ch 26-28

Question 1

what is a condominium

Answer 1

is a building in which each owner has a percentage ownership of the entire property. The condo is for legal purposes real property. The condo owner, owns his or her individual apartment just as if it were a private home

Owns an undivided percentage of the common elements of the building along with the other unit owners

The condo is governed by a board of directors or board of managers that maintains the common elements and enforces the regulation

Question 2

what are condominium documents

Answer 2

are generally divided into 3 parts: Declaration, Articles of Incorporation, and Rules and Regulations

The bylaws are the basic rules under which the condo operates

The condo sponsor is the condo’s owner or developer. The sponsor appoints the board members, appoints the managing agent, and puts a limit of his own control of the board

The offering plan also known as a prospectus or black book (floor plans, units available, parking info), must be reviewed by the NYS Attorney General’s Office to be sure the info is accurate and complete according to NYS legal requirements before the plan can be distributed to the public

The declaration explains the nature of the development project, including the name of the condo, the developer and the principal officers: a description of the units, the way the condo is governed and how the dues will be assessed; an explanation of repair and maintenance responsibilities and a description of the ownership interest between the condo association and the owner

Question 3

what is a letter of intent (LOI)

Answer 3

is a written statement expressing the intention of the undersigned to enter into a formal agreement to purchase a condo

Contains :
Price and deposits
Completion date and closing date
Use of the unit
Non-exclusivity

Question 4

What does a certificate of occupancy (CO) do

Answer 4

a new building cannot be legally occupied until the building department has issued a final or temporary CO. If a temporary CO expires and is not renewed a new buyer may find it difficult or impossible to renew his or her homeowner’s insurance policy or to sell or refinance the home

Question 5

what is flipping

Answer 5

buying and selling quick or buying a unit from a developer as soon as it comes on the market (often b4 construction) and then reselling the contract to a third party before closing occurs. Flipping is a quick turn around of the unit for a faster profit, but it may only be done with the developer’s permission

Flipping can drive up the prices of the units in a development. It can cause financial problems for buyers who purchase the flipped units for much more than they would have paid if they bought directly from the developer

Question 6

When can developers do a market test

Answer 6

as long as the follow the rules outlined in the Cooperative Policy Statement #1 (CPS1)

Covenants, conditions, and restriction are limitations and rules placed on a group of homes by a builder, developer, neighborhood association and or homeowner association. All condos and townhomes have CCRs

Question 7

what is the right of first refusal and who typically has this right in a condo

Answer 7

this is the right of a person or entity to have the first opportunity to either purchase or lease real property. In some condos the association of unit owners retains the right of first refusal on the sale of any unit

Question 8

what is the mansion tax

Answer 8

a 1% tax paid by the buyer on an residential property that sells for $1M or more

Question 9

what is title insurance

Answer 9

will protect the buyer against any unpaid bills or liens against the condo association

A lender will require this to protect interest

Question 10

what is the difference between a condo and a cooperative

Answer 10

it is the form of ownership. While a condo owner actually owns the unit, which is treated as real property, a co-op member does not directly own any real estate. The corporation owns or leases all real estate

Each unit in a co-op is allocated a number of shares of stock. When buying into the co-op a person is buying those shares in the corporation

Each month the shareholders pay a maintenance fee that covers their share of the operating expenses of their cooperative corporation

Co-op members are entitled to a tax deduction for their portion of the building’s real estate tax, their portion of the building’s interest payment on its mortgage and the interest payment on their own apartment loan

Should review financial statement b4 investing in a co-op

Question 11

what is an underlying mortgage

Answer 11

1/ more mortgage on an entire building

Question 12

What is contained in the financial statement of the co-op

Answer 12

Accountant’s opinion letter
Statement of financial position or balance sheet
Income statement
Notes to the financial statement

Question 13

what is discussed in the board’s minutes

Answer 13

Can be helpful to prospective buyers
may discuss maintenance issues and make decisions about whether they will need special assessments during the year to cover certain expenses. Will give the prospective buyer an idea of what maintenance issues are of concern to the co-op board.
May also give the buyer info about the status of the mortgages that can’t be found in the financial statement, as well as , info about the reserve funds

Question 14

who owns a co-op

Answer 14

the ownership of the building and all of the common elements is a fee simple ownership.

For shareholders, their interest is a leasehold estate.

