TAMU FINC 475 - Final Exam Study Guide (10 pages)

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Final Exam Study Guide

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Final Exam Study Guide


Includes new chapters, REIT presentation notes, and DCF practice problems

Study Guide
Texas A&M University
Finc 475 - Real Estate Inv Anlys
Real Estate Inv Anlys Documents
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FINC 475 1st Edition Final Exam Study Guide Lectures Ch 15 19 21 and 23 REIT Notes DCF NOTE This exam is cumulative See previous study guides for a review of previous material This study guide includes the new chapters REIT presentation information and DCF practice problems New Chapters 15 19 21 23 Chapter 15 What are the four categories of risk 1 Business Risk making inappropriate business decisions or misjudging consequences of ones actions 2 Financial Risk choice of financial arrangements 3 People Risk from dependency on others 4 Political Risk from dependency on government What are a few ways to manage risk Insurable Risk safe deals diversification research experience shift risk to tenant hedging What are the steps in how to identify risk Identify Assess Probability Determine Response Plan Set Up Systems to Manage Monitor Why is it important to identify risk Improve Decision Making Planning and Prioritization Allocate Capital and Resource more Efficiently Anticipate what might go Wrong Reduces Firefighting Improve Probability of Success What are the traditional tools for risk assessment Payback Period Risk Adjusted Discount Rate most common use risk premium each project has its own risk characteristic Partitioning of Cash Flows NPV of each piece to see which is most important Sensitivity Analysis Extension of Partitioning in that we add the impact of changing variable What are the contemporary tools for risk assessment Rank the Risks according to probability and outcome Work Breakdown Structure is a timeline of the project Chapter 19 What are the categories of constraints for investments Physical engineering limits soil tolerances size limits amount of space neighborhood amenities transportation services etc Legal zoning court rulings public pressure Valuation market considerations What is the difference between feasibility and valuation Both utilize the same data however valuation is solely asset worth aka already assumes reasonable feasibility and feasibility considers more than value What constitutes highest and best use Legally permissible physically possible financially feasible maximally productive What are the steps in the feasibility study 1 Assess physical and legal aspects 2 Estimate demand and tenant needs 3 Analyze competition 4 Estimate costs 5 Determine financing costs 6 Estimate absorption 7 Prepare cash flow analysis 8 Determine investor returns What is the purpose and benefit of sensitivity analysis The purpose is to determine the level of impact on Financial Feasibility by adjusting Variables or Assumptions The benefits are that you can determine the level of cushion in the assumptions be better prepared at negotiating table and ultimately gain confidence in project What does feasibility analysis attempt to do Feasibility analysis attempts to estimate the probability of success of a specific proposed course of action Chapter 21 What is development redevelopment and gentrification Development is the process of adding improvements to land Redevelopment is taking property with exiting improvements and upgrading or converting it to another use Gentrification is the buying and renovation of houses and stores in deteriorated urban neighborhoods by upper or middle income families or individuals thus improving property values but often displacing lowincome families and small businesses A successful development must do what Meet an Existing Need Ensure Financial Success Overcome Legal Requirements What are the steps of basic real estate development Identify market demand o Research May buy raw or improved land o Control a site Secure a tenant or build on spec Secure zoning entitlements and permits Design Finance Build Improvements o 6 24 month Construction Process Lease and occupy o Marketing Leasing and Building Operations What are the types of subdivisions Residential Home Lots Commercial Industrial Office Parks Mixed Use Mall Development Condominium Conversion Time Shares What are the steps in the subdividing process Determine Absorption i e demand Tie Up of Control Land o Purchase or option Develop Plan Survey locate lots easements Obtain Entitlements Improve Land grading utilities streets curbs sidewalks Sell What are the risks of subdividing Return is from capital appreciation or resale Also the sale of the entire development may take years Explain the J curve with regard to the cash flow timeline There are heavy initial cash outlays so it starts out negative then increases Eventually overhead declines with success of sales What is the J curve risk in land Heavily dependent on the success of non income producing asset Chapter 23 What is a REIT REITS were modeled after the mutual fund A REIT is a company that combines the capital of many investors to acquire and manage real estate REITs do not pay corporate income tax and thus investors are not double taxed In order to qualify as a REIT the company must comply with certain provisions of the IRS What are two other real estate securities First there are real estate operating companies which are conventional taxable corporations engaged in real estate investments that are more typical of development companies and hotel management Second there are commercial mortgage backed securities which are shares in pools of mortgages What are the six requirements to qualify as a REIT 1 Invest at least 75 of its total assets in RE 2 Derive at least 75 of gross income from rents of real property or interest on mortgages of real property 3 Pay dividends of at least 90 of taxable income 4 Be managed by a Board of Directors or Trustees 5 Minimum of 100 shareholders no less than five owning more than 50 of the voting shares 6 Be a corporation business trust or similar association What is the difference between a REIT and an UPREIT Traditionally real estate property ownership interests were exchanged for REIT shares thereby causing a capital gains income taxation event The UPREIT structure was created to avoid recognition of taxable income for existing property owners on the transfer of appreciated property to a REIT For the UPREITs one of the major advantages are instead of paying cash is that you have the ability to issue limited partnership units As a result nearly two thirds of all newly formed REITs since 1992 have resulted from an UPREIT structure More than half of the largest REITs are organized as UPREITs at present What does funds from operations mean FFO is considered a supplemental number and means GAAP net income

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