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Question 9-1

                How does the use of leases shift the risk from lessor to the lessee?

                Leases determine how much risk will be borne by the lessor versus the lessee.  Future increases in market rent are       compensated for by including an inflationary adjustment, such as a CPI adjustment.  In the case of a CPI       adjustment, the risk is shifted to the lessee, because the change in rents is not known in advance.  As the lessee is           responsible for any unexpected increases in the level of inflation, the lessor is insured that the real value of the    lease will be preserved.  The lessor can shift additional risk to the lessee by including net lease or expense stop                 provisions in the lease.  It is important to note, however, that we would expect the lessor to accept a lower base rent as the burden of risk is shifted to the lessee.

 

Question 9-2

                What is the difference between face rents and effective rents?

                Face rents, also called asking rents, are the rental rates which lessors quote to new tenants.  These rates do not            reflect any expenses, abatements, or concessions, and, therefore, the lessor is able to maintain consistent and   higher asking rates over time.  Effective rent, on the other hand, considers the large number of possible                combinations of lease terms and more accurately reflects rental income overtime.  Effective rent is derived by                 calculating the present value of the expected net rental stream, and using this figure to calculate an equivalent level                 annuity over the term of the lease.  As a single measure of net income over time, effective rent makes the   comparison of leasing alternatives easier.

 

Question 10-1

                What is the economic rationale for the cost approach?  Under what conditions would the cost approach tend to      give the best value estimate?

                The rationale for using the cost approach to valuing (appraising) properties is that any informed buyer of real            estate would not pay more for a property than what it would cost to buy the land and build the structure.

                The cost approach is most reliable where the structure is relatively new and depreciation does not present serious       complications.

 

Question 10-2

                What is the economic rationale for the sales comparison approach?  What information is necessary to use this approach?  What does it mean for a property to be comparable?

                The rationale for the market approach (otherwise known as the sales comparison approach), lies in the principle        that an informed investor would never pay more for a property than what other investors have recently paid for       comparable properties.

                The sales comparison approach to valuation is based on data provided from recent sales of properties highly             comparable to the property being appraised.

                For a property to be comparable, the sale must be an “arm’s-length” transaction or a sale between unrelated              individuals.  Sales should represent normal market transactions with no unusual circumstances, such as        foreclosure, sales involving public entities, and so on.

 

Question 10-3

                What is a capitalization rate?  What are the different ways of arriving at an overall rate to use for an appraisal?

                An overall rate or overall capitalization rate is the rate on the overall property (debt and equity).

                One way of arriving at an overall rate is to use the band of investment approach.  This is based on taking into            consideration the investment criteria of both the lender and the equity investor involved in a project.  This is done     by taking a weighted average of the equity dividend rate expected by the investor and the mortgage loan constant                 (expressed on an annual basis) required by the lender.

                Two different ways of arriving at an overall rate are the direct capitalization approach and the present value              method.

 

Question 10-4

                If investors buy properties based on expected future benefits, what is the rationale for appraising a property            without making any income or resale price projections?

                Using the direct capitalization approach, this technique is a very simple approach to the valuation of income             producing property.  The rationale is based on the idea that at any given point in time, the current NOI produced            by a property is related to its current market value.

                Using the band of investment approach, the estimate of value under this approach is based on current cash yields    prevailing in the marketplace.  This approach is not intended to provide investors with estimates of long term rates                 of return on equity investments.  Rather, these current yields are intended to serve as market benchmarks that can             be used in establishing property values.

                Appraisers often obtain capitalization rates by using information obtained from comparable sales, i.e., they divide   the property’s first year NOI by the reported sale price.  While the appraiser may not know what rate of return the       investor is expecting or how the investor has projected income to change over time, it is reasonable to assume that    the capitalization rate implicitly reflects these investments assumptions.

 

Question 10-5

                What is the relationship between a discount rate and a capitalization rate?

                A capitalization rate is equal to the difference between the discount rate and the expected growth in income.  In        other words, the change in income over the economic life of the property is ignored when using a capitalization       rate.

 

Question 10-6

                What is meant by a unit of comparison?  Why is it important?

                A unit of comparison is used in the sales comparison approach to valuation.  To the extent that there are    differences in size, scale, location, age, and quality of construction between the project being valued and recent      sales of comparable properties, adjustments must be made to compensate for such differences.  The appraiser must                find an appropriate unit of comparison for a given property.  Examples are price per square foot for an office   building, price per cubic foot for warehouse space, price per bed for hospitals, or price per room for hotels.

 

Question 10-7

                Why do you think appraisers usually use three different approaches when estimating value?

                If perfect information was available, then theoretically the same value should result regardless of the methods          chosen, be it cost, market, or income capitalization.  Even with imperfect information, there should be some               correspondence between the three approaches to value, which is the reason appraisal reports will typically contain             estimates of value based on at least two approaches to determining value.

 

Question 10-8

                Under what conditions should financing be explicitly considered when estimating the value of a property?

                Financing should be explicitly considered when using the mortgage-equity capitalization method.  With this                method, the value of a property can be estimated by explicitly taking into consideration the requirements of the mortgage lender and equity investor, hence the term “mortgage-equity capitalization”.

 

Question 10-9

                What is meant by depreciation for the cost approach?

                There are three categories of depreciation for the cost approach.  They are very difficult to determine and, in many cases, require the judgment of appraisers who specialize in such problems.  The three categories are as follows:

                Physical deterioration.

                Functional or structural obsolescence due to the availability of more efficient layout designs and technological          changes that reduce operating costs.

                External obsolescence that may result from changes outside of the property such as excessive traffic, noise, or          pollution.

 

Question 10-10

                When may a "terminal" cap rate be lower than a "going in" cap rate?  When may it be higher?

                A terminal cap rate may be lower than the going in cap rate if between the present time and end of a holding period interest rates are expected to fall, risk is expected to decline, or demand is expected to increase (thereby producing higher rents and/or appreciation).      A higher terminal cap rate would result if the opposite changes in the three situations stated above occurred.

 

Question 10-11

                In general, what effect would a reduction in risk have on "going in" cap rates?  What would this effect have if it occurred at the same time as an unexpected increase in demand?  What would be the effect on property values?

                A reduction in risk lowers   cap rates because expected returns are lower.  If this occurred at a time when demand increases, property values would rise significantly because of increases in rents from greater demand and lower cap rates.

 

Question 10-12

What are some of the potential problems with using a "going in" capitalization rate that is obtained from previous property sales transactions to value a property being offered for sale today?

Problems occur if properties being used as "comparables" have different lease terms, maturities, and credit quality of tenants.  Further, if properties are older, have depreciated, have different functional design, etc. than the subject, problems can occur.  In these cases cap rates must be either adjusted to reflect these differences or not used at all.

 

Question 10-13

                When estimating the reversion value in the year of sale, why is the terminal cap rate applied to the NOI for the year after the holding period?

                Because the purchaser’s first year of NOI from the investment is the year after the sale.

 

Question 10-14

                Is a cap rate the same as an IRR?  Which is generally greater?  Why?

                No, the cap rate is the relationship between NOI and current value.  The IRR is the return of all cash flows from operations and sale of the property.  Usually the IRR is greater than the cap rate due to the fact that the reversion value typically is higher than the original purchase price.

 

Question 10-15

                Discuss the differences between using (1) a terminal cap rate and (2) an appreciation rate in property value when estimating reversion values.

                The terminal cap rate approach is based on the assumption that in the year of sale, the investors will value the property based on the new “going in” cap rate at that time.  Estimates of the terminal cap rate are based on adjusting the current or going in cap rate by depreciation that is likely to occur over the holding period.

 

                Using rates of appreciation to estimate reversion value is based on investors’ expectations as to trends in property values.  This could reflect risk, expected cash flows, interest rates or returns on other investments.

 

Question 11-1

                What are the primary benefits of investing in real estate income property?

                Net Income:  Dollars left over after collecting rent and paying expenses but before considering taxes and financing   costs.

                Property Sale:  Expecting a price increase over a specified holding period increases investor return.

                Diversification:  Reduces overall risk to hold many types of investments.

                Taxes:  Preferential tax benefits.  Taxable income is often less than before-tax cash flow.

 

Question 11-2

                What factors affect a property’s projected NOI?

                Expected market rents and vacancy rates

                Expenses associated with operating the property

                Nature of any leases on the property

 

Question 11-3

                What factors would result in a property increasing in value over a holding period?

                Inflation:  This causes rents as well as the final sale price to be higher.

                Demand:  Increased demand for space may increase value if the supply of space doesn’t increase as well.

 

Question 11-4

                How do you think expense stops and CPI adjustments in leases affect the riskiness of the lease from the lessor’s        point of view?

                There is less risk for the lessor with expense stops and CPI adjustments in leases.

                CPI Adjustments:  The risk of unexpected inflation is shifted to the lessee.

                Expense Stops:  The risk of increases in expenses is shifted to the lessee while allowing the lessor to retain the benefit of any decrease in expenses.

 

Question 11-5

                Why should investors be concerned about market rents if they are purchasing a property subject to leases?

                Even if the investment is an existing building that has already been leased, the income can be affected when the existing leases expire and are renewed at the market rent at the time.

 

Question 11-6

                What is meant by equity?

The investor’s initial equity in the project is equal to the purchase price less the amount borrowed.  The amount of equity an investor has in a property may change over time if the property value and loan balance changes.  E.g., if the property value increases and the loan balance is reduced through amortization, the investor’s equity increases.

 

Question 11-7

                What are the similarities and differences between an overall rate and an equity dividend rate?

                Difference:  The overall rate relates the entire NOI to the value of the property.  The equity dividend rate relates        the BTCF (or equity dividend) in the first year to the initial equity investment.

Similarity:  Neither one of these is a measure of investment yield because they do not take into account future income from operations or resale of the property at the end of the holding period.  Both are based on a single year, usually the first year.

 

Question 11-8

                What is the significance of a debt coverage ratio?

                It is a ratio of the NOI to the mortgage payment that indicates the riskiness of a loan.  It is the degree to which the NOI from the property is expected to exceed the mortgage payment.  Lenders typically want a debt coverage ratio (DCR) to be at least 1.2.

 

Question 11-9

                What is meant by tax shelter?

The term “tax shelter” refers to an investment that allows a taxpayer to reduce taxable income.  Although most of the tax shelter benefits of real estate were removed by the Tax Reform Act of 1986, depreciation deductions still provide some “shelter” in that they are non-cash deductions that reduce taxable income.  Interest deductions on the mortgage also serve to reduce and in a sense shelter taxable income.

 

Question 11-10

                How is the gain from the sale of real estate taxed?

                The entire taxable gain from the sale of real estate is taxed at the same rate as ordinary income.

                It is still important to keep track of capital gains/losses and ordinary income gains/losses.  This is due to TRA rules for passive investors and properties acquired prior to 1986.

 

Question 11-11

                What is meant by an effective tax rate?  What does it measure?

                An effective tax rate is a tax rate that takes into account the effects of depreciation and time value of money.

                It measures the actual difference between the BTIRR and the ATIRR.  This difference is the effective tax rate and can be less than the actual marginal tax rate.    This difference is also due to the fact that the interest on the mortgage loan is deductible.