Some co-ops have a flip tax that is imposed when the unit transfers. A flip tax is not really a tax but a fee for the sale of a co-op unit

Question 15

what documents are needed for a co-op transfer

Answer 15

Subscription agreement: the contract to purchase the shares in a co-op corporation

Proprietary lease: a proprietary lease is a lease given by a corporation to another. It is often used in a co-op context, where the owner is given a certain number of shares in the co-op, along with a proprietary lease for one of the residences in the building. In this manner, a stockholder in the co-op has a certain number of shares in the co-op, along with a lease to use one of the apartments under the conditions specified

Question 16

what are articles of incorporation

Answer 16

they are the primary rules governing the management of a corporation in the US and Canada, and are filed with a state or other regulatory agency

Question 17

what are bylaws

Answer 17

state how the co-op will conduct business and must be consistent with both State statutes and the articles of incorporation

Question 18

what are house rules

Answer 18

less technical, and involve primarily quality of life issues. They are easier to amend, but harder to enforce than bylaws and are at the root of many conflicts a board may encounter

Question 19

what does purchaser receive when close on a purchased unit

Answer 19

a stock certificate in his or her name

Do not receive a deed. Instead ownership of the shares entitles the purchaser to a long-term proprietary lease for the apt or unit

Question 20

what does a shareholder need to make changes to their unit

Answer 20

an alteration agreement

Question 21

what does a prospective purchaser need to do in order to buy into the co-op

Answer 21

a private interview along with an application packet

Question 22

what kind of loan does a purchaser receive from a bank since they dont own real estate

Answer 22

a share loan

Question 23

what is a recognition agreement

Answer 23

it is a 3 party contract usually between tenant-shareholder’s lender and the co-op, which is then signed and approved by the shareholder

Question 24

name four items that are normally included in a board package

Answer 24

An application with basic info about the purchaser, including financial condition
One/two years of tax returns
Two to four personal reference letter
Two to four reference letters from work colleagues

Question 25

what are some problems restrictions with subletting in a co-op

Answer 25

most co-ops prefer that units are not sublet to non-shareholder tenants Co-ops that allows sublets have some potential issues. For example if the % of sublets is high the co-op may not be able to borrow money easily or refinance its underlying mortgage without paying much higher rates Co-ops that do allow subletting often have restrictions on the length of time for which the shareholder-owner may sublet the unit In some cases the bylaws or rules of the co-op will allows a sponsor who owns the shares allocated to a unit to sublet that unit, even though other unit owners may be prohibited from doing so

Question 26

who is present at the board interview

Answer 26

either the entire board or more likely some subset of board members designated to perform this task and then report back to the full board

Question 27

under what circumstances might allowing subletting in a co-op be a good thing

Answer 27

at any given time one or more individual shareholders in a building may have a change in circumstances that require them to relocate. A sublet allows that owner to collect the rent needed to make the maintenance payment

Question 28

what is a condop

Answer 28

is a building which has been divided up into mixed-use segments, with each segment receiving a condo unit deed. Subsequently one of these segments is identified as a residential component that is owned by a co-op corporation. There are some situations in which a conversion to a condop might be worthwile

Question 29

what is the IRS 80/20 rule

Answer 29

is a federal tax rule that requires residential co-ops to get at least 80 percent of their gross income from their tenant-shareholders and no more than 20 percent from other sources like commercial rents

Question 30

what does the mortgage debt relief act of 2007 amend with the 80/20 rule

Answer 30

Now a co-op can also qualify if for the tax year in question one of the following is true: At least 80% of the total square footage of the co-op property is used or available for use by shareholders for residential or residentially-ancillary purposes At least 90% of the co-ops expenses are for the acquisition, construction, management, maintenance or care of the co-ops property for the benefit of its shareholders

Question 31

what is the time value of money

Answer 31

is based on the idea that money available at the present time is worth more than the same amount in the future, due to its potential earning capacity

Question 32

what is liquidity

Answer 32

is a term that refers to an asset's ability to be easily converted through an act of buying or selling without causing a significant movement in the price and with minimum loss of value. Property is considered an illiquid asset which cannot be transferred as easily as other assets, such as stocks or bonds

Question 33

what is leverage

Answer 33

is the use of borrowed funds to increase the potential return of an investment. financial leverage is created by mixing borrowed funds with equity (the cash contributed by the investor)

Question 34

what is the debt to equity ratio

Answer 34

this is total liabilities divided by shareholders's equity Financial leverage can be measured by this

Question 35

list three other risk factors an investor must consider besides financial risk

Answer 35

business risk Inflation risk Management risk

Question 36

risk of unimproved or undeveloped property

Answer 36

is probably the riskiest of all property investments. It can be the most illiquid of all property types

Question 37

what are the different office buildings

Answer 37

Low rise: 1-3 stories Mid rise: 4-15 stories High-rise: over 15 stories Garden office: 1-5 stories with extensive landscape Research and development: 1-2 stories 50% office or dry lab and rest workshops, storage, or light manufacturing Flex space: 1-2 stories can be for warehouse and light industrial or offices

