Commercial Real Estate SAE - Champion's School of Real Estate 495 Questions with Verified Answers,100% CORRECT

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Commercial Real Estate SAE - Champion's School of Real Estate 495 Questions with Verified Answers Productivity Management - CORRECT ANSWER Measuring the results from the use of available systems an... d tools for prospecting activities CRM - CORRECT ANSWER Contact Relationship Manager, a tool used to automate prospecting tasks and manage leads Geographic farming - CORRECT ANSWER A particular area that may include neighborhoods that a sales agent or broker markets for the solicitation of business Management plan - CORRECT ANSWER A schedule of activities that creates the ability to measure accomplished tasks _________ are an important way to offer a platform for advice and encouragement for agents - CORRECT ANSWER Business meetings Incremental evaluation - CORRECT ANSWER Evaluations that take place at pre-determined intervals, such as monthly ongoing evaluation - CORRECT ANSWER Takes place consistently throughout each week to help business owners monitor, assess, and analyze specific assets of their firms preventative controls - CORRECT ANSWER A type of financial control through assignment of duties, authorization, and verification, and access to equipment, cash, and other assets detective controls - CORRECT ANSWER A type of financial control that includes performance reviews, reconciliation of financial records, audits, inventories, and other investigative activities business activity management - CORRECT ANSWER A process that can help brokerage owners to recognize, define, and analyze critical risks, and opportunities data retention plan - CORRECT ANSWER A set of policies for handling sensitive information using protocols that meet federal, state, and local legal requirements information management - CORRECT ANSWER Systems that allow businesses to collect, store, organize retain, and communicate information lean management - CORRECT ANSWER The evaluation of a brokerage's structure to improve efficiency to maximize what it is that customers value about your business, always with an eye out for cost reduction vertical expansion - CORRECT ANSWER Growth through adding specialty departments horizontal expansion - CORRECT ANSWER Growth by enlarging the company through adding branch offices organic growth - CORRECT ANSWER Referred to as true growth, involves expansion through the company's own resources such as energy, personnel, creativity, and reputation inorganic growth - CORRECT ANSWER Growth by adding additional businesses from the outside to produce company growth merger - CORRECT ANSWER Growth by bringing two or more companies together, combining their assets acquisition - CORRECT ANSWER Growth through one company buying another company venture capital - CORRECT ANSWER Investment from outside resources used to grow or start a company mentor - CORRECT ANSWER An experienced agent who guides a newer agent through their first year of real estate comprehensive database - CORRECT ANSWER A list of properties and property owners within a geographical region time blocking - CORRECT ANSWER Separating periods of time for different activities intermediary brokerage - CORRECT ANSWER Brokerages that will represent both parties in a transaction caveat emptor - CORRECT ANSWER Let the buyer beware fair housing - CORRECT ANSWER Federal, state, and local laws that ensure the public has unobstructed access to housing CCIM - CORRECT ANSWER Certified Commercial Investment Member designation for commercial real estate agents who want to further their business practices through education and networking opportunities IREM - CORRECT ANSWER Institute of Real Estate Management is an international community of real estate managers dedicated to ethical business practices, maximizing the value of investment real estate, and promoting superior management through education and information sharing SIOR - CORRECT ANSWER Society of Industrial and Office Realtors is a professional organization that is affiliated with NAR ICSC - CORRECT ANSWER International Council of Shopping Centers is designed to advance the shopping center industry and to promote its role in the commercial distribution of consumer goods and services BOMA - CORRECT ANSWER Building Owners and Managers Association is an association of building owners, managers, developers, leasing professionals, corporate facility managers, asset managers, and providers of the products needed to operate commercial properties NARPM - CORRECT ANSWER The National Association of Residential Property Managers is an organization of managers of single-family and small multifamily properties diplomacy - CORRECT ANSWER The ability to handle clients and situations in a sensitive and effective way Agent Jay procures a buyer for the owner of a convenience store in a high-crime urban area. There have been 3 robberies, a fatal stabbing, and fatal shooting on the property in the last two years. The fatal stabbing occurred in the parking lot, after hours. The fatal shooting occurred inside the establishment during a robbery, killing the store clerk. The suspects were never apprehended. Jay knows the history of the property from watching the evening news. His buyer, however, lives in a different city, over 200 miles away. Are the seller or Agent Jay obligated to disclose the murders that took place on the property to the seller? - CORRECT ANSWER No T or F: The CCIM is the largest commercial real estate professional organization. - CORRECT ANSWER true T or F: Federal Fair Housing laws apply to both residential and commercial real estate transactions. - CORRECT ANSWER false T or F: Federal, state, and local fair housing laws ensure that only citizens have an unobstructed access to housing. - CORRECT ANSWER false T or F: The Canons of Professional Ethics and Conduct include loyalty as an article. - CORRECT ANSWER false T or F: The sale of a house is considered a good under the Deceptive Trade Practices and Consumer Protection Act. - CORRECT ANSWER true T or F: The primary duty of a real estate agent is to represent the interests of his or her client. - CORRECT ANSWER true T or F: The Consumer Protection Notice must be in a prominent location in each place of business the broker maintains. - CORRECT ANSWER true T or F: Intermediary allows a broker to work with a seller client and a buyer customer in the same transaction. - CORRECT ANSWER false T or F: Brokerage is not covered under the DTPA. - CORRECT ANSWER false Agent Business Plan - CORRECT ANSWER create a budget goal setting daily plan: must-dos, should-dos, could-dos 3 categories of time - CORRECT ANSWER income-generating activities support activities personal time The Canons of Professional Ethics and Conduct, part of TREC's Rules, include all of the following articles, except: - CORRECT ANSWER a. fidelity b. competency c. loyalty d. consumer information c. loyalty Section 535.2 of the TREC Rules require brokers to - CORRECT ANSWER maintain written policies and procedures and advise a sponsored sales agents of the scope of authorized activities Under the DTPA, _______________ are defined as tangible chattels. - CORRECT ANSWER goods Commercial real estate is often defined as any real estate that is _____. - CORRECT ANSWER not residential in nature Which of the following is a good reason for joining a big-name international commercial real estate firm? - CORRECT ANSWER a. no MLS b. good mentorship program c. the ability to keep your residential clients d. all of these b. good mentorship program Which statement regarding commercial real estate is false - CORRECT ANSWER a. pocket listings are rare and can be viewed at unethical b. it can take uo to 3 to 6 months for a deal to close c. No TREC-promulgated forms exist d. Attorneys are often involved in the transaction a. pocket listings are rare and can be viewed as unethical What do buyers and sellers look for in a commercial agent? - CORRECT ANSWER the ability to close deals supply and demand - CORRECT ANSWER The primary determinants of real estate values return on investment (ROI) - CORRECT ANSWER The primary factor motivating people to buy commercial real estate office park - CORRECT ANSWER Located in suburban areas are commercial centers ranging in size from low-rise (1 to 2 stories) to mid-rises, but rarely over four to five stories. Also known as a business park campus-style - CORRECT ANSWER Named due to their resemblance to university campuses, are commercial centers that are large and spread out over several acres of land, allowing for ample parking and not relying on foot traffic rban-style - CORRECT ANSWER Commercial centers that are in busy, developed, geographical regions but still outside the central business district. center business district (CBD) - CORRECT ANSWER Located within the heart of the city is home to banking, finance and mega insurance companies low-rise - CORRECT ANSWER Commercial development that is less than 7 stories mid-rise - CORRECT ANSWER Commercial development that is 7 to 25 stories high-rise - CORRECT ANSWER Commercial development that is more than 25 stories skyscraper - CORRECT ANSWER Supertall and mega-tall commercial buildings multifamily - CORRECT ANSWER Residential living facilities ranging from duplexes to multi-story apartment complexes and buildings walk-ups - CORRECT ANSWER A building with usually four to six stories without an elevator used for residential living garden-style apartments - CORRECT ANSWER Low-rise clusters of buildings with access to the landscaped outdoor areas surrounding the structure general purpose center - CORRECT ANSWER A category of shopping centers including neighborhood centers, strip centers, community centers, and regional/super-regional malls specialized purpose center - CORRECT ANSWER A category of shopping centers including power centers, lifestyle centers, and factory outlets limited purpose center - CORRECT ANSWER A category of shopping centers including airport retail centers single-purpose industrial - CORRECT ANSWER Large home improvement chains and warehouse-type retailers that take up to 90% of the gross leasable area of a power center and are dominant in the market and kill the competition speculative land - CORRECT ANSWER Land that will not be developed in the next 24 months non-speculative land - CORRECT ANSWER Land that will be developed in the next 12 to 24 months general purpose indstrial - CORRECT ANSWER Flexible spaces that can be adapted and configured for a variety of uses single purpose industrial - CORRECT ANSWER Designed and purpose-built for one specific type of industry or company Supply can be restricted by many factors, including: - CORRECT ANSWER zoning oridnances commercial agents will typically work with one or more of the following property types - CORRECT ANSWER office retail raw land for development special-use multifamily and apartments industrial hospitality/leisure Class A buildings - CORRECT ANSWER Class A buildings are usually recently developed properties in desirable, cosmopolitan areas that will attract sophisticated tenants. Class A office buildings are typically going to be newer properties, with quality construction. These properties are located in areas with easy access to major thoroughfares, and will often be landmark buildings that are known by name across the city. Many will include on-site gyms and delis or convenience stores. Leasing space in these properties will be expensive for tenants but will provide them with a strong market presence. Older buildings that have been renovated, painstakingly improved, and upgraded to include sought-after amenities can also carry an A classification in some markets. Class B buildings - CORRECT ANSWER Class B buildings are generally older, yet well-maintained properties that are in good locations. These properties may have once commanded a Class A rating and clientele, but have fallen in status due to age and competition from newer, higher-end properties. The building finishes are adequate but lack the quality and polish of a Class A property. Office buildings classified as Bs typically have good visibility from major arteries and some amenities, but owners cannot charge tenants premium rates. Building owners often renovate Class B buildings, creating outside seating, upgrading lobbies, elevators, and common areas to try to squeeze out an A rating to attract quality tenants. Class C buildings - CORRECT ANSWER Class C buildings are usually older properties (20 years and up) that are maintained as functional properties for tenants and residents. These properties often need upgrades or facelifts. Rent is on the lower end, and there are not many amenities. Office buildings typically do not go any lower than a C classification. Office space in Class C buildings can take a long time to lease as tenants interested in leasing in these properties often want to reduce overhead so they can use their money to put toward growing their businesses. Class buildings - CORRECT ANSWER Class D buildings rank the lowest, and in many markets, these are buildings that display obvious signs of deferred maintenance. These are older buildings, usually more than 30 years, that have been neglected or have not been appropriately maintained, and are often not in prime or preferred locations. Rents are typically below market and it is challenging for landlords to attract good tenants. Businesses that are not as address-conscious will typically choose to lease space in Class B or Class C buildings, depending upon their budget. Investors will often be interested in buying a Class C building, then renovating it to bring it up to today's basic standards. The idea behind this is to buy when the property is distressed at a high cap rate. Then put the money saved into rehabbing the property, and raise the rents. The investor will hold onto the property and sell it at a low cap rate in order to make money on the deal. Class A multifamily - CORRECT ANSWER Class A multifamily properties will be new builds with granite countertops, garden tubs, higher-grade appliances, usually stainless steel, in each unit. The property will boast a luxurious clubhouse with a resort-style pool and a well-equipped gym. Often, these properties will have high-walkability scores, close