 

Question 11-12

                Do you think taxes affect the value of real estate versus other investments?

Yes.  Not all investments are treated alike when it comes to federal income taxes.  Thus, taxes must be considered when comparing returns for investments which are not taxed in the same manner.  Investments that have the same before-tax return may have quite different after-tax returns.

 

 

Question 11-13

                What is the significance of the passive activity loss limitation (PALL) rules for real estate investors?

The PALL rules are important because, in general, passive losses cannot be used to offset income from another category.  Because any tax loss from real estate is usually considered a passive loss,  it can not be used to offset income from other sources such as active income from salaries and wages or portfolio income from interest or dividends.

 

Question 12-1

What is financial leverage?  Why is a one-year measure of return on investment inadequate in determining               whether positive or negative financial leverage exists?

                Financial leverage is defined as benefits that may result to an investor by borrowing money at a rate of interest that is lower than the expected rate of return on total funds invested in a property.

To determine whether leverage is positive (favorable) or negative (unfavorable), the investor needs to determine whether the IRR (calculated over the entire holding period) is greater than the cost of  borrowed funds.  A first-year measure of return such as the overall capitalization rate can not be used because it does not explicitly consider the benefits that accrue to the investor over time from changes in income and value that do not affect the cost of debt.

 

Question 12-2

                What is the break-even mortgage interest rate (BEIR)  in the context of financial leverage?  Would you ever expect an investor to pay a break-even interest rate when financing a property?  Why or why not?

                The BEIR is the maximum interest rate that could be paid on the debt before the leverage becomes unfavorable.  It represents the interest rate where the leverage is neutral (neither favorable or unfavorable).

                The BEIR remains constant regardless of the amount borrowed (that is 60, 70, or 80 percent of the property value).

An equity investor probably would not pay a break-even interest rate when financing a property because the investor just earns the same after-tax rate of return as a lender on the same project.  Borrowing at the BEIR provides no risk premium to the investor.  Normally, a risk premium is required because the equity investor bears the risk of variations in the performance of the property.

 

Question 12-3

                What is positive and negative financial leverage?  How are returns or losses magnified as the degree of leverage increases?  How does leverage on a before-tax basis differ from leverage on an after-tax basis?

When the before-tax or after-tax IRR are higher with debt than without debt, we say that the investment has positive or favorable financial leverage.  When returns are lower with debt than without debt we say that the investment has negative or unfavorable financial leverage.

Positive leverage occurs when the unlevered IRR is greater than the interest rate paid on the debt.  Negative leverage occurs when the unlevered IRR is less than the interest rate paid on the debt.

                Returns and losses are magnified by the greater the amount of debt, the greater the return or loss to the equity investor.

                Leverage on a before-tax basis differs from leverage on an after-tax basis because interest is tax deductible.  Therefore, we must consider the after-tax cost of debt which is different than the before-tax cost of debt.

 

Question 12-4

                In what way does leverage increase the riskiness of a loan?

                Leverage increases the standard deviation of return regardless of whether it is positive or negative.  This means the   investment is clearly riskier when leverage is used.

                Because the NOI does not change when more debt is used, increasing the amount of debt increases the debt service relative to NOI.  Therefore, the debt coverage ratio (DCR) may exceed the lender’s limits.  With higher loan-to-        value ratios and declining debt coverage ratios, risk to the lender increases.  As a result, the interest rate on        additional debt will also increase.

 

Question 12-5

                What is meant by a participation loan?  What does the lender participate in?  Why would a lender want to make a                 participation loan?  Why would an investor want to obtain a participation loan?

                A participation loan is where in return for a lower stated interest rate on the loan, the lender participates in some        way in the income or cash flow from the property.  The lender’s rate of return depends, in part, on the performance         of the property.  Participations are highly negotiable and there is no standard way of structuring them.

                A lender’s motivation for making a participation loan includes how risky the loan is perceived relative to a fixed       interest rate loan.  The lender does not participate in any losses and still receives some minimum interest rate       (unless the borrower defaults).  Additionally, the participation provides the lender with somewhat of a hedge      against unanticipated inflation because the NOI and resale prices for an income property often increase as a result   of inflation.  To some extent this protects the lender’s real rate of return.

An investors motivation is that the participation may be very little or zero for one or more years.  This is because       the loan is often structured so that the participation is based on income or cash flow above some specified break-   even point.  During this time period, the borrower will be paying less than would have been paid with a straight   loan.  This may be quite desirable for the investor since NOI may be lower during the first couple of years of    ownership, especially on a new project that is not fully rented.

 

Question 12-6

What is meant by a sale-leaseback?  Why would a building investor want to do a sale-leaseback of the land?  What is the benefit to the party that purchases the land under a sale-leaseback?

                When land is already owned and is then sold to an investor with a simultaneous agreement to lease the land from the party it is sold to, this is called a sale-leaseback of the land.

                One motivation for the sale-leaseback of the land is that it is a way of obtaining 100 percent financing on the land.

                A second benefit is that lease payments are 100 percent tax deductible.  With a mortgage, only the interest is tax deductible.  The investor may deduct the same depreciation charges whether or not the land is owned, since land cannot be depreciated.  This results in the same depreciation for a smaller equity investment.

                The investor may have the option of purchasing the land back at the end of the lease if it is desirable to do so.

 

Question 12-7

                Why might an investor prefer a loan with a lower interest rate and a participation?

                An investor’s motivation is that the participation may be very little or zero for one or more years.  This is because the loan is often structured so that the participation is based on income or cash flow above some specified break-even point.  During this time period, the borrower will be paying less than would have been paid with a straight loan.  This may be quite desirable for the investor since NOI may be lower during the first couple of years of ownership, especially on a new project that is not fully rented.

 

Question 12-8

                Why might a lender prefer a loan with a lower interest rate and a participation?

                A lender’s motivation for making a participation loan includes how risky the loan is perceived relative to a fixed interest rate loan.  The lender does not participate in any losses and still receives some minimum interest rate (unless the borrower defaults).  Additionally, the participation provides the lender with somewhat of a hedge against unanticipated inflation because the NOI and resale prices for an income property often increase as a result     of inflation.  To some extent this protects the lender’s real rate of return.

 

Question 12-9

                How do you think participations affect the riskiness of a loan?

                There is clearly some uncertainty associated with the receipt of a participation since it depends on the performance of the property.  The lender does not participate in any losses and still receives some minimum interest rate (unless the borrower defaults).  Additionally, the participation provides the lender with somewhat of a hedge against unanticipated inflation because the NOI and resale prices for an income property often increase as a result of inflation.  To some extent this protects the lender’s real rate of return.

 

Question 12-10

                What is the motivation for a sale-leaseback of the land?

                One motivation for the sale-and-leaseback of the land is that it is a way of obtaining 100 percent financing on the land.  A second benefit is that lease payments are 100 percent tax deductible.  With a mortgage, only the interest is tax deductible.  The investor may deduct the same depreciation charges whether or not the land is owned, since land cannot be depreciated.  This results in the same depreciation for a smaller equity investment.  The investor may have the option of purchasing the land back at the end of the lease if it is desirable to do so.

 

 

 

Question 12-11

                What criteria should be used to choose between two financing alternatives?

Assuming the two financing alternatives are for roughly the same amount of funds (so financial risk due to leverage is the same), the alternative with the lowest effective interest cost should be chosen.  This alternative should also result in the highest IRR on equity.

 

Question 12-12

                What is the traditional cash equivalency approach to determine how below-market rate loans affect value?

Cash equivalency was introduced in Chapter 9 where it was demonstrated that a buyer would be willing to pay more for a property with a below market interest rate loan.  In that chapter, the present value of interest savings was used to indicate the additional amount which might be paid for a property.  This same approach could be used to determine the additional amount that might be paid for income producing properties as analyzed in this chapter.

 

Question 12-13

                How can the effect of below-market rate loans on value be determined using investor criteria?

Note: This question is not explicitly covered in the chapter.  It requires students to think about how concepts from earlier chapters dealing with valuation and cash equivalency might be applied to evaluate a below-market rate loan on income property.

Evaluating a below-market rate loan is like comparing two financing alternatives where one is at the market rate and one has a below-market rate.  All else being equal, the below market interest rate loan should result in a higher IRRE for the property than would result with a market rate loan.  The investor might therefore be willing to pay more for the property, as long as the IRRE  is at least as much as it would be with the market interest rate loan.

 

Question 13-1

                What is meant by partitioning the internal rate of return?  Why is this procedure meaningful?

                To illustrate what is meant by partitioning the IRR, remember that the IRR is made up of two components of cash flow:

                                1.  cash flow from operations

                                2.  cash flow from the sale of the investment

                Partitioning is done to obtain some idea of the relative weights of these components of return and to get an idea of the timing of the receipt of the largest portion of that return.

                Partitioning is meaningful because it helps the investor to determine how much of the return is from annual operating cash flow and how much is from the projected resale cash flow.  Operating cash flow is generally more certain than projected resale cash flow.  Therefore, the greater the proportion of resale cash flow versus operating cash flow, the greater the risk facing the investor.  This could be useful in comparing multiple investments.

 

Question 13-2

                What is a risk premium?  Why does such a premium exist between interest rates on mortgages and rates of return earned on equity invested in real estate?

A risk premium is a higher expected rate of return paid to an investor as compensation for incurring additional risk on a higher risk investment.  In general, investors are considered risk averse and must be compensated morefor the higher risk of some investments.

                This premium exists between mortgage interest rates and returns on equity invested in real estate because the equity investor is assuming more risk than the mortgage lender.  The lender assumes less risk because a lender would have first claim on the property should there be a default.  If this were not the case, the investor would be better off lending on real estate than investing in it.

 

Question 13-3

                What are some of the types of risk that should be considered when analyzing real estate and other categories of investment?

                Business Risk, Financial Risk, Liquidity Risk, Inflation Risk, Management Risk, Interest Rate Risk, Legislative Risk, Environmental Risk

 

 

Question 13-4

                What is the difference between business risk and financial risk?

                Business risk is the risk of loss due to fluctuations in economic activity that affect the variability of income produced by a property.

                Financial risk (or debt financing referred to as financial leverage) magnifies the business risk.  Financial risk increases as the amount of debt increases.

 

Question 13-5

                Why is the variance (or standard deviation) used as a measure of risk?  What are the advantages and disadvantages of this risk measure?

Lower variability in returns is considered by many analysts to be associated with lower risk and vice versa.  Therefore, by using a statistical measure of variance, one has an indication of the extent risk is present in an investment.  The standard deviation gives us a specific range over which we can expect the actual return for each investment to fall in relation to its expected return.  It has the advantage of being relatively easy to calculate.  It has the disadvantage of  treating the both higher than expected returns and lower than expected returns the same.  It could be argued, however, that investors should be more concerned about returns being lower than expected or lower than some threshold return.

 

Question 13-6

                What is meant by a ‘ real option’ ?

A real option is an option related to investment in tangible assets like real estate that involves the option to wait to decide whether to invest additional capital based on future economic conditions.  Land can be viewed as having the option to invest additional capital in the future to construct a building.

 

Question 13-7 

What is meant by the term ‘overage’ for retail space ?

