purpose. Surplus land would be valued with the original parcel, and it may or may not add value to the land.
71
Speculator vs. Developer
A speculator will subdivide tracts and sell the lots unimproved. A developer will improve the lots (adding water, power, sewer, etc.), and then sell them as improved. A developer may also improve the land by adding residential or commercial construction before selling.
72
Dead Money
Investors call investing in vacant land “dead money” because vacant land doesn’t produce income. Therefore, the longer a vacant piece of land is held, the more potential income is lost—income that could be making more income and increasing investment return. Unimproved land is a financial drain because debt service, taxes, and insurance have to be paid whether any income is being realized or not.
73
The Interstate Land Sales Full Disclosure Act
Passed in 1968 and originally administered by the U.S. Department of Housing and Urban Development (HUD) through the office of Interstate Land Sales registration, regulates the sale of unimproved lots across state lines. It does so in order to keep gangsters, con artists, and other hooligans from selling property to unsuspecting consumers sight unseen. While it used to be administered by HUD, the Consumer Financial Protection Bureau (CFPB) is now tasked with overseeing it.
74
The primary difference between general building codes and the FHA’s minimum property standards relate to the durability of a dwelling’s _________.
Fixtures
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Business risk
Risk that an investment will not realize the required return on investor capital.
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Capital risk
Either the ability to secure financing at an affordable rate, or the loss of the principal amount invested.
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Dynamic risk
A type of business risk that is uninsurable because it's determined by economic, tax, and market changes.
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Financial risk
Risk that is directly related to leverage—the higher the leverage, the higher the risk.
79
Static risk
An insurable business risk that includes insuring for accident liability, fire, theft, and vandalism.
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scheduled gross income
Income a property could bring in if it were leased at full capacity, with all tenants paying full rent
81
Pro Forma Statement
reworking a property operating statement to make ti more realistic (good or bad)
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Formula to figure out cap rate
Net operating income ÷ capitalization rate = approximate value
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Formula to find NOI from cap rate and house purchase price.
Value (purchase price) × cap rate = net operating income
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Cash-on-cash return
The ratio of annual before-tax cash flow to the amount of cash they’ve invested, and it’s expressed as a percentage.
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after-tax-cash flow
Take the profit yielded from the investment and subtract income taxes that apply to the property’s income.
86
Operating leverage (high and low)
Refers to the relationship between the investment or company’s fixed costs and its variable costs.
High level of fixed costs relative to variable costs = high operating leverage
Low level of fixed costs relative to variable costs = low operating leverage
87
Impacts of high operating leverage
A company with high operating leverage that experiences an increase in sales doesn’t experience a proportional increase in expenses, so these companies often have a higher operating income than other companies do. For this reason, companies with high operating leverage can substantially affect profit by increasing sales—either via entire sales volume, or via per-unit price.
On the flip side, when sales drop, fixed costs don’t. Because of this, companies with high operating leverage can experience extreme fluctuations in gross profit.
88
Impacts of low operating leverage in an investment
an increase or decrease in the amount of overall sales doesn’t have as profound of an impact on gross profit as it does with a company with high operating leverage. Instead, the sales increase or decrease is met with a similar uptick or downturn in gross profit.
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Financial leverage
The use of borrowed funds as a source of capital. Investors commonly use borrowed funds for investment purposes.
90
Difference between direct capitalization and yield capitalization
The basic difference between these two approaches is that direct capitalization is what’s known as a “non-discounted approach,” while yield capitalization is a “discounted approach.”
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direct capitalization
Assesses what the investment is worth today or for the current year, based on a single year’s income. They don't attempt to identify what the investment’s cash flows will be in the future.
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Yield Capitalization
Discounted method to determine an investment's value based on its expected future yield. They project cash flows several years into the future. And then, based on the fact that a dollar received in the future is worth less than it is today, those future cash flows are discounted to determine what those future cash flows are worth today. The discounted value is called the “present value.”