to shopping districts and entertainment. The apartment owner can charge premium rental rates for these properties. These high-quality properties tend to have a lower cap rate because investors are not going to realize a high cash flow. Operating expenses are high as the properties have professional management companies and many amenities to maintain. Class B multifamily - CORRECT ANSWER Class B multifamily properties will rent in the mid-range of the market and will be in desirable areas, but will not offer the amenities of a Class A property Class C multifamily - CORRECT ANSWER Class C multifamily units are clean but might not have central a/c, depending instead on window units to cool the apartments. Appliances are older, yet functional, and kitchens and bathrooms are merely utilitarian. Class C properties offer a higher cap rate than As or Bs, and many investors are interested in buying C-quality properties in B-quality locations. After the investors purchase the properties, they clean them up so that they can raise the rents. Class D multifamily - CORRECT ANSWER Class D multifamily properties are typically in economically depressed areas and often suffer from a great deal of deferred maintenance. These properties typically have higher cap rates because of the high risk involved. These properties will require a sizable investment for rehabilitation to bring them up to a higher standard. Commercial agents will also be able to classify multifamily properties by their rents. Remember, rental markets are different in each area, but let's look at a basic example of rents for a 2-bedroom apartment in different locations spanning an urban area. Lovely low-rise 63-unit property built in 1983 minutes away from the city, major freeways, and the airport. New roofs, floors, and appliances installed in the last year. Beautiful courtyard with relaxing pool and picnic area. All units are large and spacious, cable-ready and include A/C, ceiling fans, crown molding, and walk-in closets,. Property manager on site. Gross Rental Income is $550,000. Contact listing broker. - CORRECT ANSWER class c Recently remodeled 6-unit income-producing property $399,999! Property is one story, built in 1960. All units are 800 sq.ft. and all are currently rented for $750 per month. New floors, newer roof, freshly painted...11.0% cap rate. - CORRECT ANSWER class d Historic gem close to downtown entertainment district converted to residential loft units! Ground floor occupied by restaurant and bar space. Nine-story building built in 1910 contains 120 spacious residential lofts. Painted concrete floors, granite countertops, high-end appliances. Central a/c and elevator. Close to rail and major cross streets, this is a public transit rider's paradise! 100% occupied! - CORRECT ANSWER class b Brand-new upscale development located at busy major intersection. Mid-rise building features state-of-the-art fitness center, beautiful sparkling resort-style pool, entertainment lounge with Wi-Fi café, business center, and outdoor lounge with fireplace and gas grills. Multi-level parking garage onsite. Variety of floor plans. Each residence includes: granite countertops, custom cabinetry, stainless steel Energy Star appliances, 10' ceilings, built-in wine racks, oversized soaking tubs and walk-in showers available in select units. Full-size washer and dryer in each unit. - CORRECT ANSWER class a Super Champions Apartments is an 82-unit garden-style apartment community situated on 3.5 acres. Less than 10 miles from downtown, this two-story property was built in 1983, and has been well maintained. Beautifully landscaped with mature trees, this property includes a swimming pool, playground, and picnic area. Each unit includes a/c, ceiling fans, and balcony. Average occupancy is 100%, parking ratio 1.5/1,000 sq.ft. - CORRECT ANSWER class c shopping centre design classifications - CORRECT ANSWER straight-line (strip) L-shaped U-shaped T-shaped cluster triangle dumbbell double dumbbell shopping center characteristics - CORRECT ANSWER neighborhood shopping centers strip centers community centers regional malls power centers lifestyle centers factory outlets Business owners who require financing for special-purpose properties may apply through: - CORRECT ANSWER the small business administration 50/50 office/warehouse - CORRECT ANSWER This type of building is typically constructed out of heavy metal framing, complete with roller doors for easy loading and unloading of materials by large trucks and work vans. 50% of the space is air-conditioned office space; the other 50% is warehouse space. 50/50 warehouse/office spaces are perfect for companies involved in research and development, and small technology start-ups who need office space and work or lab space. semi-dock - CORRECT ANSWER Semi-Dock buildings are ideal for companies that employ box trucks for the movement of goods. Semi-docks allow trucks to back in and unload dollies onto the floor of the building because the lip of the truck will match up with the floor of the loading bay, making them perfect for warehouse and storage facilities. dock - CORRECT ANSWER Dock buildings are designed with the right door height and width for larger, semi-trucks and heavy moving equipment like forklifts and mobile cranes. Only 10 to 15% of the building serves as air-conditioned office space with the majority of the square footage allotted for large pallets of merchandise loaded and unloaded through multiple loading bays equipped with roller doors. There is usually a glass-walled office space with a view of the loading bays, from which a floor manager can supervise operations from all directions with an eye for safety. The loading docks are not flush with the back of the trucks. Instead, they slope downward, allowing for the truck to be backed in and unloaded or loaded by a forklift or crane. Large online retailers that need space in strategic locations are called: - CORRECT ANSWER fulfilment centers _______________ are larger than a strip or neighborhood center and are typically anchored by supermarkets, large drugstore chains, or discount stores. - CORRECT ANSWER community centers Information resource: The Council on Tall Buildings and Urban Habitat (CTBUH) - CORRECT ANSWER Founded in 1969 at Lehigh University in Bethlehem, Pennsylvania, CTBUH's website is an excellent resource to read about the latest supertall and megatall building projects around the world. You can search the Tall and Urban Database, watch video interviews with builders and architects, and read about how the definition of a tall building has changed throughout history. REDNews - CORRECT ANSWER The REDNews is a popular publication written specifically for commercial real estate in Texas. REDNews is an invaluable source for news, information, and listings for commercial agents and brokers across the state. Subscribe to their print publication or visit the REDNews website. _________ affects the supply of real estate in the US - CORRECT ANSWER economics, land costs, taxation What is the primary motivating factor for purchasing commercial real estate? - CORRECT ANSWER return on investment What type of building would you most likely find in the suburbs? - CORRECT ANSWER office parks property management - CORRECT ANSWER An employee or general agent of the owner who has a broad scope of responsibilities including protecting and preserving the property of the owner while generating an income for the owner. management agreement - CORRECT ANSWER The property manager's employment contract that establishes the roles and responsibilities of the property manager and the property owner cash flow report - CORRECT ANSWER Shows all cash that was received and all the expenses incurred by the property during the reporting period operating statement - CORRECT ANSWER A report that gives the landlord a picture of the financial health of the property profit and loss statement - CORRECT ANSWER An account of all revenues and expenses a company has generated during a specific timeframe occupancy report - CORRECT ANSWER An analysis of occupied and vacant space to total space during a specific time period maintenance report - CORRECT ANSWER An account of all maintenance completed during a specific period of time preventative maintenance - CORRECT ANSWER Regular servicing of equipment to prevent breakdown deferred maintenance - CORRECT ANSWER The accumulation of needed maintenance over time individual property manager - CORRECT ANSWER An employee of the owner who is not required in the state of Texas to have a real estate license that manages a specific complex like an on-site manager Licensed property manager - CORRECT ANSWER Licensed real estate agents who work for a property management firm or a licensed broker who offers property management services residential property manager - CORRECT ANSWER A property manager who may live on the property that they manage and may be employed by the individual owner or by a property management firm single-family homes vacation rentals manufactured-home parks multifamily housing VAMA - CORRECT ANSWER Voluntary Affirmative Marketing Agreement is a contract that is negotiated between HUD and national associations that represent the housing industry reasonable accommodation - CORRECT ANSWER A change to a rule, policy, or practice, or service for a disabled person to use housing service animals - CORRECT ANSWER A specially trained canine or miniature horse that works with a disabled individual providing a service to their human companions therapy animals - CORRECT ANSWER An animal that provides support to individuals with physical, cognitive, emotional and/or social issues and does not live with the individual but visits the individual for sessions emotional support animals - CORRECT ANSWER An animal that provides emotional and companionship for an individual prescribed as part of a medical treatment plan ADA - CORRECT ANSWER Americans With Disabilities Act is a federal law that prohibits discrimination against those with disabilities by denying them the full and equal enjoyment of goods, facilities, accommodations, services and privileges Texas Property Code - CORRECT ANSWER Texas Statute Law that is formatted and numbered into fifteen titles addressing property in Texas USGBC - CORRECT ANSWER United States Green Building Council is a membership-based non-profit organization that promotes sustainability in the way that buildings are designed, built, and operated LEED - CORRECT ANSWER Leadership in Energy and Environmental Design is a voluntary rating and certificate system geared toward increasing the environmental and health performance of structures and neighborhoods One trend a manager should follow in the marketplace: - CORRECT ANSWER vacancy rates ________ causes a downward spiral in rental rates. - CORRECT ANSWER deferred maintenance The property manager must understand federal, state, and local laws that affect property management, including: - CORRECT ANSWER federal, state, and local housing laws americans and disabilities act building and fire codes etc. No one may take any of the following actions based on race, color, national origin, religion, sex, familial status, or handicap in the sale or rental of housing - CORRECT ANSWER refuse to rent or sell housing refuse to negotiate for housing making housing unavailable deny availability of a dwelling set different terms, conditions, or privileges for sale or rental of a dwelling provide different housing services or facilities falsely deny that housing is available for inspection, sale, or rental for profit, persuade owners to sell or rent (blockbusting) deny anyone access to membership in a facility or service (such as MLS) related to the sale or rental of housing Does advertising a property at 'walking distance' violate fair housing laws? - CORRECT ANSWER yes, it is assuming someone can walk therefore unintentionally discriminating against ADA What are the ADA violation penalties? - CORRECT ANSWER Penalties for violation of the act are up to $75,000 for the first violation and up to $150,000 for subsequent violations. often canine in nature - CORRECT ANSWER service animals emotional support animals not therapy animals specifically defined as dogs by ADA - CORRECT ANSWER service animals covered by the ADA as service animals - CORRECT ANSWER service animals Places of worship are not required to allow individuals to bring them inside - CORRECT ANSWER service animals emotional support animals therapy animals provide companionship help with depression and anxiety - CORRECT ANSWER emotional support animals therapy animals provide individuals with therapeutic contact, often in a clinical setting in order to improve their emotional, social, or cognitive function - CORRECT ANSWER therapy animals may live with a disabled individual - CORRECT ANSWER service animals emotional support animals ADA provides the right to being the animal into a public place - CORRECT ANSWER service animals must be vaccinated according to state and local laws - CORRECT ANSWER service animals emotional support animals therapy animals Texas Property Code - CORRECT ANSWER The Texas Property Code arranges Texas Statute Law into a logical order, making it more accessible and understandable. Each statute is formatted and numbered, enabling easy citation of the law. There are fifteen titles included in the property code. Most important to property managers and landlords is Title 8, Landlord and Tenant, Chapters 91-93. Property Code - Title 8 and Tenant Chapter 93. Commercial tenancies - CORRECT ANSWER This chapter applies only to the relationship between landlords and tenants of commercial rental property. Property Management Certifications and Designation - CORRECT ANSWER Certified Property Manager (CPM) Accredited Residential Manager (ARM) Accredited Commercial Manager (ACoM) Accredited Management Organization (AMO) Certified Sustainable Property Program (CSP) Certified Property Manager (CPM) - CORRECT ANSWER Certified Property Manager (CPM) is the premier accreditation that is ideal for asset managers and managers of large multifamily, office, retail, or industrial properties. The CPM process includes seven courses, letters of recommendation, and a comprehensive examination. A fast track option is available for those candidates who have specific real estate