Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

RE 3095 > Module 7 > Flashcards

Module 7 Flashcards

(76 cards)

Start Studying
1
Q

During the sales comparison approach, what is investigated?

A

Similar buildings and per-square-foot value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

When is the sales comparison approach valuable?

A

When there are many similar buildings to compare

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is the most valuable way to value properties?

A

Income-based approach

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is done during the income-based approach?

A

Analyze a set of cash flows to return a value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is done in a discounted cash flow model?

A

Look at the cash flows to find the net present value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are the three ways to approach real estate valuation?

A

Cost approach, sales comparison approach, and income-based approach

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is the cost approach to real estate valuation?

A

Looks at the cost of land plus construction costs while excluding depreciation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are the types of depreciation associated with the cost approach to real estate valuation?

A

Physical deterioration, functional obsolescence, and external obsolescence

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is physical deterioration?

A

Decay

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is functional obsolescence?

A

Problems with style and design

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is external obsolescence?

A

A neighborhood mismatch

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

When is the cost approach to valuation used?

A

With properties lacking income or similar transactions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What are the main problems with the sales comparison approach?

A

Lack of similar transactions, difficulty in assigning dollar values to attributes, unobserved heterogeneity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is unobserved heterogeneity?

A

Acknowledging that all differences may not be readily observed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

When is the sales comparison approach commonly used?

A

With residential properties

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is net operating income in real estate?

A

The income properties yield after subtracting vacancy and expenditures

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What are the two income-based approaches?

A

Discounted cash flow and direct capitalization

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is the process for direct capitalization?

A

Estimate the NOI of the cash flow for the first period, then compare the NOI to those of your neighbors, and then get a rate of return from there

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is potential gross income?

A

The expected income if the entire building is occupied (aka no vacancy)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is market rent?

A

Renting when a lease is new

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What is contract rent?

A

Renting from existing leases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What are the main types of leases?

A

Flat, step-up/escalated, indexed, and percentage

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is a flat lease?

A

A lease with equal rent over the duration of the lease

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What is a step-up/escalated lease?

A

A lease with predetermined increases in rent during the lease

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
What is an indexed lease?
A lease where rent increases based on inflation or consumer price index
26
What is a percentage lease?
A lease that is structured with a base rent plus a percentage of revenue/profit
27
How does occupancy affect valuation?
It has an impact on Net operating income. If there is a large amount of vacancy then the PGI will be low which lowers the cash flow.
28
What are common lease terms?
Concessions by landlord, tenant renewal options, leasing commissions, cost recoveries
29
What is an example of concessions of a landlord regarding free rent?
If you come now then you get free rent for a year. This is because the owner knows once the occupants are there it will be hard for them to leave so there will be long periods of future expected cash flows
30
What is an example of concessions by a landlord regarding improvements?
Ask what the tenant wants for improvements (these can be paid by tenants or owners). These improvements will then persuade the occupants to come.
31
What are tenant renewal options?
Define when you will have to discuss renewal can be 3 to 5 years
32
What are the two types of leasing terms in the United States for housing?
Month-to-month lease, and annual lease
33
What do leasing commissions say?
Tenants and owners may have their own brokers
34
What are the two areas of cost recovery?
Operating expenses and common area maintenance
35
What is common area maintenance?
It defines the common area of the building and determines who has to pay for them
36
When calculating effective gross income what do you do?
Start with potential gross income - vacancy & collection losses + miscellaneous income
37
What percentages are typically used for vacancy and collection losses?
5-10%
38
What is a strategy for determining vacancy if you do not use the standard percentage?
Use comparables on the market to find the vacancy rates of similar property types
39
What are the two types of operating expenses?
Fixed and variable
40
What are fixed operating expenses?
Expenses not dependent on the property
41
What is an example of a fixed operating expense?
Property taxes
42
What are examples of variable operating expenses?
Utilities, ordinary maintenance, common area maintenance, security
43
Tenants responsibility for operating expenses can vary from a _ lease to a _ lease
Gross, Triple Net
44
What happens during a gross lease?
The tenant does not pay any operating expenses
45
What happens during a net lease?
The tenant pays for the property taxes
46
What happens during a net-net lease?
The tenant pays for the property taxes and insurance
47
What happens during a triple-net lease?
The tenant pays for all operating expenses
48
What are capital expenditures?
Non-recurring expenses that lead to an increase in the value of the property
49
What are examples of capital expenditures?
Replacing the roof or mechanical systems (HVAC) and other tenant improvements
50
Capital expenditures can be funded through _
Reserve accounts
51
What are reserve accounts?
Accounts that collect annual payments where savings build up to pay for expenses that are expected in the future
52
What are the categories used to define the condition/potential of the property?
Classes A through C
53
What is the description of a class A property?
In the best location, is very high quality, and is built to last
54
What is the description of a class B property?
An older building that is in a good location
55
What is the description of a class C property?
Run-down properties
56
What is an example of a class C property?
Strip malls
57
How is the cap rate calculated?
Net operating income you can get next period / what you have to pay for it
58
Why does a cap rate typically drop?
An increase in prices
59
Which category has higher cap rates? Class A or Class B?
Class B because the selling price for Class B is lower than the selling price for Class A
60
What are the main types of commercial real estate?
Office, retail, hospitality, industrial, recreational, institutional, multifamily
61
What are examples of institutional real estate?
Hospitals and prisons
62
Why is the sales-comparison approach to valuation common for residential real estate but not commercial real estate?
There are many properties to compare in residential real estate, but not many in commercial real estate
63
_ should be lower than _ for projects that you want to invest in
MIRR, IRR
64
Why do you want MIRR to be lower?
IRR assumes that you are reinvesting your cash flows at the same rate of return as your project. The alternative rate of return will be lower than the return of your project and that is what you will actually be reinvesting your cash flows into
65
The finance rate of _ cash flows will not change the _ when there are no negative cash flows in the future
Negative, MIRR
66
What does IRR assume about cash flows?
That they are reinvested at the same rate as IRR
67
What does MIRR assume about positive cash flows?
That they are reinvested at the cost of capital
68
When do CAP rates increase in unanticipated markets?
When there is an increase in supply/demand or interest rates
69
When do CAP rates decrease in unanticipated markets?
When there is a decrease in supply/demand or interest rates
70
What is Cash-on-cash (COC)?
The measure of first-year cash flow as a ratio of upfront developer equity
71
What does the COC calculation ignore?
Income taxes, Loan amortization, and terminal cap rates
72
What is the Internal Rate of Return?
The calculation of interest-rate when the net present value of all cash flows equals zero
73
What are the assumptions with IRR?
All positive cash flows are reinvested and all negative cash flows are borrowed at the same interest rate the property itself generates
74
How is Net Present Value (NPV) calculated?
Subtract the present value of costs from the present value of benefits of making a decision today
75
What are the key assumptions of Net Present Value?
The opportunity cost of equity is often unclear and ignores a potential value in delaying the decision until more info is available
76
What are the three ways to estimate net sales proceeds?
Buyer assumes a constant rate of appreciation, Buyers conduct DCF analysis, Buyers conduct Direct CAP analysis

RE 3095 (4 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions