Flashcards in Chapter 9 Deck (19)
How does the decision to offer a gross versus net lease impact the value of a property and future cash flows?
*Gross lease-owners pays everything
*net lease-lessee pay utilities, repairs, taxes, insurance, etc
If tenants negotiate gross lease then a greater burden is placed on the owner as it must have cash on hand to pay for expenses.
Why does vacant land offer more utility than improved land?
It offers more flexibility in terms of development opportunities.
How does an asset manager determine the highest and best use for a property?
An asset manager needs to consider several factors in determining the highest and best use, many of which can be done via a market analysis. In determining highest and best use, consideration must be given to: financial requirements to meet highest and best use, environmental considerations, zoning and other legal issues, and social concerns.
What are some examples that demonstrate how social trends, economic conditions, governmental actions, capital markets, and environmental considerations impact a property's value?
social trends-increasing numbers of owners in household means dual incomes and therefore more expensive
changes in employment and wage levels-if unemployment is high people don't invest in properties
government regulations-zoning rules may impact expenses associated with ownership
capital markets-high mortgage rates means borrowers won't take on new loans
environmental-presence of asbestos
How do the three basic approaches to value differ?
Cost Approach-focuses on construction and land
Market Comparison Approach-relies heavily on sales of comparable properties
Income Capitalization Approach-based on net operating income
Why is it important for an asset manager to consider how the quantity of income is measured in relation to valuing properties?
By establishing a realistic income value for a property a stringer valuation for determining what should be paid for a property is possible.
Why is the quality of income as important as the quantity?
Because it determines the dependability or durability of future income.
Fixed option leases are beneficial in most instances to which party involved in this contractual relationship?
Identify four items that impact the value created by leasing?
Current rental income
Gross versus net leases
Credit worthiness of tenants
Staggering lease expirations to minimize risk.
What is the purpose of a "go-dark clause" in relation to leasing value?
The clause gives the tenant the option to close for business. It does not allow for the termination of the tenant's lease.
Define market value
The most probable sales price of a property
Explain the four fundamental economic principles used in property valuation by asset managers and others.
Utility-does it fill a need or provide a desired service
scarcity-limited supply relative to demand
desire-what someone is willing to pay
purchasing power-ability of a buyer to pay
Explain the concept of highest and best use.
The lawful use of a property that produces the greatest net income.
Four criteria-legal permissibility, physical possibility, financial feasibility, maximum profitibility
Define the economic principle of substitution.
When several similar items are available the one with the lowest price will attract the greatest demand and widest distribution.
Define DCF (Discounted Cash Flow).
A financial analysis tool that gives the present value of an investment and is used for calculating comparable evaluations for investments with future cash flows.
In relation to impacting the quantity of income, describe the three methods asset managers can use to improve NOI (net operating income).
Conversion-making unusable space into income producing space
Improvement-improving existing space to create more income
Cost reduction-reducing operating cost to increase net income
Identify four unique income sources that are not necessarily related to conversion, improvement, or cost reduction.
Rooftop communications-paid for dish on roof
Cable riser space-similar to rooftop communications
Building measurements-new measurement regulations
Options-tenant pays for temporary use of space
Short term sales-holiday kiosks
Describe the credit analysis process as it relates to the quality of income.
1) good track record of paying bills on time
2) history of profitability for past three years
3) balance sheet shows adequate net worth
4) positive trend in financial growth, company stability