designations, a real estate degree, or significant experience. IREM requires CPMs to be affiliated with the NAR. Accredited Residential Manager (ARM) - CORRECT ANSWER Accredited Residential Manager (ARM) is a designation for residential property managers that demonstrates to the industry that the individual is knowledgeable, ethical, and reliable. Individuals must complete coursework, including courses on managing maintenance operations and property risk, and marketing and leasing strategies for multifamily properties among others. An examination is required to obtain the certification. Accredited Commercial Manager (ACoM) - CORRECT ANSWER Accredited Commercial Manager (ACoM) is an accreditation program for commercial property managers that lends credibility to property managers who may be new to the discipline. The program includes four courses and requires letters of recommendation and a comprehensive examination. Optional paths to accreditation are available to those candidates who have specific real estate designations or a real estate degree. PMs can obtain the ACoM while working toward the CPM designation. Accredited Management Organization (AMO) - CORRECT ANSWER Accredited Management Organization (AMO) is an accreditation for real estate management firms. Firms with the AMO accreditation must have specific standards for firm operations, servicing clients, and managing properties. Certified Sustainable Property Program (CSP) - CORRECT ANSWER Certified Sustainable Property Program (CSP) is a recognition program for existing properties, including office, multifamily, and shopping centers. The CSP offers many benefits, most notably, perhaps is achieving recognition for sustainability when LEED® certification is out of reach. Chapter _______________ of the Texas Property Code addresses commercial tenancies. - CORRECT ANSWER 93 In Texas, TREC promulgates all but one of the following documents: - CORRECT ANSWER a. unimproved property contract b. 1-4 family c. commercial lease agreement d. farm and ranch contract c. commercial lease agreement TREC Laws and Rule on Trust Accounts: TREC Rule §535.2(i)(7) - CORRECT ANSWER All trust accounts, including but not limited to property management trust accounts, and other funds received from consumers are maintained by the broker with appropriate controls in compliance with §535.146. TREC Laws and Rule on Trust Accounts: TREC Rule §535.2(c) - CORRECT ANSWER A broker is responsible for the proper handling of trust funds placed with the broker and must comply with §535.146 of this title. TREC Rules §535.146 - Maintaining Trust Money - CORRECT ANSWER (1) "Trust money" means client's money, earnest money, rent, unearned fees, security deposits, or any money held on behalf of another person. (2) "Trust account" means an account managed by one party for the benefit of another in a banking institution authorized to do business in Texas. Placing other people's money into the broker's operating or personal account is _________ - CORRECT ANSWER commingling A broker must disburse money from the broker's trust account in accordance with the ________. - CORRECT ANSWER agreement The growth of the green building industry can be attributed to many factors, including: - CORRECT ANSWER The rising cost of energy Air quality issues associated with urban sprawl An increasing awareness of current and future water shortages An awareness of the importance of indoor air quality The appeal of higher-density development that contributes to cohesive, walkable neighborhoods U.S. Green Building Council's Leadership in Energy and Environmental Design - CORRECT ANSWER is a voluntary rating and certificate system geared toward increasing the environmental and health performance of structures and neighborhoods. LEED® encompasses new construction, existing buildings, and additions of commercial, industrial, mixed-use, and all residential structures, whether single-family or multifamily. LEED® subject areas include sustainable sites, energy efficiency, water efficiency, materials and resource use, indoor environmental quality, emissions, and operations and maintenance. According to the USGBC Texas website (figures for 2018): - CORRECT ANSWER 300 LEED® buildings/projects Central Texas 709 LEED® buildings/projects Gulf Coast 640 LEED® buildings/projects North Texas The Austin City Council unanimously adopted its Climate Protection Resolution in 2007. The resolution addresses five major areas of focus: - CORRECT ANSWER Making all city buildings and operations carbon neutral by the year 2020 Reducing Austin's energy usage and increasing the renewable energy portfolio by 2020 Enforcing energy efficiency codes on existing and new residential and commercial structures Taking inventory of community greenhouse gas emissions, develop targets and strategies to reduce them Providing tools for individuals to mitigate their own emissions to become carbon neutral San Antonio - CORRECT ANSWER In November of 2017, San Antonio's City Council approved an agreement to develop a Climate Action and Adaptation Plan Houston - CORRECT ANSWER In June of 2004, the Houston City Council adopted its Green Building Resolution. __________ is a voluntary rating and certificate system geared toward increasing the environment and health of structures and neighborhoods - CORRECT ANSWER LEED The growth of the green building industry can be attributed to: - CORRECT ANSWER rising energy costs, air quality issues with urban sprawl, and an awareness of current and future water shortages The __________ is a private 501(c)3 founded in 1993 to promote sustainability in the way that buildings are designed, built, and operated. - CORRECT ANSWER USGBC ICC - CORRECT ANSWER International Code Council IgCC - CORRECT ANSWER International Green Construction Code The _______ sets the minimum requirements for the environmental performance of buildings including new construction, and additions and alterations to existing construction - CORRECT ANSWER IgCC The role of a property manager is established by a written agreement called a ________. - CORRECT ANSWER management agreement The overall duty of a property manager is to: - CORRECT ANSWER Seek and achieve the objectives of the owner/landlord A property's value and desirability are determined by the level of ________ that is done on the property. - CORRECT ANSWER preventative maintenance Land - CORRECT ANSWER The surface of the earth extending downward to the center of the earth and upward above the surface to infinity Real Estate - CORRECT ANSWER All that is encompassed in land, with the addition of all man-made additions to the land (improvements) real property - CORRECT ANSWER Beyond the physical real estate and includes the rights that a person has in the land air rights - CORRECT ANSWER Extending above the surface without limitation surface rights - CORRECT ANSWER The right to develop and use the surface of land and its resources that may be extracted from or near the surface including stone, gravel, water, and limestone subsurface rights - CORRECT ANSWER The rights to oil, gas and other minerals water rights - CORRECT ANSWER The right an owner has to use water including riparian, littoral, and appropriative wind rights - CORRECT ANSWER The right to use the wind that passes over land zoning - CORRECT ANSWER Local or municipal codes that regulate they way land may be used setback - CORRECT ANSWER The amount of space required between the lot line and the building line buffer zone - CORRECT ANSWER An area of land separating one incompatible land used from another, such as residential from commercial rollback taxes - CORRECT ANSWER A tax incurred from changing an agricultural land use to a non-agricultural land use encumbrances - CORRECT ANSWER Limitations to the rights of a property owner such as a claim, lien, charge, or liability attached to and binding real property liens - CORRECT ANSWER A right given by law to certain creditors to have debts paid out of the property of a defaulting debtor. A charge against a property as security for a debt CC&Rs - CORRECT ANSWER Covenants, Conditions, and Restrictions are the most common control of land found in a recorded document called the Declaration of Restrictions Appurtenances - CORRECT ANSWER A right or privilege or improvement that belongs to and passes with land, but is not necessarily part of the land encroachments - CORRECT ANSWER An intrusion of one's property onto another's property ESAs - CORRECT ANSWER Environmental Site Assessments an assessment carried out by a qualified environmental professional to determine whether or not a property has been contaminated by any previous or current activities that occur(red) on or near the property CERCLA - CORRECT ANSWER Comprehensive Environmental Response, Compensation, and Liability Act is a federal law designed to clean up sites contaminated with hazardous substances, pollutants or contaminants Wetlands - CORRECT ANSWER The transitional zones between uplands and deep water variance - CORRECT ANSWER Permission to violate current zoning regulations ownership term: minerals - CORRECT ANSWER Oil, gas, coal, gravel, geos, bauxite, etc. ownership term: executive - CORRECT ANSWER right to execute a contract or lease ownership term: royalty - CORRECT ANSWER Right to collect for production ownership term: surface - CORRECT ANSWER Right to control access or ingress and egress surface waiver - CORRECT ANSWER Could be used if there is no present lease in place and the seller owns the Mineral Estate. The waiver promises that the seller will not drill on the property as described but allows him to join a pool and enjoy royalties. The waiver protects the buyer from any production on the property. This waiver will survive closing, so it becomes a restriction on the property in the deed. designates drill sites - CORRECT ANSWER May be used if there is no lease in place at the time of the sale to the buyer. This designates mutually-agreed-to drill sites that can only be used by the exploration company in case they want to drill. minerals in steps - CORRECT ANSWER The buyer gains so much of the minerals in a period of time. For example, the buyer is granted 10% of all the estate each year for ten years. mineral estate in life estate - CORRECT ANSWER When the seller dies, the minerals convey to the buyer. Agents should educate their clients on mineral issues and take the proper steps prior to the expiration of the option period. These steps should include: - CORRECT ANSWER Having a professional research the deed of the property in question in order to determine ownership of the minerals. Determining what the client wants Requesting the client's wants in the offer or through other means (always in writing) Negotiating with the seller during the option period. riparian rights - CORRECT ANSWER the rights that an owner has to use water from a river or a stream on or next to a property. littoral rights - CORRECT ANSWER the rights to use water from a lake, ocean, or sea on or next to property. prior appropriation - CORRECT ANSWER a theory of water law based on the idea that "first in time is first in right." The first landowner to claim riparian rights has the exclusive right to take all the water for specific beneficial uses. Subsequent owners of nearby properties cannot claim water rights. Water rights acquired under this theory are referred to as appropriative rights. T or F: Air Rights extend above the surface limited to 1000 feet above the surface. - CORRECT ANSWER false T or F: Subsurface rights extend to oil and gas but not other minerals. - CORRECT ANSWER false PETE - CORRECT ANSWER Police Power, Eminent Domain, Taxation, Escheat rollback taxes - CORRECT ANSWER example - AG USE VALUATION $15,210 /100 = 152.1 × $2.00 = $304.20 $304.20 x 5 = $1,521.00 NON AG USE VALUATION $628,480 / 100 = $6,284.8 × $2.00 = $12,569.60 $12,569.60 × 3 YEARS = $37,708.80 - $1,521.00 = $36,187.80 common examples of liens include: - CORRECT ANSWER Mortgages and Trust Deeds Tax Liens Judgments Mechanics and Materialman's (M&M) liens specific lien - CORRECT ANSWER attaches to one or more specific or named properties (Example: a mortgage) general lien - CORRECT ANSWER attaches to all the property of the debtor, not exempt from forced sale (Example: a judgment or IRS lien). Recording is required for a judgment to become a lien. voluntary lien - CORRECT ANSWER one that is freely given, usually as collateral for a loan. A mortgage lien is a common example of a voluntary lien. involuntary lien - CORRECT ANSWER An involuntary lien is one that is placed on the property against the wishes of the property owner. Common examples of involuntary liens include judgment and tax liens. statutory lien - CORRECT ANSWER Because it is created by law, a tax lien would also be categorized as a statutory lien. Equitable liens arise out of common law. Vendor (seller) or vendee (buyer) liens are examples of equitable liens. Changing the use of a property with an agricultural exemption will cause a rollback tax of _______________ years. - CORRECT ANSWER three _______________ is the property value of a property for tax purposes - CORRECT ANSWER assessed value One someone dies leaving no will and no heirs, _______________ says that the government will take the property. - CORRECT ANSWER escheat The _______________ is the recorded document that contains the Covenant, Conditions, and Restrictions. - CORRECT ANSWER declaration of restrictions All of the following are types of liens, except: - CORRECT ANSWER a. mortgages b. encroachments c. judgements d. mechanics and materialman's lien b. encroachments A(n) _________ is a right or privilege or improvement that belongs to and passes with the land, but is not necessarily part of the land. - CORRECT ANSWER appurtenance The right the government has to regulate and control the way land is used is called: - CORRECT ANSWER police power radon - CORRECT ANSWER Radon is a naturally occurring, colorless and odorless gas produced by the decay of radioactive materials in rocks under the ground. Radon enters buildings through the foundations. Mitigation is the term used to describe methods used to lower levels of radon in homes and other buildings. asbestos - CORRECT ANSWER Asbestos is used to insulate pipes, in chimneys and roofs, as well as in flooring materials and