Escolar Documentos
Profissional Documentos
Cultura Documentos
ACCOUNTING NOTES
PROFESSOR MICHAEL F.X.WATERS
SEPTEMBER 7, 1989
FINANCIAL ACCOUNTING (WITH FINANCIAL STATEMENTS)
HOW TO PROVE TO INTERESTED OTHERS WHAT IS GOING ON IN A BUSINESS
A.K.A. COMPLIANCE ACCOUNTING
TO I.R.S., S.E.C., BOARD OF DIRECTORS OF BANKS, LENDERS, CREDITORS
PRODUCED FOR EXTERNAL USE
MANAGERIAL ACCOUNTING
A.K.A. CONTROL ACCOUNTING
MANAGING THE RESOURCES RESULTANT OF BUSINESS POLICY
IN WATERS' VIEW, THE MAIN FOCUS OF ACCOUNTANTS IS THE FINANCIAL
ACCOUNTING AS OPPOSED TO MANAGERIAL ACCOUNTING.
THIS IS PROBLEMATIC
BECAUSE THE FIRST IS DONE, IN SUBSTANCE, TO ACCOMMODATE THE PROPER
UTILIZATION OF THE SECOND.
GAAP GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
FASB FINANCIAL ACCOUNTING STANDARDS BOARD (IN EXISTENCE SINCE 1973)
GAAP AND FASB DETERMINE THE APPROPRIATE STANDARDS FOR THE INDUSTRY
FASB IS LIKE THE SUPREME COURT OF ACCOUNTING
WHY DO ACCOUNTANTS DEAL MOSTLY WITH "EXTERNAL" ACCOUNTING?
FOR TWO REASONS:
ACCOUNTANTS MAKE MORE MONEY DOING IT
CERTIFIED AUDITS ARE NECESSARY TO GET LENDING, MANAGEMENT IS NOT
CPA - CERTIFIED PUBLIC ACCOUNTANT
CMA - CERTIFIED MANAGEMENT ACCOUNTANT
THEY ARE DIFFERENT, AND ARE SPECIALISTS, AND CAN NOT DO EACH OTHERS
WORK.
"WHAT IS NOT COUNTED CAN NOT BE MEASURED, WHAT CAN NOT BE MEASURED CAN
NOT BE CONTROLLED"
- OR YOU HAVE TO KNOW WHAT YOUR COSTS ARE IN ORDER TO CONTROL AND MANAGE THEM
TYPES OF ACCOUNTING FOR JOINT VENTURES
EQUITY METHOD OF ACCOUNTING
RE: THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS IN COMMON STOCK
THE STATEMENT INDICATES THAT A VENTURER SHOULD ACCOUNT FOR THE ONGOING
OPERATIONS OF THE JOINT VENTURE ON THE EQUITY METHOD. THAT PRESUMPTION
MAY BE OVERCOME, HOWEVER, WHEN A VENTURER HAS LESS THAN A 10 PERCENT
INTEREST IN THE TOTAL VENTURE AND CAN CLEARLY BE CONSIDERED A PASSIVE
PARTNER IN THE JOINT VENTURE. IN THESE CASES IT MAY BE APPROPRIATE TO
BECAUSE THIS IS THE ONLY WAY THAT THE INVESTOR CAN REALIZE HIS
INVESTMENT.
AS A GENERAL RULE, SPECIFIED PROFIT AND LOSS ALLOCATION RATIOS SHOULD NOT
BE USED TO DETERMINE AN INVESTOR'S EQUITY IN VENTURE EARNINGS IF THE
ALLOCATION OF CASH DISTRIBUTIONS AND LIQUIDATION DISTRIBUTIONS ARE
DETERMINED ON SOME OTHER BASIS. FOR EXAMPLE AN AGREEMENT ALLOCATING ALL
DEPRECIATION TO ONE INVESTOR AND ALL REVENUE AND EXPENSES EQUALLY, BUT
PROVIDING THAT IRRESPECTIVE OF SUCH ALLOCATIONS CASH DISTRIBUTIONS TO THE
INVESTORS WILL BE MADE SIMULTANEOUSLY AND DIVIDED EQUALLY BETWEEN THEM,
THERE IS NO SUBSTANCE TO THE PURPORTED ALLOCATION OF DEPRECIATION
EXPENSE.
HOW TO OWN PROPERTY
PROPRIETORSHIP - TITLE DEED IS RECORDED IN INDIVIDUAL'S NAME
PARTNERSHIP - TWO OR MORE PERSONS (GENERAL AND LIMITED PARTNERSHIPS)
CORPORATION - AN ENTITY FOR OWNING LAND (S CORPORATION AND C CORPORATION)
JOINT VENTURE - A MIX OF THE ABOVE
INITIAL CAPITAL CONTRIBUTIONS
INVESTMENT IN THE FORM OF PROPERTY IS RECOGNIZED AT THE COST BASIS OF THE
PROPERTY.
AN EQUITY INTEREST IN A JOINT VENTURE, OBTAINED IN EXCHANGE FOR SERVICES
RENDERED OR TO BE RENDERED, SHOULD BE RECOGNIZED AT THE COST OF THOSE
SERVICES.
AS A GENERAL RULE, AN INVESTMENT IN A JOINT VENTURE SHOULD BE RECOGNIZED
AT THE VENTURER'S COST OF THE ASSETS CONTRIBUTED.
SOME TRANSACTIONS, STRUCTURED IN THE FORM OF CAPITAL CONTRIBUTIONS, MAY
IN ECONOMIC SUBSTANCE, BE SALES AND SHOULD BE ACCOUNTED FOR UNDER THE
GUIDELINES OF FASB 66.
AN
INVESTOR
CONTRIBUTING
PROPERTY
TO
A
VENTURE
MAY
OBTAIN
DISPROPORTIONATELY SMALL INTEREST IN THE VENTURE BASED ON A COMPARISON OF
THE CARRYING AMOUNT OF THE PROPERTY WITH THE CASH CONTRIBUTED BY THE
OTHER INVESTORS.