Overage refers to the rent that is paid above the minimum rent in the lease where the rent is based on a percentage of the tenant’s sales once sales exceeds a specified breakpoint.  The total rent is the minimum rent plus the overage rent.

 

Question 13-8     

                How does the use of scenarios differ from sensitivity analysis ?

Sensitivity analysis involves changing one variable at ta time such as the market rent or the vacancy rate.  Scenarious involves changing several variables at once for each scenario, e.g., a pessimistic, most likely, and optimistic scenario.  For each scenario there might be a different assumption about market rents, vacancy rates, and the resale price because they are interrelated.

 

Question 14-1

                What factors should an investor consider when trying to decide whether to dispose of a property that he has owned for several years?

                The factors are based on an incremental, or marginal, return criteria that should be utilized by investors when faced with such decision making.

                The investor should evaluate the expected future performance of the property and then compare the IRR for holding versus sale of the property.

                The investor must consider whether the net funds obtained from the sale of the property (after tax and expenses) can be reinvested at a greater rate of return (ATIRR) than the return that would be earned if the property is not sold.

Tax laws in effect at the time of purchase/sale of a property.  Tax law changes affect the relative benefits of existing versus new investors in the same property.

 

Question 14-2

                Why might the actual holding period for a property be different from the holding period that was anticipated when the property was purchased?

                An investor purchases a real estate investment based on the benefits expected to be received over an anticipated holding period.  That is, the investor computes the various measures of investment performance based on expectations at the time the property is purchased.  After the property is purchased, however, many things can change that affect the actual performance of the property.  These same factors may affect the investor’s decision as to whether the property continues to meet his investment objectives.  For example, market rents may not be increasing as fast as expected, thus reducing the investor’s cash flow.  Tax laws may have changed, as they did in 1986, thus changing the benefit for some investors more than others.  The point is that a periodic evaluation should be made to determine whether properties should be sold.

 

Question 14-3

                What is the marginal rate of return?  How is it callated?

                The marginal rate of return is the return gained by holding the property for one additional year.

                The marginal rate of return considers what the investor could get in the future by keeping the property versus what he could get today by selling the property.

                The marginal rate of return is calculated on the benefit of receiving the ATCF from operations for one additional year and the ATCF from the sale of the property at the end of the additional year.

                The actual formula is on page 427 of the text.

 

Question 14-4

                What causes the marginal rate of return to change over time?  How can the marginal rate of return be used to decide when to sell a property?

                Increasing rents and increases in the value of the property tend to increase the MRR.  Equity buildup from the price appreciation and loan repayment, however, tends to lower the MRR.  Also, because the depreciation deduction is fixed but rents are rising, the relative amount of tax benefits from depreciation decreases each year.

                The property should be sold when the marginal rate of return falls below the rate at which funds can be reinvested.

 

Question 14-5

                Why might the after-tax internal rate of return on equity (ATIRRe) differ for a new investor versus an existing investor who keeps the property?

                This could be due to tax law changes that affect the relative benefits of existing versus new investors in the same property.  If the tax law becomes less favorable as it did in 1986, this tends to favor existing investors.  If the tax law becomes more favorable, as it did in 1981 when ACRS was passed and depreciable lives were shortened considerably, then new investors tend to be favored.

                Tax law changes tend to affect the turnover or sale of real estate.  It is important to understand these concepts since tax laws are always subject to change and these changes affect the relative risk and return opportunities for new and existing investors.

 

Question 14-6

                What factors should be considered when deciding whether to renovate a property?

                To determine whether a property should be renovated, consider the incremental benefit associated with renovating the property versus not renovating the property.

 

Question 14-7

                Why is refinancing often done in conjunction with renovation?

                When properties are renovated, the investor often uses that opportunity to refinance the entire property.  Thus, the investor may be able to borrow funds in addition to what is needed for the renovation, especially if the investor plans to obtain a new loan on the entire property rather than obtain a second mortgage to cover the renovation costs.  The total amount of funds that the investor will be able to borrow is usually based on a percentage of the estimated value of the property after renovation is completed.

 

Question 14-8

                Why would refinancing be an alternative to sale of the property?

                Refinancing would increase financial leverage.  Refinancing at a higher loan-to-current-value ratio may provide the investor with additional funds to invest.  This, to some extent, is an alternative to sale of the property.

                No taxes have to be paid on funds received by additional borrowing, whereas taxes would have to be paid if the property is sold.

 

Question 14-9

                How can tax law changes create incentives for investors to sell their properties to other investors?

                Tax law changes affect the relative benefits of existing versus new investors in the same property.  If the tax law becomes less favorable as it did in 1986, this tends to favor existing investors.  If the tax law becomes more favorable, as it did in 1981 when ACRS was passed and depreciable lives were shortened considerably, then new investors tend to be favored.

                Tax law changes tend to affect the turnover or sale of real estate.  It is important to understand these concepts since tax laws are always subject to change and these changes affect the relative risk and return opportunities for new and existing investors.

 

Question 14-10

                How important are taxes in the decision to sell a property?

Taxes are important for a number of reasons.  If a property is sold, capital gains tax must usually be paid.  This increases the opportunity cost of selling versus keeping the property.  Also, tax laws may have changed since the property was purchased.  This means that the depreciation deductions available to a new investor might be better or worse than that which the current owner is using.  This affects the return that a new investor can get relative to that which the current owner can get by keeping the property.

 

Question 14-11

                Are tax considerations important in renovation decisions?

Yes.  First, the improvements may result in an increased depreciable basis and more tax deductions.  Second, there may be tax credits available for renovating the property.

 

Question 14-12

                What are the benefits and costs of renovation?

                In general, renovation can have many benefits, including increasing rents, lowering vacancy, lowering operating expenses and increasing the future property value.

 

Question 14-13

                Do you think renovation is more or less risky than a new investment?

Renovation can be more risky because of the uncertainty as to the cost of the renovation.  It is often easier to estimate the costs of new construction relative to the costs of renovating an older building that may have hidden structural and environmental problems.

 

Question 14-14

                What is meant by the “incremental cost of refinancing?”

                When the interest rate is higher on the larger loan amount, the incremental cost of the additional funds borrowed is even higher than the rate on the larger loan.  This is due to the fact that the higher rate has to be paid on all the funds borrowed, not just the additional funds.

                For refinancing to be a profitable strategy, the effective cost of the debt must be less than the unlevered return on the projects being financed.

 

Question 14-15

                In general, what kinds of tax incentives are available for rehabilitation of real estate income property?

There are several tax incentives for rehabilitation.  For example, investment tax credits are available for certain rehabilitation expenditures.  A property placed in service before 1936 may be eligible for a 10% credit and a building that is a certified historic structure may be eligible for a 20% credit.  There are also credits available for renovation of low income housing.

 

Question 15-1

                What are the main reasons that corporations may choose to own real estate?

There are a number of reasons a corporation may decide to own (rather than lease) real estate.  It may find that owning is less expensive than leasing when considering the cost of leasing and the tax benefits of owning.  The corporation may also want to have more control over the real estate than is possible with leasing.  It may also feel that owning real estate provides diversification of its asset base.

 

Question 15-2

                What factors would tend to make leasing more desirable than owning?

The cost of leasing may be less than the cost of owning the space, especially if the company can not use the tax benefits associated with owning.  The company may also be concerned about the effect that owning real estate may have on its income and balance sheets.  It may also prefer the flexibility associated with leasing, especially if the company only plans to use the space for a short period of time.

 

 

Question 15-3

                Why might the cost of a mortgage loan be greater than the cost of using unsecured corporate debt to finance corporate real estate?

                Mortgage loans are typically on a non-recourse basis for real estate income property.  This means that the risk of default must be built into the mortgage interest rate.  A corporation with a high credit rating may find that it can borrow money at a cheaper rate based on the credit worthiness of the corporation.  That is, the corporation may be less risky than a specific property that the company wants to finance.

 

Question 15-4

           Views (311)

Body Preview(11004 words)

Question xxxxxxx style="margin-left:-36.0pt;">                How xxxxxxx the use xxxxxxx xxxxxxx shift xxxxxxx risk from xxxxxxx to the xxxxxxx style="margin-left:-36.0pt;">                xxxxxxx xxxxxxx how much xxxxxxx will be xxxxxxx by the xxxxxxx versus the xxxxxxx Future increases xxxxxxx market rent xxxxxxx xxxxxxx compensated xxxxxxx by including xxxxxxx inflationary adjustment, xxxxxxx as xxxxxxx xxxxxxx adjustment.  In xxxxxxx case of xxxxxxx CPI       xxxxxxx the risk xxxxxxx shifted to xxxxxxx lessee, because xxxxxxx xxxxxxx in xxxxxxx is not xxxxxxx in advance.  xxxxxxx the xxxxxxx xxxxxxx           responsible xxxxxxx any unexpected xxxxxxx in the xxxxxxx of inflation, xxxxxxx lessor is xxxxxxx that the xxxxxxx xxxxxxx of xxxxxxx    lease xxxxxxx be preserved.  xxxxxxx lessor xxxxxxx xxxxxxx additional risk xxxxxxx the lessee xxxxxxx including net xxxxxxx or expense xxxxxxx                 provisions xxxxxxx the lease.  xxxxxxx xxxxxxx important xxxxxxx note, however, xxxxxxx we would xxxxxxx the xxxxxxx xxxxxxx accept a xxxxxxx base rent xxxxxxx the burden xxxxxxx risk is xxxxxxx to the xxxxxxx style="margin-left:-36.0pt;"> 

Question xxxxxxx xxxxxxx What xxxxxxx the difference xxxxxxx face rents xxxxxxx effective xxxxxxx xxxxxxx Face rents, xxxxxxx called asking xxxxxxx are the xxxxxxx rates which xxxxxxx quote to xxxxxxx tenants.  These xxxxxxx xxxxxxx not xxxxxxx reflect any xxxxxxx abatements, or xxxxxxx and, xxxxxxx xxxxxxx lessor is xxxxxxx to maintain xxxxxxx and   xxxxxxx asking rates xxxxxxx time.  Effective xxxxxxx on the xxxxxxx xxxxxxx considers xxxxxxx large number xxxxxxx possible                xxxxxxx of xxxxxxx xxxxxxx and more xxxxxxx reflects rental xxxxxxx overtime.  Effective xxxxxxx is derived xxxxxxx                 calculating xxxxxxx present value xxxxxxx xxxxxxx expected xxxxxxx rental stream, xxxxxxx using this xxxxxxx to xxxxxxx xxxxxxx equivalent level xxxxxxx annuity over xxxxxxx term of xxxxxxx lease.  As xxxxxxx single measure xxxxxxx net income xxxxxxx xxxxxxx effective xxxxxxx makes the xxxxxxx comparison of xxxxxxx alternatives xxxxxxx xxxxxxx style="margin-left:-36.0pt;">                What xxxxxxx the economic xxxxxxx for the xxxxxxx approach?  Under xxxxxxx conditions would xxxxxxx cost approach xxxxxxx xxxxxxx      xxxxxxx the best xxxxxxx estimate?

                xxxxxxx rationale xxxxxxx xxxxxxx the cost xxxxxxx to valuing xxxxxxx properties is xxxxxxx any informed xxxxxxx of real xxxxxxx estate would xxxxxxx xxxxxxx more xxxxxxx a property xxxxxxx what it xxxxxxx cost xxxxxxx xxxxxxx the land xxxxxxx build the xxxxxxx style="margin-left:-36.0pt;">                The xxxxxxx approach is xxxxxxx reliable where xxxxxxx structure is xxxxxxx xxxxxxx and xxxxxxx does not xxxxxxx serious       xxxxxxx style="margin-left:-36.0pt;"> 

What is xxxxxxx economic rationale xxxxxxx the sales xxxxxxx approach?  What xxxxxxx is necessary xxxxxxx use this xxxxxxx xxxxxxx does xxxxxxx mean for xxxxxxx property to xxxxxxx comparable?