siding. Problems arise in its removal because the dust can be extremely hazardous. There is no duty for the seller to remediate the presence of asbestos, simply to disclose it. To remove asbestos, the area must be sealed off, and then the asbestos removed. The building does not have to be tented because it is better to encapsulate asbestos than to remove it. An asbestos abatement plan outlines the method to handle the control of asbestos found in a property. urea formaldehyde foam insulation (UFFI) - CORRECT ANSWER Urea Formaldehyde Foam Insulation (UFFI) is pumped into walls as a foam, it hardens and insulates. Moisture softens the hardened material and causes the release of hazardous gas. Lead - CORRECT ANSWER Lead is found in paint and pipes and soil - use the Lead Paint Disclosure for all properties built before 1978. The seller is responsible for providing the Lead Paint Disclosure. The disclosure allows buyers to waive their right to a lead inspection. Lead is hazardous when eaten or when inhaled in dust particles. There is no duty to remediate lead. landfills and waste disposal sites - CORRECT ANSWER Landfills or waste disposal sites that are improperly constructed can lead to groundwater contamination. Know locations and disclose them. Recommend water testing. underground storage fuel tanks - CORRECT ANSWER Underground storage fuel tanks, old, rusty, or leaking containers can cause groundwater contamination. Sometimes found on both commercial and residential properties, these are commonly called USTs. Recommend water testing. farming herbicides and pesticides - CORRECT ANSWER Farming herbicides and pesticides are other sources of groundwater contamination. Recommend water testing. electromagnetic fields (EMFs) - CORRECT ANSWER Electromagnetic Fields (EMFs) caused by high-tension power lines are a controversial topic. Know their location, and disclose. Who is responsible for determining if an area is home to any wetlands? - CORRECT ANSWER the US army Corps of engineers According to Texas law, how many graves must be present to constitute a cemetery? - CORRECT ANSWER one What agency should BREDC contact to file paperwork disclosing the presence of graves on their site? - CORRECT ANSWER the county clerk Raw land generally lacks any ________ - CORRECT ANSWER improvements The ______ is the dominant estate in Texas. - CORRECT ANSWER subsurface Who controls drilling for oil and gas in Texas? - CORRECT ANSWER texas railroad commission Most exploration companies as well as some title companies utilize professionals called "______." - CORRECT ANSWER landmen lease - CORRECT ANSWER An agreement that transfers the right to possess a property for a period of time contract rent - CORRECT ANSWER The rental income stipulated by the parties in a lease economic rent - CORRECT ANSWER The rent the property could currently command on the open market statute of frauds - CORRECT ANSWER A laws requiring all real estate contracts to be in writing to be enforceable CAM fees - CORRECT ANSWER Common area maintenance fees that may be charged to a tenant usable square footage - CORRECT ANSWER The area inside of an office suite rentable square footage - CORRECT ANSWER The usable square footage the tenant occupies plus the common areas add-on factor - CORRECT ANSWER The addition to the usable square footage to cover the cost of the common area maintenance UCC1 - CORRECT ANSWER The addition to the usable square footage to cover the cost of the common area maintenance graduated lease - CORRECT ANSWER A lease in which the payments begin at a lower, fixed-rate, but gradually increase as the lease matures gross lease - CORRECT ANSWER A lease of property where the landlord pays charges regularly incurred in ownership, such as taxes, insurance, utilities, and repairs, with the tenant only paying rent. net lease - CORRECT ANSWER A lease in which, in addition to rent, the tenant pays expenses such as taxes, insurance, and maintenance single-net lease - CORRECT ANSWER A lease in which the tenant pays rent and property taxes double net lease - CORRECT ANSWER A lease in which the tenant pays rent, property taxes and property insurance triple net lease - CORRECT ANSWER A lease in which the tenant pays rent plus all fixed and variable expenses related to a property percentage lease - CORRECT ANSWER A lease in which all of art of rent is based on the gross receipts of the tenant's business sale and leaseback - CORRECT ANSWER One party sells the property and then leases it back, usually for a long-term lease index leases - CORRECT ANSWER A lease that assigns an adjustment number to the lease, often tied to the Consumer Price Index allowing for the rent to increase or decrease consumer price index - CORRECT ANSWER Referred to as the cost of living index is a measurement used to compare the average cost of certain goods that consumers buy, including real estate letter of intent - CORRECT ANSWER A non-binding agreement to work out business terms and pricing lessee - CORRECT ANSWER The person who receives occupancy from the owner lessor - CORRECT ANSWER The person who gives occupancy to the tenant assignment - CORRECT ANSWER The transfer of a tenant's right and liabilities to another sublet - CORRECT ANSWER The transfer of some or all of the tenant's rights and/or leased space to another with liability remaining with the lessee requirements of a valid lease: - CORRECT ANSWER competent parties let and take agreement adequate consideration legal purpose description of the property The __________ requires that a lease for a period of time of more than one year be in writing to be enforceable. - CORRECT ANSWER statute of frauds To find the add-on factor: - CORRECT ANSWER (Rentable sq.ft / Usable sq.ft.) -1 = Add-on% To find the rentable square foot (RSF) or usable square feet (USF) - CORRECT ANSWER RSF = USF × (1+ Add-on %) example CAM fees - CORRECT ANSWER Jay wants to rent a small suite of offices with a reception area, conference room, a work area, and a few individual employee offices. The suite measures 26' × 40', 1040 sq. ft. of usable square feet. Jay will be charged for 1196 rentable sq.ft. What was the add-on factor used? Step 1: Divide the rentable square feet by the usable square feet. 1196 sq. ft. / 1040 sq. ft. = 1.15 Step 2: Subtract 1. 1.15 - 1 = 0.15 Answer: The add-on factor is 15% All of the following are methods a landlord would use to qualify a commercial tenant for office space, except: - CORRECT ANSWER a. tenants lease history b. other assets c. business financial records d. tenants personal credit score b. other assets lease option - CORRECT ANSWER Allows the tenant to buy the property at a preset price and terms for a given period. This can also be called a lease with an option to buy. At the time the lease is negotiated, a purchase price is also negotiated. The tenant has the right to purchase the property for that preset price. The tenant is not obligated to buy, but the landlord is obligated to sell. Although this is a legal agreement, license holders in Texas are specifically prohibited from writing this type of agreement for their clients. If your clients wish to enter into a lease-purchase agreement, you must send them to an attorney. Percentage lease example - CORRECT ANSWER Plan A Example: A tenant grosses $1,400,000 for the year less a 4% charge to the landlord in the form of rent. How much rent did the landlord receive for this year? Answer: $56,000 Plan B Example: A tenant grosses $1,400,000 for the year less a 4% charge to the landlord in the form of rent due. The landlord also requires a base monthly rent of $1,000. What was the annual rent? Answer: $68,000 Plan C Example: A landlord charges 4% on gross receipts over $200,000 per year. The tenant grosses $1,400,000 for the year. How much rent does the tenant owe the landlord? Answer: $48,000 rent per square foot - CORRECT ANSWER Rent can also be quoted on a per-square-foot basis, especially for office space. If the rent in an office building is $24.00 per square foot, per year, what is the monthly rent on a space having 4,000 square feet? Step 1: Find the total annual rent. 4,000 square feet x $24.00 per square foot = $ 96,000 Step 2: Convert the annual rent to monthly. $96,000 divided by 12 months = $8,000 per month Answer: $8,000 monthly rent If the lease provided for a percentage rent of 4% of gross sales with a breakpoint of $250,000, the tenant would pay additional rent only on monthly sales over $250,000. index lease - CORRECT ANSWER assigns an adjustment number to the lease, often tied to the Consumer Price Index (CPI), that allows for the rent to increase or decrease, usually from year to year To calculate the adjusted rental rate on an index lease: - CORRECT ANSWER (New Index Rate / Original Index Rate) x Price per square foot Example - Index Leases - CORRECT ANSWER A real estate brokerage leases a space in a Class A office building, which rents for $32 per square foot with a CPI index of 1.025 for the first year. The CPI index increases to 1.031 for the second year. What is the adjusted rental rate for the second year? Step 1: Divide the new index rate by the original (old) index rate. 1.031 ÷ 1.025 = 1.0059 adjustment factor (this is how much the rent is increasing). Step 2: Multiply the rental increase by the price per square foot. $32 × 1.0059 = $32.19 Answer: The adjusted rental rate is $32.19 per square foot. common lease provisions - CORRECT ANSWER leased premises business activities prohibited activities signage insurance business interruption parking escalation clauses common area use and maintenance cooperative marketing assignment and sublet tenant and landlord obligations tenant improvements maintenance when dealing with leases, there are several terms that a license holder must be aware of: - CORRECT ANSWER action of forcible detainer (eviction) assignment contract rent economic rent expiration holdover tenant lease leasehold estate lessee lessor right of first refusal subletting termination Jessie has a 5,000 sq. ft. boutique store in a high-end 100,000 sq.ft. shopping center. What percentage of the shopping center does Jessie occupy? - CORRECT ANSWER 5% 5,000 sq ft / 100,000 sq ft = .05 = 5% Texas REALTORS Commercial Real Estate Listing Agreements - Exclusive Right to Lease - CORRECT ANSWER Paragraph: 1. parties 2. property 3. listing price 4. term 5. broker's fee 6. exclusions 9. intermediary 10. confidential information 11. broker's authority 12. representations 13. landlord's additional promises 14. limitation of liability 19. addenda 21. additional notices listing price - CORRECT ANSWER Base rent is entered here. Paragraph 3. B(2)(a) - Every January, owners review the past year's expenses and raise expenses accordingly. The tenant is responsible for his/her pro-rata share of expenses that exceed the base-year expenses. Base rent is entered here. Paragraph 3. B(2)(a) - Every January, owners review the past year's expenses and raise expenses accordingly. The tenant is responsible for his/her pro-rata share of expenses that exceed the base-year expenses. "CAM", or Common Area Maintenance, means all of Landlord's expenses reasonably incurred to maintain, repair, operate, manage, and secure the Property (e.g., security, lighting, painting, cleaning, decorations, utilities, trash removal, pest control, promotional expenses, etc.). CAM does not include capital expenditures, interest, depreciation, tenant improvements, insurance, taxes, or brokers' leasing fees. Paragraph 3. B(2)(3)(7)- Landlords often give tenants money to build-out space. For example, $12 per sq. ft. The tenant pays the landlord the difference for anything above the allotted amount, often with interest. For the broker/agent, sometimes the landlord will not pay the agent commission on the tenant improvements, so check to make sure. broker's fee - CORRECT ANSWER Could be a fixed fee or a percentage; there is no standard practice. TREC does not get involved with commission. Paragraph 5. A(2) - The broker can address the commission for tenant build-out in this paragraph. Paragraph 5.D. Other Fees: Paragraph 5. D(1) (a) - If the broker procures or brings the tenant to the landlord and the tenant extends, renews, or expands the lease during the listing, the agent will want a portion of that commission. intermediary - CORRECT ANSWER Intermediary is extremely common in commercial real estate. Commercial brokers want to sell to their own clients. broker's autority - CORRECT ANSWER The landlord/owner gives the broker the responsibility to market the property. The broker can post the listing in LoopNet, CoStar, etc. addenda - CORRECT ANSWER The landlord/owner gives the broker the responsibility to market the property. The broker can post the listing in LoopNet, CoStar, etc. retail lease - CORRECT ANSWER certain lease provisions premises security deposit rents utilities acceptance assignment or subletting conduct of business rules and regulations defaults and remedies insurance no personal liability of landlord hold harmless access to demised premises alterations repairs and maintenance liens condemnation force majeure landlord's lien surrender of premises signs hazardous materials miscellaneous signature page exhibits alterations by landlord - CORRECT ANSWER Landlord has the exclusive control to change or close off the common areas of the premises. The rental income stipulated by the parties in a lease is known as _______________. - CORRECT ANSWER contract rent listing presentation - CORRECT ANSWER The meeting where the real estate agent shows the owner of the property how the agent will market the owner's property listing agreement - CORRECT ANSWER An employment contract between a seller or landlord and the broker open listing - CORRECT ANSWER A listing that gives the seller the right to list the property with multiple competing brokers and to sell the property personally, without liability for payment of a commission exclusive agency - CORRECT ANSWER multiple competing brokers and to sell the property personally, without liability for payment of a commission Exclusive agency A listing where the seller agrees to list the property with only one broker during the listing term, with the provision that the seller can sell the property independently, without paying a commission exclusive right to sell - CORRECT ANSWER A listing