Question 38

what is malls

Answer 38

shops and association walkways and parking areas. Public area

Question 39

what is regional centers

Answer 39

Regional centers are intended to serve as the focal points of regional commerce, identity, and activity. They cater to many neighborhoods and communities and serve a population of 250,000 to 500,000 resident

Question 40

what is mega malls

Answer 40

super regional centers

Question 41

what is outlet centers

Answer 41

100,000-300,000 sqft couple dept stores

Question 42

what are the different industrial property

Answer 42

warehouse/manufacturing: focus on storage and distribution Manufacturing Flex Loft building: several floors with large areas of unobstructed space, originally rented out for light industrial now for residential

Question 43

name 2 advantages of investing in commercial property

Answer 43

very little risk of rent control. Business tenants are generally easier to deal with than apartment house tenants

Question 44

what is net operating income

Answer 44

the net income produced by a specific property after all expenses have been deducted from the gross receipts Expenses: Variable expenses fluctuate according to the degree of occupancy. Here are some examples. Management fees are based on a percentage of rental income. Utility expenses. Expenses for cleaning. Fixed Expenses Fixed expenses do not fluctuate. Real estate taxes. Insurance premium. Repairs and maintenance. Advertising and promotions

Question 45

what is cash flow

Answer 45

is equal to cash received minus the cash paid out over a given period of time Before tax cash flow is the measure of the cash received after the net operating income has been calculated and any mortgage related expenses are paid, but before taxes are taken into consideration After tax cash flow is the profit that the investor actually receives from income-producing property after the income taxes are paid. It is the before-tax cash flow, minus the tax liability

Question 46

what is taxable income

Answer 46

= NOI - depreciation - mortgage interest

Question 47

what is a tax shelter

Answer 47

an investment designed to reduce or avoid income taxes

Question 48

what is a real estate operating statement

Answer 48

usually presents cash inflows and outflows from operations and is broadened to include non-operating cash flows, such as those that come from debt services, income taxes, and capital expenditures

Question 49

what is gross income

Answer 49

is the amount of revenue the property would generate if it had no vacancies. The gross rental income is adjusted to reflect vacancy losses to derive effective rental income. The effective rental income amount is then further adjusted to include income from other sources, resulting in the gross operating income

Question 50

what is operating expenses

Answer 50

will show the cash expenditures that are needed to maintain and operate the property

Question 51

what is debt services

Answer 51

is the principal and interest payments made on a debt over a period of time. Debt services are subtracted from the net operating income to get the before-tax cash flow

Question 52

what is cash on cash return or equity dividend rate

Answer 52

is the ratio of annual before tax cash flow or after tax cash flow to the total amount of cash invested, expressed as a percentage (annual before tax cash flow / total cash invested = cash on cash return

Question 53

how to estimate current operation costs

Answer 53

First identify comparable properties | Second compare data to published sources

Question 54

what are two crucial physical traits that affect a property's ability to stay competetive

Answer 54

Functional efficiency: is an assessment of how well a property does the job it is supposed to do Physical durability: is a calculation of the buildings remaining physical life, which is based on how well the building was originally designed coupled with how well it has been maintained over its life

Question 55

what is an income multiplier

Answer 55

express the relationship between price and either gross or net income. The current price of the property is divided by the income to give an idea of how effective the property is at generating income compared to its market price

Question 56

what is operating ratio

Answer 56

this is the percentage of effective gross income that is consumed by the operating expenses. It is calculated by dividing the operating expenses by the effective gross income. Usually, the lower the ratio, the more efficient the property is

Question 57

what is break even ratio

Answer 57

this calculation shows the percentage of effective gross income that is required the meet cash expenditures. It is calculated by adding debt services to operating expenses and dividing by operating income. Lenders use the break even ratio as one of their analysis methods when considering providing financing for an investment property. Too high of a break-even ratio would cause a lender to use caution

Question 58

what is debt coverage ratio

Answer 58

it measures the investor's ability to pay the property's monthly mortgage payments from the cash generated from renting the property. Lenders use this ratio as a guide to determine whether the property will generate enough cash to pay rental expenses plus the loan payments. It is calculated by dividing the annual NOI by the annual debt service

Question 59

what is a pro forma income statement

Answer 59

is similar to a historical income statement, except it projects the future rather than tracks the past. Pro forma income statements are an important tool for planning future business operations

Question 60

what is capitalization rate

Answer 60

is designed to reflect the recapture rate of an investor's original investment over the economic life of the investment to give that investor an acceptable rate of return on his or her investment. As the capitalization rate goes down, the value of the property goes up