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RE Fundamentals > Mid-Term Review > Flashcards

Mid-Term Review Flashcards

1
Q

Bid Rent Function

A

The maximum rent that a potential user would pay for a site or location due to transportation costs. The steeper the slope, the more sensitive to transportation costs.

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2
Q

Residual Land Theory

A

Land Value = Value of Goods/Services Produced - Cost of Production (including capital)

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3
Q

Net Present Value

A

Tells how much net value the investment is expected to create. Given in $

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4
Q

Kinked Supply Curve

A

Occurs when the price equals the marginal cost of adding new space (replacement costs) to the submarket

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5
Q

Space Market Segmentation

A

RE market tends to be local in nature and specialized by property usage

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6
Q

Equilibrium

A

When the quantity of space demanded equals the quantity supplied. AKA market rent

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7
Q

Asset Market

A

The exchange of ownership of real property. AKA property market

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8
Q

Space Market

A

The usage of real property. AKA rental market

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9
Q

Boom Cycle

A

Space markets see an extended rise in occupancy and rents

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10
Q

Compound Interest

A

Interest paid on the original principal and on accumulated interest

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11
Q

Compound Interest Equation

A

FV = PV + (1+i)^n

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12
Q

Negative Net Absorption

A

More commercial space was vacated than leased/absorbed. Rents in the scenario would fall

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13
Q

Positive Net Absorption

A

More commercial space was leased/absorbed than what was vacated. Leads to a decrease in supply causing rents to rise.

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14
Q

Net Absorption

A

The net change in the amount of occupied space in the market

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15
Q

Gross Absorption

A

Measures the total amount of space leased during the year

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16
Q

Months Supply (MS)

A

An indicator of how long it will take in months for all of the vacant space in the market to be absorbed

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17
Q

Months Supply Formula

A

MS = (Vacancy + Construction)/(Net absorption/12)

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18
Q

Centrifugal Forces

A

Decentralizing forces that limit growth and result in smaller more dispersed cities

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19
Q

If density and transportation costs remain constant, what is the effect of population growth on a city?

A

The city must expand

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20
Q

Highest & Best Use

A

The use that would produce the highest value for a property

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21
Q

HBU Tests (4)

A
  1. Is the use physically possible?
  2. Is the use legally permitted?
  3. Is the use financially feasible?
  4. Is the use maximally productive?
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22
Q

Central Place Theory Principles (2)

A
  1. If a territory is underserved, there is room for a new central site
  2. If a central site is already effectively located, it will be difficult to develop a new such site nearby
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23
Q

Edge City

A

A concentration of business, shopping and entertainment outside of a traditional downtown in what had previously been a residential or rural area

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24
Q

Economic Base Theory

A

The source of an area’s income. Growth depends on growth in the export sector.

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25
Q

Employment Multiplier

A

Net total employment increase/Export employment increase (typically 2.0 to 4.0)

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26
Q

Population Multiplier

A

Net total population increase/Export employment increase (typically 2.5 to 9.0)

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27
Q

Hurdle Rate

A

Rate of return required

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28
Q

Primary Centripetal Forces (3)

A
  1. Economies of scale
  2. Economies of agglomeration
  3. Positive locational externalities
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29
Q

SE Quadrant

A

Stock adjustment quadrant. How the new construction relates to the existing stock of space

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30
Q

SW Quadrant

A

Construction quadrant. How the amount of new construction is determined.

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31
Q

NE Quadrant

A

Rent determination quadrant. How rents are determined.

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32
Q

NW Quadrant

A

Valuation quadrant. How properties are valued in the asset market

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33
Q

Four Quadrant Model

A

The market is dynamic and always trying to move towards equilibrium but often overshoots or undershoots supply and demand

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34
Q

Cap Rate Perceived Risk

A

How risky is this investment relative to others? Greater risk = higher cap rate required

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35
Q

Cap Rate Growth Expectations

A

Future cash flow projections. Higher growth expectations = lower cap rate

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36
Q

Cap Rate Opportunity Cost of Capital

A

Considers how much investors could earn on other types of investment assets. Higher OCC = higher cap rate

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37
Q

Cash-on-Cash Returns

A

Annual before-tax cash flow/Total equity invested

38
Q

Holding Period Return Formula

A

Income + (Ending value - Beginning value)/Beginning value

39
Q

Mortgage Equivalent Yield

A

12 payments

40
Q

Bond Equivalent Yield

A

2 payments

41
Q

Sector Model of Urban Land Use (Hoyt)

A

Growth tends to extend outward from the city center along transportation lines and specific types of development tend to cluster together in patterns.