that has the seller paying commission even if the property is sold by the owner verbal listing - CORRECT ANSWER An oral listing agreement that is unenforceable letter of intent (LOI) - CORRECT ANSWER A non-binding agreement to work out business terms and pricing Sherman Antitrust Act - CORRECT ANSWER Federal law that preserves business competition by preventing monopolies, monopolistic practices, and restraint of trade clayton act - CORRECT ANSWER Federal law that preserves business competition by preventing monopolies, monopolistic practices, and restraint of trade procuring cause of sale - CORRECT ANSWER The individual who, through a series of uninterrupted activities or actions, brought about the completion of a contract suit for commission - CORRECT ANSWER the broker must prove the existence of an employment agreement with a promise to pay a commission, signed by the party to be charges (usually the seller) the broker must have a real estate license the broker must be the procuring cause of the sale the broker must provide a ready, willing, and qualified buyer who agrees to the sales terms required by the seller. the buyer may not be under duress the license holder must have informed the purchaser, in writing, to have the abstract examined by an attorney, or obtain title insurance reasons for the termination of a listing - CORRECT ANSWER When the purpose of the agency is completed (i.e., the property is sold and closed) The expiration of the time period stated in the listing contract At any time by mutual agreement Death or incapacity of either party Condemnation or destruction of the property Bankruptcy of either party Revocation of the broker's license Abandonment by the broker At any time by broker or principal The ________ period covers the agent for a specified amount of time if the listing agreement ends and a buyer whom the agent procured buys the property within the period. - CORRECT ANSWER protection Most commercial properties will be described using a __________ legal description. - CORRECT ANSWER metes and bounds Which type of listing dominates the commercial real estate industry? - CORRECT ANSWER open listing Why do people buy? - CORRECT ANSWER They buy to satisfy a need. It may be a primary need, like the need for food, shelter, or clothing. In real estate, it is often more than that. Your buyer is an investor who wants to buy low and sell high. Investors will only look at property that can produce good income or that has a desperate seller. What do people buy? - CORRECT ANSWER People buy what we in real estate call "amenities." Amenities are expected benefits received as a result of ownership. For example, in the paragraph above, the buyer will get a tax advantage and a long-term investment. How do people buy? - CORRECT ANSWER A series of logical steps is involved in every major purchase. Along with these, each purchase has emotional phases. We will discuss both and see how they are connected. The psychology of marketing - the logical steps - CORRECT ANSWER the customer acknowledges a need to buy the customer acknowledges that a particular property satisfies his needs the customer is pleased or satisfied with the source of supply (you) the customer has determined an acceptable price the customer is ready to buy the emotional phases - CORRECT ANSWER attention interest desire act cold calling techniques - CORRECT ANSWER investor groups retail shopping center owners property management companies office building owners __________ have proven to be invaluable for designing marketing campaigns and gaining insight into consumer buying patterns and behaviors - CORRECT ANSWER analytics prospected for new clients on social media - CORRECT ANSWER 38.5% use social media to market listings - CORRECT ANSWER 56.3% use social media to stay up-to-date on commercial real estate news - CORRECT ANSWER 55.9% fact - CORRECT ANSWER The Pew Research Center's Social Media Fact Sheet3 reports that about 7 out of 10 Americans use social media for a variety of reasons including, connecting to other people, reading and staying informed with news and current events, and as a form of entertainment. virtual reality - CORRECT ANSWER computer generated simulation of 3D images or environment that can be interacted with augmented reality - CORRECT ANSWER modified views of reality According to the text, what percentage of agents in a major metropolitan area are typically residential agents? - CORRECT ANSWER 92% Where can you find contact information on taxable entities like LLCs for prospecting purposes? - CORRECT ANSWER Secretary of State's website income - CORRECT ANSWER Derived from the collection of rents and other revenue streams from a property appreciation - CORRECT ANSWER The passive increase in the value of a parcel due to market forces investment gain - CORRECT ANSWER The increase in value in apparel of land due to the activities of the owner/developer gross schedule income - CORRECT ANSWER The passive increase in the value of a parcel due to market forces liquidity - CORRECT ANSWER The ease with which an investment can be converted to cash capital gains - CORRECT ANSWER The gain (or loss) realized when a property is sold limited partnerships - CORRECT ANSWER A form of business created in Texas by filing a certificate of limited partnership with the Texas Secretary of State corporation - CORRECT ANSWER A form of business formed by filing articles of corporation with the Texas Secretary of State that is owned by stockholders who have limited liability in the corporation limited liability company - CORRECT ANSWER A form of business formed by filing articles of organization with the Texas Secretary of State and is governed by the Texas Limited Liability Act real estate syndicate - CORRECT ANSWER A real estate investment that is formed to own and operate a real estate investment general partner - CORRECT ANSWER A partner in a partnership who is involved in the day to day operations or management of the company limited partner - CORRECT ANSWER A partner in a partnership that has no involvement in the day-to-day operations of the business but invests in the business real estate mortgage investment conduit - CORRECT ANSWER Invests in mortgages or mortgage backed securities and distributes the bulk of their income to investors as dividends real estate investment trust (REIT) - CORRECT ANSWER An investment vehicle created by Congress to make it possible for small investors to invest in larger commercial properties by purchasing shares in the organization that owns the real estate DUST - CORRECT ANSWER The characteristics of value: Demand, Utility, Scarcity, and Transferability market value - CORRECT ANSWER The most probable price a property should bring in a competitive and open market under all conditions requisite for a fair sale, under guidelines published by federal lending institutions (Fannie Mae and Freddie Mac) MAI - CORRECT ANSWER Member of the Appraisal Institute designation that shows the appraiser is experienced and knowledgeable, adhering to the Appraisal Institute Code of Professional Ethics and Standards of Professional Appraisal Practice market data method - CORRECT ANSWER A method of valuation that uses known recently sold comparable properties income approach - CORRECT ANSWER A method of valuation that is used for income producing properties. Also known as the capitalization method gross rent multiplier - CORRECT ANSWER A method of applying the income approach using comparable rental properties and market values in the subject's area. GRM = Price/Monthly Rent capitalization rate - CORRECT ANSWER A risk reward ratio used by investors to determine values of income producing properties discounted cash flow analysis - CORRECT ANSWER A method of valuing real estate to project the return on an investment net present value - CORRECT ANSWER Based on the discounted cash flow analysis, Net Present Value is the difference between present value of cash inflows and the present value of cash outflows over a period of time internal rate of return - CORRECT ANSWER A valuation metric used in financial analysis to estimate the profitability of a potential investment cash-on-cash return - CORRECT ANSWER An investment analysis tool to determine whether or not a property is a good investment. It is calculated by dividing a property's yearly cash flow by the amount of cash needed to purchase the property interest - CORRECT ANSWER Money paid at a particular rate for the use of money loaned to a person or entity. The cost of borrowing money 1031 exchange - CORRECT ANSWER A like-kind exchange, also known as a tax-deferred exchange, that is used to defer paying capital gains upon the sale of a property Residential income property may be depreciated over ______ years using straight-line depreciation - CORRECT ANSWER 27.5 Shareholders - CORRECT ANSWER Shareholders (stockholders) who are the owners of the corporation Board of Directors - CORRECT ANSWER A Board of Directors elected by the shareholders who represent the interests of the shareholders Corporate Officers - CORRECT ANSWER Corporate Officers who are responsible for the overall management of the operation of the business Advantages of a REIT - CORRECT ANSWER high returns/low risk (REITs provide a historically stable cash flow) portfolio diversification capital appreciation liquidity (shares are easier to sell than property) Disadvantages of a REIT - CORRECT ANSWER subject to the economic conditions and supply and demand of the market (REITs that invest in office supply and demand for office space) reliance on debt paying for rising property taxes reduces earnings A(n) _________ provides limited liability for its shareholders. - CORRECT ANSWER corporation A(n) _________ is formed by filing articles of organization with the Texas Secretary of State. - CORRECT ANSWER LLC A(n) __________ is created when two or more parties join together to create and operate a real estate investment. - CORRECT ANSWER joint venture A(n) __________ REIT invests in mortgages or mortgage-backed securities - CORRECT ANSWER mortgage A corporation includes Shareholders, a board of directors and ____________ - CORRECT ANSWER corporate officers A(n) ____________ allows for the indirect investment in mortgages through the sale of securities. - CORRECT ANSWER REMIC Limited partnerships provide ________ liability to its limited partners. - CORRECT ANSWER limited depreciation - CORRECT ANSWER After determining the replacement cost of the structure, the appraiser calculates a value for depreciation. Depreciation is the reduction in the value of property from causes such as deterioration or obsolescence. Types of depreciation include physical deterioration, functional obsolescence, and external obsolescence. The appraiser then subtracts depreciation from the new cost to determine the depreciated value of the structure. The next step in the cost approach is to add the land value to arrive at a total estimated value. The appraiser determines the value of the land as if it were vacant. While land values may decrease in the market, land is treated as a separate item under the cost approach and is never depreciated. physical deterioration - CORRECT ANSWER Physical deterioration is the loss in a property's value due to daily wear and tear. All properties experience this type of depreciation over time. However, with above-average maintenance and upkeep, some properties experience less than average physical deterioration. Examples of physical deterioration that an appraiser should note on the appraisal report include a leaky roof, inadequate floor coverings, or an overall need for repainting. Because it involves factors under the control of the property owner, physical deterioration is the easiest form of depreciation to cure and has the least effect on the value of the property. This type of deterioration can be addressed through repairs and systems replacement done by the owner or a contractor. functional obsolescence - CORRECT ANSWER Functional obsolescence is the loss in the desirability of the style, layout, or function of a property over time. For example, an old apartment building that has deteriorated to the point that it is no longer fit for occupancy and no longer functions as it was intended. external obsolescence - CORRECT ANSWER External obsolescence refers to the loss in value of a property caused by factors outside of the property itself. Such influences include the oversupply and consequent drop in demand for a particular kind of property, as well as government actions like zoning changes or condemnation proceedings and proximity to undesirable land uses like highways or factories. External obsolescence is sometimes referred to as environmental or economic obsolescence. income approach (GRM) - CORRECT ANSWER The income approach to appraisal will be used when there are a notable number of rental properties in the area. The calculation begins with a review of comparable rental rates and market values in the subject property's area. These rates are then used to compute a gross rent multiplier (GRM). The GRM is the relationship between the amount of rent a specific property can command and the value of the property to the owner. This number is neighborhood specific as it is a factor based on location and rent - a price per rent. Residential investment properties are generally purchased to provide income to the buyer. Therefore, the income approach to appraisal can be used on these properties. License holders or appraisers may use the GRM as a simple technique to determine a range of value. This number, when multiplied by the monthly rent, gives an estimate of value for the property. (GRM × monthly rent = price) example gross rent multiplier 1 - CORRECT ANSWER If the GRM is 150 and monthly rent on a single-family house is $1,000, then the value of the house is 150 × $1,000 = $150,000. A GRM is calculated by taking the property value and dividing it by monthly rent. If you know the value of the property and the monthly rent, you can find the GRM. Price / Monthly rent = GRM example gross rent multiplier 2 - CORRECT ANSWER If a property in a neighborhood is valued at $175,000 and charges $1,000 in monthly rent, then the GRM on that property is: $175,000 / $1,000 = 175 GIM - CORRECT ANSWER For multifamily residential, properties a GIM is used. The