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Present Value
In yield capitalization, the discounted value is called the “present value.”
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The formula for determining a capitalization rate is:
Net operating income ÷ Value = Rate
or
NOI ÷ V = R
95
When is direct capitalization used
* most widely used method and the easiest to calculate.
* often used when the property’s income isn’t expected to vary a lot over time (like with an apartment building that has consistent income and expenses year after year).
* Requires data on comparable companies’ sales and income expectations.
96
Formula for direct capitalization
NOI (net operating income) ÷ capitalization rate (R) = value (V)
Or
NOI ÷ R = V
97
Sale-Leasebacks
These are used mostly in large-scale project financing.
Property owners sell to investors and lease the property back.
By selling the property, the owner frees up resources for other purposes.
Lease periods are long, sometimes 30 to 40 years.
98
sale leaseback-buyback.
The buyer can lease the property from investors and at the end of the lease term buy the property back at a price agreed to at the time of the sale leaseback arrangement. The new sale, when it occurs, creates a new depreciable basis, which results in tax benefit.
99
flexible payment plan
A flexible payment plan allows the borrower to improve his financial position while payments are low in order to make higher payments over the life of the loan
100
Loan factor
Also known as loan constant, this is an interest factor used to calculate the debt service of a loan.
101
Maximum loan
This is the maximum amount the lender is willing to lend.
102
In order to arrive at annual debt service cost, divide ______ by the debt coverage ratio.
Annual NOI
103
How do you calculate maximum equity?
Divide cash flow by desired rate of return
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Question 3
| Which two numbers do you add to calculate maximum price?
Maximum equity and maximum loan
105
Title I of ADA deals with
No discrim disabled in employment:
* Job application procedures
* Hiring, firing, or advancement
* Compensation
* Job training
* Other employment terms, conditions, and privileges
106
Title III ADA
concerned with the accessibility of public accommodations
* overing restaurants, stores, entertainment venues, schools, museums/other places of public displays, social service facilities, gyms, recreation facilities, public transportation stations, service establishments, public gathering spaces, and doctors' offices.
* New spaces must be built ADA compliant
107
ADA Enforcement
* Individuals can complain to DOJ
| * DOJ can got to court if "pattern of discrimination.
108
Efficiency Rate
Amount of productive space (rentable sqftage) in a building verses "non productive" (halls, elevators, etc)
109
net lease
A lease in which the tenant pays some or all of the proportionate expenses for taxes, insurance, and utilities separately.
110
double net lease
Under a double-net lease, the tenant also pays for maintenance expenses in addition to some or all taxes, insurance and utilities.
111
triple net lease
A triple-net lease is one in which the tenant pays all expenses related to the property in addition to the rent and common area maintenance (CAM) charges, which include all expenses involved in maintaining common areas, such as water/sewer, trash, restrooms, landscaping, parking lots, fire sprinklers, the roof, or anything else that all tenants share.a triple-net lease sometimes requires a tenant to pay the interest payments on the lessor’s mortgage on the property. These charges are in addition to base rent. Triple-net leases are most frequently used for free-standing office buildings.
112
Tax clause in a commercial lease
This clause stipulates that the tenant is responsible for paying any increase in taxes over the base year’s taxes, in addition to the base rent. (Because property taxes increase at a constant rate in many areas, this clause is becoming increasingly common in office leases—even on short-term leases.)
113
Escalation clause in a commercial lease
Many current office leases are designed to pass on the utility cost increases to individual tenants. Generally, such a lease includes an escalation clause, which either stipulates increased rental rates at specific times during the lease term, or requires the tenant to pay a proportionate amount of the overall increased utility expense, in addition to base rent.
114
Services included in a commercial lease
This clause stipulates that the tenant will be provided with specific services for an additional rental fee. These services range from janitorial services to high-speed Internet or electronic services, or utilizing a central receptionist or photocopying services, and more.