                The xxxxxxx comparison approach xxxxxxx valuation is xxxxxxx xxxxxxx data xxxxxxx from recent xxxxxxx of properties xxxxxxx             xxxxxxx xxxxxxx the property xxxxxxx appraised.

                xxxxxxx a property xxxxxxx be comparable, xxxxxxx sale must xxxxxxx an “arm’s-length” xxxxxxx xxxxxxx a xxxxxxx between unrelated xxxxxxx individuals.  Sales xxxxxxx represent xxxxxxx xxxxxxx transactions with xxxxxxx unusual circumstances, xxxxxxx as        xxxxxxx sales involving xxxxxxx entities, and xxxxxxx on.

 

Question xxxxxxx xxxxxxx What xxxxxxx a capitalization xxxxxxx What are xxxxxxx different xxxxxxx xxxxxxx arriving at xxxxxxx overall rate xxxxxxx use for xxxxxxx appraisal?

                xxxxxxx overall rate xxxxxxx overall capitalization xxxxxxx xxxxxxx the xxxxxxx on the xxxxxxx property (debt xxxxxxx equity).

 

                xxxxxxx investors buy xxxxxxx based on xxxxxxx future benefits, xxxxxxx is the xxxxxxx xxxxxxx appraising xxxxxxx property            xxxxxxx making any xxxxxxx or xxxxxxx xxxxxxx projections?

                xxxxxxx the direct xxxxxxx approach, this xxxxxxx is a xxxxxxx simple approach xxxxxxx the valuation xxxxxxx xxxxxxx             xxxxxxx property.  The xxxxxxx is based xxxxxxx the xxxxxxx xxxxxxx at any xxxxxxx point in xxxxxxx the current xxxxxxx produced            xxxxxxx a property xxxxxxx related to xxxxxxx xxxxxxx market xxxxxxx style="margin-left:-36.0pt;">                Using xxxxxxx band of xxxxxxx approach, xxxxxxx xxxxxxx of value xxxxxxx this approach xxxxxxx based on xxxxxxx cash yields xxxxxxx prevailing in xxxxxxx marketplace.  This xxxxxxx xxxxxxx not xxxxxxx to provide xxxxxxx with estimates xxxxxxx long xxxxxxx xxxxxxx                 of xxxxxxx on equity xxxxxxx Rather, these xxxxxxx yields are xxxxxxx to serve xxxxxxx market benchmarks xxxxxxx xxxxxxx             xxxxxxx used in xxxxxxx property values.

 

Question xxxxxxx style="margin-left:-36.0pt;">                What xxxxxxx the relationship xxxxxxx a discount xxxxxxx and a xxxxxxx xxxxxxx style="margin-left:-36.0pt;">                xxxxxxx capitalization rate xxxxxxx equal to xxxxxxx difference xxxxxxx xxxxxxx discount rate xxxxxxx the expected xxxxxxx in income.  xxxxxxx        other xxxxxxx the change xxxxxxx income over xxxxxxx xxxxxxx life xxxxxxx the property xxxxxxx ignored when xxxxxxx a xxxxxxx xxxxxxx rate.

 

                xxxxxxx is meant xxxxxxx a unit xxxxxxx comparison?  Why xxxxxxx it important?

 

Question xxxxxxx style="margin-left:-36.0pt;">                Why xxxxxxx you xxxxxxx xxxxxxx usually use xxxxxxx different approaches xxxxxxx estimating value?

 

Question xxxxxxx style="margin-left:-36.0pt;">                Under xxxxxxx xxxxxxx should xxxxxxx be explicitly xxxxxxx when estimating xxxxxxx value xxxxxxx xxxxxxx property?

                xxxxxxx should be xxxxxxx considered when xxxxxxx the mortgage-equity xxxxxxx method.  With xxxxxxx                method, xxxxxxx xxxxxxx of xxxxxxx property can xxxxxxx estimated by xxxxxxx taking xxxxxxx xxxxxxx the requirements xxxxxxx the mortgage xxxxxxx and equity xxxxxxx hence the xxxxxxx “mortgage-equity capitalization”.

Question 10-9

                xxxxxxx xxxxxxx three categories xxxxxxx depreciation for xxxxxxx cost approach.  xxxxxxx are very xxxxxxx to determine xxxxxxx in many xxxxxxx xxxxxxx the xxxxxxx of appraisers xxxxxxx specialize in xxxxxxx problems.  xxxxxxx xxxxxxx categories are xxxxxxx follows:

                xxxxxxx deterioration.

                xxxxxxx or structural xxxxxxx due to xxxxxxx availability of xxxxxxx xxxxxxx layout xxxxxxx and technological xxxxxxx changes that xxxxxxx operating xxxxxxx xxxxxxx External obsolescence xxxxxxx may result xxxxxxx changes outside xxxxxxx the property xxxxxxx as excessive xxxxxxx noise, or xxxxxxx xxxxxxx style="margin-left:-36.0pt;"> 

                When xxxxxxx a "terminal" xxxxxxx rate xxxxxxx xxxxxxx than a xxxxxxx in" cap xxxxxxx When may xxxxxxx be higher?

                xxxxxxx terminal cap xxxxxxx may be xxxxxxx xxxxxxx the xxxxxxx in cap xxxxxxx if between xxxxxxx present xxxxxxx xxxxxxx end of xxxxxxx holding period xxxxxxx rates are xxxxxxx to fall, xxxxxxx is expected xxxxxxx decline, or xxxxxxx xxxxxxx expected xxxxxxx increase (thereby xxxxxxx higher rents xxxxxxx appreciation).      xxxxxxx xxxxxxx terminal cap xxxxxxx would result xxxxxxx the opposite xxxxxxx in the xxxxxxx situations stated xxxxxxx occurred.

 

Question xxxxxxx xxxxxxx general, xxxxxxx effect would xxxxxxx reduction in xxxxxxx have xxxxxxx xxxxxxx in" cap xxxxxxx What would xxxxxxx effect have xxxxxxx it occurred xxxxxxx the same xxxxxxx as an xxxxxxx xxxxxxx in xxxxxxx What would xxxxxxx the effect xxxxxxx property xxxxxxx xxxxxxx reduction in xxxxxxx lowers   xxxxxxx rates because xxxxxxx returns are xxxxxxx If this xxxxxxx at a xxxxxxx xxxxxxx demand xxxxxxx property values xxxxxxx rise significantly xxxxxxx of xxxxxxx xxxxxxx rents from xxxxxxx demand and xxxxxxx cap rates.

 

Question xxxxxxx are some xxxxxxx the potential xxxxxxx with using xxxxxxx xxxxxxx in" xxxxxxx rate that xxxxxxx obtained from xxxxxxx property xxxxxxx xxxxxxx to value xxxxxxx property being xxxxxxx for sale xxxxxxx occur if xxxxxxx being used xxxxxxx "comparables" have xxxxxxx xxxxxxx terms, xxxxxxx and credit xxxxxxx of tenants.  xxxxxxx if xxxxxxx xxxxxxx older, have xxxxxxx have different xxxxxxx design, etc. xxxxxxx the subject, xxxxxxx can occur.  xxxxxxx these cases xxxxxxx xxxxxxx must xxxxxxx either adjusted xxxxxxx reflect these xxxxxxx or xxxxxxx xxxxxxx at all.

 

Question xxxxxxx When estimating xxxxxxx reversion value xxxxxxx the year xxxxxxx sale, why xxxxxxx the terminal xxxxxxx xxxxxxx applied xxxxxxx the NOI xxxxxxx the year xxxxxxx the xxxxxxx xxxxxxx Because the xxxxxxx first year xxxxxxx NOI from xxxxxxx investment is xxxxxxx year after xxxxxxx sale.

 

Question 10-14

                xxxxxxx xxxxxxx cap xxxxxxx the same xxxxxxx an IRR?  xxxxxxx is xxxxxxx xxxxxxx Why?

                No, xxxxxxx cap rate xxxxxxx the relationship xxxxxxx NOI and xxxxxxx value.  The xxxxxxx is the xxxxxxx xxxxxxx all xxxxxxx flows from xxxxxxx and sale xxxxxxx the xxxxxxx xxxxxxx the IRR xxxxxxx greater than xxxxxxx cap rate xxxxxxx to the xxxxxxx that the xxxxxxx value typically xxxxxxx xxxxxxx than xxxxxxx original purchase xxxxxxx 10-15

                Discuss xxxxxxx differences xxxxxxx xxxxxxx (1) a xxxxxxx cap rate xxxxxxx (2) an xxxxxxx rate in xxxxxxx value when xxxxxxx reversion values.

                xxxxxxx xxxxxxx cap xxxxxxx approach is xxxxxxx on the xxxxxxx that xxxxxxx xxxxxxx year of xxxxxxx the investors xxxxxxx value the xxxxxxx based on xxxxxxx new “going xxxxxxx cap rate xxxxxxx xxxxxxx time.  xxxxxxx of the xxxxxxx cap rate xxxxxxx based xxxxxxx xxxxxxx the current xxxxxxx going in xxxxxxx rate by xxxxxxx that is xxxxxxx to occur xxxxxxx the holding xxxxxxx xxxxxxx rates xxxxxxx appreciation to xxxxxxx reversion value xxxxxxx based xxxxxxx xxxxxxx expectations as xxxxxxx trends in xxxxxxx values.  This xxxxxxx reflect risk, xxxxxxx cash flows, xxxxxxx rates or xxxxxxx xxxxxxx other xxxxxxx 11-1

                What xxxxxxx the primary xxxxxxx of xxxxxxx xxxxxxx real estate xxxxxxx property?

                Net xxxxxxx Dollars left xxxxxxx after collecting xxxxxxx and paying xxxxxxx but before xxxxxxx xxxxxxx and xxxxxxx   costs.

                xxxxxxx Sale:  Expecting xxxxxxx price xxxxxxx xxxxxxx a specified xxxxxxx period increases xxxxxxx return.

                Diversification:  xxxxxxx overall risk xxxxxxx hold many xxxxxxx of investments.

                xxxxxxx xxxxxxx tax xxxxxxx Taxable income xxxxxxx often less xxxxxxx before-tax xxxxxxx xxxxxxx 11-2

                What xxxxxxx affect a xxxxxxx projected NOI?

                xxxxxxx market rents xxxxxxx vacancy rates

                xxxxxxx associated with xxxxxxx xxxxxxx property

                xxxxxxx of any xxxxxxx on the xxxxxxx 11-3

                xxxxxxx xxxxxxx would result xxxxxxx a property xxxxxxx in value xxxxxxx a holding xxxxxxx Inflation:  This xxxxxxx rents as xxxxxxx xxxxxxx the xxxxxxx sale price xxxxxxx be higher.

                xxxxxxx Increased xxxxxxx xxxxxxx space may xxxxxxx value if xxxxxxx supply of xxxxxxx doesn’t increase xxxxxxx well.

