Chapter 17 FIVE POWERFUL SECONDARY FINANCING TECHNIQUES THAT EFFECTIVELY CLOSE DEALS Flashcards
(100 cards)
1
Q
What is the goal of this chapter?
A
To introduce five powerful closing techniques that are effective for real estate investors.
2
Q
List the five powerful closing techniques mentioned.
A
- Leasehold financing
- Land leases
- Percent of income
- Joint ventures
- Syndications
3
Q
What is leasehold financing?
A
The ownership of a right to use a specific property for a term of years for which the lessee pays rent.
4
Q
What is a leasehold interest?
A
A tenant’s interest in a property that can be pledged as security on loans if lease terms are met.
5
Q
What rights can be leased or sold?
A
- Land
- Mineral rights
- Air space
- Building occupancy (all or part)
6
Q
What is a land lease?
A
An agreement allowing a tenant to use land for a specified period while paying rent.
7
Q
What is the importance of understanding the status of other rights during a lease?
A
To maximize benefits and clarify what other rights may be controlled by the tenant.
8
Q
In the hotel example, how much annual rent does Ronnie pay?
A
$74,000 a year.
9
Q
What was the total value of the land plus the building in Ronnie’s case?
A
$2 million.
10
Q
What was the seller’s reason for establishing an income stream from the land?
A
To avoid triggering a large capital gain tax at that time.
11
Q
What was the term of the lease agreed upon by Ronnie?
A
99 years.
12
Q
What was the purchase price of the hotel business Ronnie bought?
A
$1 million.
13
Q
What percentage of the hotel purchase price was held as a first mortgage?
A
70 percent.
14
Q
What does ‘subordination’ refer to in the context of land leases?
A
The act of placing a lender’s interest ahead of the landowner’s interests.
15
Q
True or False: Lenders prefer lending on unsubordinated land leases.
A
False.
16
Q
What is the estimated present value of the land after 10 years?
A
$5 million.
17
Q
How much was the negative value of Ronnie’s lease payment estimated at?
A
$740,000.
18
Q
What must a buyer have to justify the value of a leasehold property?
A
An appropriate and viable use of the property.
19
Q
What are the seven elements that establish the value of a leasehold interest?
A
- Type of property leased
- Annual rent of the lease
- Duration of the lease
- Market conditions
- Improvements on the property
- Comparable property values
- Lease terms and conditions
20
Q
What is the effect of annual rent payments on leasehold equity?
A
They govern the actual value and become the primary security for unsubordinated loans.
21
Q
Fill in the blank: Leasehold financing will ultimately be based on the _______ of the lease.
A
[terms of years]
22
Q
What is the capitalized value of the rent in the F.P.A. Corp. example?
A
$265,000 at a 10% yield rate.
23
Q
How is leasehold equity calculated?
A
Total value minus existing financing and capitalized value of rent.
24
Q
What happens to leasehold equity appreciation when capital investment is deducted?
A
It results in total leasehold equity after adjustments.
25
What is the total leasehold equity mentioned?
$ 860,000 and $ 793,750
26
What is the leasehold equity appreciation after capital investment?
$ 760,000 and $ 693,750
27
What factors can affect the leasehold equity?
* Period of time remaining on the lease
* Terms, obligations, restrictions, and provisions of the lease
* Use of the property
* The tenant
* Options available to the lessee
* Security from leasehold equities
28
True or False: The leasehold equity will decline if the lease expires in one year.
True
29
What are some critical options available to the lessee?
* Option to buy
* Option to extend the lease
* Option to remove buildings without replacing them
* Option to recast debt
* Option for subordination
30
What is the difference between subordinated fee and unsubordinated fee in leasehold financing?
Subordinated fee allows the lender to secure interests in the property, while unsubordinated fee does not.
31
What are the seven main criteria that create leasehold financing?
* Period of time remaining on the lease
* Terms, obligations, restrictions, and provisions of the lease
* Use of the property
* The tenant
* Options available to the lessee
* Security from leasehold equities
32
What is the significance of mineral rights in land ownership?
Mineral rights may not belong to the landowner if retained by a previous owner.
33
Fill in the blank: The right to dispose of space under your land is known as _______.
subterranean rights
34
What rights may coincide with riparian rights?
Water rights
35
What are air rights?
The rights to sell or lease space above the land, such as for office buildings.
36
What can happen if a property is zoned in such a way that it cannot be subdivided?
Further subdivision may not be possible unless zoning is changed.
37
How can a lease serve as a financing tool?
It can shift equity between parties similar to a mortgage.
38
What may happen if your adjusted basis is lower than the contract price of the property?
You may create a taxable gain.
39
What is a sale and leaseback?
A method for a property owner to raise capital while retaining property use.
40
What is the implication of leasehold equity for lenders?
Lenders analyze leasehold equity based on the remaining lease term.
41
What is the impact of lease terms on property value?
Long lease terms can enhance the value of the underlying property.
42
What is a taxable gain in property sales?
A taxable gain occurs when your adjusted basis is lower than the contract price of the property, resulting in a tax obligation.
43
What should you check before selling a property to offset a taxable gain?
Check for any losses or tax credits that can offset the taxable gain.
44
If you sell a property for $750,000 and your adjusted tax basis is $395,000, what is your taxable gain?
$355,000
45
What is the likely tax rate if you have a taxable gain?
At least 33 percent.
46
True or False: Selling a property at a loss can be beneficial.
False.
47
What tax law currently does not allow you to apply a loss on the sale of your residence?
The current tax laws do not allow applying a loss on the sale of your residence against other capital gains.