SUCH A SITUATION MAY INDICATE THAT THE INVESTOR
CONTRIBUTING THE PROPERTY HAS SUFFERED A LOSS THAT SHOULD BE RECOGNIZED.
SEE BONGIORNO 2.52.3 FOR EXCEPTIONS TO THESE RULES.
THE JOINT VENTURE
CORPORATE JOINT VENTURES ARE OWNED AND OPERATED BY A SMALL GROUP OF
VENTURERS TO ACCOMPLISH A MUTUALLY BENEFICIAL VENTURE OR PROJECT.
UNDIVIDED INTERESTS ARE AN OWNERSHIP ARRANGEMENT IN WHICH TWO OR MORE
PARTIES JOINTLY OWN PROPERTY, AND TITLE IS HELD INDIVIDUALLY AND
OPERATIONS ARE SHARED TO THE EXTENT OF EACH PARTY'S INTEREST.
THE PROPRIETORSHIP (W-2)
(K-1)
TO
HIS
FOR EXAMPLE:
BUY A BUILDING FOR TEN MILLION DOLLARS.
I NEED ONE MILLION TO TAKE OVER THE BUILDING.
I GET TEN FRIENDS WITH
100,000 DOLLARS EACH (50,000 CASH, 50,000 NOTE PAID OVER TWO YEARS). EVEN
THOUGH A CLAIM MAY BE MADE AGAINST THE COMPANY BEFORE THE FULL TWO YEARS
PASSED AND WITH THE 50,000 NOTE NOT FULLY PAID, THE LIABILITY OF THE
LIMITED PARTNER IS STILL THE FULL 100,000 DOLLARS.
THE GENERAL PARTNER IS USUALLY A CORPORATION WITH NO ASSETS, OFF SHORE.
THE GENERAL PARTNER NEED NOT CONTRIBUTE ANY MONEY.
THE LIMITED PARTNER CAN NOT BE INVOLVED IN MANAGEMENT ACTIVITIES,
THEREFORE THE COMPANY NEEDS A MANAGER. IF THE LIMITED PARTNER DOES GET
INVOLVED, HE BECOMES A GENERAL PARTNER.
THE K-1 IS THE FORM DETAILING INCOME AND LOSS ON INTEREST IN A LIMITED
PARTNERSHIP.
THE INFORMATION RETURN WHICH IS THE W-2 EQUIVALENT FOR
INDIVIDUAL RETURNS OF A LIMITED PARTNERSHIP. THE VEHICLE IS THE BUSINESS
WHICH IS THE LIMITED PARTNERSHIP.
THE CORPORATION
CORPORATION POSITIVES - OWNERS SHIELDED FROM SUITS, LIMITED LIABILITY,
CREDITORS HAVE NO CLAIM AGAINST THE OWNERS' PERSONAL ASSETS, ONLY AGAINST
THE CORPORATIONS' ASSETS.
CORPORATION NEGATIVES - CORPORATE TAX FOR THE "C" CORPORATION (SEE ALSO,
PROBLEM WITH "S"CORP., UNDER "PROBLEM"
-------------DISCUSSION CONTINUED
THE "C" CORPORATION - ORGANIZED IN ACCORDANCE WITH STATE LAW. IT IS A
LEGAL ENTITY ("A PERSON"). CORPORATION OWNS 100% OF STOCK.
TAXES ARE PAID BY THE CORPORATION AS IF IT WERE A PERSONAL ENTITY (I.E. A
PERSON) BASED ON A GRADUATED SCALE .
TOPS OUT AT 34% OVER 75,000
DOLLARS.
THE "S" CORPORATION - SINCE 1959.
THE SAME AS A C CORPORATION EXCEPT
TAXED UNDER SUBCHAPTER S OF THE INTERNAL REVENUE CODE, TO BE TAXED AS IF
IT WERE A PARTNERSHIP.
IT IS A CONDUIT WHICH TAKES PROFIT AND DISTRIBUTES IT TO STOCKHOLDERS WHO
THEN PAY TAXES ON IT ON THEIR 1040.
THEREFORE, SINCE PROFITS ARE
DISTRIBUTED, IT PAYS NO TAXES. K-1 IS GIVEN TO EACH STOCKHOLDER.
PROBLEM:
YOU ARE TAXED ON SHARE PROFIT WHETHER OR NOT YOU WITHDRAW AND
TAKE POSSESSION OF THE MONEY.
9/14/89
CHAPTER ONE REVIEW AND PARTNERSHIP ACCOUNTING
THE "ENTITY", WHAT IS IT?
I.E. AN INDIVIDUAL MAY OWN LAND AS A PROPRIETOR, CORPORATION, OR PARTNER.
THE ACCOUNTING
RULES ARE DIFFERENT AND ALL MUST BE CONSIDERED
SEPARATELY.
THE BASIS OR METHOD OF ACCOUNTING............ ACCRUAL OR CASH BASIS
ASSETS = LIABILITY + CAPITAL
DEFINITION: ASSETS ARE ANYTHING THAT THE BUSINESS OWNS, OR POSSESSES
UNDER A CAPITAL LEASE WHICH CAN, BUT NOT NECESSARILY WILL, BRING A FUTURE
CASH FLOW.
THERE MUST BE A CLAIM WHICH LINKS OWNER WITH ASSET.
LIABILITY = DEBT OR CLAIM AGAINST AN ASSET
CAPITAL: HAS DIFFERENT TITLES DEPENDING ON TYPE OF OWNERSHIP. BASICALLY,
IT IS THE INVESTMENT IN THE BUSINESS ENTERPRISE FOR ITS DURATION.
CAPITAL IS CONSTANTLY CHANGING OR SUBJECT TO CHANGE.