 

Question 11-4

                xxxxxxx do you xxxxxxx xxxxxxx stops xxxxxxx CPI adjustments xxxxxxx leases affect xxxxxxx riskiness xxxxxxx xxxxxxx lease from xxxxxxx lessor’s        xxxxxxx of view?

                xxxxxxx is less xxxxxxx for the xxxxxxx with expense xxxxxxx xxxxxxx CPI xxxxxxx in leases.

                xxxxxxx Adjustments:  The xxxxxxx of xxxxxxx xxxxxxx is shifted xxxxxxx the lessee.

                xxxxxxx Stops:  The xxxxxxx of increases xxxxxxx expenses is xxxxxxx to the xxxxxxx xxxxxxx allowing xxxxxxx lessor to xxxxxxx the benefit xxxxxxx any xxxxxxx xxxxxxx expenses.

 

Question 11-5

                xxxxxxx should investors xxxxxxx concerned about xxxxxxx rents if xxxxxxx are purchasing xxxxxxx property subject xxxxxxx xxxxxxx Even xxxxxxx the investment xxxxxxx an existing xxxxxxx that xxxxxxx xxxxxxx been leased, xxxxxxx income can xxxxxxx affected when xxxxxxx existing leases xxxxxxx and are xxxxxxx at the xxxxxxx xxxxxxx at xxxxxxx time.

 

Question 11-6

                xxxxxxx is meant xxxxxxx equity?

The xxxxxxx xxxxxxx equity in xxxxxxx project is xxxxxxx to the xxxxxxx price less xxxxxxx amount borrowed.  xxxxxxx amount of xxxxxxx xxxxxxx investor xxxxxxx in a xxxxxxx may change xxxxxxx time xxxxxxx xxxxxxx property value xxxxxxx loan balance xxxxxxx E.g., if xxxxxxx property value xxxxxxx and the xxxxxxx balance is xxxxxxx xxxxxxx amortization, xxxxxxx investor’s equity xxxxxxx 11-7

                What xxxxxxx the xxxxxxx xxxxxxx differences between xxxxxxx overall rate xxxxxxx an equity xxxxxxx rate?

                Difference:  xxxxxxx overall rate xxxxxxx the entire xxxxxxx xxxxxxx the xxxxxxx of the xxxxxxx The equity xxxxxxx rate xxxxxxx xxxxxxx the BTCF xxxxxxx equity dividend) xxxxxxx the first xxxxxxx to the xxxxxxx equity investment.

Similarity:  xxxxxxx one of xxxxxxx xxxxxxx a xxxxxxx of investment xxxxxxx because they xxxxxxx not xxxxxxx xxxxxxx account future xxxxxxx from operations xxxxxxx resale of xxxxxxx property at xxxxxxx end of xxxxxxx holding period.  xxxxxxx xxxxxxx based xxxxxxx a single xxxxxxx usually the xxxxxxx year.

 

Question xxxxxxx xxxxxxx is the xxxxxxx of a xxxxxxx coverage ratio?

                xxxxxxx is a xxxxxxx of the xxxxxxx to the xxxxxxx xxxxxxx that xxxxxxx the riskiness xxxxxxx a loan.  xxxxxxx is xxxxxxx xxxxxxx to which xxxxxxx NOI from xxxxxxx property is xxxxxxx to exceed xxxxxxx mortgage payment.  xxxxxxx typically want xxxxxxx xxxxxxx coverage xxxxxxx (DCR) to xxxxxxx at least xxxxxxx 11-9

                xxxxxxx xxxxxxx meant by xxxxxxx shelter?

The term xxxxxxx shelter” refers xxxxxxx an investment xxxxxxx allows a xxxxxxx to reduce xxxxxxx xxxxxxx Although xxxxxxx of the xxxxxxx shelter benefits xxxxxxx real xxxxxxx xxxxxxx removed by xxxxxxx Tax Reform xxxxxxx of 1986, xxxxxxx deductions still xxxxxxx some “shelter” xxxxxxx that they xxxxxxx xxxxxxx deductions xxxxxxx reduce taxable xxxxxxx Interest deductions xxxxxxx the xxxxxxx xxxxxxx serve to xxxxxxx and in xxxxxxx sense shelter xxxxxxx income.

 

Question 11-10

                xxxxxxx is the xxxxxxx from the xxxxxxx xxxxxxx real xxxxxxx taxed?

                The xxxxxxx taxable gain xxxxxxx the xxxxxxx xxxxxxx real estate xxxxxxx taxed at xxxxxxx same rate xxxxxxx ordinary income.

                xxxxxxx is still xxxxxxx to keep xxxxxxx xxxxxxx capital xxxxxxx and ordinary xxxxxxx gains/losses.  This xxxxxxx due xxxxxxx xxxxxxx rules for xxxxxxx investors and xxxxxxx acquired prior xxxxxxx 1986.

 

Question 11-11

                xxxxxxx is meant xxxxxxx an effective xxxxxxx xxxxxxx What xxxxxxx it measure?

                xxxxxxx effective tax xxxxxxx is xxxxxxx xxxxxxx rate that xxxxxxx into account xxxxxxx effects of xxxxxxx and time xxxxxxx of money.

                xxxxxxx measures the xxxxxxx xxxxxxx between xxxxxxx BTIRR and xxxxxxx ATIRR.  This xxxxxxx is xxxxxxx xxxxxxx tax rate xxxxxxx can be xxxxxxx than the xxxxxxx marginal tax xxxxxxx This difference xxxxxxx also due xxxxxxx xxxxxxx fact xxxxxxx the interest xxxxxxx the mortgage xxxxxxx is xxxxxxx xxxxxxx Do you xxxxxxx taxes affect xxxxxxx value of xxxxxxx estate versus xxxxxxx investments?

Yes.  Not xxxxxxx investments are xxxxxxx xxxxxxx when xxxxxxx comes to xxxxxxx income taxes.  xxxxxxx taxes xxxxxxx xxxxxxx considered when xxxxxxx returns for xxxxxxx which are xxxxxxx taxed in xxxxxxx same manner.  xxxxxxx that have xxxxxxx xxxxxxx before-tax xxxxxxx may have xxxxxxx different after-tax xxxxxxx 11-13

                xxxxxxx xxxxxxx the significance xxxxxxx the passive xxxxxxx loss limitation xxxxxxx rules for xxxxxxx estate investors?

The xxxxxxx rules are xxxxxxx xxxxxxx in xxxxxxx passive losses xxxxxxx be used xxxxxxx offset xxxxxxx xxxxxxx another category.  xxxxxxx any tax xxxxxxx from real xxxxxxx is usually xxxxxxx a passive xxxxxxx it can xxxxxxx xxxxxxx used xxxxxxx offset income xxxxxxx other sources xxxxxxx as xxxxxxx xxxxxxx from salaries xxxxxxx wages or xxxxxxx income from xxxxxxx or dividends.

 

What is xxxxxxx leverage?  Why xxxxxxx xxxxxxx one-year xxxxxxx of return xxxxxxx investment inadequate xxxxxxx determining xxxxxxx xxxxxxx positive or xxxxxxx financial leverage xxxxxxx Financial leverage xxxxxxx defined as xxxxxxx that may xxxxxxx to an xxxxxxx xxxxxxx borrowing xxxxxxx at a xxxxxxx of interest xxxxxxx is xxxxxxx xxxxxxx the expected xxxxxxx of return xxxxxxx total funds xxxxxxx in a xxxxxxx determine whether xxxxxxx is positive xxxxxxx xxxxxxx negative xxxxxxx the investor xxxxxxx to determine xxxxxxx the xxxxxxx xxxxxxx over the xxxxxxx holding period) xxxxxxx greater than xxxxxxx cost of  xxxxxxx funds.  A xxxxxxx measure of xxxxxxx xxxxxxx as xxxxxxx overall capitalization xxxxxxx can not xxxxxxx used xxxxxxx xxxxxxx does not xxxxxxx consider the xxxxxxx that accrue xxxxxxx the investor xxxxxxx time from xxxxxxx in income xxxxxxx xxxxxxx that xxxxxxx not affect xxxxxxx cost of xxxxxxx style="margin-left:-36.0pt;"> 

                The xxxxxxx is the xxxxxxx interest rate xxxxxxx could be xxxxxxx on the xxxxxxx xxxxxxx the xxxxxxx becomes unfavorable.  xxxxxxx represents the xxxxxxx rate xxxxxxx xxxxxxx leverage is xxxxxxx (neither favorable xxxxxxx unfavorable).

                The xxxxxxx remains constant xxxxxxx of the xxxxxxx borrowed (that xxxxxxx xxxxxxx 70, xxxxxxx 80 percent xxxxxxx the property xxxxxxx equity xxxxxxx xxxxxxx would not xxxxxxx a break-even xxxxxxx rate when xxxxxxx a property xxxxxxx the investor xxxxxxx earns the xxxxxxx xxxxxxx rate xxxxxxx return as xxxxxxx lender on xxxxxxx same xxxxxxx xxxxxxx at the xxxxxxx provides no xxxxxxx premium to xxxxxxx investor.  Normally, xxxxxxx risk premium xxxxxxx required because xxxxxxx xxxxxxx investor xxxxxxx the risk xxxxxxx variations in xxxxxxx performance xxxxxxx xxxxxxx property.

 

                What xxxxxxx positive and xxxxxxx financial leverage?  xxxxxxx are returns xxxxxxx losses magnified xxxxxxx xxxxxxx degree xxxxxxx leverage increases?  xxxxxxx does leverage xxxxxxx a xxxxxxx xxxxxxx differ from xxxxxxx on an xxxxxxx basis?

When the xxxxxxx or after-tax xxxxxxx are higher xxxxxxx debt than xxxxxxx xxxxxxx we xxxxxxx that the xxxxxxx has positive xxxxxxx favorable xxxxxxx xxxxxxx When returns xxxxxxx lower with xxxxxxx than without xxxxxxx we say xxxxxxx the investment xxxxxxx negative or xxxxxxx xxxxxxx leverage.

Positive xxxxxxx occurs when xxxxxxx unlevered IRR xxxxxxx greater xxxxxxx xxxxxxx interest rate xxxxxxx on the xxxxxxx Negative leverage xxxxxxx when the xxxxxxx IRR is xxxxxxx than the xxxxxxx xxxxxxx paid xxxxxxx the debt.

                xxxxxxx and losses xxxxxxx magnified xxxxxxx xxxxxxx greater the xxxxxxx of debt, xxxxxxx greater the xxxxxxx or loss xxxxxxx the equity xxxxxxx Leverage on xxxxxxx xxxxxxx basis xxxxxxx from leverage xxxxxxx an after-tax xxxxxxx because xxxxxxx xxxxxxx tax deductible.  xxxxxxx we must xxxxxxx the after-tax xxxxxxx of debt xxxxxxx is different xxxxxxx the before-tax xxxxxxx xxxxxxx debt.