formula is the same as that for the GRM but is based on annual rent rather than monthly rent. (GIM × annual rent = price) The GRM/GIM method of valuation is not as popular in commercial real estate investment because it does NOT take into account location, condition, or vacancy, and is mainly used as a means of determining the value for small residential properties (rent houses). capitalization rates - CORRECT ANSWER For an investor, the net income of a property is a major indicator of the value of the property. One measure of the value of a property is its income capitalization rate, or "cap rate." The capitalization rate is found by dividing the net income (NOI) of a property by its value or sales price. Net Income / Sales Price = Capitalization Rate example - cap rates - CORRECT ANSWER If a property was offered for sale at $550,000, and the net income was $55,000, what is the capitalization rate? Step 1: Divide the net income by the sales price. $55,000 ÷ $550,000 = 10% Answer: The Capitalization Rate is 10%. discounted cash flow (DCF) analysis - CORRECT ANSWER Discounted cash flow analysis (DCF) can be used to value real estate and employs discount factors (discount or interest rates) to project the return on an investment. It works by forecasting the expected future cash flow of an investment, like the income from a property. This analysis allows for the fact that income streams fluctuate over time, and discounts that future income of an investment to its present value. This analysis assumes that the investment will be sold and that the cash flow will end at a particular point in time, say 5 years. Real estate investors are extremely interested in what is happening to the money that they invest. This interest calls for a detailed analysis of the investment. The four most basic, yet important questions a real estate investor can ask about an investment are: How much money goes into this investment? (Dollars in) When does the money go into this investment? (Timeline for dollars in) How much money will I make on this investment? (Dollars out) When do I get the money out of this investment? (Timeline for dollars out) The formula for present value is: - CORRECT ANSWER PV = C / (1+r)t C = cash flow r = rate (%) t= time (period of investment) t will change from year to year. So, at year 1, t = 1, at year 2, t= 2, year 3, t= 3, and so on NPV > 0 = good NPV < 0 = not good Internal Rate of Return - CORRECT ANSWER The internal rate of return (IRR) is another calculation investors use to analyze investment properties to make decisions on whether or not to purchase them for their portfolios. IRR is very similar to NPV. However, the investor is looking for a discount rate that will cause the NPV to be equal to zero. Why does the investor want the NPV to be equal to zero? He wants it to equal zero because he wants to find the "break-even" rate at which he is neither gaining nor losing money so that he can compare it to the returns on other properties. After performing the calculations, the investor will have a picture of the kind of return he can expect from a particular property after a certain number of years. cash on return (equity dividend rate) - CORRECT ANSWER Cash-On-Cash Return, also known as the Equity Dividend Rate, or even as Return on Investment (ROI), is calculated by dividing a property's yearly cash flow (after debt service) by the amount of cash needed to purchase the property. This number is significant to real estate investors. A real estate investor looks at the cash-on-cash number to determine whether or not a property is a good investment. Yearly Cash Flow / Cash Required to Buy Property = Cash-on-Cash example: cash-on-cash - CORRECT ANSWER A rent house costs $200,000, all in cash. The property rents for $2,000 per month. The yearly operating expenses are $3,150, which includes insurance, maintenance, and HOA fees. Taxes $6,400 Insurance $1,000 HOA $ 650 Misc. $1,500 What is the cash-on-cash return? Step 1: Find the yearly property rent. $2,000 × 12 = $24,000 per year Step 2: Total the yearly operating expenses. $6,400 + $1,000 + $650 + $1,500 = $9,550 Step 3: Deduct the yearly operating expenses from the yearly property rent to find the yearly cash flow. $24,000 - $9,550 = $14,450 (NOI pre-tax) Step 4: Divide the yearly cash flow (NOI) by the purchase price, the amount needed to purchase the property. $14,450 / $200,000 = 0.07225 = 7.23% Answer: 7.23% cash-on-cash return The basic formula for computing simple interest is: - CORRECT ANSWER Principal × Rate × Time = Interest I = PRT Interest / Rate = Principal Interest / Principal = Rate Note: Time must be brought up to an annual amount in order for the formula to work correctly. Time can be: Semi-Annual = 6 months Quarterly = 4 times per year Yearly = 12 months1 Quarter = 3 months Using the T-Formula to solve simple interest problems: The yearly interest is the Part. The interest rate is the %. The principal is the Total. Compounding Interest - CORRECT ANSWER Compound interest is different from simple interest because you are not just adding interest to the original deposit or initial investment, but interest is being added on top of the interest that has already been added to the principal. compounding interest expample - CORRECT ANSWER Tom deposited $1,000 into a savings account that earns 10% that is compounded annually. How much money will Tom have in his account after 2 years' time? Step 1: Multiply the original deposit $1,000 by 10%. $1,000 × 10% = $100. Step 2: Add $100 to the original deposit. $1,000 + $100 = $1,100. This is the balance for year one. Step 3: Multiply the year one balance by 10%. $1,100 × 10% = $110. Step 4: Add $110 to the year one balance. $1,100 + $110 = $1,210. Answer: $1,210 in Tom's account after 2 years. Today - $1,000 Year One - $1,100 Year Two - $1,210 compound interest - another formula - CORRECT ANSWER P(1 + i)n = S P = Principal i = Interest Rate n = Compounding periods S = Future value Don't Forget PEMDAS! The gross annual income from an apartment building owned by Henry Britt is $95,000. The yearly expenses are $31,500. If Henry wishes a 9% return on his investment, what is the value of the property? - CORRECT ANSWER First deduct the yearly expenses from the gross annual income. $95,000 - $31,500 = $63,500. Then, divide the net income by 9%. $63,500 / 9% = $705,555.56 What is the estimated value of an apartment building that shows net annual rents of $120,000 if the owner realizes a 9% return on the investment? - CORRECT ANSWER $120,000 NAI (net annual income) / 9% Rate of Return = $1,333,333.33 Value like-kind exchange - CORRECT ANSWER A like-kind exchange, also known as a tax-deferred exchange, is a simple strategy for selling one qualified property, then acquiring another qualified property within the required time frame. The procedure is almost identical to any other standardized buying and selling process. The unique part of a 1031-exchange is the entire transaction is treated as an exchange and not just a simple sale. Why Are 1031 Exchanges Popular? - CORRECT ANSWER A real estate investor should consider an exchange when he or she intends to acquire a replacement "like-kind" investment property upon the sale of a currently held investment property, as other scenarios would necessitate payment of a Capital Gains tax. 2 major rules of 1031 exchanges - CORRECT ANSWER 1. The total purchase price of the replacement, "like-kind" property must be equal to or greater than the total net sales price of the relinquished "like-kind" property. 2. All the equity received from the sale of the relinquished real estate property must be used to acquire the replacement "like-kind" property. If the investor violates either of these two rules, the tax liability will change for the investor involved in the exchange. To the extent that all equity, per the rules stated above, is moved to the replacement property, there will be no tax. exhanger - CORRECT ANSWER The property owner(s) seeking to defer capital gain tax by utilizing a Section 1031 exchange. (IRS uses the term "taxpayer") qualified intermediary - CORRECT ANSWER The entity that facilitates the exchange for the Exchanger. The term "facilitator" or "accommodator" is also commonly used, although the IRS specifies the term "Qualified Intermediary." relinquished property - CORRECT ANSWER The property sold by the Exchanger. The relinquished property is also sometimes referred to as the "exchange" property or the "downleg" property. replacement property - CORRECT ANSWER The property acquired by the Exchanger. The replacement property is sometimes referred to as the "acquisition" property or the "upleg" property. 180-day rule - CORRECT ANSWER The Exchanger must acquire all the replacement property(ies) within 180 days from the date he transfers the first property to the buyer. 48-day rule - CORRECT ANSWER The exchanger must identify the potential replacement property(ies) within the first 45 days of the 180-day period. 1031 Exchange motives - CORRECT ANSWER increase cash flow - trade vacant land for improved property appreciation - dispose of property in a slow market area and acquire property in a hot market area conversion - acquire property suitable for the future joint ownership problems - acquire separate property in order that co-owners can separate interests reduce management burdens - acquire management-free property tax write-off - restore depreciation deductions estate planning - dispose of one property and acquire several properties for several family members relocation - acquire property in an area where exchanger is relocating financing - exchange to property, which will support a new loan As a general rule, there are 3 parties involved in a 1031 Exchange: - CORRECT ANSWER The exchanger - the property owner who is exchanging the property The buyer - the purchaser of the exchanger's property The seller - the individual who is selling the replacement property to the exchanger Delayed Exchanges Identification Rules - CORRECT ANSWER 1. Three Property Rule - The exchanger may identify up to three properties regardless of aggregate value identified. 2. 200% Rule - The exchanger may identify more than three properties, but the total fair market value of what is identified cannot exceed 200% of the fair market value of the relinquished property. Exclusions to Section 1031 - CORRECT ANSWER A Home Builder A Developer Personal Residence (Homestead) IRS 121 A Flipper Stock in Trade or Property held primarily for sale Stocks, Bonds or Notes Securities or Evidence of Indebtedness of Interest Delayed Exchange Time Limits - CORRECT ANSWER 1. 180-Day Rule: The Exchanger must acquire all the replacement property(ies) within 180 days, or the date the Exchanger must file the tax return (including extensions) for the year of the transfer of the relinquished property, whichever occurs first. 2. 45-Day Rule: The Exchanger must identify the potential replacement property(ies) within the 45 days of the 180-day Exchange Period. 3. There is no extension of these deadlines for Saturdays, Sundays, or holidays. 4. The time limits begin to run on the date the Exchanger transfers the first relinquished property to the buyer. 5. The "date of transfer" will be the date of recording or transfer of the benefits and burdens of ownership, whichever occurs first. qualified intermediary (QI) - CORRECT ANSWER Exchangers should never undertake to perform a 1031 Exchange on their own but should enlist the services of a qualified intermediary (QI) who will become the fourth party involved in the exchange. The IRS urges those interested in a like-kind exchange to use a QI to hold on to proceeds from the sale of the relinquished property until the exchange is complete. Merely using the services of the exchanger's attorney, real estate agent, or accountant is not sufficient. The Qualifying Intermediary may be a(n) - CORRECT ANSWER escrow agent Which of the following parties is not involved in a 1031 Exchange? - CORRECT ANSWER a. seller b. exchanger c. agent d. buyer c. agent 5Cs of credit - CORRECT ANSWER Lenders measure cash flow, collateral, commitment, the character of potential borrowers, and the conditions of the loan to make loan approval determinations. annual debt service (ADS) - CORRECT ANSWER The total of principal and interest that will be paid annually to service the debt. capital gain - CORRECT ANSWER Income earned from the sale of an asset (formerly a tax-favored sale). capital investment - CORRECT ANSWER The initial capital and the long-term expenditures made to establish and maintain a business or investment property. capitalization - CORRECT ANSWER A mathematical process for estimating the value of an income-producing property by dividing the annual net operating income by the capitalization rate. capitalization rate (CAP Rate) - CORRECT ANSWER The rate of return a property will produce on the owner's investment. cash flow - CORRECT ANSWER The net spendable income from an investment that is determined by deducting all operating and fixed expenses from the gross income. If expenses exceed income, negative cash flow will result. collateral - CORRECT ANSWER something of value deposited with a lender as a pledge to secure repayment of a loan. debt service - CORRECT ANSWER The amount of cash needed to repay the loan. effective gross income (EGI) - CORRECT ANSWER Actual gross income received by the landlord. Also referred to as gross operating income. Gross Potential Income + Other Income - Vacancy & Credit Losses = Effective Gross Income (GPI + OI - VCL = EGI) fixed expenses (FE) - CORRECT ANSWER Overhead costs that typically do not change from month to month or year to year, regardless of production volume, occupancy, or vacancy rates. Examples include real estate property taxes, and employees' salaries. gross scheduled income (GSE) - CORRECT ANSWER The potential maximum income of a property (amount of rent) collected in a year, assuming that the property was fully rented, with no vacancies and no credit losses. Also sometimes referred to as gross potential income (GPI). leverage - CORRECT ANSWER The use of borrowed money to finance the bulk of an investment and to magnify the rate of return. net operating income (NOI) - CORRECT ANSWER The income (cash) the owner receives from operating the property. The net income is the