EQUITY CAPITAL IS AN ASSET OR INVESTMENT WITH NO CLAIM AGAINST IT.
DEBT CAPITAL IS AN ASSET WITH A CLAIM AGAINST IT.
REVENUE IS THE RECEIPT OF FUNDS.
IT IS ALL KINDS OF INCOME, SUCH AS,
COMMISSIONS, RENTALS, MISCELLANEOUS.
IT IS THE INFLOW OF RESOURCES,
GENERALLY IN THE FORM OF CASH, NOTES, OR ACCOUNTS RECEIVABLE.
INCOME IS THE EXCESS OF REVENUE OVER THE ASSOCIATED EXPENSES AND LOSSES
FOR A PERIOD.
THE METHOD YOU CHOOSE DEPENDS ON YOUR BUSINESS. THE ACCRUAL METHOD IS
PREFERABLE, BECAUSE THE MATCHING PRINCIPLE IS BETTER APPLIED.
THE CASH METHOD: USED IN THE REPORTING OF INCOME RECEIVED DURING A
PERIOD, AND DOES NOT CONSIDER INCOME EARNED BUT NOT RECEIVED.
AN EXAMPLE OF ACCRUAL METHOD:
A LOAN, TAKEN OUT ON OCTOBER 30, 1989, HAS A PAYMENT DUE ON FEBRUARY 1,
1989. INTEREST FOR 1989 COMPUTED IN RELEVANT PERIOD (1989) BY COMPUTING
INTEREST FROM OCTOBER 30, 1989 TO DECEMBER 31, 1989.
QUESTION: WHEN MUST THE ACCRUAL METHOD BE USED?
ANSWER: WHEN REQUIRED.
WHEN YOU ARE USING INVENTORY IN YOUR BUSINESS,
FOR INSTANCE. (I.E. BUSINESS OF BUYING AND SELLING PROPERTY; BUILDINGS
AND LAND ARE YOUR INVENTORY)
INVENTORY IS SOMETHING THAT YOU ACQUIRE WITH THE INTENT TO SELL TO A
CUSTOMER IN THE NORMAL COURSE OF BUSINESS, FROM THE POINT OF ACQUISITION.
BUSINESSES WITH INVENTORY MUST USE THE ACCRUAL METHOD. BUSINESSES WITH
DEPRECIATION
DEPRECIATION =
AMOUNT OF DEPRECIATION IN
I.E.
CAPITALIZED STATEMENT:
WHAT MAY BE CAPITALIZED? IF AND ONLY IF EXPENDITURE EXTENDS THE ECONOMIC
LIFE BEYOND THAT WHICH WOULD OTHERWISE BE EXPECTED.
MAY IT BE CAPITALIZED?
SOME EXAMPLES...
YES
NEW BOILER
ALL NEW ROOF
NO
PAINT
PATCH ROOF
9/21/89
BONGIORNO - 2.22.4 TABLE
RENT
1ST 24
NEXT 18
NEXT 18
NEXT 12
MONTHS................................120,000
MONTHS................................150,000 "AN
MONTHS................................180,000 ESCALATING
MONTHS................................160,000 LEASE"
---------72 MONTHS TOTAL
610,000
FOR FINANCIAL STATEMENT PURPOSES, THE ABOVE MUST BE "EVENED OUT" (NOT
APPLICABLE TO TAX ACCOUNTING).
(610,000 / 72) x 12 = 101,667 (RENTAL EXPENSES IN EACH YEAR)
DEFINITION OF "MATERIAL" INFORMATION:
THAT INFORMATION
IMPORTANT, WHICH IS DEFINED AS 5 PERCENT OR GREATER OF INCOME.
ESCALATION CLAUSES.............EXAMPLES
BASE LABOR PRICE
HEATING COSTS
REAL ESTATE TAXES
10
WHICH
IS
TO THE EXTENT THAT YOU KNOW THE ABOVE, YOU ADJUST THE FIGURES PERTAINING
TO THEM.
ESTIMATED USEFUL LIFE IS NOT RELEVANT TO TAX ACCOUNTING BECAUSE THE
FIGURE FOR DEPRECIATION IS GIVEN BY REGULATION, AND IS NOT ESTIMATED.
THESE FIGURES ARE AS FOLLOWS:
COMMERCIAL REAL ESTATE = 31.5 YEARS
RESIDENTIAL REAL ESTATE = 27.5 YEARS
REGULATORY ACCOUNTING:
WHEN LOOKING AT FINANCIAL STATEMENTS, BE SURE YOU ARE LOOKING AT THE
FINANCIAL REPORT RATHER THAN THE TAX REPORT.
SALARY - A DIVISION OF PROFITS, NOT A SALARY TO EMPLOYEES, UNDER THE
PARTNERSHIP ENTITY.
NO WITHHOLDING OF FICA AND SOCIAL SECURITY PAYMENTS
NOT A "SALARY EXPENSE" (SEE PAGE 25, WILEY)
PARTNER CAN NOT BE AN EMPLOYEE AND RECEIVE A SALARY...HIS SALARY
IS IN A DIFFERENT "CLASS".
-UNLESSA GUARANTEED PARTNER GETS THE PARTNER "NAME", GETS A GUARANTEED
SALARY, VOTING RIGHTS, BUT NO SHARE IN THE BUSINESS. WHEN YOU
ARE A TRUE PARTNER, YOU LOSE GUARANTEED SALARY.
REVENUE RECOGNITION - WHEN DO WE RECOGNIZE REVENUE? SEE PG. 29, WILEY AND
PG. 36,37 WILEY.
FASB 66- ANSWERS THE FOLLOWING QUESTIONS:
AT WHAT POINT ARE REVENUES RECOGNIZED?
IF PROFIT OR LOSS IS TO BE RECOGNIZED, WHICH RECOGNITION METHOD
SHOULD BE USED?