115
Assignment and subletting clause in a commercial lease
This clause stipulates that the tenant is allowed to assign or sublet the rented space to a sublessee if the tenant has a change in circumstances. Because this clause basically forces the investor-owner to accept a new tenant with no input, it’s quite controversial. Where this type of clause does exist, tenants may be able to sublease their rented space for a higher price than they’re paying the investor-owner. Not surprisingly, where this is allowed, tenants must pay the investor-owner between 50 and 100% of the excess money they receive over the regular amount of their rent. State laws may or may not allow subleasing and assignments, and their specific requirements can vary, so all parties involved should consult with their attorneys about this matter.
116
Lease types (3)
Lease for years -- has end date (years or less)
Lease from period to period -- automatic renewal
Tenancy at will -- goes on until on party gives notice
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Gross lease
Net lease
Percentage lease
* Gross lease -- tenant pays rent and utilities only. In commercial, landlord may pay some utilities.
* Net lease -- tenant pays some portion taxes, util, etc
* Percentage lease--tenant pays rent plus % profits
118
How long does a triple net lease run?
Triple-net leases are usually very long-term leases and could extend for 50 years or more.
119
Uniform Residential Landlord and Tenant Act
The Uniform Residential Landlord and Tenant Act (URLTA), ratified in 1972 and mostly unchanged since then, clarifies landlord and tenant duties and helps establish the basis for professional relationships between them. Virginia has adopted the URLTA in its entirety and expects landlords to follow the rules laid out by the legislation.
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The URLTA provides guidance for landlords and property managers in a number of areas including, but not limited to:
```
Code compliance
Keeping properties fit and habitable
Keeping common areas clean
Keeping utilities working
Handling waste
Providing heat and water
```
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What does Section 504 of the 1973 Rehabilitation Act do?
Protects people with disabilities from discrimination in programs that get financial assistance from the federal government.
122
How are investors able to take deductions on loan costs?
Costs associated with obtaining the loan (such as lender fees) have to be amortized over the life of the loan.
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How much of property cost reduced to reflect land when depreciating ...
The amount an investor allocates to the land is normally between 10% and 15% of the purchase price.
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straight-line depreciation
Depreciation basically divides the basis of the property into a number of years, and then allows the investor to depreciate—or take a business deduction for—that amount each year.
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Two types of depreciation
* Economic depreciation, where the asset is actually worth less because it’s deteriorating physically.
* Tax depreciation, which allows an investor to take a business deduction for annual depreciation.
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component depreciation
Component depreciation means separating an asset into its components and placing each one on its own depreciation schedule, based on its economic life cycle. from HVAC to other compoents
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How to tax law impact component depreciation
Tax Reform Act of 1986 eliminated this option for every item except those deemed tangible personal property.
Investors must determine whether a component, which would otherwise be considered part of the real property, may be separated out as tangible personal property for the purpose of component depreciation.
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What Constitutes “Tangible Personal Property”?
Treas. Reg. § 1.48-1(c) defines tangible personal property as any property except land and improvements, such as buildings or other inherently permanent structures (including items considered to be structural components of those buildings or structures).
129
Portfolio income is
income from investments, which includes capital gains, interest, and dividends.
130
How does the IRS treat passive income losses
IRS will only allow $3,000 of passive losses to be deducted against active taxable income.
131
How does IRS treat active income losses
If the IRS classifies someone as an active investor, however, he can deduct up to $25,000 from active taxable income. In order to qualify for that $25,000 deduction, the investor has to have an adjusted gross income of $100,000 or less.
132
two steps for calculating alternative minimum tax
Calculate the AMT based on one of only two AMT tax brackets (26% and 28%).
If the AMT calculated is higher than the tax calculated using the standard method, the taxpayer must pay the AMT. The highest amount is always the one that should be paid.
133
To figure out whether an investor will owe any additional tax under the AMT system, the investor complete _______.