income that can be used to make loan payments, assuming that the property is financed. operating expenses (OE) - CORRECT ANSWER Expenses incurred to maintain an income-producing property include, management fees, utilities, insurance, property taxes, maintenance expenses, and vacancy and credit losses. Fixed expenses plus variable expenses equal total operating expenses (TO) (FE + VE = TO) other income - CORRECT ANSWER Income that is derived from sources other than rents. This could be income from parking/garage fees, coin-op laundry machines, vending machines, etc., on the property. reversion - CORRECT ANSWER The mathematical process of estimating the future cash benefit that the investor will receive upon sale of the subject property. This valuation method relies upon the projection of future cash flows. Also called Net Reversion or Reversionary Value time value of money (TVM) - CORRECT ANSWER The concept that available money in the present is worth more than an equal amount of money promised in the future - a dollar is worth more now than if it is promised three years from now. If an investor has money in his pocket in the present, that money can be invested and earning interest, instead of waiting for years for the same amount of money. vacancy and credit losses - CORRECT ANSWER Allows for any vacancies (premature or otherwise) and non-payment of rent. This amount is deducted from the gross scheduled income of a property. Virtually all rental properties will include a deduction for this on their operating statements. Vacancy and credit losses usually run 5 to 10% of gross scheduled income. variable expenses (VE) - CORRECT ANSWER The costs of doing business that can change from month to month or year to year. Variable expenses can be affected by factors like sales volume. For example, retailers pay credit card processing fees for consumer credit card transactions. Another example is a property with a high occupancy rate that has higher utility fees. which of the following is not a benefit of investing in real estate? - CORRECT ANSWER a. high capital costs b. high rates of return c. leveraging borrowed money to make money d. none of these a. high capital costs commercial mortgage-backed securities - CORRECT ANSWER Pools of commercial and multi-family loans from which investors purchase bonds backed by the commercial real estate mortgages collateralized debt obligations - CORRECT ANSWER A secondary market investment that can be backed by any kind of consumer debt, not just commercial mortgages government sponsored enterprises - CORRECT ANSWER Entities that purchase mortgages in the secondary market, Freddie Mac and Fannie Mae small business administration - CORRECT ANSWER Provides funds for small business owners to purchase commercial real estate yield - CORRECT ANSWER The return on an investment REIMC - CORRECT ANSWER Real Estate Mortgage Investment Conduit is used to pool mortgage loans and issue mortgage-backed securities to be purchased on the secondary market loan-to-value - CORRECT ANSWER The percent of the price or appraisal value that the buyer is borrower, whichever is lower Debt coverage ratio - CORRECT ANSWER A calculation that takes the property's net operating income and divides it by the annual debt service to determine loan qualification ECOA - CORRECT ANSWER Equal Credit Opportunity Act is a federal law that prohibits discrimination by lenders requiring lenders to equally apply qualification standards HMDA - CORRECT ANSWER Home Mortgage Disclosure Act requires lenders to report ethnicity, race, gender, and gross income of mortgage applicants and borrowers FCRA - CORRECT ANSWER Fair Credit Reporting Act is a federal law designed to protect consumers against unfair credit reporting practices and protect credit privacy. FIRREA - CORRECT ANSWER Financial Institutions Reform, Recovery, and Enforcement Act that modified federal laws governing thrift and bank regulation including real estate appraisal reforms TALCB - CORRECT ANSWER Texas Appraisal Licensing and Certification Board OCC - CORRECT ANSWER Office of the Comptroller of the Currency charters, regulates and supervises all national banks and federal savings associations as well as federal branches and agencies of foreign banks equity - CORRECT ANSWER The amount of cash paid into a property over and above any mortgage indebtedness hard costs - CORRECT ANSWER Cost associated with the building construction costs including labor and materials soft costs - CORRECT ANSWER Business costs not associated with the physical construction project non-recourse loan - CORRECT ANSWER Loans that are secured by assets like real estate but not by borrower's funds junior loan - CORRECT ANSWER A second loan that is subordinate to the original loan senior loan - CORRECT ANSWER The first mortgage called the first lien and is repaid first in default The U.S. provides a large chunk of commercial real estate debt-chartered depository institutions, otherwise known as commercial banks, but other sources of capital include: - CORRECT ANSWER commercial mortgage backed securities (CMBS) collateralized debt obligations (CDOs) life insurance companies credit unions government sponsored enterprises (GSEs) small business administration private investors bond waterfall - CORRECT ANSWER Commercial mortgage-backed securities (CMBS) are pools (portfolios) of commercial and multifamily first mortgage loans (primary liens) from which investors purchase bonds backed by commercial real estate mortgages. The monthly principal and interest paid from the income of the commercial properties flow to the investors, beginning with the investors who hold the highest-rated bonds (AAA/AA/A/BBB), followed by the next highest-rated bonds (BB/B), on down the line. This structure is called the "bond waterfall." CMBS offers many benefits to lenders, borrowers, investors, and the market at large. Some of the benefits include: - CORRECT ANSWER a wider range of investors can invest in commercial mortgages investors can manage their risk by choosing lower-risk bonds (higher-rated bonds carry less risk and have a lower interest rate) provides transparency in funding for real estate borrowers growth and stabilization of the commercial real estate market attractive yields for investors competitive loan rates for borrowers typically offer higher returns that government or corporate bonds SBA 504 Loans may be used to purchase: - CORRECT ANSWER land and improvements owner-occupied buildings, utilities parking lots construction of new facilities renovation or conversion of existing facilities purchase of long-term machinery and equipment financing soft costs The property must be 51% owner-occupied if it is an existing building and 60% owner-occupied if it is a newly constructed building. SBA 7(a) loan - CORRECT ANSWER this is the SBA's primary lending program The same owner-occupancy rates as a 504 loan still apply. Borrowers can also use the funds for: working capital equipment/inventory acquisition refinance of business debt change of ownership Minimum loan amounts begin at $50,000 up to a maximum of $5,000,000. Unlike SBA 504 Loans, the 7(a) Loan Program typically offers variable interest rates but does offer some fixed rates. Real estate and construction are financed up to 25 years through the program with a downpayment of 10% or more from the borrower. collateralized debt obligations - CORRECT ANSWER are divided into different risk categories called traunches life insurance companies fund loans from ________ paid by the insured. - CORRECT ANSWER premiums _________ are pools of commercial and multifamily first mortgage loans - CORRECT ANSWER CMBS commercial mortgage-backed securities commercial banks are __________ that provide lines of credit and loan products to the communities in which they are charted to do business for - CORRECT ANSWER depository institutions People finance commercial real estate because: - CORRECT ANSWER it is expensive and requires a large amount of capital to purchase financing leaves more cash that is not tied up in the company leveraging someone else's money to make money In addition to cash flow, lenders look at several aspects of a property when considering a loan request for commercial real estate, including: - CORRECT ANSWER property condition and maintenance (poor condition is a red flag for most lenders) property location/market (is the area economically depressed or on the rise?) successful operating history by the previous owner (if the previous owner was successful, there is a good chance that the applicant will be too) existing leases (who is leasing space, and how long are they locked in for?) traffic patterns (how easy or hard is it for consumers to get in or out of a property?) environmental issues (dry cleaners and gas stations in particular) difference between commercial and residential financing - CORRECT ANSWER size of the loans commercial lenders do not have to be licensed. An RMLO must be licensed to make a $100,000 residential mortgage loan, but no license is required for a commercial lender to make a $20 million apartment loan In residential real estate, lenders use a front ratio and a back ratio to qualify an applicant. Commercial lenders use the debt coverage ratio (debt service coverage ratio) to qualify the property. Down payments are higher in commercial real estate, as are interest rates. However, loan terms are shorter. While most residential mortgages are financed for a 15 or 30-year term, commercial mortgages rarely exceed a 10-year term; many are under 10 years. Unlike residential mortgages, which are simple-interest loans with no pre-payment penalties, commercial mortgages, especially those with fixed rates, usually have pre-payment penalties. Commercial loans have pre-payment penalties because CMBS investors want to make a certain yield on their investment over a specific period. example of loan to value - CORRECT ANSWER Leon, an investor, is considering purchasing a 5,236 sq.ft., 8-unit multifamily property, built in 1970, for $550,000. All 8 units were recently renovated with new carpet, paint, tile in the bathrooms, and kitchen appliances. 7 out of the 8 units are occupied. The occupancy rate runs on average at 87%. There is a laundry room located on-site, creating additional income for the landlord. The cap rate is 8.76%. Leon has $137,500 in cash and wants to borrow the rest of the purchase price from a lender. What is the loan to value on this property? Loan amount ($550,000 - $137,500) / Less of sales price or appraised value ($550,000) = LTV $412,500 / $550,00 = .75 LTV = 75% debt coverage ratio - CORRECT ANSWER The debt coverage ratio is a calculation that takes the property's net operating income (NOI), also called the annual operating income, and divides it by the annual debt service (ADS). If the result is greater than 1, the lender determines that the property generates enough income to pay all of the current debt obligations. Most commercial banks require a minimum DCR of 1.2 × NOI (profit margin for the owner). In order to ensure that there is enough income generated by the property to repay the loan, the lender may set a higher DCR for certain types of properties. NOI / ADS = DCR example - debt coverage ratio - CORRECT ANSWER An investment property brings in an NOI of $150,000. The mortgage payment is $110,000. What is the debt coverage ratio? NOI / Mortgage payment = DCR $150,000 / $110,000 = 1.36 DCR = 1.36 In essence, the property generates enough income to pay 100% of the mortgage after all of the expenses and has 36% left over. Net operating income (NOI) is the annual income of an income-generating property after all income has been collected from the property (rents, etc.) and the operating expenses have been subtracted. If the DCR calculation is less than 1, a property is generating negative cash flow, meaning that there is not enough NOI to pay all of its annual debts. In order to determine the maximum loan amount, the DCR is used to adjust for risk. NOI / DCR = ADS example - annual debt service - CORRECT ANSWER Jay wants to purchase a small strip center as an investment property. The center has an NOI of $100,000, and the lender requires a DCR of 1.2. What is the annual debt service for the property? NOI / DCR = ADS $100,000 / 1.2 = $83,333 (rounded) Jay is applying for a conventional bank loan with a fixed rate of 5% for 30 years. The DCR is 1.2. What is the maximum loan amount on the subject property rounded to the nearest hundred thousand? Step 1: Divide the ADS by 12 months. $83,333 / 12 = $6,944.42 per month Step 2: Calculate the amortization period. 30 (years) × 12 (months) = 360 periods Step 3: Calculate the interest per period. 