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Flashcards in Commercial/Investment B Deck (14):

Real estate's 6 characteristics:

(for) UI DUST



The effect of federal, state, and local income laws on the income, profit,
and losses from an investment. This addresses issues such as capital gains, tax credits,
and tax deferments.

Tax Impact:


Occurs when borrowed funds are invested at a rate of return
higher than the cost of funds to the borrower.

Positive leverage


Occurs when borrowed funds are invested at a rate of return
lower than the cost of funds to the borrower.

Negative leverage


The ability to convert an asset to cash quickly, at any price



Sources of Risk for real estate investment:


 Capital market: Changes in the market for capital will affect the value of real estate
 Environmental: The value of a property will be influenced by environmental factors
 Liquidity: Difficulty of converting an investment into cash at market value quickly
 Technology: Ever-changing technology creates obsolescence among businesses

 Financial: Exists when/if debt is used to finance an investment
 Inflation: Unexpected inflation will affect future income and purchasing power
 Legislative: Changes in laws, building codes, zoning, and other regulations will affect
the market value
 Management: Property management issues may affect the performance of a property
Space market: Demand for space will affect rents, vacancy rates, and NOI


An informed buyer will not pay more for a property than a comparable substitute. For investors, either the numbers work or they do not. There is no emotional attachment.

Substitution: A principle of valuation


Value is created by the expectation of future benefits. The investor looks at the future expected income stream, possible tax benefits, and the expected future resale value.

Anticipation: A principle of valuation


Step 1: Estimating value as if the land were vacant
Step 2: Estimating the value as currently improved
Step 3: Final determination

Steps in Determining the highest and best use


Looks at actual income and expense items associated with operating the property. The ultimate goal of this is to find the cash flow, revenue generated over a given period.

Operating statement


Cash flow from income-producing property, less income taxes, if any, attributable to the property’s income. If a tax loss provides a tax savings from the shelter of income earned outside the property, that savings is added to the property’s earned cash flow.

After Tax Cash Flow


Gross amount of income available before taking taxes into consideration.

Before Tax Cash Flow


Estimate of how much future income may be lost when a building isn't full or tenants don't pay the rent.

Vacancy and Collection Losses


Looks at hypothetical income and expense items associated with operating the property. The ultimate goal of a pro forma is to estimate value based on net operating income.

Pro Forma