IRS Form 6251.
134
What are the cap gain tax rates for people in higher income brackets
At 39.6% income tax bracket for ordinary income may be taxed at a rate of 20%
Another 3.8% may apply to net investment income for those in the highest tax bracket, making an effective long-term capital gains tax rate of 23.8%.
135
How are short term cap gains taxed
Gains on short-term capital gains (assets held one year or less) are taxed at the taxpayers’ marginal tax rate.
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Pyramiding
Pyramiding makes use of one investment to finance another. This can be done through sale or refinance.
137
what’s an involuntary conversion?
An exemption to the “every two years” rule for cap gains that allows for a partial exclusion to be taken for an earlier move made out of necessity.
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Estate tax is calculated by first computing ______ , which is the total of the fair market value of all items owned by the deceased.
Gross estate value
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Appropriation
Once the tax assessed values and rates are in place, the next step in the property taxation process is appropriation. Appropriation authorizes how funds are spent and collected. Appropriation results in the adoption of the tax law or ordinance.
140
A mill is ...
1/10 of a cent ($0.001). When a tax rate is given in mills, it will usually be expressed as either per hundred dollars or per thousand dollars of assessed value.
141
Difference between ad valorem taxes and special assessments
An ad valorem tax is a tax based on the assessed value of an item, such as real estate or personal property. Ad valorem taxes are calculated based on the assessed value of the property. The most common ad valorem taxes are property taxes. Special assessments, on the other hand, require property owners to pay for improvements to things like streets, street lighting, and curbs.
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Property tax abatement
To summarize, an abatement is a temporary reduction in the level of taxation for a specified number of years—often three, five, seven, or 10. During an abatement period, existing properties pay the usual property tax only on the property’s pre-improvement value, whereas new properties pay a reduced property tax rate during the abatement period. After the abatement period ends, all properties are assessed at their full tax-assessed value.
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PILOT programs
PILOT stands for payment in lieu of taxes. When the nature of ownership or use of a piece of property reduces a municipality’s property tax, a PILOT program may apply. EX: fed gov land ... feds pay PILOT fee to make up tax loss. States can pay too for university use of land, etc. Developers (as incentive): PILOT may be negotiated with the developer to reduce or defer the property taxes for the project
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Close Corporation
A close corporation is one in which the company's stockholders, directors, and officers are typically the same people. Officers of a close (also called closely held) corporation typically want to remain a small, tight-knit group. Owners in a close corporation run the company directly, without the oversight of a board of directors. Transfer of stock is more complicated, given the closely held ownership nature.
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How are real estate syndicates taxed?
Because real estate syndicates can take many forms (corporations, general or limited partnerships, or LLCs), taxation depends on which the form the organization has chosen.
146
Which document is used to create a corporation?
A state of incorporation is used to create a corporation. Also known as the certificate of incorporation, a state of incorporation serves as a corporation's basic governing document.
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discretionary trust
A discretionary trust is one that may be altered or discontinued by any of the parties to the trust.
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testamentary trust
A testamentary trust is one created according to the terms of the will of a deceased person. Itʼs often used to establish care for minor children. Unlike living trusts, testamentary trusts donʼt avoid probate. From the time of the trust makerʼs death until the expiration of the testamentary trust, the probate court will oversee the trust to make sure itʼs being handled properly.
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Grantor Retained Income Trusts (GRITs)
A GRIT is a method of conveying or granting title to an income-producing property to another, generally a family member, via a trust. The GRIT is usually established for a specified number of years before it becomes the granteeʼs (the trust beneficiary).
The grantor retained income trust allows for the grantors to retain the flow of income from the property up until the end date of the trust. The rules regarding establishing a GRIT are outlined in the Technical and Miscellaneous Revenue Act of 1988 (TAMRA), and include the requirements that:
The grantor (trustor) must be the only beneficiary of the income from the trust during the term of the trust and must not be the trustee.