REVENUE IS RECOGNIZED WHEN BOTH OF THE FOLLOWING CONDITIONS ARE MET:
THE EARNING PROCESS IS COMPLETE
AN EXCHANGE HAS TAKEN PLACE
FOR FINANCIAL REPORTING PURPOSES, AMOUNTS FOR RENT RECEIVED IN ADVANCE
ARE NOT TREATED AS REVENUE OF THE PERIOD IN WHICH THEY ARE RECEIVED, BUT
AS REVENUE OF THE PERIOD IN WHICH THEY ARE EARNED.
AS A RULE, THERE ARE TWO BASIC CRITERIA WHICH MUST BE MET FOR PROFIT TO
BE RECOGNIZED:
THE COLLECTIBILITY OF THE SALES PRICE SHOULD BE REASONABLY ASSURED,
AND THE AMOUNT THAT WILL NOT BE COLLECTIBLE SHOULD BE ABLE TO BE
ESTIMATED SO THAT THE AMOUNT OF PROFIT CAN BE DETERMINED; AND
THE SELLER SHOULD NOT BE OBLIGATED TO PERFORM SIGNIFICANT
ACTIVITIES AFTER THE SALE TO EARN THE PROFIT; THAT IS, THE EARNINGS
PROCESS SHOULD BE COMPLETE.
RECOGNITION OF ALL OF THE PROFIT AT THE TIME OF SALE OR AT SOME LATER
TIME WHEN BOTH CONDITIONS EXIST IS REFERRED TO AS THE FULL ACCRUAL
11
METHOD.
SEE BONGIORNO 2.61.2 FOR DECISION TREE OF PROFIT RECOGNITION
DETERMINING PROPER METHOD OF PROFIT RECOGNITION
PROFIT ON REAL ESTATE SALES TRANSACTIONS INCLUDING PARTIAL SALES IS NOT
TO BE RECOGNIZED BY THE FULL ACCRUAL METHOD UNTIL ALL OF THE FOLLOWING
CRITERIA ARE MET:
*
A SALE IS CONSUMMATED
*
THE BUYER'S INITIAL INVESTMENT IS ADEQUATE TO DEMONSTRATE A
COMMITMENT TO PAY FOR THE PROPERTY.
*
THE BUYER'S CONTINUING INVESTMENT IS ADEQUATE TO DEMONSTRATE A
COMMITMENT TO PAY FOR THE PROPERTY.
*
THE SELLER HAS TRANSFERRED TO THE BUYER THE USUAL RISKS AND REWARDS
OF OWNERSHIP IN A TRANSACTION THAT IS IN SUBSTANCE A SALE. THE
SELLER DOES NOT HAVE A SUBSTANTIAL CONTINUING INVOLVEMENT WITH THE
PROPERTY.
CONSUMMATION OF SALE TAKES PLACE WHEN:
THE PARTIES ARE BOUND BY THE TERMS OF A CONTRACT;
ALL CONSIDERATION HAS BEEN EXCHANGED;
ANY PERMANENT FINANCING FOR WHICH THE SELLER IS RESPONSIBLE HAS
BEEN ARRANGED;
ALL CONDITIONS PRECEDENT TO CLOSING HAVE BEEN MET.
IN MOST CASES, THESE FOUR CRITERIA ARE MET AT THE TIME OF CLOSING, AND
NOT MET AT THE TIME AN AGREEMENT TO SELL IS SIGNED OR AT PRECLOSING.
FASB 66 HAS ONE EXCEPTION TO THE FOURTH ITEM: DUE TO THE AMOUNT OF TIME
THAT ELAPSES DURING THE CONSTRUCTION PERIOD, A CERTIFICATE OF OCCUPANCY,
WHICH IS A CONDITION PRECEDENT TO CLOSING, MAY NOT YET HAVE BEEN OBTAINED
AT THE TIME OF CLOSING. IN THIS CASE, INCOME MAY BE RECOGNIZED DURING
THE PERIOD OF CONSTRUCTION SUBJECT TO THE FOLLOWING CONDITIONS:
PROFIT SHOULD BE RECOGNIZED ON A PERCENTAGE OF COMPLETION BASIS,
PROVIDED THAT THE COSTS MAY BE REASONABLY ESTIMATED. IF THE SELLER
DOES NOT HAVE A SUCCESSFUL CONSTRUCTION HISTORY FROM WHICH TO MAKE
ESTIMATES, COMPLETED CONTRACT METHOD IS USED.
CONSUMMATION OF SALE HAS NOT TAKEN PLACE: WHAT DO YOU DO?
THE DEPOSIT METHOD OF ACCOUNTING IS TO BE USED UNTIL
CONSUMMATED.
THE
SALE
IS
12
13
14
MEETS THE
OTHER CRITERIA
15
OF COMPLETION
COMPLETED.
METHOD
AS
THE
REMAINDER
OF
THE
EARNINGS
PROCESS
IS
BROKER
HAS
COMMISSION
OF
114,000
ON
THE
TWO
IN FASB TERMS, OXY RECORDS SALE OF PROPERTY WITH 3,000,000 PROFIT WITH
114,000 EXPENSE (THE BROKER'S FEE)
EARNINGS PER SHARE IS THE MOST COMMONLY USED FINANCIAL FIGURE.
IT IS
USED TO GAUGE THE MARKET VALUE OF A SECURITY. IT EFFECTS PRICE/EARNINGS
RATIO. EPS BRINGS UP P.E.R., WHICH INCREASES STOCK PRICE. THIS WAS THE
PURPOSE OF THE ABOVE OXY/CLOUT DEAL.
FASB GUARDS ACCESS TO FULL ACCRUAL ACCOUNTING OF REAL ESTATE SALES.