5% / 12 (months) = 0.4166666% per period The maximum loan on the property is the present value (PV) of the loan payments (an annuity) at 5% per year with monthly compounding for 30 years. Using a TVM financial calculator, the values are: Payment (PMT) = $6,944.42Amortization period (N) = 360Interest (I) = 0.4166666 The Loan amount (PV) is $1,293,618. The lender may choose to round up to $1.3 million. Note: Commercial loans are calculated using a 360-day year as opposed to consumer loans, which are calculated at a 365-day year. debt coverage ratio fact - CORRECT ANSWER After the economic crisis of 2008, lenders raised the debt coverage ratio from 1.2 to 1.4. his increase hurt the commercial real estate market because businesses and investors had to have at least 40% equity in a property in order to obtain financing. This requirement destroys the leverage and returns for the investor. Virtually no deals transpired for a couple of years before the market stabilized. XYZ Corp wants build a 25-floor high-rise office building just outside of the city's central business district. The building will have a 20,000 sq.ft. footprint and will cost $100 per sq.ft. to construct. The corporation was able to secure bank financing through the SBA for 80% LTV. They still need to raise money for a down payment. XYZ contacts Agent Jay who specializes in raising equity capital for commercial real estate. Jay is able to bring in investors with big pockets to raise the remaining capital for the project. In order to qualify for financing through the SBA, what must XYZ Corp do? - CORRECT ANSWER occupy at least 60% of the building XYZ Corp wants build a 25-floor high-rise office building just outside of the city's central business district. The building will have a 20,000 sq.ft. footprint and will cost $100 per sq.ft. to construct. The corporation was able to secure bank financing through the SBA for 80% LTV. They still need to raise money for a down payment. XYZ contacts Agent Jay who specializes in raising equity capital for commercial real estate. Jay is able to bring in investors with big pockets to raise the remaining capital for the project. How much will it cost to construct the building? (Hint: Multiply the sq.ft. footprint by the number of floors. Then, multiply by the cost per sq.ft.) - CORRECT ANSWER 50 million XYZ Corp wants build a 25-floor high-rise office building just outside of the city's central business district. The building will have a 20,000 sq.ft. footprint and will cost $100 per sq.ft. to construct. The corporation was able to secure bank financing through the SBA for 80% LTV. They still need to raise money for a down payment. XYZ contacts Agent Jay who specializes in raising equity capital for commercial real estate. Jay is able to bring in investors with big pockets to raise the remaining capital for the project. How much equity capital must Agent Jay's investors raise for the downpayment on the office building? (Hint: Subtract 90% of the cost from the total cost to build.) - CORRECT ANSWER 5 million balloon note - CORRECT ANSWER Balloon loans are common in commercial real estate finance and are beneficial to some borrowers, especially those who plan to refinance or sell their property in the near term. A balloon loan is a partially amortized loan with a final payment substantially larger than the others Balloon loans often reach maturity (meaning the principal must be paid back to the lender) before the amortization period ends The main benefit of this type of loan is a lower interest rate if it is a fixed rate or declining interest environment. The main disadvantage is the high cost of refinancing and floating interest rates balloon loan example - CORRECT ANSWER For example, a borrower wants to purchase a retail center as an investment property. The primary tenant of the center is a discount, dollar store type retailer whose lease is for a term of five years with three five-year renewal options. The lender will require the loan term not to exceed 5 years. The loan is amortized for 20 years, with a balloon at 5 years. The note balloons at 5 years because the primary source of repayment is the tenant, whose lease term is up in 5 years. blanket mortgage - CORRECT ANSWER A blanket mortgage covers more than one piece of property. A builder may buy more than one lot in a new subdivision; he will do so with one loan. This type of loan is likely to contain a release clause, allowing the borrower to obtain partial releases of specific lots by making required lump sum payments. bridge loan - CORRECT ANSWER Bridge loans provide short-term financing, typically 12 to 36 months, that bridges the gap between two loans. Borrowers find bridge loans attractive because they often need temporary financing to renovate a run-down property before it will qualify for permanent financing or they need to refinance their existing commercial property, but their credit is less than ideal. Bridge loans are also utilized by developers to finance the building of houses until construction is completed and the new owners obtain permanent financing. Bridge loans are available for retail shopping centers, apartment buildings, hotels, industrial properties, office buildings, and raw land for development. These types of loans fund deals quickly, but they come at a price. collateral-dependent loans (hard-money loans) - CORRECT ANSWER A hard-money loan is a specific type of asset-based financing in which a borrower receives funds secured by the value of a parcel of real estate. Hard-money lenders lend on a "hard" asset - the property - with legitimate value. Hard-money loans are typically issued at much higher interest rates than conventional commercial loans. People only go to a hard-money lender when all other avenues for financing have been exhausted. Many hard-money loans are made by private investors, generally in their local areas. conduit loans - CORRECT ANSWER Conduit loans are used for the purchase or refinance of commercial properties. Typically non-recourse, permanent, and fixed-rate, conduit loans are first-position mortgage loans. Borrowers are attracted to conduit loans because their underwriting guidelines are more flexible than traditional bank loans, especially in terms of standards for liquidity and creditworthiness. They also carry lower interest rates and allow for higher leverage than most traditional bank loans. These mortgages are packaged with other commercial mortgages and sold in the secondary market to investment groups (see Commercial-Backed Mortgage Securities). Conduit lenders include life insurance companies, investment banks, commercial banks, and financial services firms. other types of commercial loans - CORRECT ANSWER construction-to-permanent mezzanine loan: Mezzanine financing is an alternative method of financing and is often utilized by businesses that have positive cash flow but need capital to expand their operations. For example, a restaurateur wants to do a large, expensive expansion project. Borrowers like the option of mezzanine financing because they do not have to put up their real estate as collateral. Instead, the lender gets certain options or warrants in the form of partial ownership of the business assets or stock if the loan goes into default. similar to second mortgages mini-perm loan: A mini-perm loan, by its very name, provides short-term financing for income-producing properties, like multifamily buildings and office buildings, or even construction projects. Mini-perm loans usually entail a 3 to 5-year term and function in a similar manner to bridge loans as they are often used to fill in the gaps between a temporary loan and permanent financing. Many borrowers choose a mini-perm loan to build a performance history for a start-up property, then search for more permanent financing once the income stream has been established participation loan: two or more lenders own a share. A participation loan allows lenders to share or distribute the risk (shared appreciation mortgage) wraparound mortgage: A wraparound mortgage is a method of financing that preserves the low, existing interest rate on the original note. The wraparound is seller financing, in which a new loan takes a secondary lien position, and the original mortgage is not repaid. there are several reasons that sellers might be interested in financing their own property for a borrower. - CORRECT ANSWER the seller decides on the interest rate and terms of the loan. The seller can make concessions for friends or family and offer more favorable terms If the property will not appraise because it is atypical or has unconventional characteristics If the property is non-performing or distressed The seller gains a source of income (an annuity) from the note payments The seller can get away from paying for property repairs and expenses related to real estate ownership There are several reasons that a buyer might be interested in seller financing. - CORRECT ANSWER No origination fees or discount points Save money on closing costs Closing process is typically faster Possibility of a lower downpayment Many seller-financed loans are short-term; buyers will often try to refinance before the note matures. If the buyer defaults on the payments, the seller can sell the property to another buyer. ___________ is a federal law designed to protect consumers against unfair credit reporting practices and protect credit privacy. - CORRECT ANSWER regulation V exemptions to FIRREA - CORRECT ANSWER appraisal threshold - for transaction value of $400,000 or less abundance of caution loans not secured by real estate liens for purposes other than the real estate's value real estate-secured business loans leases renewals, refinancings and other subsequent transactions transactions involving real estate notes transactions insured by government transactions that qualify for sale to, meet the appraisal standards of government transactions regulated institutions as fiduciaries appraisals not necessary to protect federal financial and public policy interests or the safety and soundness of financial institutions A commercial bank's working capital is primarily generated through ________. - CORRECT ANSWER account holders' deposits commercial mortgage-backed securities are pooled and held in a trust, often a _______, from which bonds are issued. - CORRECT ANSWER real estate mortgage investment conduit which of the following is not a benefit of commercial mortgage-backed securities mentioned in the text? - CORRECT ANSWER a. competitive loan rates for borrowers b. attractive yields for investors c. a wider range of investors can invest in commercial mortgages d. lower cap rates d. lower cap rates Collateralized debt obligations (CDOs) are divided into risk categories called _______ - CORRECT ANSWER tranches Which of the following institutions provides funding for commercial real estate loans? - CORRECT ANSWER life insurance companies commercial banks credit unions all of these all of these proforma - CORRECT ANSWER A cash flow projection for the property made by a prospective buyer consideration - CORRECT ANSWER Something of value given by the party to a contract. The buyer's promise to pay in exchange for the seller's promise to deliver a deed. amendment - CORRECT ANSWER Modification to an existing agreement. due diligence period - CORRECT ANSWER The feasibility period in which the buyer takes time to perform all necessary actions to determine the suitability of the property for the buyer. proration of rents - CORRECT ANSWER The division of collected unearned rent. estoppel certificate - CORRECT ANSWER A document signed by a current tenant reiterating their current rent and square footage. a letter of intent is considered a(n) ________ in the industry. - CORRECT ANSWER starting point a letter of intent is considered a(n) ________ way for a buyer to make an offer.t - CORRECT ANSWER low risk due diligence periods in commercial contracts operate similarly to _______ in residential contracts - CORRECT ANSWER option periods 5 essential elements of a valid contract - CORRECT ANSWER competent parties offer and acceptance (mutual consent) legal purpose in writing (when required by law) consideration reasons for termination - CORRECT ANSWER mutual agreement partial performance substantial performance impossibility operation of law breach of contract T or F: an offer that is agreed upon orally is not a contract - CORRECT ANSWER false T or F: earnest money is the consideration of a contract - CORRECT ANSWER false T or F: in texas, the statute of limitations is 4 years for a written agreement - CORRECT ANSWER true T or F: every contact has duties that must be performed by the parties - CORRECT ANSWER true T or F: a contract for an illegal activity is valid until it is challenged in court - CORRECT ANSWER false T or F: contracts with a person who lacks mental ability can be wither void or voidable - CORRECT ANSWER true T or F: an addendum changes an existing contract - CORRECT ANSWER false T or F: a sales contract is not terminated by the death of one of the parties - CORRECT ANSWER true typical closing costs include: - CORRECT ANSWER title work (title policy, fees for clear title) loan commitment fees (usually up to 1% for the luxury of having a loan) prorated property taxes appraisal const escrow (if applicable) insurance survey UCC search (to research liens on the property or equipment that will be transferred to the new owner) due diligence fees (environmental studies, inspections) A selling landlord has collected the June rent from all 8 tenants at $450 each per month. If the sale is closing on June 9, how much in unearned rent will the owner owe the buyer at closing? - CORRECT ANSWER $450 rent per unit X 8 units = $3600 monthly rent. $3600 / 30 days in June = $120 per day. June has 30 days - 9 days for closing day = 21 days of unearned rent. $120 per day X 21 days = $2520 unearned rent Mortimer is selling his 4-plex to investor Davis on May 15th. The May rents have already been collected for 3 of the units at $1,150 per unit, per month; the fourth unit is owner-occupied. How much in unearned rents is Davis entitled to receive from Mortimer? - CORRECT ANSWER $1150 rent per unit X 3 units = $3450 monthly rent $3450 / 31 days in May = $111.29 per day May has 31 days - 15 days for closing day = 16 days of unearned rent $111.29 per day X 16 days = $1780.65 TREC commercial contract - improved property - CORRECT ANSWER page 1: parties property sales price page 2: financing earnest money page 3: survey UCC search page 4: property condition feasibility period page 5: property information contracts affecting operations page 6: leases brokers page 7: closing page 8: sales expenses prorations page 9: prorations page 10-14: material facts agreement of the parties paragraph 22.E signatures The parties to the transaction are listed in paragraph _________ of the TXR Commercial Contract - Improved Property. - CORRECT ANSWER 1 Paragraph 4 uses checkbox selections to show all of the following choices for financing except __________ - CORRECT ANSWER contract for deed The _______________________ is a period of time that the buyer investigates to determine if the property is suitable for the buyer. - CORRECT ANSWER feasibility period A UCC search may be conducted to identify any _________ associated with the real property. - CORRECT ANSWER personal property Paragraph ______ discloses who the broker(s) represents(s) and any fee to be paid by the Principal Broker to a Cooperating Broker. - CORRECT ANSWER 9 A(n) ___________ should be delivered to the buyer from the seller within a previously negotiated number of days when the property is encumbered by at least one lease. - CORRECT ANSWER estoppel certificate According to the TXR Commercial Contract - Improved Property contract, rollback taxes will be paid by the ____________. - CORRECT ANSWER party that changes the use if the property [Show More]

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