Real Estate Expense Property
In this chapter we discuss real estate capital expense property.
adjusted basis
The cost or other original basis of property reduced by adjustments such as depreciation allowed or allowable and increased by capital improvements and other adjustments.
appreciation
an increase in price or value
basis
accounting procedure used to determine the capital gain or loss after the sale of property it is equal to purchase price plus capital improvements, less depreciation
boot
extra, non like kind of property that can be a part of a like kind exchange to make up for pricing disparity between like kind properties
capital gain
, the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the seller
depreciation
a decrease in price or value
home acquisition debt
A mortgage a taxpayer take out to buy, build, or substantially improve a qualified home.
home equity debt
Debt secured by a personal residence to the extent the debt does not exceed the owner’s equity in the residence
passive income
Income resulting from business activities in which you do not actively participate
portfolio income
A category of income, for tax purposes, generated by investments in securities consisting of dividends, interest and capital gains. aka investment income
recaptured depreciation
Represents depreciation that was taken in anticipation of a decline in value that ultimately DID NOT materialize. Since property received depreciation tax shield, you now have to pay taxes on the expense you took in the past. Basically took TOO MUCH depreciation in the past.
straight-line depreciation
charging an equal amount of depreciation expense for a plant asset in each year of useful life
tax-deferred exchange
an IRS sanctioned method for real estate investors to defer taxation of capital gains by making a property exchange rather than by selling the investment property
80/20 rule
the idea that 80 percent of a firm’s sales are obtained from 20 percent of its customers
alteration agreement
a written agreement, signed by co-op shareholder tenantefore any renovations, modifications, repairs, or alterations can begin
assigning agreement
encompasses the transfer of rights held by one party—the assignor—to another party—the assignee
assigning a contract
Assigning the purchase
FROM to property or a condominium unit to
another buyer before that property or unit
is closed.
board package
Presented to the co-op(or sometimes condo) board of directors and often includes financial qualifications, employment verification, letters of reference, and other material requested by the board.
bylaws
The rules and regulations by which a corporation is governed; (Bylaws can be changed or amended).
common areas
places that are usually owned jointly by all unit owners
condominium
housing consisting of a complex of dwelling units (as an apartment house) in which each unit is individually owned
condominium act
Article 9-B of the Real Property Law is NY States law covering the establishment of condominiums.
condominium declaration
The document which establishes a condominium ascribes the property rights of the unit owners.
condop
Organized like a condo, the developer retains (only) 20% of the property for commercial purposes, such as office, retail, professional and/or garage space.
cooperative
a building owned by a corporation where residents are shareholders in the corporation; each shareholder receives a proprietary lease on an individual unit and the right to use to common areas
cooperative policy statement #1 (cps-1)
Applicable to cooperatives, condominiums, and homeowners associations and is used to test the market, explore the venture, and determine the needs to meet a variety of conditions.
covenants, conditions, and restrictions (cc&rs)
Private agreements that affect the land use. They may be enforced by an owner of real estate and included in the seller’s deed to the buyer.
flip tax
A fee imposed by the co-op board for the transfer of ownership during the sale of the unit.
flipping
Purchasing a property and quickly reselling it for a profit, usually after fixing it up.
horizontal property acts
Laws that create the legal framework for creating a condominium form of ownership and make it possible to define actual ownership rights.
house rules
Rules and requirements established for condo or co-op tenants.
letter of intent
A letter signifying intention to enter into a formal agreement and setting forth the general terms thereof.
limited common areas
Areas in a condominium or co-op owned by all but used by only the owner. (parking spots)
maintenance fees
Monthly fees paid by condominium owners or co-op shareholders for common area expenses like utilities, building maintenance, and upkeep.
offering plan
Type of document, provided by the sponsor of a condominium, contains detailed information on floor plans, estimated expenses, building materials ect…
proprietary lease
Sometimes called an “owner’s” lease. It is held by a person who owns shares in a stock cooperative. They own personal property which entitles them to this type of lease.
recognition agreement
.A document which a cooperative corporation recognizes certain rights of a lender in a particular cooperative unit
right of first refusal
Right to have the first chance to buy or lease property if the owner decides to sell or lease.
share loan
A co-op loan signifying a buyer is purchasing shares in a corporation, rather than a mortgage for ownership of property.
simultaneous closing
A seller financing technique used when an investor or seller creates a private mortgage note and then simultaneously closes with the buyer on the same day.
sponsor
aka developer , a sponsor is the person/corporation or other entity that is part of the sale and development of a condo or coop property
actual eviction
the physical ouster of a tenant from the leased premises
anchor tenant
The tenant in a shopping center that leases the largest space and will draw the greatest amount of traffic e.g., grocery store in a plaza or a major department store in a mall.