VALUATION ISSUES
NET REALIZABLE VALUE
LAND AND BUILDINGS HELD FOR SALE OR BEING DEVELOPED FOR SALE, REPRESENT
THE INVENTORY OF THE COMMERCIAL DEVELOPER. INVENTORIES SHOULD BE CARRIED
AT 'COST', WHICH IS NOT IN EXCESS OF MARKET OR AT 'LOWER OF COST OR
MARKET'. BECAUSE THERE IS NO QUOTED MARKET AND BECAUSE OF THE UNIQUENESS
OF LAND AND BUILDING LOCATIONS, WHICH OFTEN DISCREDITS THE VALIDITY OF
REPLACEMENT COST, MARKET IS USUALLY CONSIDERED TO BE NET REALIZABLE
VALUE. THUS, THE NET REALIZABLE VALUE IS GENERALLY THE FAIR MARKET VALUE
REDUCED BY THE COSTS OF DISPOSITION.
NRV IS BASED ON A PROJECT BY PROJECT ANALYSIS. INDIVIDUAL PROJECTS ARE,
FOR THIS PURPOSE, COMPONENTS OR WHOLES OF A PROJECT THAT ARE HOMOGENOUS
IN NATURE.
FOR EXAMPLE, A MULTIPHASE DEVELOPMENT CONSISTING OF A TRACT OF SINGLEFAMILY HOUSES, A CONDOMINIUM COMPLEX, AND A LOT SUBDIVISION WOULD BE
EVALUATED AS THREE SEPARATE PROJECTS.
IN DETERMINING THE COST OF
16
17
ASSET, YOU
WILL HAVE
AN ACCUMULATED
BUILDING.....................................3,000,000
LESS
ACCUMULATED DEPRECIATION..................... 200,000
EQUALS
-------------BOOK VALUE.................................. 2,800,000
LAND........................................
100,000
EQUALS
-------------TOTAL VALUE................................. 2,900,000
SOLD FOR.................................... 3,000,000
FINANCIAL GAIN..............................
100,000
SEE SECTION 179 - DEPRECIATION
AS PERTAINING TO TAX ACCOUNTING, 10,000 PER YEAR MAY BE DEDUCTED AS
DEPRECIABLE ASSETS (EXCLUDING REAL PROPERTY).
THIS HAS NOTHING TO DO
WITH FASB, HOWEVER, AS IT DOES NOT PERTAIN TO FINANCIAL ACCOUNTING.
DEPRECIATION IS PRO-RATED OR DISBURSED ON MID YEAR CONVENTION FOR
PROPERTY PURCHASED AT TIMES OTHER THAN THE FIRST OF THE YEAR OR SOLD
BEFORE THE LAST OF THE YEAR.
READ BONGIORNO CHAPTER TWO
CHAPTER THREE, STARTING 3.01 TO 3.43
WILEY, CHAPTER 3 AND 4
END OF THIRD CLASS
9/28/89
REAL ESTATE ESCALATIONS
LABOR COSTS
CONTINGENT uncertainty in facts
18
C.P.I.
GOT
IN
SETTING
THE
LAW
ON
REVENUE
KNOW THAT YOU CAN NOT RECORD EXPENSES UNLESS IT CAN BE MATCHED WITH
REVENUES WHICH CAUSED THEM TO OCCUR.
EXAMPLE: ON NOVEMBER 30, 1989, A COMPANY SIGNS A LEASE
ON DECEMBER 1, 1990, THEY OCCUPY THEIR OFFICE SPACE.
RENT: 5,000 MONTHLY FOR FIVE YEARS
AT THE SIGNING OF THE LEASE, THEY PUT UP 2 MONTHS RENT AS SECURITY
(10,000).
ADDITIONALLY, THEY PUT UP THE FIRST MONTH'S RENT (5,000).
FURTHERMORE, THEY TURN OVER A CHECK FOR 60,000 FOR LEASEHOLD ALTERATIONS
THAT HAVE BEEN COMPLETED. THE TOTAL AMOUNT, THEN, IS 75,000.
UNDER ACCRUAL ACCOUNTING, WHAT IS THE EXPENSE FOR THIS OFFICE SPACE?
UNDER THE RULES OF FINANCIAL ACCOUNTING, THIS EXAMPLE IS AN OPERATING
LEASE. WE MUST DETERMINE THE RENT EXPENSES, AND EVALUATE THE TIMING OF
THE RECOGNITION OF THOSE EXPENSES.
FIRST MONTHS RENT
5,000
ASSETS
LIABILITIES
10,000 SECURITY (NEVER AN EXPENSE)
5,000 RENT
60,000 LEASEHOLD IMPROVEMENTS
1,000 FOR IMPROVEMENTS
MINUS
(60,000 / 60 MONTHS)
1,000 DEPRECIATION ON THE 60 MONTH LEASE
------59,000
10,000
-----69,000
FOR TAX ACCOUNTING PURPOSES, THE IMPROVEMENTS ARE DEPRECIATED OVER THE
LIFESPAN OF THE IMPROVEMENT, NOT THE LEASE PERIOD FOR THE TENANT. FOR
THE OWNER, THE OFFICE SPACE WOULD BE DEPRECIATED OVER 31.5 YEARS.
FOR FINANCIAL ACCOUNTING PURPOSES, YOU AMORTIZE THE IMPROVEMENTS OVER THE
LIFE OF THE LEASE OR THE ECONOMIC LIFE OF THE IMPROVEMENTS, WHICHEVER IS
LESS.
THEREFORE, EQUIPMENT IN THE BUILDING WITH AN ECONOMIC LIFE OF,
SAY, 7.5 YEARS WILL STILL DEPRECIATE AT 5.0 YEARS BECAUSE THE LEASE IS
OVER 60 MONTHS.
IS IT AN OPERATING LEASE OR A CAPITAL LEASE?