The trust term must not exceed 10 years.
150
Between April 2017 and March 2018, foreign investors purchased _____ worth of real estate in this country, down from ______ billion during the previous twelve months.
Between April 2017 and March 2018, foreign investors purchased $121 billion worth of real estate in this country, down from $153 billion during the previous twelve months.
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The average price paid per house by foreign buyers was nearly ______, compared to the overall U.S. average of about ______
The average price paid per house by foreign buyers was nearly $454,400, compared to the overall U.S. average of about $290,600.
152
For a foreign trust, to ensure capital gains are paid how much does IRS want held to sure taxes are paid.
Trusts with foreign beneficiaries and foreign corporations that sell properties in the U.S. must withhold 35% of the amount realized from the sale.
153
Per Foreign Investment in Real Property Tax Act (FIRPTA), For a non resident, to ensure capital gains are paid how much does IRS want held to sure taxes are paid
15 percent
154
Is a person with a green card considered a foreign person on FIRPTA
Nope.
155
Uniform Electronic Transactions Act (UETA)
UETA established that electronic documents and signatures have the legal equivalence to physical records and writing.
156
Question 4
| When offer and acceptance has occurred, both parties enter into ______.
Mutual agreement
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Choice of law contract clause
Choice of law: Points out that the contract will be interpreted under the laws of the given jurisdiction.
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Severability contract clause
Severability: Notifies the parties that even if one part of the contract is found invalid, the other parts of the contract can be valid and enforceable.
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Delivery addendum
some states have created a delivery addendum that allows clients to opt for use of email to send and receive documents. In addition to authorizing the use of this delivery method, the addendum ensures that clients understand their rights as granted by the federal Electronic Signatures in Global and National Commerce Act (ESIGN)
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Electronic Signatures in Global and National Commerce Act (ESIGN)
specifies that the use of a digital signature is as legally valid as a traditional signature written in ink on paper, thus establishing that electronic contracts, e-signatures, and other electronic records are legally equivalent to their paper counterparts.
161
What is the difference between an Estate at sufferance and a Holdover tenant
Both are staying beyond lease, but holdover refuses to move
162
Periodic estate compared to an Estate for years
Periodic is automatic renewal, like month to month
| Estate for years is for set term, such as 6 month or one year lease.
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"lease" and "leasehold estate": what is the difference?
Lease: This is the contract
| Leasehold estate: this defines the relationship that enables a part to live on an estate where they have the contract
164
Responsibility and Non-assignability clause of a lease is ...
the paragraph puts the parties on notice that they are individually and jointly responsible for fulfilling the terms of the contract.
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covenant of seisin
The covenant of seisin is essentially a covenant that the grantor owns the estate that the deed says it conveys to the grantee. This covenant promises that no one else has any conflicting possessory interests, present or future. ... In general, the same title defects breach both the covenants of seisin and right to convey.
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habendum clause
A habendum clause is a clause in a deed or lease that defines the type of interest and rights to be enjoyed by the grantee or lessee. In a deed, a habendum clause usually begins with the words "to have and to hold".
167
Bring down
Because it’s possible for a recent lien not to have been entered in the public records yet when the search is performed, the title insurance company will often do another search, called a bring down, after closing and before any new documents are filed. As part of this subsequent search, the seller may be required to provide an affidavit of title, which is a sworn statement assuring the title insurance company and the buyer that no other title defects occurred since the date of the title search.
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subrogation.
A title defect is discovered after closing. IA covered party such as the property owner or lender can give the title company the right to pursue the party who caused the loss; this is called A title defect is discovered after closing.
169
Covenant of seisin:
The grantor owns the title specified in the deed. (Seisin means possession of the right to transfer ownership. Think "seize.”)
170
Covenant of right to convey deep provision
: The grantor has the capacity and right to convey title.
