RE Finance Quiz 2

Question 1

Market Value Definition

Answer 1

The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.

Question 2

Load Factor Formula

Answer 2

Total SF / Rentable SF

Question 3

Load Factor Explanation

Answer 3

Total SF / Rentable SF. 12,000 sq ft floor = gross leasable area. 10,000 office, 2,000 common. 1.2 Load factor.

Question 4

Sales Comparison Approach

Answer 4

Based on data provided from recent sales of properties highly comparable to the property being appraised. These sales must be “arm’s-length” transactions or sales between unrelated individuals.

Question 5

Unit of comparison

Answer 5

Square feet, number of apartment units in an apartment building and number of cubic feet in a warehouse. Divide total price by unit of comparison when using sales approach.

Question 6

Income Approach

Answer 6

The value of a property is related to its ability to produce cash flow.

Question 7

Gross Income Multiplier

Answer 7

GIM = sales price / gross income. Gross Income for the subject property will be for the first year of operation after the date for which the property is being appraised.

Question 8

Potential Gross Income

Answer 8

All space is occupied and rented. Rent x Sq Ft.

Question 9

Effective Gross Income

Answer 9

Occupied space only. PGI - vacancies - collections.

Question 10

Effective Gross Income Balance Sheet

Answer 10

Rental Income at Full Occupancy
\+ Other Income
= Potential Gross Income (PGI)
- Vacancy and collection Losses
= Effective Gross Income

Question 11

NOI Balance Sheet

Answer 11

Rental Income at Full Occupancy
\+ Other Income
= Potential Gross Income (PGI)
- Vacancy and collection Losses
= Effective Gross Income
- Real Estate Taxes
- Insurance
- Utilities
- Repair and Maintenance
- Salaries 
- Administrative and General
- Management and Leasing
- CAPEX/Improve Allowance
= Net Operating Income

Question 12

Value Formula

Answer 12

Value = NOI / Cap Rate (R)

Question 13

Comparability

Answer 13

Very similar in quality, construction, size, age, functionality, location, and operating efficiency. Also similar lease maturities, lease options, rent escalators, and any other major lease attributes such as easements, title restrictions, and so on.

Question 14

Nonrecurring outlays

Answer 14

Many appraisers estimate an annual average outlay for such items and adjust NOI downward by deducting such outlays much like an annual expense.

Question 15

Discounted Cash Flow Method

Answer 15

Investors will pay no more for a property than the present value of all future NOIs. NOI forecast is made for a time period during which we can foresee any material change in market supply or demand conditions that could affect rents.

Question 16

Four Steps to Estimate PV for Discounted Cash Flow Method

Answer 16

1) Forecast NOI 2) Select a holding period 3) Select a discount rate 4) find reversion value (resale price)

Question 17

Reversion Value

Answer 17

Present Value of Expected NOI beyond the 10-year period of analysis. Represented by resale price.

Question 18

Before Tax Cash Flow (BTCF)

Answer 18

BTCF = NOI - debt service. Also referred to as the equity dividend because it represents the cash flow that will actually be received by the investor each year, analogous to a dividend on common stocks.

Question 19

Before Tax IRR

Answer 19

Find IRR of BTCFs (NOIs - debt service) including initial purchase and final sale.

Question 20

Subtracting the mortgage payment from NOI results in what?

Answer 20

Before Tax Cash Flow

Question 21

Taxable Income Formula

Answer 21

Taxable Income = NOI - interest - depreciation

Question 22

After Tax Cash Flow Formula

Answer 22

ATCF = BTCF - [(NOI - Interest - Depreciation) * Tax Rate]

Question 23

After Tax Cash Flow Balance Sheet

Answer 23

BTCF

NOI
- Interest
- Depreciation
= Taxable Income
* Tax Rate
= Tax (savings)

Before Tax Cash Flow
- Tax (savings)
= After Tax Cash Flow

Question 24

Depreciation timelines

Answer 24

Residential: 27.5 years
Commercial: 39 years

Question 25

Equity Dividend

Answer 25

Equity Dividend = NOI - DS NOI = Net Operating Income DS = Debt Service The equity dividend is also referred to as the before-tax cash flow from operations (BTCF0)

Question 26

ATCF on Income Example

Answer 26

Step 1: 1 taxable income: NOI $85,000 Depreciation - $34,545 Interest - $48,775 Taxable Income $ 1,680 ``` Step 2: Compute Taxes Taxes (at 28%) = 0.28 x 1,680 = $470 Step 3: Compute after-tax cash flow from operations for year 1 ATCF1 = BTCF1 – Taxes = 29,115 - 470 = $28,645 ```

Question 27

ATCF on Sale

Answer 27

Step 1: Compute tax on property value increase: $9,360,805 – 8,500,000 = $860,805 Taxed at 15% capital gains rate = $129,121 Step 2: Compute tax on prior depreciation: 5 Years = $918,563 Taxed at 25% = $229,641 Step 3: Compute total taxes from sale: $129,121 + $229,641 = $358,761 Step 4: Compute after-tax cash flow from the property sale ATCFs = BTCFs – Taxes ATCFs = $431,678 - $49,545 = $382,133

Question 28

Residual Land Value

Answer 28

PV of cash flows - construction costs = Residual. | (NOI / Cap) - construction = residual

Question 29

Debt Service Coverage Ratio

Answer 29

NOI / Debt Service = DSCR. | Can use to find value. If given DSCR, solve for Annual Debt Service. Use PMT to find PV.

Question 30

Adjusted Basis

Answer 30

Original Investment - Accumulated Depreciation

Question 31

Before Tax Equity Reversion

Answer 31

``` Sale Price (final year NOI / cap rate) - selling expenses - mortgage. Use BTCF to calculate IRR ```

Question 32

Taxable Capital Gain

Answer 32

Net Sale Price - Adjusted Basis

Question 33

After-Tax Equity Reversion

Answer 33

BTER - capital gain | BTER - [(net sale price - adjusted basis) * cap gain tax rate]

Question 34

Net Sale Price

Answer 34

Sale price - selling expenses