1. © 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 Learning

2. © 2013 All rights reserved. Chapter 17 Commercial and Investment Real Estate2 Chapter 17 Commercial and Investment Real Estate

3. © 2013 All rights reserved. Chapter 17 Commercial and Investment Real Estate3 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

4. © 2013 All rights reserved. Chapter 17 Commercial and Investment Real Estate4 Chapter 17 Key Terms (continued)  Pro forma statement  Rate of Return  Tax Shelter  Time value of money  Usable square footage/rentable square footage

5. © 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 ___ = $25,000 Factor missing: divide and convert decimal to percentage $25,000 ÷ $175,000 = _____ Answer: 7% (rounded for 6 mos; 14% (rounded) for the year Chapter 17 Commercial and Investment Real Estate5

6. © 2013 All rights reserved. Investment Analysis Time value of money Holdings period planning Leverage Available financing Proforma schedule Chapter 17 Commercial and Investment Real Estate 6

7. © 2013 All rights reserved. Characteristics of Real Estate Investments Risk Rate of Return LiquidityLeverage Debt to Equal Ratio And Leveraging Chapter 17 Commercial and Investment Real Estate 7

8. © 2013 All rights reserved. Types of Investment Properties TYPES Unimproved Land Office Buildings Residential Buildings Mixed Used Buildings Retail Centers Industrial Properties Chapter 17 Commercial and Investment Real Estate 8

9. © 2013 All rights reserved. Property Analysis and Terminology Cash World: Deriving the Net Operating Income Gross 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 Flow Measured 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 Chapter 17 Commercial and Investment Real Estate9

10. © 2013 All rights reserved. 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 Chapter 17 Commercial and Investment Real Estate10

11. © 2013 All rights reserved. Tax World  Formula for deriving the income tax: Total Property Income -Deductions, allowable credits and exemptions =Taxable income  Value overview by income capitalization Capitalization formula: Value x capitalizations rate= annual net income Chapter 17 Commercial and Investment Real Estate11

12. © 2013 All rights reserved. Chapter 17 Commercial and Investment Real Estate12 Analysis of Income, Rate, and Value (IRV) I = Income R = Rate V = Value or Sales Price I ÷ R = V R x V + I I ÷ V = R I R V

13. © 2013 All rights reserved. Commercial Leasing Building amenities Type of lease Lease duration On-site management Chapter 17 Commercial and Investment Real Estate 13

14. © 2013 All rights reserved. Commercial Leases Square Footage Usable square footage- area contained within the space that the tenant occupies Rentable Square Footage Square footage of the total area Loss and Add-On Factors Common Areas Chapter 17 Commercial and Investment Real Estate14

15. © 2013 All rights reserved. Concerns of Commercial Tenants Effective rent Building design Location Chapter 17 Commercial and Investment Real Estate15

16. © 2013 All rights reserved. Lease Clauses Lease duration The tenant mix In the building On-site management Building amenities Type of lease Chapter 17 Commercial and Investment Real Estate16

17. © 2013 All rights reserved. Commercial Leases  Index lease  Percentage lease  Gross  Net lease (triple-net) lease  Graduated lease Commercial leases generally include lease escalation clauses Chapter 17 Commercial and Investment Real Estate17

18. © 2013 All rights reserved. Discounted Investment Property  Foreclosed 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 Chapter 17 Commercial and Investment Real Estate18

19. © 2013 All rights reserved. Purpose of Lease Escalation Clause Purpose Proportionate shares of occupancy Base year Operating stop/Tax stop clause Real property tax clause Direct operating cost Porter’s wage escalation formula Fixed percentage increase- indexed escalation Chapter 17 Commercial and Investment Real Estate19

20. © 2013 All rights reserved. Marketing Investment Properties CCapital improvement budget CCash flow analysis and projection EEngineering review FFeasibility study IIncome and expense analysis LLease review LLegal review and compliance verification MMarketing analysis and/or appraisal RReview of existing and proposed financing TTitle history Chapter 17 Commercial and Investment Real Estate20