building manager
Oversees the management of one building for a property owner.
capital expense
Expenses that do not flow directly to the income statement, instead they appear as assets on the balance sheet
capital reserve budget
a budget for capital expenses that are not fixed (variable expenses)
construction eviction
The name of the process by which a tenant is allowed to abandon a leased property without legal consequence if the landlord causes that leased property to become uninhabitable
corrective maintenance
Actual repairs that keep building equipment functioning; i.e., repairing a boiler, fixing a leaky faucet, fixing an air conditioner
cosmetic maintenance
Maintenance that increases a property’s appeal.
fiduciary
holding or held in trust
general agent
someone authorized to transact every kind of business for principal
lessee
a tenant who holds a lease
lessor
someone who grants a lease
management agreement
Document setting up an agency relationship between owner and property manager who is general agent establishing the rights and duties of each party
management proposal
A property manager’s report to the owner of a plan for supervising the property.
operating budget
a budget for current expenses as distinct from financial transactions or permanent improvements
preventative maintence
routine maintenance and inspections that keep equipment and the property in good working order.
principal
buyer or seller
property management
Management of another’s property for compensation
property manager
Property manager (agent) is hired by the owner (principal) to maintain owner’s investment and ensure that the property produces income
rent roll
A rent roll shows the name of each tenant, amount of rent, expiration date of each lease, and amount of security deposits.
resident manager
An employee of the property management firm and its representative on the premises.
risk management
identfying managing and minimizing the potential risk on the property
stabilized budget
When the budgeted/allocated funds used to cover operating expenses remain constant for a period of time.
variable expense
an expense that changes from month to month
amenity purchaser
Person who values a
property based on its ability to fulfill his
specific business needs, unlike investors
who value a property based primarily on its
investment return.
anchor tenant
The tenant in a shopping center that leases the largest space and will draw the greatest amount of traffic e.g., grocery store in a plaza or a major department store in a mall.
clear span
Open distance between inside faces of support members
common area maintenance
maintenance of common areas shared by tenants in a condo or coop such as hallways, garages, etc
consumer price index (cpi)
An index published monthly by the US Bureau of Labor(BLS) Standards considered by many to be the basic indicator of inflation in the US
escalation clause
Allows lender to raise interest rate. (Adjustable Rate Mortgage, ARM).
loft
floor consisting of open space at the top of a house just below roof
loss factor/load
Ratio of rentable space to usable space.
(Rentable Sq.Ft. – Usable Sq.Ft.) / Rentable Sq.Ft. = Loss Factor
market value
the price at which property would sell
net lease
Lease requiring tenant to pay not only rent but also taxes, insurance, utilities and repairs
pass-through
mortgage backed securities issue by ginnie mae which pay interest and principal payments on a monthly basement
porter’s wage escalation formula
Ties the rent escalation to the wages of the buildings cleaning and building maintenance personnel(Called “porters”)
pro-rate share
a proportionate share
rentable square footage/gross square footage
Total floor area of a building including shared common areas., -total square feet of a facility
-est. by measuring the perimeter of a facility and multiplying the result by the number of levels
-includes space not necessarily usable
retail investment property
Where a specific type of business activity occurs-retail sales and related business activities.
usable square footage/net square footage
The amount of actual space within the perimeter of the tenant’s premises., to the floor area that can be leased
before tax cash flow
A measure of the expected annual cash flow from the operation of a real estate investment after all expenses but before taxes.
capitalization rate
The rate of return a property will produce on the owner’s investment.
cash flow
Movement of the money you receive and the money you spend.
cash-on-cash return
the annual net cash flow after operating expenses divided by the cost of acquisition
debt service
Periodic payment of the principal and interest on a loan.
effective gross income
The total annual income the rental property produces after subtracting vacancy losses and adding miscellaneous income.
fixed expenses/variable expenses
fixed expenses- expenses that are paid regularly, usually every month
variable expenses- expenses that change monthly
gross income
the total amount of income from wages before any payroll deductions
leverage
investing with borrowed money as a way to amplify potential gains (at the risk of greater losses)
liquidity
being in cash or easily convertible to cash
market value
the price at which property would sell
net operating income
income before interest and income taxes have been deducted
operating statement
a financial statement that gives operating results for a specific period
pro forma
a schedule of the projected income and expenses for a real estate investment over a given period
rate of return
The return on an investor’s capital. Also called Yield. Expressed in a percentage
return of/on investment
Return On = Interest / Return Of = Principal
risk
the probabilities that events might not occur as expected