48
Complete the sentence: If you acquire a new residence and convert your home into an investment property, you may have the right to _______.
deduct any loss from other capital gains.
49
What is the implication of having a taxable gain but no proceeds to cover it?
You may have to pay tax from your own funds if the tax exceeds the cash left after closing.
50
How is the capital gain calculated when selling a property?
Selling price minus adjusted tax basis.
51
What happens when you borrow money on property without paying tax on it?
The borrowed money exceeding the book value will be taxed.
52
What is the advantage of leasing land instead of selling it?
You do not create a gain or loss and can save on reinvestment potential.
53
Fill in the blank: The annual rent from leasing land is _______.
an allowable deduction against income.
54
What is the result of offering a land lease instead of an outright sale?
Increased reinvestment potential from savings on gains tax.
55
What is an example of a split lease/purchase transaction?
Selling a building while leasing the land it sits on.
56
What should be considered when evaluating the cash flow yield in a lease scenario?
The overall cash invested and the cash flow yield should be balanced.
57
What financial metric can Roy use to assess the advantages of buying the building outright versus leasing the land?
Cash flow yield.
58
What is the formula for calculating the purchase price in the option to buy scenario?
10 times the annual rent based on 12 months of the last month's rent prior to closing.
59
What is a common risk associated with leasing property?
Inability to refinance the loan before the end of the lease term.
60
True or False: A lease scenario guarantees a higher cash flow than a purchase.
False.
61
What is the potential issue if the seller does not subordinate to the loan?
Roy may not get the loan at the same constant rate.
62
What is the purchase price if 108,000 is multiplied by 10?
$1,080,000
63
Why might property owners be reluctant to sell?
Large tax liability from the sale
64
What is a land lease?
An agreement allowing one party to use land owned by another party in exchange for rent
65
What is the real value to the seller if they price a property at $900,000 to cover a $150,000 tax payment?
$750,000
66
What is the most important aspect of leasehold financing?
The rise and decline of leasehold equity
67
What is the 'percent of income' in real estate financing?
A percentage of the income derived from the investment given to the lender
68
In the buyer's example, how much cash did the buyer offer for Charlie's apartment complex?
$240,000
69
What is a wraparound mortgage?
A secondary mortgage that wraps around an existing mortgage
70
What bonus was offered to Charlie in the buyer's example?
5 percent of all revenue exceeding his pro forma NOI for the first three years
71
What was the seller's counteroffer in the example where the buyer offered $900,000 cash down?
$1,300,000 cash down with a secondary financing of $1,600,000 at 6 percent interest
72
What is a common motivation for lenders to accept a lower interest rate?
Receiving a bonus of income above a set standard
73
What did Wilton offer for the shopping center owned by Miles?
$650,000 with $150,000 cash and a $75,000 second mortgage
74
What was the interest rate on the second mortgage in the shopping center example?
7 percent per annum
75
What additional bonus did Miles receive in the shopping center transaction?
25 percent of all cash flow above $24,000
76
What is a joint venture?
A joint effort by two or more people combining abilities or capabilities
77
What is a syndication?
A group of people combining monetary ability to buy land or property for mutual profit
78
What is the role of a syndicator?
The person or entity that puts the deal together for investment
79
What are some legal forms of ownership for joint ventures and syndications?
* Limited partnerships
* Investment trusts
* Corporations
* Professional associations
80
What can joint ventures and syndications do for investors?
Divide ownership interest among several buyers for larger properties
81
True or False: All joint ventures take the syndication route.
False
82
Fill in the blank: The seller may need to be educated on the benefits of a _______ to make a deal.
land lease
83
What is the purpose of the brief passages on joint ventures and syndications?
To spark interest in these fields and acquaint readers with their potential methods of use in investment strategies.
84
What solution can be used when the price or size of a property is beyond the capability of the average investor?
Divide the ownership interest among several buyers in the form of a syndication.
85
What is a key consideration when using joint ventures as a financing tool?
The goals of all parties involved.
86
Where can you find partners for joint ventures?
They can be found almost everywhere; starting with determining the probable use of the property.
87
What should you do if you represent property suitable for a shopping center?
Look for developers of shopping centers as possible partners.
88
What is a preferred return in a joint venture?
A condition that allows the first percent of income to go to a specific investor.
89
How does a guaranteed return differ from a preferred return?
A guaranteed return ensures the return of a set percentage regardless of income availability.
90
What is accrual of unpaid but earned return?
When an investor does not receive their preference or guarantee, increasing their total investment amount.
91
What is subordinate interest in a joint venture context?
When one party, typically the seller, puts their equity behind the financing to allow for maximum mortgage availability.
92
What is land banking?
When the owner of land carries the cost while the partner develops it.
93
What is essential for attracting developers or investors in joint ventures?
Understanding the area’s and investors’ needs.
94
What is the first step to becoming involved with syndications and joint venture deals?
Study the tools used by syndicators and brokers.
95
What should you ask your lawyer regarding syndications?
For help with syndication or information about joint venture deals they have put together.
96
What legal requirements must be considered in syndications?
There are many laws controlling the sale of securities, which most syndications will fall under.
97
What can happen if you are a professional syndicator regarding IRS audits?
You may face more frequent audits and may not qualify for usual capital gain treatment.
98
True or False: The time to develop a shopping center is shorter than that for a strip store.
False.
99
Fill in the blank: A _______ return is generally demanded by one of the partners in a joint venture.
[preferred return]
100
Fill in the blank: The seller may offer a preferred return as an inducement to attract _______ investors.
[big money]