171
The six included covenants are:
The six included covenants are:
1 - Covenant of seisin: right to transfer ownership.
2 - Covenant of right to convey: right to convey title.
3 - Covenant against encumbrances:
4 - Covenant of quiet enjoyment:
5 - Covenant for further assurances:
6 - Covenant of warranty: The grantor will warrant and defend the title to the grantee against the lawful claims of others.
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Common Interest Community Board
* Established in 2008 by Virginia government.
* It creates policy
* Establishes and enforces regulations
* Administers the Virginia Property Owners’ Association Act, the Real Estate Cooperative Act, the Condominium Act, and the Real Estate Time-Share Act.
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CIC
* Common Interest Community (Condo/coop/timeshr)
* Va. RE subj to a declaration w/ lots & common areas
* Lots must be residential/occupied for recreational
* Unit/lot owner = Assn Members
* Members pay asessments per the declaration.
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Office of the Common Interest Community Ombudsman
* Part of DPOR
| * Administers all of the CIC regulations
175
Common Interest Community Board
* An agency—separate from the Virginia Real Estate Board—that’s also administered by DPOR.
* Created VA Code, Chapter 23.3 Common Interest Communities, on July 1, 2008.
* Regulate CIC managers through a specific licensing program.
176
CIC Board Members
11 members/8 in the biz reps 2 public:
```
3 - Representatives CIC Mgrs.
2 - CPA who reps. assns.
2 - CIC developers
1 - VA attorney reps. assns
1 - Rep. of a time-share community.
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1 - Person who serves or served on condo board
2 -Residents of CIC
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CIC Board Responsibilities
* Overseeing all CIC mgt situations
* Creates, enforces regs governing CICs
* Estabs license criteria: CIC mgrs & employee certif.
* Seeks high standard of conduct for CIC managers
* Approves crit: accredited CIC manager training
* Responsible for developing and publishing best practices for the content of declarations.
178
Where can individuals complain about not getting resale package?
On occasion, the board may also receive a complaint directly from individuals who didn’t receive a resale certificate or disclosure packet within the regulated timeline; this is considered a pretty big violation of the Property Owners’ Association Act.
179
What happens if you operate a CIC without a license from the state of VA?
* Could be found guilty of a Class 1 misdemeanor
* 3 or more convictions could get Class 6 felony.
* A variety of penalties may apply.
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Requirements for CIC mgr license
* Educational requirements
* Must obtain and maintain a blanket fidelity bond or employee dishonesty insurance policy
* Bond/Insur coverag either $2 million OR the highest aggregate amount of all of the operating and reserve balances of all associations under the CIC manager’s control during the prior fiscal year.
* At a minimum, the bond/insurance coverage amount must equal $10,000.
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Who is exempt from requirement to get CIC mgr license?
* Employees of licensed CIC mgrs or assns.
* CIC residents
* CIC association’s governing board members
* Attorneys representing the CIC manager
* CPAs hired by CIC managers/associations
* Virginia real estate licensees
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CIC Management Information Fund
* PPromote info & resch CIC mgmt and operation
* Streamline procedures resolving member complaints
* Provide seminars and educational programs
* Funds Office of the CIC Ombudsman
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How is the CIC Management Information Fund funded?
* The annual fees the CIC managers pay to the board
* Plus annual assessment on property mangers at least $10 a year, but the lesser of $1,000 a year or 0.05% of the gross receipts from CIC management during the preceding year
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Office of the Common Interest Community Ombudsman
* Separate and distinct from the CIC Board
* Member VA Bar appointed by the DPOR director.
* Assists & Informs association members re: rights
* Reviews CIC member complaints
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Can the Common Interest Community Ombudsman offer legal advice?
No: The ombudsman can provide a lot of great resources and information, but cannot offer legal advice or interpret any legal information, such as bylaws and governing documents.
