© 2013 All rights reserved. Chapter 17 Commercial and Investment Real Estate1 New York Real Estate for Salespersons, 5 th e By Marcia Darvin Spada Cengage

© 2013 All rights reserved. Chapter 17 Commercial and Investment Real Estate 1

New York Real Estate for Salespersons, 5th e

By Marcia Darvin SpadaCengage Learning


Chapter 17

Commercial and Investment Real Estate


Chapter 17 Key Terms

Anchor tenant

Capitalization rate

Cash flow/before tax

cash flow/after tax

cash flow

Cash on cash return

Common Areas

Debt Service

Lease Escalation

Clause

Leverage

Net operating

income/gross income


Chapter 17 Key Terms (continued)

Pro forma statement

Rate of Return

Tax ShelterTime value of moneyUsable square

footage/rentable square footage

© 2013 All rights reserved.

Rate of Return$ Rate of Return

Percentage of income that

the investor receives

back on an investment

Tom buys an income

property for $175,000.

He sells it 6 mos. later

for $200,000. What is

his percentage of

return?

Investment x percentage of return = dollars in profit

$175,000 X ___ = $25,000Factor missing: divide and

convert decimal to percentage

$25,000 ÷ $175,000 = _____

Answer: 7% (rounded for 6 mos; 14% (rounded) for the yearChapter 17 Commercial and Investment

Real Estate 5


Investment AnalysisTime value of

money

Holdings periodplanning

LeverageAvailablefinancing

Proforma schedule

Chapter 17 Commercial and Investment Real Estate 6


Characteristics of Real Estate Investments

Risk

Rate ofReturn

LiquidityLeverage

Debt to Equal Ratio

And Leveraging



Types of Investment Properties

IndustrialProperties

Retail Centers

Mixed UsedBuildings

ResidentialBuildings

Office Buildings

Unimproved Land

TYPES



Property Analysis and Terminology Cash World: Deriving the

Net Operating IncomeGross income is

received without deducting expenses

The result of deducting operating expenses is net operating income

Mortgage principal and interest payments are called debt service

Cash World: Deriving the Before-Tax Cash FlowMeasured before

taxes are considered

Formula for Equity Dividend Rate: Cash-on-Cash Return

Annual before-tax cash flow/Total Cash invested=Cash-on-cash return



Cash Flow

Cash flow

Net proceeds after

all expenses are

met

either before or

after taxes

Income = $500,000

Expenses =

$300,000

Cash flow (net

return) = $200,000



Tax WorldFormula for

deriving the income tax:

Total Property Income

-Deductions, allowable credits and exemptions

=Taxable income

Value overview by income capitalizationCapitalization

formula:

Value x capitalizations

rate=annual net income



Analysis of Income, Rate, and Value (IRV)

I = IncomeR = RateV = Value or

Sales Price

I ÷ R = V

R x V + I

I ÷ V = RI

R V


Commercial LeasingBuilding amenities

Type of lease

Lease duration

On-site management

Chapter 17 Commercial and Investment Real Estate

13


Commercial LeasesSquare Footage

Usable square footage- area contained within the space that the tenant occupies

Rentable Square FootageSquare footage of

the total area

Loss and Add-On Factors

Common Areas



Concerns of Commercial Tenants

LocationLocationLocationLocation

Building designBuilding designBuilding designBuilding design

Effective rentEffective rentEffective rentEffective rent



Lease Clauses

Subordination, nondisturbance and attornment agreement

Estoppel certificateUse clauseType of leaseBuilding amenitiesOn-site managementThe tenant mix In the buildingLease duration



Commercial LeasesIndex lease

Percentage lease

Gross Net lease (triple-

net) lease

Graduated lease

Commercial leases generally include lease escalation clauses



Discounted Investment PropertyForeclosed property-property sold at

auction by lender

Short sale-lender allows property to be sold at a loss

Other distressed property-properties in depressed areas or in disrepair



Purpose of Lease Escalation Clause

Fixed percentage

increase-indexedescalation

Porter’swage

escalationformula

Direct operating

cost

Real propertytax clause

Operating stop/Tax

stop clause

Base year

Proportionateshares of

occupancy

Purpose



Marketing Investment Properties Capital

improvement budget Cash flow analysis

and projection Engineering review Feasibility study Income and expense

analysis Lease review

Legal review and compliance verification

Marketing analysis and/or appraisal

Review of existing and proposed financing

Title history


Documents

© 2013 All rights reserved. Chapter 17 Commercial and Investment Real Estate1 New York Real Estate for Salespersons, 5 th e By Marcia Darvin Spada Cengage