Management 180

Full Service Gross Lease
Tenant primarily pays base rent with a few add-ons
Triple Net Lease (NNN)
Tenant pays base rent plus operating expenses (property tax,insurance, utilities)
Modified Gross Leases
Somewhere in between the above two configurations, subject to
negotiation and can be complex, depending on the situation
What separates real estate investments from government treasury securities?
Risk premium (or “spread”)
What is a cap rate?
Measures unleveled yield, measures all the returns on assets on the property assuming it was bought all cash, and no borrowed funds.
Active debt?
Loan origination (acting as a lender and making loans), loan purchases on secondary market
Passive debt?
Pass through certificates, mortgage REITs
Active equity
ownership of rental property, development
Passive equity
equity REIT, Limited Partnership (LP) shares
What is an REIT
Real Estate Investment Trust – tax-advantaged entities that trade like stocks. (Established by Congress in 1960 to help smaller investors make investments
in large-scale income producing real estate. Currently there are about 200 public REITs in the U.S., with $475B in assets. 90% of taxable income paid out as dividends. – because of this it competes
with fixed income securities.)
Private Equity Funds
Pools of capital raised from investors to make debt and equity RE investments.
“Core” assets
include properties that are already stabilized, with tenants and steady income streams in place. These are typically fairly lower risk
“Value-add” assets
include properties that are in need or repositioning, re-tenanting, or change of use. They are often moderately risky, based on the less-than-certain likelihood of achieving expected results
“Opportunity” assets
include ground-up development, distressed deals, and properties that exhibit a high level of risk and uncertainty. Opportunity investors require high returns to compensate themselves for the inherently higher level of risk and uncertainty
Future value eqn.
FV = P x (1+r)^n, where
P = initial payment
rP = accumulated interest r = interest rate
Present value definition
represents amount of money I would need to put away today, in order to guarantee myself $1 at certain point in the future.
Present Value Eqn.
PV = F/(1+r)^n
What commercial real estate has the lowest risk/ cap rate?
What kind of leases are on multifamily?
full service gross
whats kind of leases are used for industrial real estate?
triple net leases
What kind of rent do retail tenants pay?
percentage rent clauses
How is the risk on office buildings?
high risk, especially as tenants get larger
What types of leases on office buildings?
modified gross lease
Real Estate is a “_____ game”
______ is simply the process of making adjustments to cash flows to account for time and risk.
What causes a normal yield curve?
investors require a higher rate of return for their capitol over longer periods of time.
Also called the “spread”, what is added to the risk free rate when applying yield curves to real estate.
risk premium
What occurs during a “bubble” real estate market?
risk premiums decline unreasonably, causing RE prices to rise faster than cash flows.
Why is equity riskier than debt?
It is paid second, thus higher rates of return are demanded.
Why is Real Estate difficult to compare against other assets?
sparse, contradictory data. few reporting periods due to quarterly appraisal estimates, escrow, etc.
Potential gross rent
amount of money collected with no vacancies or uncollectibles
Effective gross income (EGI)
potential gross rent adjusted for vacancies and uncollectables
What is the vacancy factor for a strong market? Weak market?
3% and 5%
What is the difference between vacancies and write off/delinquencies?
unoccupied unit vs. occupied units with faulty payments
What is the “wildcard” expense in real estate?
Maintenance and repairs
Exit cap
cap rate to be used in the year of exit
Discount rate
opportunity cost of capital, expected return of investments of similar risk
Reversion value
selling price, equals the NOI of the final year divided by the exit cap

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