186
How long must a CIC maintain compliant documents
One year
187
What kind of complaints may CIC members file with the Ombudsman
Violations of CIC state LAWS and REGs
They can't file for violations of Assn. rules and regs.
188
Two types of CIC Complaint forms for Ombudsman
1 - CIC complaint form
| 2 - Notice of final adverse decision (NFAD)
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CIC member complaint process
1 - try to resolve using Assn complaint process
2 - File CIC complaint form if not resolved
3 - If assn no respond/resolve file CIC compliant fm again
4 - File NFAD
5 - Ombudsman investigate provide determination
6 - Determination sets "required actions" but its not a legally binding thing.
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What must CIC's have to address complaints
Written procedures and a form the members to use to file complaints.
191
How can Assn members get $$ from The Common Interest Community Management Recovery Fund?
File a verified claim in writing to the director of the DPOR.
Can cover complainants reasonable fees, costs, and expenses.
192
What happens to a CIC manger if a complainant gets $$ from fund bc of his violations?
* The board will revoke the license of the CIC manager
| * The CIC manager must repay the fund in full (including interest) before reapplying for licensure.
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The Common Interest Community Management Recovery Fund
Fund to paying out for complaints against CICs. Funds come from $25 complainant fees and $25 annual assessment to CIC mangers. If fund grows excess money beyond cost of administration $$ can stay there or be distributed to CIC Management Information Fund.
194
CIC Management Recovery Fund minimum balance and how maintained?
* At least $150,000.
* When below: Get $ fm CIC Mgmt Infor Fund
* If Info Fund not enough $$: Board assesses Assns and CIC managers to increase Fund to $150,000.
195
What may happen to an association that fails to remedy a violation after a determination is made by the ombudsman?
The CIC Board may take action to enforce CIC laws.
196
Convertible Land in condo declaration
Land near the existing condo project that could be converted to more units.
The declaration should contain detailed information about the expansion or contraction, including:
* A legal description of each parcel of convertible land within the condominium complex
* A statement of the maximum number of units that may be created within each piece of convertible land
* A description of other improvements that may be made on the convertible land
* Whether the developer has the right to create new common elements on the convertible land
197
Expandable Condominiums
If some unit boundaries aren’t finished, or if the developer wants to submit only certain floors or areas of a building as condo units, this is known as an expandable or phased condominium project.
198
What should a declaration contain if it's an expandable condo?
* Statement that the developer has option to expand
* Conditions nec for expansion (ex: owner consent)
* Time limit for option (not to exceed 10 years)
* Legal description “additional land” avail
* Statement on max #of units possible on addl land
* Compatibility with existing structures (in terms of quality of construction, materials used, and architectural style)
199
Contractable Condominiums
Condominium projects have units that may be phased out or converted into something else.
200
Declaration requirements for contactable condos
* Statement on Devloper option to contract
* Conditions nec such as owner consent
* Time limit for option up to 10 years
* A legal description of all land that may be withdrawn from the condominium (referred to as “withdrawable land”)
201
Public Offering Statement (POS)
A public offering statement (POS) is a document that builders provide to condo buyers. It includes information about the condo association and its CC&Rs. It also contains information regarding budgets, insurance, and construction details of the condominium.
202
POS includes
* The name and address of the condo
* A description of the condominium
* Copies of the declaration and bylaws
* Copes of any management contracts
* Info on construction status, zoning, insur, permits
* Encumbrances, easements, liens, and matters of title
* Financing offered to the buyer
* Warranties for units and common elements
* Note buyer cancel within five days of POS delivery
* Note builder’s obligation to complete
* Listing of the facilities or amenities
* Limitations on the number of occupants per unit
* Restrictions or limitations right to display the U.S. flag
* Any add'l info for buyer full and fair disclosure
203
Condo owner rights about flag display
In accordance with federal law, no association may prohibit a unit owner from displaying the U.S. flag. Associations may, however, restrict the size, place, duration, and manner of placement if it protects a substantial interest of the association.