Question 12-4

                Because xxxxxxx NOI does xxxxxxx change when xxxxxxx debt is xxxxxxx increasing the xxxxxxx xxxxxxx debt xxxxxxx the debt xxxxxxx relative to xxxxxxx Therefore, xxxxxxx xxxxxxx coverage ratio xxxxxxx may exceed xxxxxxx lender’s limits.  xxxxxxx higher loan-to-        xxxxxxx ratios and xxxxxxx debt coverage xxxxxxx xxxxxxx to xxxxxxx lender increases. xxxxxxx a result, xxxxxxx interest xxxxxxx xxxxxxx        additional xxxxxxx will also xxxxxxx style="margin-left:-36.0pt;"> 

Question xxxxxxx style="margin-left:-36.0pt;">                What xxxxxxx meant by xxxxxxx participation loan?  xxxxxxx xxxxxxx the xxxxxxx participate in?  xxxxxxx would a xxxxxxx want xxxxxxx xxxxxxx a                 xxxxxxx loan?  Why xxxxxxx an investor xxxxxxx to obtain xxxxxxx participation loan?

                A xxxxxxx xxxxxxx for xxxxxxx a participation xxxxxxx includes how xxxxxxx the xxxxxxx xxxxxxx perceived relative xxxxxxx a fixed xxxxxxx interest rate xxxxxxx The lender xxxxxxx not participate xxxxxxx any losses xxxxxxx xxxxxxx receives xxxxxxx minimum interest xxxxxxx       (unless xxxxxxx borrower xxxxxxx xxxxxxx the participation xxxxxxx the lender xxxxxxx somewhat of xxxxxxx hedge      xxxxxxx unanticipated inflation xxxxxxx the NOI xxxxxxx xxxxxxx prices xxxxxxx an income xxxxxxx often increase xxxxxxx a xxxxxxx xxxxxxx of inflation.  xxxxxxx some extent xxxxxxx protects the xxxxxxx real rate xxxxxxx return.

An investors xxxxxxx is that xxxxxxx xxxxxxx may xxxxxxx very little xxxxxxx zero for xxxxxxx or xxxxxxx xxxxxxx This is xxxxxxx       the xxxxxxx is often xxxxxxx so that xxxxxxx participation is xxxxxxx on income xxxxxxx xxxxxxx flow xxxxxxx some specified xxxxxxx even point.  xxxxxxx this xxxxxxx xxxxxxx the borrower xxxxxxx be paying xxxxxxx than would xxxxxxx been paid xxxxxxx a straight xxxxxxx loan.  This xxxxxxx xxxxxxx quite xxxxxxx for the xxxxxxx since NOI xxxxxxx be xxxxxxx xxxxxxx the first xxxxxxx of years xxxxxxx    ownership, xxxxxxx on a xxxxxxx project that xxxxxxx not fully xxxxxxx xxxxxxx is xxxxxxx by a xxxxxxx Why would xxxxxxx building xxxxxxx xxxxxxx to do xxxxxxx sale-leaseback of xxxxxxx land?  What xxxxxxx the benefit xxxxxxx the party xxxxxxx purchases the xxxxxxx xxxxxxx a xxxxxxx When land xxxxxxx already owned xxxxxxx is xxxxxxx xxxxxxx to an xxxxxxx with a xxxxxxx agreement to xxxxxxx the land xxxxxxx the party xxxxxxx is sold xxxxxxx xxxxxxx is xxxxxxx a sale-leaseback xxxxxxx the land.

                xxxxxxx motivation xxxxxxx xxxxxxx sale-leaseback of xxxxxxx land is xxxxxxx it is xxxxxxx way of xxxxxxx 100 percent xxxxxxx on the xxxxxxx xxxxxxx second xxxxxxx is that xxxxxxx payments are xxxxxxx percent xxxxxxx xxxxxxx With a xxxxxxx only the xxxxxxx is tax xxxxxxx The investor xxxxxxx deduct the xxxxxxx depreciation charges xxxxxxx xxxxxxx not xxxxxxx land is xxxxxxx since land xxxxxxx be xxxxxxx xxxxxxx results in xxxxxxx same depreciation xxxxxxx a smaller xxxxxxx investment.

                The xxxxxxx may have xxxxxxx option of xxxxxxx xxxxxxx land xxxxxxx at the xxxxxxx of the xxxxxxx if xxxxxxx xxxxxxx desirable to xxxxxxx so.

 

Question 12-7

                xxxxxxx might an xxxxxxx prefer a xxxxxxx with a xxxxxxx interest rate xxxxxxx xxxxxxx participation?

                xxxxxxx investor’s motivation xxxxxxx that the xxxxxxx may xxxxxxx xxxxxxx little or xxxxxxx for one xxxxxxx more years.  xxxxxxx is because xxxxxxx loan is xxxxxxx structured so xxxxxxx xxxxxxx participation xxxxxxx based on xxxxxxx or cash xxxxxxx above xxxxxxx xxxxxxx break-even point.  xxxxxxx this time xxxxxxx the borrower xxxxxxx be paying xxxxxxx than would xxxxxxx been paid xxxxxxx xxxxxxx straight xxxxxxx This may xxxxxxx quite desirable xxxxxxx the xxxxxxx xxxxxxx NOI may xxxxxxx lower during xxxxxxx first couple xxxxxxx years of xxxxxxx especially on xxxxxxx new project xxxxxxx xxxxxxx not xxxxxxx rented.

 

Question 12-8

                xxxxxxx might a xxxxxxx prefer xxxxxxx xxxxxxx with a xxxxxxx interest rate xxxxxxx a participation?

                xxxxxxx lender’s motivation xxxxxxx making a xxxxxxx loan includes xxxxxxx xxxxxxx the xxxxxxx is perceived xxxxxxx to a xxxxxxx interest xxxxxxx xxxxxxx The lender xxxxxxx not participate xxxxxxx any losses xxxxxxx still receives xxxxxxx minimum interest xxxxxxx (unless the xxxxxxx xxxxxxx Additionally, xxxxxxx participation provides xxxxxxx lender with xxxxxxx of xxxxxxx xxxxxxx against unanticipated xxxxxxx because the xxxxxxx and resale xxxxxxx for an xxxxxxx property often xxxxxxx as a xxxxxxx xxxxxxx of xxxxxxx To some xxxxxxx this protects xxxxxxx lender’s xxxxxxx xxxxxxx of return.

 

Question xxxxxxx How do xxxxxxx think participations xxxxxxx the riskiness xxxxxxx a loan?

                xxxxxxx is clearly xxxxxxx xxxxxxx associated xxxxxxx the receipt xxxxxxx a participation xxxxxxx it xxxxxxx xxxxxxx the performance xxxxxxx the property. xxxxxxx lender does xxxxxxx participate in xxxxxxx losses and xxxxxxx receives some xxxxxxx xxxxxxx rate xxxxxxx the borrower xxxxxxx Additionally, the xxxxxxx provides xxxxxxx xxxxxxx with somewhat xxxxxxx a hedge xxxxxxx unanticipated inflation xxxxxxx the NOI xxxxxxx resale prices xxxxxxx an income xxxxxxx xxxxxxx increase xxxxxxx a result xxxxxxx inflation.  To xxxxxxx extent xxxxxxx xxxxxxx the lender’s xxxxxxx rate of xxxxxxx 12-10

                What xxxxxxx the motivation xxxxxxx a sale-leaseback xxxxxxx the land?

                xxxxxxx xxxxxxx for xxxxxxx sale-and-leaseback of xxxxxxx land is xxxxxxx it xxxxxxx xxxxxxx way of xxxxxxx 100 percent xxxxxxx on the xxxxxxx A second xxxxxxx is that xxxxxxx payments are xxxxxxx xxxxxxx tax xxxxxxx With a xxxxxxx only the xxxxxxx is xxxxxxx xxxxxxx The investor xxxxxxx deduct the xxxxxxx depreciation charges xxxxxxx or not xxxxxxx land is xxxxxxx since land xxxxxxx xxxxxxx depreciated.  xxxxxxx results in xxxxxxx same depreciation xxxxxxx a xxxxxxx xxxxxxx investment.  The xxxxxxx may have xxxxxxx option of xxxxxxx the land xxxxxxx at the xxxxxxx of the xxxxxxx xxxxxxx it xxxxxxx desirable to xxxxxxx so.

 

 

 

Question 12-11

                xxxxxxx criteria xxxxxxx xxxxxxx used to xxxxxxx between two xxxxxxx alternatives?

Assuming the xxxxxxx financing alternatives xxxxxxx for roughly xxxxxxx same amount xxxxxxx xxxxxxx (so xxxxxxx risk due xxxxxxx leverage is xxxxxxx same), xxxxxxx xxxxxxx with the xxxxxxx effective interest xxxxxxx should be xxxxxxx This alternative xxxxxxx also result xxxxxxx the highest xxxxxxx xxxxxxx equity.

 

Question xxxxxxx What is xxxxxxx traditional cash xxxxxxx approach xxxxxxx xxxxxxx how below-market xxxxxxx loans affect xxxxxxx equivalency was xxxxxxx in Chapter xxxxxxx where it xxxxxxx demonstrated that xxxxxxx xxxxxxx would xxxxxxx willing to xxxxxxx more for xxxxxxx property xxxxxxx xxxxxxx below market xxxxxxx rate loan.  xxxxxxx that chapter, xxxxxxx present value xxxxxxx interest savings xxxxxxx used to xxxxxxx xxxxxxx additional xxxxxxx which might xxxxxxx paid for xxxxxxx property.  xxxxxxx xxxxxxx approach could xxxxxxx used to xxxxxxx the additional xxxxxxx that might xxxxxxx paid for xxxxxxx producing properties xxxxxxx xxxxxxx in xxxxxxx chapter.

 

Question 12-13

                xxxxxxx can the xxxxxxx of xxxxxxx xxxxxxx loans on xxxxxxx be determined xxxxxxx investor criteria?

Note: xxxxxxx question is xxxxxxx explicitly covered xxxxxxx the chapter.  xxxxxxx xxxxxxx students xxxxxxx think about xxxxxxx concepts from xxxxxxx chapters xxxxxxx xxxxxxx valuation and xxxxxxx equivalency might xxxxxxx applied to xxxxxxx a below-market xxxxxxx loan on xxxxxxx property.

Evaluating a xxxxxxx xxxxxxx loan xxxxxxx like comparing xxxxxxx financing alternatives xxxxxxx one xxxxxxx xxxxxxx the market xxxxxxx and one xxxxxxx a below-market xxxxxxx All else xxxxxxx equal, the xxxxxxx market interest xxxxxxx xxxxxxx should xxxxxxx in a xxxxxxx IRRE for xxxxxxx property xxxxxxx xxxxxxx result with xxxxxxx market rate xxxxxxx The investor xxxxxxx therefore be xxxxxxx to pay xxxxxxx for the xxxxxxx xxxxxxx long xxxxxxx the IRRE xxxxxxx at least xxxxxxx much xxxxxxx xxxxxxx would be xxxxxxx the market xxxxxxx rate loan.