3.30 AND 3.31 IN BONGIORNO (CAPITAL LEASE).
19
20
OPERATING LEASES
NEITHER AN ASSET NOR A LIABILITY IS RECORDED FOR AN OPERATING LEASE.
RENTAL PAYMENTS ARE CHARGED TO OPERATIONS AS THEY BECOME DUE.
IF RENTAL PAYMENT IS NOT MADE ON A STRAIGHT LINE BASIS, RENTAL EXPENSE
SHOULD, HOWEVER, BE RECOGNIZED ON A STRAIGHT LINE BASIS UNLESS ANOTHER
SYSTEMATIC BASIS IS MORE APPROPRIATE UNDER THE CIRCUMSTANCES.
LESSOR ACCOUNTING
THE SALES TYPE, DIRECT FINANCING, AND LEVERAGED LEASES
TO QUALIFY AS A SALES TYPE, DIRECT FINANCING OR LEVERAGED LEASE, THE
FOLLOWING CRITERION MUST BE MET:
COLLECTIBILITY OF THE MINIMUM LEASE PAYMENTS IS REASONABLY
PREDICTABLE AND ASSURED;
THE LESSOR CAN REASONABLY ESTIMATE ANY UNREIMBURSABLE COSTS YET TO
BE INCURRED.
MUST MEET ONE OF THE FOUR CRITERION UNDER THE HEADING FOR CAPITAL
LEASE DEFINITION ABOVE.
THE SALES TYPE LEASE
IF THE LEASE MEETS THE ABOVE CRITERIA AND GIVES RISE TO A PROFIT OR LOSS
TO THE LESSOR (THAT IS, IF THE FAIR MARKET VALUE OF THE LEASED PROPERTY
AT THE INCEPTION OF THE LEASE IS GREATER OR LESS THAN ITS COST OR
CARRYING AMOUNT), THEN THE LEASE QUALIFIES AS A SALES TYPE LEASE.
FOR A SALES-TYPE LEASE, THE PRESENT VALUE OF THE MINIMUM LEASE PAYMENTS
IS REPORTED AS SALES. THE CARRYING AMOUNT OF THE LEASED PROPERTY PLUS
ANY INITIAL DIRECT COSTS, LESS THE PRESENT VALUE OF ANY UNGUARANTEED
RESIDUAL, IS CHARGED AS COST OF SALES. THE LESSOR REPORTS AS AN ASSET ON
THE BALANCE SHEET THE NET INVESTMENT IN THE LEASE.
THIS IS DONE BY
RECORDING THE SUM OF THE LEASE PAYMENTS AND THE UNGUARANTEED RESIDUAL
(THE GROSS INVESTMENT) AT THEIR PRESENT VALUE, USING THE INTEREST RATE
IMPLICIT IN THE LEASE AS THE DISCOUNT FACTOR.
THE DIFFERENCE BETWEEN THE GROSS INVESTMENT AND THE NET INVESTMENT IS
UNEARNED INCOME THAT IS AMORTIZED INTO INCOME OVER THE LEASE TERM TO
PRODUCE A CONSTANT PERIODIC RATE OF RETURN ON THE NET INVESTMENT.
THE SALES-TYPE LEASE WILL BE REGARDED AS AN OPERATING LEASE IF IT DOES
NOT, IN ADDITION TO THE OTHER CRITERIA, MEET WITH THE FASB 66 CONDITIONS
OF FULL AND IMMEDIATE PROFIT RECOGNITION.
DIRECT FINANCING LEASES
IF NO PROFIT IS TO BE RECOGNIZED (I.E. FAIR MARKET VALUE OF THE LEASED
PROPERTY EQUALS ITS COST), AND UNLESS THE LEASE MEETS ALL OF THE CRITERIA
SPECIFIED BELOW FOR LEVERAGED LEASES, THE LEASE IS CLASSIFIED AS A DIRECT
21
EARLY
YEARS
AND
22
23
ORIGINAL LESSEE
THE ORIGINAL LEASE IS A:
CAPITAL LEASE
AN ORIGINAL LESSEE MAY SUBSTITUTE A NEW LESSEE UNDER THE ORIGINAL
LEASE AGREEMENT (WHO BECOMES THE PRIMARY OBLIGOR) OR CANCEL THE ORIGINAL
LEASE AGREEMENT OUTRIGHT. IF THE ORIGINAL LEASE WAS A CAPITAL LEASE THE
ASSET AND OBLIGATION REPRESENTING THE ORIGINAL LEASE IS REMOVED FROM THE
ACCOUNTS AND A GAIN OR LOSS IS RECOGNIZED FOR THE DIFFERENCE.
ANY
CONSIDERATION PAID OR RECEIVED TO EFFECT THE TERMINATION IS INCLUDED IN
THE DETERMINATION OF GAIN OR LOSS.
IF THE ORIGINAL LEASE MET EITHER THE FIRST OR THE SECOND OF THE
CAPITALIZATION CRITERIA AND WAS CAPITALIZED BY THE ORIGINAL LESSEE, AS
SUBLESSOR HE MUST CLASSIFY THE NEW LEASE AS A SALES TYPE LEASE OR DIRECT
FINANCE LEASE IF THE NEW LEASE MEETS THE CRITERIA FOR A CAPITAL LEASE.
THE UNAMORTIZED BALANCE OF THE ASSET UNDER THE ORIGINAL LEASE BECOMES THE
COST OF THE LEASED PROPERTY UNDER THE NEW LEASE.
IF THE NEW LEASE
DOESN'T QUALIFY, IT IS TREATED AS AN OPERATING LEASE.
IN EITHER CASE,
THE ORIGINAL LESSEE CONTINUES TO ACCOUNT FOR THE OBLIGATION RELATED TO
THE ORIGINAL LEASE AS BEFORE.
