RECA COMMERCIAL UNIT2 300
QUESTIONS AND VERIFIED ANSWERS
Capital stack - ANSWER ✔✔- A financial structure that illustrates the layers of
financing the fund, the purchase, or the improvement of a commercial real estate
asset.
Commercial real estate asset - ANSWER ✔✔- Real estate or real property used or
intended to be used to generate income.
Exercise date - ANSWER ✔✔- A date by which an option specified in a contract,
such as a lease, is put into effect.
Fiscal year - ANSWER ✔✔- A 12-month period that begins at any point in time.
Lease rollover - ANSWER ✔✔- The pending expiration date of a lease that results
in a new lease with either the existing tenant or a new tenant.
Net effective rent - ANSWER ✔✔- The rent after deducting any items of value
related to fulfilling the lease, such as a tenant improvement allowance or other
leasing inducements, from the basic rent amount stipulated in the lease agreement.
Net rent or Basic rent - ANSWER ✔✔- The monthly or annual periodic amount
paid by the tenant to the landlord as defined in the lease for a specified space.
Often it is a dollar amount per square foot or per square meter. Net rent may also
be referred to as monthly rent or annual rent, or the face rate in a lease.
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,Net operating income (NOI) - ANSWER ✔✔- The total amount of income
generated by the real estate asset after all of the relevant operating expenses have
been paid.
Operating expenses - ANSWER ✔✔- Costs a landlord incurs through the operation
of a real estate asset (e.g. property taxes, insurance, maintenance and repairs,
management, utilities, and common area maintenance).
Option (6 examples) - ANSWER ✔✔- A clause in a lease that gives the tenant an
exclusive right. It usually includes a period of time during which the option must
be exercised. There are many types of options that can be included in lease
agreements, such as:
Renewal Option: Gives the tenant the right to renew their initial lease term upon
expiration of the lease
Expansion Option: Gives the tenant the right to request additional space as their
business needs change
Relocation Option: Grants the landlord the right to provide similar space when
they require the subject space to accommodate another tenant
Right of First Refusal Option: Gives the tenant the right of first refusal to purchase
the real estate asset for a specified price during a specific time frame
Termination Option: Gives the tenant the right to terminate the lease in whole or in
part under pre-negotiated terms. The terms often require the tenant to pay all
unamortized inducements the landlord made when the lease was negotiated, such
as tenant improvements and rent abatement. In addition, the tenant may be required
to repay any unamortized portion of the real estate commissions that were paid.
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,Re-measurement Option: Gives the landlord the right to re-measure the tenant's
leased space or the entire building and confirm or correct the measurements in
accordance with the measurement standards defined in the lease.
Potential gross income (PGI) - ANSWER ✔✔- The maximum income a real estate
asset is capable of producing.
Pro forma statement - ANSWER ✔✔- A set of financial projections or forecasts
for a real estate asset that are used to estimate either the value of the asset or a
potential return from purchasing the asset at a certain price.
Rent abatement - ANSWER ✔✔- A period of time where the landlord chooses to
forgive some or all of the basic rent, additional rent, and/or parking rent.
Risk - ANSWER ✔✔- The degree of chance an investment will result in a
financial loss. It is a function of the volatility of the expected return.
Commercial real estate assets have a number of attributes that make them unique
relative to other types of investments. These attributes include the following: (x10)
- ANSWER ✔✔- 1. They involve land
2.Transaction time frames are long
3. Transaction costs are high
4. they are expensive
5. They are long lasting
6. Highly regulated
7. have a long production cycle
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, 8. are management intensive
9. are heterogeneous
10. Involve measuring return on investment
1. Long-lasting, Durable Goods
2. Expensive, High-valued (left for well capitalized investors)
3. Transaction Costs: Due diligence and commissions alone comprise about three
to five percent of transaction costs.
4. Transaction Time Frame
5. Land
6. Heterogeneous: every parcel of land is unique so every commercial real estate
asset is unique. However, improvements are rarely identical as unique site
characteristics, land use regulations, and the market often require different
solutions from developers.
7. Return Measures
8. Management Intensive
9. Long Production Cycle: it takes time to develop and construct new commercial
real estate assets to meet the needs of the expanding population. This results in the
real estate supply being relatively slow to respond to changes in demand (i.e.
inelastic supply).
10. Highly Regulated
Inelastic supply - ANSWER ✔✔- there is a limited supply. To illustrate, many
cities are geographically constrained and have a Land Use Bylaw that limits the
ability to change the use of a parcel of land. This results in a relatively inelastic
supply of land for commercial purposes. Inelastic supply means the supply cannot
readily adjust to changes in demand or price.