 

Question xxxxxxx What is xxxxxxx by partitioning xxxxxxx internal rate xxxxxxx xxxxxxx Why xxxxxxx this procedure xxxxxxx To illustrate xxxxxxx is xxxxxxx xxxxxxx partitioning the xxxxxxx remember that xxxxxxx IRR is xxxxxxx up of xxxxxxx components of xxxxxxx flow:

                                1.  xxxxxxx xxxxxxx from xxxxxxx 2.  cash xxxxxxx from the xxxxxxx of xxxxxxx xxxxxxx Partitioning is xxxxxxx to obtain xxxxxxx idea of xxxxxxx relative weights xxxxxxx these components xxxxxxx return and xxxxxxx xxxxxxx an xxxxxxx of the xxxxxxx of the xxxxxxx of xxxxxxx xxxxxxx portion of xxxxxxx return.

                Partitioning xxxxxxx meaningful because xxxxxxx helps the xxxxxxx to determine xxxxxxx much of xxxxxxx xxxxxxx is xxxxxxx annual operating xxxxxxx flow and xxxxxxx much xxxxxxx xxxxxxx the projected xxxxxxx cash flow.  xxxxxxx cash flow xxxxxxx generally more xxxxxxx than projected xxxxxxx cash flow.  xxxxxxx xxxxxxx greater xxxxxxx proportion of xxxxxxx cash flow xxxxxxx operating xxxxxxx xxxxxxx the greater xxxxxxx risk facing xxxxxxx investor.  This xxxxxxx be useful xxxxxxx comparing multiple xxxxxxx 13-2

                What xxxxxxx xxxxxxx risk xxxxxxx Why does xxxxxxx a premium xxxxxxx between xxxxxxx xxxxxxx on mortgages xxxxxxx rates of xxxxxxx earned on xxxxxxx invested in xxxxxxx estate?

A risk xxxxxxx is a xxxxxxx xxxxxxx rate xxxxxxx return paid xxxxxxx an investor xxxxxxx compensation xxxxxxx xxxxxxx additional risk xxxxxxx a higher xxxxxxx investment.  In xxxxxxx investors are xxxxxxx risk averse xxxxxxx must be xxxxxxx xxxxxxx the xxxxxxx risk of xxxxxxx investments.

                This xxxxxxx exists xxxxxxx xxxxxxx interest rates xxxxxxx returns on xxxxxxx invested in xxxxxxx estate because xxxxxxx equity investor xxxxxxx assuming more xxxxxxx xxxxxxx the xxxxxxx lender.  The xxxxxxx assumes less xxxxxxx because xxxxxxx xxxxxxx would have xxxxxxx claim on xxxxxxx property should xxxxxxx be a xxxxxxx If this xxxxxxx not the xxxxxxx xxxxxxx investor xxxxxxx be better xxxxxxx lending on xxxxxxx estate xxxxxxx xxxxxxx in it.

 

Question xxxxxxx What are xxxxxxx of the xxxxxxx of risk xxxxxxx should be xxxxxxx when analyzing xxxxxxx xxxxxxx and xxxxxxx categories of xxxxxxx Business Risk, xxxxxxx Risk, xxxxxxx xxxxxxx Inflation Risk, xxxxxxx Risk, Interest xxxxxxx Risk, Legislative xxxxxxx Environmental Risk

 

 

Question xxxxxxx What is xxxxxxx difference between xxxxxxx xxxxxxx and xxxxxxx risk?

                Business xxxxxxx is the xxxxxxx of xxxxxxx xxxxxxx to fluctuations xxxxxxx economic activity xxxxxxx affect the xxxxxxx of income xxxxxxx by a xxxxxxx Financial risk xxxxxxx xxxxxxx financing xxxxxxx to as xxxxxxx leverage) magnifies xxxxxxx business xxxxxxx xxxxxxx risk increases xxxxxxx the amount xxxxxxx debt increases.

 

Question xxxxxxx Why is xxxxxxx variance (or xxxxxxx deviation) used xxxxxxx xxxxxxx measure xxxxxxx risk?  What xxxxxxx the advantages xxxxxxx disadvantages xxxxxxx xxxxxxx risk measure?

Lower xxxxxxx in returns xxxxxxx considered by xxxxxxx analysts to xxxxxxx associated with xxxxxxx risk and xxxxxxx xxxxxxx Therefore, xxxxxxx using a xxxxxxx measure of xxxxxxx one xxxxxxx xxxxxxx indication of xxxxxxx extent risk xxxxxxx present in xxxxxxx investment.  The xxxxxxx deviation gives xxxxxxx a specific xxxxxxx xxxxxxx which xxxxxxx can expect xxxxxxx actual return xxxxxxx each xxxxxxx xxxxxxx fall in xxxxxxx to its xxxxxxx return.  It xxxxxxx the advantage xxxxxxx being relatively xxxxxxx to calculate.  xxxxxxx xxxxxxx the xxxxxxx of  treating xxxxxxx both higher xxxxxxx expected xxxxxxx xxxxxxx lower than xxxxxxx returns the xxxxxxx It could xxxxxxx argued, however, xxxxxxx investors should xxxxxxx more concerned xxxxxxx xxxxxxx being xxxxxxx than expected xxxxxxx lower than xxxxxxx threshold xxxxxxx xxxxxxx What is xxxxxxx by a ‘ xxxxxxx option’ ?

A real xxxxxxx is an xxxxxxx related to xxxxxxx in tangible xxxxxxx xxxxxxx real xxxxxxx that involves xxxxxxx option to xxxxxxx to xxxxxxx xxxxxxx to invest xxxxxxx capital based xxxxxxx future economic xxxxxxx Land can xxxxxxx viewed as xxxxxxx the option xxxxxxx xxxxxxx additional xxxxxxx in the xxxxxxx to construct xxxxxxx building.

 

Question xxxxxxx xxxxxxx meant by xxxxxxx term ‘overage’ xxxxxxx retail space ?

Overage xxxxxxx to the xxxxxxx that is xxxxxxx above the xxxxxxx xxxxxxx in xxxxxxx lease where xxxxxxx rent is xxxxxxx on xxxxxxx xxxxxxx of the xxxxxxx sales once xxxxxxx exceeds a xxxxxxx breakpoint.  The xxxxxxx rent is xxxxxxx minimum rent xxxxxxx xxxxxxx overage xxxxxxx 13-8     

                How xxxxxxx the use xxxxxxx scenarios xxxxxxx xxxxxxx sensitivity analysis ?

Sensitivity xxxxxxx involves changing xxxxxxx variable at xxxxxxx time such xxxxxxx the market xxxxxxx or the xxxxxxx xxxxxxx Scenarious xxxxxxx changing several xxxxxxx at once xxxxxxx each xxxxxxx xxxxxxx a pessimistic, xxxxxxx likely, and xxxxxxx scenario.  For xxxxxxx scenario there xxxxxxx be a xxxxxxx assumption about xxxxxxx xxxxxxx vacancy xxxxxxx and the xxxxxxx price because xxxxxxx are xxxxxxx xxxxxxx What factors xxxxxxx an investor xxxxxxx when trying xxxxxxx decide whether xxxxxxx dispose of xxxxxxx property that xxxxxxx xxxxxxx owned xxxxxxx several years?

                xxxxxxx factors are xxxxxxx on xxxxxxx xxxxxxx or marginal, xxxxxxx criteria that xxxxxxx be utilized xxxxxxx investors when xxxxxxx with such xxxxxxx making.

                The xxxxxxx xxxxxxx evaluate xxxxxxx expected future xxxxxxx of the xxxxxxx and xxxxxxx xxxxxxx the IRR xxxxxxx holding versus xxxxxxx of the xxxxxxx The investor xxxxxxx consider whether xxxxxxx net funds xxxxxxx xxxxxxx the xxxxxxx of the xxxxxxx (after tax xxxxxxx expenses) xxxxxxx xxxxxxx reinvested at xxxxxxx greater rate xxxxxxx return (ATIRR) xxxxxxx the return xxxxxxx would be xxxxxxx if the xxxxxxx xxxxxxx not xxxxxxx laws in xxxxxxx at the xxxxxxx of xxxxxxx xxxxxxx a property.  xxxxxxx law changes xxxxxxx the relative xxxxxxx of existing xxxxxxx new investors xxxxxxx the same xxxxxxx xxxxxxx Why xxxxxxx the actual xxxxxxx period for xxxxxxx property xxxxxxx xxxxxxx from the xxxxxxx period that xxxxxxx anticipated when xxxxxxx property was xxxxxxx An investor xxxxxxx a real xxxxxxx xxxxxxx based xxxxxxx the benefits xxxxxxx to be xxxxxxx over xxxxxxx xxxxxxx holding period.  xxxxxxx is, the xxxxxxx computes the xxxxxxx measures of xxxxxxx performance based xxxxxxx expectations at xxxxxxx xxxxxxx the xxxxxxx is purchased.  xxxxxxx the property xxxxxxx purchased, xxxxxxx xxxxxxx things can xxxxxxx that affect xxxxxxx actual performance xxxxxxx the property.  xxxxxxx same factors xxxxxxx affect the xxxxxxx xxxxxxx as xxxxxxx whether the xxxxxxx continues to xxxxxxx his xxxxxxx xxxxxxx For example, xxxxxxx rents may xxxxxxx be increasing xxxxxxx fast as xxxxxxx thus reducing xxxxxxx investor’s cash xxxxxxx xxxxxxx laws xxxxxxx have changed, xxxxxxx they did xxxxxxx 1986, xxxxxxx xxxxxxx the benefit xxxxxxx some investors xxxxxxx than others.  xxxxxxx point is xxxxxxx a periodic xxxxxxx should be xxxxxxx xxxxxxx determine xxxxxxx properties should xxxxxxx sold.

 

Question 14-3

                xxxxxxx is xxxxxxx xxxxxxx rate of xxxxxxx How is xxxxxxx callated?

                The xxxxxxx rate of xxxxxxx is the xxxxxxx gained by xxxxxxx xxxxxxx property xxxxxxx one additional xxxxxxx The marginal xxxxxxx of xxxxxxx xxxxxxx what the xxxxxxx could get xxxxxxx the future xxxxxxx keeping the xxxxxxx versus what xxxxxxx could get xxxxxxx xxxxxxx selling xxxxxxx property.

                The xxxxxxx rate of xxxxxxx is xxxxxxx xxxxxxx the benefit xxxxxxx receiving the xxxxxxx from operations xxxxxxx one additional xxxxxxx and the xxxxxxx from the xxxxxxx xxxxxxx the xxxxxxx at the xxxxxxx of the xxxxxxx year.

                xxxxxxx xxxxxxx formula is xxxxxxx page 427 xxxxxxx the text.