Associations are also permitted to restrict the display of the flag in the common areas.
204
Can condo owners record association meetings
YES: All condo unit owners have the right to be notified of association meetings and to subsequently attend, participate in, and record the meetings.
205
Condominium _______ set forth the rules and regulations for the condominium owners associations. They govern how the associations manage and spend cash reserves, for example.
Bylaws
206
The tenant may serve notice on the landlord if the landlord breaches the rental agreement, and may terminate if the landlord does not remedy the breach in ________days
21
207
Members of the armed forces or National Guard may terminate their lease if the member has received a change of orders to move for more than three months more than ____ miles from the dwelling unit. They can also terminate if discharged or released from active military duty or full-time duty or technician status with the National Guard, or if they are ordered _____________
35
| to report to government-supplied quarters.
208
How may a landlord dispose of personal property belonging to a tenant who has died?
The landlord must provide 10 days’ written notice to the tenant’s emergency contact before disposing of the belongings.
209
Reasonable care working around marked utility lines
“Reasonable steps” for excavators include the following:
Exposing the underground utility line by hand digging
ot using mechanical equipment within two feet of the exposed utility lines
Protecting the exposed utility lines from damage
Digging at reasonable distance along the line of excavation
Exercising due care at all times to protect utility lines when hand digging
210
Underground Utility Damage Prevention Special Fund is
The special fund may be used for educational purposes, in addition to funding administration or regulatory enforcement.
211
___________ is in charge of administering and enforcing fair housing laws in Virginia.
The Fair Housing Board
212
Four exemptions t fair housing laws.
1 - Owner-sold/rented single-family home, as long as that owner doesn’t own more than three single-family homes at once
2 - The Mrs. Murphy exemption
3 - Religious, private, or commonwealth organization exemptions
4 - Housing for older persons
213
Complaints to be investigated by DPOR must be made in writing and received within __________ of the occurrence.
Three years
214
Who governs excavators and operators to make sure that no one damages underground utility lines?
The State Corporation Commission
215
What pays for the Office of the Ombudsman?
CIC Management Information Fund
216
GRM is used for?
Income-producing properties with four or fewer units. Properties with five or more units use gross income multiplier.
217
What are static risks?
Static risks are those business risks that could potentially be lessened with insurance, such as accident liability, fire, theft, and vandalism
218
Effective Gross Income
Income minus vacancy and collection losses. Does not include taxes
219
Which group is responsible for either dismissing the complaint or issuing a charge of discrimination by a real estate licensee?
The Virginia Real Estate Board is responsible for fair housing cases involving real estate licensees or their employees.
220
Which class of office building has adequate systems that are fair to good for the area?
Class B. These office buildings can’t command the same prices as Class A buildings because they are rated as only fair to good for the area.
221
Condominium _______ set forth the rules and regulations for the condominium owners associations. They govern how the associations manage and spend cash reserves, for example.
Bylaws; Your community’s bylaws establish the structure of day-to-day governance of your homeowners association. This includes things like:Frequency of HOA board elections
Process for nominating and electing new board members
Number of members that serve at one time
Length of board member service terms
Meeting frequency and quorum requirements
Duties and responsibilities of board members
222
CC&R's
This is a legally binding document that is officially recorded and filed with your state. Your CC&Rs cover the rights and obligations of the homeowners association to its members and vice versa. CC&Rs often cover legal issues, such as:
Property-use restrictions
Clearly defined maintenance obligations for the HOA and individual members
Mechanisms for rule enforcement and dispute resolution
Lender protection provisions
Assessment obligations
Insurance obligations
223
What can an on-site property manager negotiate with a prospective tenant to have included in the lease agreement to ensure that the tenant is running a profitable business?
Cancellation Clause: New businesses’/tenants’ leases usually include a cancellation clause that the property manager can exercise if the business is unable to pull in a certain gross volume.