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QUESTIONS AND VERIFIED ANSWERS
Capital stack - ANSWER ✔✔- A financial structure that illustrates the layers of
financing the fund, the purchase, or the improvement of a commercial real estate
asset.
Commercial real estate asset - ANSWER ✔✔- Real estate or real property used or
intended to be used to generate income.
Exercise date - ANSWER ✔✔- A date by which an option specified in a contract,
such as a lease, is put into effect.
Fiscal year - ANSWER ✔✔- A 12-month period that begins at any point in time.
Lease rollover - ANSWER ✔✔- The pending expiration date of a lease that results
in a new lease with either the existing tenant or a new tenant.
Net effective rent - ANSWER ✔✔- The rent after deducting any items of value
related to fulfilling the lease, such as a tenant improvement allowance or other
leasing inducements, from the basic rent amount stipulated in the lease agreement.
Net rent or Basic rent - ANSWER ✔✔- The monthly or annual periodic amount
paid by the tenant to the landlord as defined in the lease for a specified space.
Often it is a dollar amount per square foot or per square meter. Net rent may also
be referred to as monthly rent or annual rent, or the face rate in a lease.
1|Page
,Net operating income (NOI) - ANSWER ✔✔- The total amount of income
generated by the real estate asset after all of the relevant operating expenses have
been paid.
Operating expenses - ANSWER ✔✔- Costs a landlord incurs through the operation
of a real estate asset (e.g. property taxes, insurance, maintenance and repairs,
management, utilities, and common area maintenance).
Option (6 examples) - ANSWER ✔✔- A clause in a lease that gives the tenant an
exclusive right. It usually includes a period of time during which the option must
be exercised. There are many types of options that can be included in lease
agreements, such as:
Renewal Option: Gives the tenant the right to renew their initial lease term upon
expiration of the lease
Expansion Option: Gives the tenant the right to request additional space as their
business needs change
Relocation Option: Grants the landlord the right to provide similar space when
they require the subject space to accommodate another tenant
Right of First Refusal Option: Gives the tenant the right of first refusal to purchase
the real estate asset for a specified price during a specific time frame
Termination Option: Gives the tenant the right to terminate the lease in whole or in
part under pre-negotiated terms. The terms often require the tenant to pay all
unamortized inducements the landlord made when the lease was negotiated, such
as tenant improvements and rent abatement. In addition, the tenant may be required
to repay any unamortized portion of the real estate commissions that were paid.
2|Page
,Re-measurement Option: Gives the landlord the right to re-measure the tenant's
leased space or the entire building and confirm or correct the measurements in
accordance with the measurement standards defined in the lease.
Potential gross income (PGI) - ANSWER ✔✔- The maximum income a real estate
asset is capable of producing.
Pro forma statement - ANSWER ✔✔- A set of financial projections or forecasts
for a real estate asset that are used to estimate either the value of the asset or a
potential return from purchasing the asset at a certain price.
Rent abatement - ANSWER ✔✔- A period of time where the landlord chooses to
forgive some or all of the basic rent, additional rent, and/or parking rent.
Risk - ANSWER ✔✔- The degree of chance an investment will result in a
financial loss. It is a function of the volatility of the expected return.
Commercial real estate assets have a number of attributes that make them unique
relative to other types of investments. These attributes include the following: (x10)
- ANSWER ✔✔- 1. They involve land
2.Transaction time frames are long
3. Transaction costs are high
4. they are expensive
5. They are long lasting
6. Highly regulated
7. have a long production cycle
3|Page
, 8. are management intensive
9. are heterogeneous
10. Involve measuring return on investment
1. Long-lasting, Durable Goods
2. Expensive, High-valued (left for well capitalized investors)
3. Transaction Costs: Due diligence and commissions alone comprise about three
to five percent of transaction costs.
4. Transaction Time Frame
5. Land
6. Heterogeneous: every parcel of land is unique so every commercial real estate
asset is unique. However, improvements are rarely identical as unique site
characteristics, land use regulations, and the market often require different
solutions from developers.
7. Return Measures
8. Management Intensive
9. Long Production Cycle: it takes time to develop and construct new commercial
real estate assets to meet the needs of the expanding population. This results in the
real estate supply being relatively slow to respond to changes in demand (i.e.
inelastic supply).
10. Highly Regulated
Inelastic supply - ANSWER ✔✔- there is a limited supply. To illustrate, many
cities are geographically constrained and have a Land Use Bylaw that limits the
ability to change the use of a parcel of land. This results in a relatively inelastic
supply of land for commercial purposes. Inelastic supply means the supply cannot
readily adjust to changes in demand or price.
4|Page