 

Question xxxxxxx What causes xxxxxxx marginal rate xxxxxxx return to xxxxxxx xxxxxxx time?  xxxxxxx can the xxxxxxx rate of xxxxxxx be xxxxxxx xxxxxxx decide when xxxxxxx sell a xxxxxxx Increasing rents xxxxxxx increases in xxxxxxx value of xxxxxxx property tend xxxxxxx xxxxxxx the xxxxxxx Equity buildup xxxxxxx the price xxxxxxx and xxxxxxx xxxxxxx however, tends xxxxxxx lower the xxxxxxx Also, because xxxxxxx depreciation deduction xxxxxxx fixed but xxxxxxx are rising, xxxxxxx xxxxxxx amount xxxxxxx tax benefits xxxxxxx depreciation decreases xxxxxxx year.

                xxxxxxx xxxxxxx should be xxxxxxx when the xxxxxxx rate of xxxxxxx falls below xxxxxxx rate at xxxxxxx funds can xxxxxxx xxxxxxx 14-5

                xxxxxxx might the xxxxxxx internal rate xxxxxxx return xxxxxxx xxxxxxx (ATIRRe) differ xxxxxxx a new xxxxxxx versus an xxxxxxx investor who xxxxxxx the property?

                xxxxxxx could be xxxxxxx xxxxxxx tax xxxxxxx changes that xxxxxxx the relative xxxxxxx of xxxxxxx xxxxxxx new investors xxxxxxx the same xxxxxxx If the xxxxxxx law becomes xxxxxxx favorable as xxxxxxx did in xxxxxxx xxxxxxx tends xxxxxxx favor existing xxxxxxx If the xxxxxxx law xxxxxxx xxxxxxx favorable, as xxxxxxx did in xxxxxxx when ACRS xxxxxxx passed and xxxxxxx lives were xxxxxxx considerably, then xxxxxxx xxxxxxx tend xxxxxxx be favored.

                xxxxxxx law changes xxxxxxx to xxxxxxx xxxxxxx turnover or xxxxxxx of real xxxxxxx It is xxxxxxx to understand xxxxxxx concepts since xxxxxxx laws are xxxxxxx xxxxxxx to xxxxxxx and these xxxxxxx affect the xxxxxxx risk xxxxxxx xxxxxxx opportunities for xxxxxxx and existing xxxxxxx 14-6

                What xxxxxxx should be xxxxxxx when deciding xxxxxxx to renovate xxxxxxx xxxxxxx To xxxxxxx whether a xxxxxxx should be xxxxxxx consider xxxxxxx xxxxxxx benefit associated xxxxxxx renovating the xxxxxxx versus not xxxxxxx the property.

 

Question xxxxxxx Why is xxxxxxx often done xxxxxxx xxxxxxx with xxxxxxx When properties xxxxxxx renovated, the xxxxxxx often xxxxxxx xxxxxxx opportunity to xxxxxxx the entire xxxxxxx Thus, the xxxxxxx may be xxxxxxx to borrow xxxxxxx in addition xxxxxxx xxxxxxx is xxxxxxx for the xxxxxxx especially if xxxxxxx investor xxxxxxx xxxxxxx obtain a xxxxxxx loan on xxxxxxx entire property xxxxxxx than obtain xxxxxxx second mortgage xxxxxxx cover the xxxxxxx xxxxxxx The xxxxxxx amount of xxxxxxx that the xxxxxxx will xxxxxxx xxxxxxx to borrow xxxxxxx usually based xxxxxxx a percentage xxxxxxx the estimated xxxxxxx of the xxxxxxx after renovation xxxxxxx xxxxxxx 14-8

                xxxxxxx would refinancing xxxxxxx an alternative xxxxxxx sale xxxxxxx xxxxxxx property?

                Refinancing xxxxxxx increase financial xxxxxxx Refinancing at xxxxxxx higher loan-to-current-value xxxxxxx may provide xxxxxxx investor with xxxxxxx xxxxxxx to xxxxxxx This, to xxxxxxx extent, is xxxxxxx alternative xxxxxxx xxxxxxx of the xxxxxxx No taxes xxxxxxx to be xxxxxxx on funds xxxxxxx by additional xxxxxxx whereas taxes xxxxxxx xxxxxxx to xxxxxxx paid if xxxxxxx property is xxxxxxx 14-9

                xxxxxxx xxxxxxx tax law xxxxxxx create incentives xxxxxxx investors to xxxxxxx their properties xxxxxxx other investors?

                xxxxxxx law changes xxxxxxx xxxxxxx relative xxxxxxx of existing xxxxxxx new investors xxxxxxx the xxxxxxx xxxxxxx If the xxxxxxx law becomes xxxxxxx favorable as xxxxxxx did in xxxxxxx this tends xxxxxxx favor existing xxxxxxx xxxxxxx the xxxxxxx law becomes xxxxxxx favorable, as xxxxxxx did xxxxxxx xxxxxxx when ACRS xxxxxxx passed and xxxxxxx lives were xxxxxxx considerably, then xxxxxxx investors tend xxxxxxx be favored.

                xxxxxxx xxxxxxx changes xxxxxxx to affect xxxxxxx turnover or xxxxxxx of xxxxxxx xxxxxxx It is xxxxxxx to understand xxxxxxx concepts since xxxxxxx laws are xxxxxxx subject to xxxxxxx and these xxxxxxx xxxxxxx the xxxxxxx risk and xxxxxxx opportunities for xxxxxxx and xxxxxxx xxxxxxx 14-10

                How xxxxxxx are taxes xxxxxxx the decision xxxxxxx sell a xxxxxxx are important xxxxxxx a number xxxxxxx xxxxxxx If xxxxxxx property is xxxxxxx capital gains xxxxxxx must xxxxxxx xxxxxxx paid.  This xxxxxxx the opportunity xxxxxxx of selling xxxxxxx keeping the xxxxxxx Also, tax xxxxxxx may have xxxxxxx xxxxxxx the xxxxxxx was purchased.  xxxxxxx means that xxxxxxx depreciation xxxxxxx xxxxxxx to a xxxxxxx investor might xxxxxxx better or xxxxxxx than that xxxxxxx the current xxxxxxx is using.  xxxxxxx xxxxxxx the xxxxxxx that a xxxxxxx investor can xxxxxxx relative xxxxxxx xxxxxxx which the xxxxxxx owner can xxxxxxx by keeping xxxxxxx property.

 

Question 14-11

                xxxxxxx tax considerations xxxxxxx in renovation xxxxxxx xxxxxxx the xxxxxxx may result xxxxxxx an increased xxxxxxx basis xxxxxxx xxxxxxx tax deductions.  xxxxxxx there may xxxxxxx tax credits xxxxxxx for renovating xxxxxxx property.

 

Question 14-12

                xxxxxxx are the xxxxxxx xxxxxxx costs xxxxxxx renovation?

                In xxxxxxx renovation can xxxxxxx many xxxxxxx xxxxxxx increasing rents, xxxxxxx vacancy, lowering xxxxxxx expenses and xxxxxxx the future xxxxxxx value.

 

Question 14-13

                xxxxxxx you think xxxxxxx xxxxxxx more xxxxxxx less risky xxxxxxx a new xxxxxxx can xxxxxxx xxxxxxx risky because xxxxxxx the uncertainty xxxxxxx to the xxxxxxx of the xxxxxxx It is xxxxxxx easier to xxxxxxx xxxxxxx costs xxxxxxx new construction xxxxxxx to the xxxxxxx of xxxxxxx xxxxxxx older building xxxxxxx may have xxxxxxx structural and xxxxxxx problems.

 

Question 14-14

                xxxxxxx is meant xxxxxxx the “incremental xxxxxxx xxxxxxx refinancing?”

                xxxxxxx the interest xxxxxxx is higher xxxxxxx the xxxxxxx xxxxxxx amount, the xxxxxxx cost of xxxxxxx additional funds xxxxxxx is even xxxxxxx than the xxxxxxx on the xxxxxxx xxxxxxx This xxxxxxx due to xxxxxxx fact that xxxxxxx higher xxxxxxx xxxxxxx to be xxxxxxx on all xxxxxxx funds borrowed, xxxxxxx just the xxxxxxx funds.

                For xxxxxxx to be xxxxxxx xxxxxxx strategy, xxxxxxx effective cost xxxxxxx the debt xxxxxxx be xxxxxxx xxxxxxx the unlevered xxxxxxx on the xxxxxxx being financed.

 

Question xxxxxxx In general, xxxxxxx kinds of xxxxxxx incentives are xxxxxxx xxxxxxx rehabilitation xxxxxxx real estate xxxxxxx property?

There are xxxxxxx tax xxxxxxx xxxxxxx rehabilitation.  For xxxxxxx investment tax xxxxxxx are available xxxxxxx certain rehabilitation xxxxxxx A property xxxxxxx in service xxxxxxx xxxxxxx may xxxxxxx eligible for xxxxxxx 10% credit xxxxxxx a xxxxxxx xxxxxxx is a xxxxxxx historic structure xxxxxxx be eligible xxxxxxx a 20% xxxxxxx There are xxxxxxx credits available xxxxxxx xxxxxxx of xxxxxxx income housing.

 

Question xxxxxxx What are xxxxxxx main xxxxxxx xxxxxxx corporations may xxxxxxx to own xxxxxxx estate?

There are xxxxxxx number of xxxxxxx a corporation xxxxxxx decide to xxxxxxx xxxxxxx than xxxxxxx real estate.  xxxxxxx may find xxxxxxx owning xxxxxxx xxxxxxx expensive than xxxxxxx when considering xxxxxxx cost of xxxxxxx and the xxxxxxx benefits of xxxxxxx The corporation xxxxxxx xxxxxxx want xxxxxxx have more xxxxxxx over the xxxxxxx estate xxxxxxx xxxxxxx possible with xxxxxxx It may xxxxxxx feel that xxxxxxx real estate xxxxxxx diversification of xxxxxxx asset base.

 

Question xxxxxxx xxxxxxx factors xxxxxxx tend to xxxxxxx leasing more xxxxxxx than xxxxxxx xxxxxxx of leasing xxxxxxx be less xxxxxxx the cost xxxxxxx owning the xxxxxxx especially if xxxxxxx company can xxxxxxx xxxxxxx the xxxxxxx benefits associated xxxxxxx owning.  The xxxxxxx may xxxxxxx xxxxxxx concerned about xxxxxxx effect that xxxxxxx real estate xxxxxxx have on xxxxxxx income and xxxxxxx sheets.  It xxxxxxx xxxxxxx prefer xxxxxxx flexibility associated xxxxxxx leasing, especially xxxxxxx the xxxxxxx xxxxxxx plans to xxxxxxx the space xxxxxxx a short xxxxxxx of time.

 

 

Question xxxxxxx Why might xxxxxxx cost of xxxxxxx xxxxxxx loan xxxxxxx greater than xxxxxxx cost of xxxxxxx unsecured xxxxxxx xxxxxxx to finance xxxxxxx real estate?

                xxxxxxx loans are xxxxxxx on a xxxxxxx basis for xxxxxxx estate income xxxxxxx xxxxxxx means xxxxxxx the risk xxxxxxx default must xxxxxxx built xxxxxxx xxxxxxx mortgage interest xxxxxxx A corporation xxxxxxx a high xxxxxxx rating may xxxxxxx that it xxxxxxx borrow money xxxxxxx xxxxxxx cheaper xxxxxxx based on xxxxxxx credit worthiness xxxxxxx the xxxxxxx xxxxxxx is, the xxxxxxx may be xxxxxxx risky than xxxxxxx specific property xxxxxxx the company xxxxxxx to finance.

 

Question xxxxxxx

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