UGA REAL 4000 EXAM 3 Dietz Questions and Answers Solved 100%

_______ leverage will ________ expected return when the investor's rate of return WITHOUT leverage exceeds the cost of debt - increased, increase -as long as each borrowed dollar is earning a greater return than it cost, the net difference goes to the owner, enhancing the equity return -also increases risk "Commercial" Mortgage Loans vs. Home Loans - commercial aren't as standardized, documents are longer and more complex, often no personal liability *Note, these are the same assumptions as the previous question* Assume the following for a floor in a multistory office building with a total usable area of 20,000 sq ft; a total common area of 5,000 sq ft; a total rentable area of 25,000 sq ft; and a tenant called "Highwoods Inc." that has a usable area: 4,000 sq ft and an annual flat rental rate of $25 per sq ft. What is the load factor for this property? - 1.25 A concept called "concession" means that an owner must provide the tenant with uninterrupted use of the property without any interference from any entity that may threaten to impose upon the tenant's leasehold interest in the property. - false absolute net lease - tenant pays all operating expenses, owner pays nothing ex: single tenant retail An office or retail landlord will often give a new tenant a certain amount of ________ allowance to cover the cost of refurbishing the rental space to meet the needs of the tenant's business. - tenant improvement Assume the following for a floor in a multistory office building with a total usable area of 20,000 sq ft; a total common area of 5,000 sq ft; a total rentable area of 25,000 sq ft; and a tenant called "Highwoods Inc." that has a usable area: 4,000 sq ft and an annual flat rental rate of $25 per sq ft.How much total rent does Highwoods Inc pay per year at this property? - $125,000 Assume you take a first and second loan on a commercial property; both are interest-only loans with one financing 60% of the purchase price at a 5% interest rate, and the other financing 20% of the purchase price at a 15% interest rate. Positive leverage would be created in the first year if the property was purchased with expected returns equivalent to ________________ - anything over a 6% going-in cap rate (unlevered IRR) Attractions of Balloon Mortgage to Lender - 1) Reduces interest rate risk to the lender on "permanent" mortgages 2) Reduces default risk (b/c risk in much greater for commercial mortgages) Before-tax cash flow (BTCF) formula - NOI-DS (debt service- annual mortgage payment) Cap rate (going in) formula - R(0) = NOI (1) / Acquisition price R(0)= overall income producing ability of the property or one-year return on total investment Carve out clause - Holds borrowers personally liable for lender losses caused by such problems Class A office building - -most desirable and new buildings in a particular market -highest rental rates -newer Class B office building - -A relatively new property with some, but not all, of the amenities of a Class A property. -less impressive Class C office building - -Typically an older property with few amenities -Often located in less desirable areas. -maintained but are below current standardsCons of ratios & multipliers - 1. No clear benchmarks for acceptable range 2. Only a partial view performance 3. No explicit assumptions about future Debt coverage ratio formula (DCR) - DCR= net operating income (NOI)/ debt service (DS) - to see how much NOI can decline before it will not cover debt service Debt service = - NOI(1)/DCR debt yield ratio (DYR) formula - DYR= net operating income/ loan amount -to indicate the expected overall return on the loan proceeds double net lease - tenant is responsible for paying rent, property taxes, and insurance, owner pays everything else ex: industrial (rare) Effective Gross Income Multiplier (EGIM) formula - EGIM= Acquisition price/Effective gross income -use only among properties with similar operating expenses and CAPX -measures price per current dollar of EGI Equity dividend rate (EDR) or cash-on-cash returns formula - EDR= BTCF/ equity investment -indicates the investor's one-period rate of return on invested equity Estimating NOI over next year formula - PGI -VC +MI -------- =EGI-OE -CAPX --------- =NOI estoppel certificate - required certificates from tenants stating that the leases are in "full force and effect" or if not, specifying defaults by the landlord Fixed rate commercial mortgage loans - -partially amortized "balloon" mortgage -25-30 year amort of principle -5-10 year loan maturity flat rent - the rental rate is fixed for the entire term. (most common)