IF THE ORIGINAL LEASE MET THE THIRD OR FOURTH CRITERION OF
CAPITALIZATION, BUT NOT THE FIRST OR THE SECOND, THE ORIGINAL LESSEE MUST
(WITH ONE EXCEPTION) CLASSIFY THE NEW LEASE IN ACCORDANCE WITH CRITERION
THREE AND THE TWO ADDITIONAL CRITERIA (UNDER LESSOR ACCOUNTING) ONLY. IF
THE TRANSACTION MEETS THESE CRITERIA, THE LESSEE SHOULD ACCOUNT FOR IT AS
A DIRECT FINANCING LEASE WITH THE UNAMORTIZED BALANCE OF THE ASSET UNDER
THE ORIGINAL LEASE BECOMING THE COST OF THE LEASED PROPERTY UNDER THE NEW
LEASE. IF NOT, IT IS AN OPERATING LEASE. HOWEVER, IF THE NATURE OF THE
SUBLEASING ACTIVITY SUGGESTS THAT THE SUBLEASE WAS INTENDED TO BE AN
INTEGRAL PART OF THE OVERALL TRANSACTION, AND THE ORIGINAL LEASE ONLY
SERVES AS A CONDUIT, THE SUBLEASE SHALL BE CLASSIFIED ACCORDING TO THE
THIRD AND FOURTH CRITERION AND THE TWO ADDITIONAL CRITERION UNDER LESSOR
ACCOUNTING.
THE ORIGINAL LEASE IS
AN OPERATING LEASE:
IF
THE
ORIGINAL
LEASE
IS
AN
OPERATING
24
LEASE,
THE
ORIGINAL
LESSEE
CONTINUES TO ACCOUNT FOR IT AND THE NEW LEASE AS OPERATING LEASES. THE
NEW LESSEE IS OBLIGED TO CLASSIFY THE NEW LEASE IN ACCORDANCE WITH THE
FOUR CAPITALIZATION CRITERIA AND TO ACCOUNT FOR IT AS APPROPRIATE IN THE
CIRCUMSTANCES.
A MORTGAGE VS. A LEASE
A MORTGAGE PAYMENT CONTAINS
PRINCIPLE + INTEREST.
A LEASE PAYMENT CONTAINS PAYMENT FOR THE LEASE OBLIGATION AND IMPUTED
INTEREST.
KNOW HOW TO TELL THE DIFFERENCE BETWEEN AN OPERATIONAL LEASE AND A
CAPITAL LEASE, AND HOW IT IS RECORDED (3.31 BONGIORNO)
THE STATEMENT OF CASH FLOWS
A NECESSARY STATEMENT IN FINANCIAL ACCOUNTING WHEN PREPARING A COMPLETE
STATEMENT (SEE BONGIORNO SUPPLEMENT, 3.04).
FINANCIAL STATEMENT
INCOME STATEMENT :
FOR A PERIOD (I.E., FOR THE YEAR 1989)
BALANCE SHEET:
AS OF A CERTAIN DATE (I.E. 12/31/89)
STATEMENT OF CAPITAL:
ON A CERTAIN DATE (I.E. 12/31/89)
STATEMENT OF CASH FLOW:
FOR THE YEAR ENDING (I.E. 12/31/89)
THE STATEMENT OF CASH FLOWS IS NEEDED TO EXPLAIN WHERE THE CASH CAME
FROM, AND WHERE IT WENT. IT MAKES ACCRUAL METHOD EXPLAINABLE.
OPERATING REVENUE IS MATCHED AGAINST OPERATING EXPENDITURES.
INVESTING REVENUE IS MATCHED AGAINST INVESTING EXPENDITURES.
FINANCING REVENUE IS MATCHED AGAINST FINANCING EXPENDITURES.
A CORPORATION PURCHASES LAND FOR 500,000
AN EXISTING HOUSE ON THE PROPERTY WAS DEMOLISHED, AND NEW CONSTRUCTION
BEGINS IN APRIL OF 1989. BY DECEMBER 31, 1989, YOU HAVE THE FOLLOWING:
DEMOLITION
TITLE INSURANCE AND LEGAL FEES
ARCHITECT'S FEES
NEW BUILDING CONSTRUCTION
(BONGIORNO, 6.41 TO 6.45)
70,000
50,000
75,000
1,000,000
WHAT WOULD THE FINANCIAL STATEMENT FOR THE BUILDING AS OF 12/31/89 LOOK
LIKE?
ASSETS
LIABILITIES
25
LAND
BUILDING
500,000
1,000,000
DEMOLITION
FEES
70,000*
50,000#
75,000*
*CAPITALIZED LIABILITY
#EXPENSED LIABILITY
THE BATTLE BETWEEN CAPITALIZING AND EXPENSING
CAPITALIZING - AN IMPROVEMENT
USEABLE, EXTENDING ITS LIFE.
WHICH
MAKES
THE
PROPERTY
MORE
(BONGIORNO 2.42)
FOR THE PURPOSES OF THE APPLICATION OF THE FULL ACCRUAL METHOD, CAN
PROFIT BE RECOGNIZED IF THE SELLER TRANSFERS THE PROPERTY BY WAY OF A
SALE LEASEBACK TRANSACTION?
APPORTIONMENT - PORTIONS OF MONTHS OR PERIODS MUST BE TAKEN INTO ACCOUNT
WHEN PREPARING STATEMENTS UNDER THE ACCRUAL METHOD OF ACCOUNTING, IN
ORDER TO MATCH EXPENSES WITH REVENUES. EXAMPLES OF THIS ARE : INTEREST,
REAL ESTATE TAXES, AND DEPRECIATION.
EXCEPTION:
AN EXCEPTION TO MATCHING EXPENSES IS WITH CONSTRUCTION AND
DEVELOPMENT.
WE CAPITALIZE REAL ESTATE TAX AND INTEREST DURING THIS
PERIOD, AND YOU MAY NOT DEDUCT THESE ITEMS DURING THIS PERIOD. THEY ARE
CALLED PERIOD COSTS.
