Commercial Real Estate Flashcards

Commercial Real Estate Flashcards Tenant ImprovementsOwners negotiate a financial allowance with tenants toward cost of making space ready for occupancy (lighting, flooring) IRR LookbackProvides the limited partner a minimum return before a sharing of investment cash proceeds is made to the managing partner.Benefits of a fixed long-term leaseIf the market increases at the time the lease is signed the tenant is locked in to a high $/sq.ft Promotional InterestAny distribution of cash profits in excess of the percentage of equity capital contributed by the partners Management RiskHow capable is the management team with dealing with day to day operations Wholly OwnedThis structure is vested in an individual party / entity without shared ownership If demand exceeds supplyThe value of the property will go up in a sufficient market, rent will increase as the demand increases.Commercial PropertiesOffice, Retail and Warehouse LesseThe tenant who occupies and uses the space and pays rent

• leasing termsIt's locked and must have capital
• Key Risk Factors of CRE investmentProperty condition, cash flow, and capital.

Joint VentureThis structure is a partnership sharing ownership between a real-estate specialist and a capital-providing partner.Apartments1 year leases, no capital costs, it is a basic human need (shelter).Financial RiskIncreases as the amount of debt on a real estate investment increases.Debt and Public Capital MarketsCommercial Mortgage Backed Securities Leasing CommissionsOwners engage leasing agents or "brokers" to provide marketing, property tours and identify and sign potential tenants. Cost is usually based on the value of the lease income stream, around 5%.LessorThe owner of the property Debt and Private Capital MarketsInsurance companies, FNMA, FLMC, Banks, and private equity funds.Contents of the LeaseParties of the lease (lessor and lesse), the date of the lease, the occupancy date, identification of the area being leased, the length of the lease term, base or minimum rent, conditions of the space, allowable uses of the space, subletting (tenant may need less space than originally may be allowed to sublease to a third party), use of common

areas, responsibility for maintenance, etc.Band of Investment Theorysupply and demand determine the price of a particular property.Property TypesOffice, Retail, Warehouse, Apartments Interest Rate RiskChanges in interest rates will affect the price of investments

Due DiligenceThe investigation that the investor should undertake when considering on acquiring a property. The process of discovering information needed to assess whether or not investment risk is suitable give the set of investment objectives.Limited PartnerRole is their capital and receives 90% of equity capital.Class C Risk SegmentHigh risk, very risky cash flow, new development or deep physical renovation, high leverage (75%-80%), 15%-20% IRR.Equity and Private Capital MarketsPrivate equity funds and high net worth investors.Business RiskLosses due to fluctuations in economic activity that affects income produced by property. Ex) Property with a well diversified tenant mix is less likely to be affect by this.Class A Risk SegmentLow risk, stable cash flow, high quality property and location, low leverage (<50%), 7-9% IRR) Hard AssetsReal estate, timber, agriculture, energy, etc.Cost of Capital (the Cap Rate)The rate of return required by the buyer of a particular property given the risks of that property. Net Operating Income of the property/Purchase Price Managing PartnerRole is their expertise and receives 10% of equity capital Asset ClassesStocks (.45-.55), Bonds (.35-.45), Alternative Investments (high yield .10-.20) Legislative RiskChanges in regulations by the government can affect the profitability of an investment Liquidity RiskWhen a continuous market of buyers, sellers, and frequent transactions are no longer available.Equity and Public Capital MarketsREIT's Real Estate Investment Trusts Inflation RiskUnexpected inflation can reduce the investors rate of return if income from investment does not increase.Risks of a fixed long-term leaseThe owner is locked in even if the market increases.Environmental RiskAffected by changes in environment or sudden awareness of existing environment Class B Risk SegmentModerate risk, enhances existing cash flow, good quality with renovation strategy, high leverage (75%-80%),

10-14% IRR