REAL 5080 UGA Test #1 Updated 2024/2025 Actual Questions and answers with complete solutions

Absolute Net Lease - The lease includes a provision that the tenant (lessee) pays all of the operating expenses...This is not the same as Triple Net. A triple net lease does not have a uniform code and differ from market to market. Annuity Due - An annuity in which the payments are received (made) at the beginning of each period Asking Rent - The quoted or face rent Assessed Value - Value of the property for property tax purposes (many times proportional to market value) Basic Steps to the Income Approach - 1) Forecast Future cash flows of the investment 2) Apply appropriate income method a. Income Multipliers Value = (Value Comparable / Income Comparable) / Income Subject b. Direct Capitalization Method Cap Rate = a one period return ... Value of Subject = Income of Subject / CapRate c. Discounted Cash Flow Model Hard to project the future since there are various complications... Breakpoints in retail leases - A dollar figure above which the tenant pays a percentage of sales; "Natural" Breakpoint in a retail lease - annual minimum rent divided by the percentage rent Cap Rate vs. Yeild - CapRates represent a partial picture while yields represent the full picture...Capital Expenditures - These can be "Time Lumpy". Landlords may establish Reserves for Replacements. Replacements and alternations to a building that materially prolongs its life and increases its value Capitalization Rate (Going-In) - NOI / Acquisition Price This indicates a one year return on total investment (debt & equity positions); overall income producing ability of property; This is a very crude decision making tool for the equity investor, as neither the numerator nor denominator reflects the investor's actual inflow and outflow. The cap rate can be defined as a return to constant income... Complications of the Sales Comparison Approach - There is no perfect substitute (heterogeneous product); Few comparable properties; Which comparable properties to use; How to use information to make adjustments Complications with the Cost Approach - Appreciation is not straight line (only straight line for tax purposes) Compound Interest - Interest that is paid on interest in addition to being paid on the original principal amount Contract Rent - The amount of rental income specified in the lease Credit Loss - Rent loss from delinquent tenants Debt Coverage Ratio (DCR) - Indicates the amount of Cash Flow Cushion above whats needed to pay debt. DCR < 1 .....cannot pay debt Lender usually seeks a minimum of 1.20-1.30, but may vary their requirements Deferred Maintenance - These are maintenance tasks that are put off until later. This isn't necessarily a bad thing, but rather due to human nature.Define "Bottom Line" at the Property Level - (NOI, BFCF (Before Financing Cash Flow), PropertyBTCF) Net CF Produced by a property before paying off debt holders and taxes These are your cash flows to the government, debt investors (mortgagees), equity owners These CFs due purely to underlying productive physical asset, not based on financing or income tax effects Relatively easy to observe empirically Define "Bottom Line" for the Equity Ownership - (After-Tax Cash Flow ATCF) Net CF available to equity owner after DS & Taxes Determines the value of equity only (not value to lenders) Sensitive to financing and income tax effects Usually difficult to observe empirically (differs across investors) Definition of Market Value - Market value is the most probable selling price which a specific interest in real property is likely to bring under all of the following conditions: 1)Specified Date 2)Open and Competitive Market 3) Arms Length 4) Both parties act in best interest 5) Reasonable marketing and exposure 6) Reasonable pricing Effective Rent - The rental rate after concessions and restrictions are taken into account. It can be calculated as the sum of all CFs divided by the lease term. In academia we calculate with regards to TVM, but the industry tends to take a shortcut and leave out TVM principles. Equity Dividend Rate - BTCF / Equity Invested This can be called the "cash-on-cash" returnIt indicates the investors one period rate of return Estimating Replacement Reserves (capital expenditures) - Capitalization: Average of today's cost over economic life or use a sinking fund based on future cost DCF Method: Estimate a lump sum at end of economic life or reduce the future selling price Excess rent - Is the amount by which contract rent exceeds market rent at the time of appraisal. This may happen when a tenant signs and then market rates proceed to decrease and the tenant is paying higher than market rent Fee Simple Valuation - The valuation of unencumbered ownership interest (at market rent) Financial Risk Ratios - Operating Expense Ratio; Loan-to-Value Ratio; Debt Coverage Ratio (DCR) Fixed Operating Expenses - Operating expenses that do not fluctuate with the occupancy levels of the building. These are relatively predictable, independent of occupancy level, tend not to be subject to budgetary control. Common examples include property taxes and insurance. Flat Rent - A lease which specifies level rent throughout the lease period Going Concern Value - The total value of a property, including both real property and intangible personal property (reputation from management and marketing) attributed to business value. Graduated Rent - (Step-up / Step-down); a lease which specifies changes ($ or %) in the amount of rent at one or more points during the lease term Gross Income Multiplier - Acquisition Price / EGI Price per current of EGI Use only among similar properties...A common weaknesses (this is based on first year expectations and the future is ignored...the cost could decrease in the future) Gross Lease (full service lease) - Landlord pays the operating expenses Hybrid Lease - A) A net lease (net-ness) - divided by expense type