42
Q

Effect of Negative Externalities

A

The boundary may have a depressing effect on adjacent location rent

43
Q

Neighborhood Succession Theory

A

Location rents and values tend to stay nearly constant once urban development has occurred until changes in the highest and best use cause sudden or sharp changes in rents and values

44
Q

Holding Period Returns (HPR)

A

Return for a single period. Assumes all cash flows occur only at the beginning and end of the period of time. AKA periodic returns

45
Q

Equity Multiple

A

The number of times an equity investor has received their original investment back

46
Q

Equity Multiple Formula

A

Total distributed returns/Equity paid-in

47
Q

Concentric Ring Model (Burgess)

A

Growth starts with a CBD at the heart of the city and RE prices lower as you move away from CBD

48
Q

Cap Rate Formula

A

Annual Net Income/Price

49
Q

Annual Net Income Formula

A

Cap Rate x Property Price

50
Q

Property Price Formula

A

Annual Net Income/Cap Rate

51
Q

Central Place Theory Concepts (2)

A
  1. Threshold: the minimum population needed to make a service viable at a particular place
  2. Range: the maximum distance a consumer is willing to travel
52
Q

Economies of Agglomeration

A

Productivity advantages of physical clustering (think Amazon)

53
Q

Present Value Formula

A

FV/(1+i)^n

54
Q

Negative Feedback Loop

A

A dampening mechanism that tends to make a system self-regulating

55
Q

Negative Feedback in RE

A

The ability of the asset market to regulate the flow of financial capital to the development industry

56
Q

How are the space markets and asset markets linked?

A

The space market determines the operating cash flows of the RE assets that make up the asset market, which informs the activity of the development industry

57
Q

EAR Formula

A

Enter [n] and [i] then [CHS][PMT][FV]

58
Q

Nominal Rate

A

The stated annual rate of interest before inflation is added

59
Q

Bust Cycle

A

Space markets see an extended period of falling occupancy and rents

60
Q

Risk Free Rate

A

The theoretical rate of return for an investment with no-risk including default risk. Compensates for pure time value of money.

61
Q

Holding Period Return Formula

A

Income + (Ending value-beginning value)/beginning value

62
Q

Advantages of IRR

A
  1. Time value of money
  2. Simplicity (easy measure to calculate)
  3. Hurdle rate not required
63
Q

Disadvantages of IRR

A
  1. Ignores size of the project
  2. Doesn’t consider unplanned future costs
  3. Ignores reinvestment rates
64
Q

Relationship between discount rate and valuation

A

Higher discount rate = lower asset values

65
Q

Natural Vacancy

A

Long run vacancy in the market, indicates supply and demand

66
Q

Vacancy Rate

A

% of built space that is not currently occupied (some vacancy is normal)

67
Q

Constant Growth Perpetuity in Arrears Formula

A

value = cash flow/(discount rate-growth rate) OR cap rate

68
Q

Discounted Cash Flow Analysis

A

The value of a property is equal to the expected future cash flows

69
Q

DCF Formula

A

PV = CF1/(1+R)^1 + CF2/(1+R)^2…

70
Q

Annualizing Returns Formula

A

(1+R)^(1/t)-1

71
Q

Shadow Space

A

Space that it either sublet or unoccupied for growth, storage, etc.

72
Q

Economies of Scale

A

Cheaper per unit to produce more at one place due to fixed costs

73
Q

Location Quotient

A

(local industry employment/total local employment)/(national industry employment/total national employment)

74
Q

Positive Locational Externalities

A

One firm benefits from another nearby (could be as few as two firms)

75
Q

Return on Cost Formula (developer)

A

First stabilized year NOI/total project costs

76
Q

Public Markets Equity Assets

A

Stocks, REITS, Mutual Funds, Exchange Traded Funds

77
Q

Private Market Equity Assets

A

Real Property, Private Equity, Hedge Funds, Private REIT

78
Q

Public Market Debt Assets

A

Bonds, Mortgaged-Backed Securities, Money Instruments, Mutual Funds, Exchange Traded Funds

79
Q

Private Market Debt Assets

A

Bank Loans, Whole Mortgages, Venture Debt/Leveraged Buyouts

80
Q

NPV Investment Rule

A

NPV>0: investment produces value above rate of return
NPV<0: investment does not produce value about rate of return
NPV = 0: the investment is at the return threshold

81
Q

Internal Rate of Return (IRR)

A

The discount rate (%) that generates an NPV of 0

82
Q

Return on Cost Formula (acquisition)

A

Potential NOI/Purchase Price

83
Q

Cash-on-Cash Returns Formula

A

Annual before-tax cash flow/total equity invested

84
Q

Hotel and convention demand drivers

A
  1. Air passenger volume

2. Tours receipts or number of visitors

85
Q

Industrial demand drivers

A
  1. Manufacturing and transportation employment
  2. Airfreight volume
  3. Rail and truck volume
86
Q

Office demand drivers

A
  1. Employment in office occupations
87
Q

Retail demand drivers

A
  1. Aggregate disposable income
  2. Aggregate household wealth
  3. Traffic volume
88
Q

Multifamily demand drivers

A
  1. Population
  2. Household formation
  3. Local housing affordability
  4. Employment growth (blue collar occupations)
89
Q

Single family residential demand drivers

A
  1. Population
  2. Household formation
  3. Interest rates
  4. Employment growth (business and professional occupations)
90
Q

Vacancy Rate Formula

A

Empty SF/Total SF

RE Fundamentals (2 decks)

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