THE COSTS ARE TRANSFERRED OUT OF THE PERIOD AND
INTO THE ASSET ACCOUNT.
YOU ADD TO THE COST OF THE PROJECT BY ADDING
THESE COSTS TO THEM.
THEN, WHEN CONSTRUCTION IS COMPLETED, THE NEW
COMPLETED VALUE, INCLUDING THE TAXES AND INTEREST, ARE DEPRECIATED WITH
THE BUILDING.
26
27
TERMS
CURRENT ASSETS - HAS THE ABILITY TO BE TURNED INTO CASH, IT MUST BE
LIQUID, AND MUST BE INTENDED TO BE TURNED INTO CASH WITHIN ONE YEAR OF
ITS ACQUISITION.
INVENTORY, RENT RECEIVABLES NOT YET PAID BUT PAYABLE
ARE EXAMPLES OF CURRENT ASSETS.
28
A.K.A. ACCOUNTS
NOTES RECEIVABLE - WHEN ACCOUNTS RECEIVABLE CAN NOT BE PAID ON TIME (I.E.
BETWEEN 30 TO 45 DAYS HENCE), A NOTE IS TAKEN WHICH FORMALLY BINDS THE
DEBTOR TO THE CREDITOR WITH INTEREST.
WE NEED TO KNOW THE ABILITY OF THE COMPANY TO COLLECT MONEY AND TO PAY
ACCOUNTS.
OTHER ASSETS ASSETS.
DEFERRED DEVELOPMENT AND MORTGAGE COST - ADDED TO THE ASSETS WHEN THEY
COME INTO EXISTENCE, AND DEPRECIATED.
THIS IS THE CAPITALIZED
DEVELOPMENT COST OF THE PROJECT.
CURRENT LIABILITIES - MIRROR IMAGE OF CURRENT ASSETS.
IT IS THE
INTENTION THAT THE OBLIGATION TO PAY IS WITHIN ONE YEAR OF THE INCURRED
LIABILITY.
ACCOUNTS PAYABLE - OBLIGATIONS TO PAY CREDITOR WITHIN 30 TO 45 DAYS.
ACCRUED EXPENSES -
IS
THE
OPPOSITE
OF
DEFICIT
ACCUMULATED
DURING
29
FINANCIAL
ACCOUNTING
THAT
ARE
RELEVANT
FOR
30
EXPENSES
DO
DO
DO
DO
31
32
11/2/89
INTEREST FREE TRANSACTIONS AND BELOW MARKET LOANS
GIVEN A PROPERTY
150,000 IS PRICE
30,000 DOWN PAYMENT
-------------------120,000 PAYABLE OVER THREE YEARS WITHOUT INTEREST
IRS MOVED IN 1982 AND 1984 WITH ACTS ON IMPUTED INTEREST TO NEGATE THE
BENEFITS OF CAPITAL GAINS VS. HIGHEST TAX ISSUE AND THE EFFECT IT HAD ON
INCREASING SALES PRICE TO REFLECT THE 0% INTEREST RATE.
IF YOU HAVE A BELOW MARKET LOAN, IRS CAN CHARGE IMPUTED INTEREST
SEE EXAMPLES OF IMPUTED INTEREST IN EXAMPLE 15, BONGIORNO, 2.63.3
NOVEMBER INTEREST RATES HANDED OUT, SEE PACKET
THERE ARE EXCEPTIONS:
DOES NOT
DOES NOT
DOES NOT
BUSINESS
PERSONAL
THE SALE/LEASEBACK
A MEANS OF GAINING CASH FROM A TRANSACTION WHICH WOULD OTHERWISE BE LOST.
A FINANCING TECHNIQUE FOR GETTING MONEY OUT OF A PROPERTY.
NON-PROFIT ORGANIZATIONS ARE THE "MAIN PLAYERS" IN THE PAST FOR THIS KIND
OF TRANSACTION
I.E. CHURCHES
UNIVERSITIES
PENSION TRUST
FOUNDATIONS
NONE PAY TAXES ON INCOME DERIVED FROM ACTIVITIES
A SALE/LEASEBACK IS A SALE - YOU NO LONGER OWN IT AND YOU PAY RENT WHICH
IS AN OPERATING EXPENSE.
FROM 1946 TO 1969, THE PERIOD OF LITTLE IRS CONTROL OVER "NON-PROFITS"
PURCHASE OF PROPERTIES FOR SALE/LEASEBACK - 1969 TAX CODE INSTITUTED A
TAX ON INCOME FROM OTHER INCOME THAN THAT GAINED IN TYPICAL BUSINESS
33
ATYPICAL WOULD
34
35
36
AMENITY MAY NOT BE EXPENSED, IN OTHER WORDS, WITH THE SALE OF THE FIRST
UNIT IN A 1,000 UNIT DEVELOPMENT.
WHEN THE DEVELOPER INTENDS TO RETAIN THE AMENITY AND CHARGE FEES TO USE
IT, THE ACTUAL DEVELOPMENT COST OF THE AMENITY IN EXCESS OF THE ESTIMATED
FAIR VALUE CAN BE CAPITALIZED AND ALLOCATED AS A COMMON COST. HOWEVER,
ONCE THE AMENITY IS SUBSTANTIALLY COMPLETE AND AVAILABLE FOR USE, ANY
REVENUE AND OPERATING COSTS SHOULD BE INCLUDED IN CURRENT OPERATING
RESULTS SINCE THE FACILITIES ARE NO LONGER PART OF THE DEVELOPMENT
PROCESS.
THE ALLOCATION OF CAPITALIZED COSTS TO COMPONENTS OF A PROJECT
IN ORDER TO PROPERLY MATCH COSTS WITH REVENUES, THE COSTS OF ACQUISITION,
DEVELOPMENT, AND CONSTRUCTION MUST BE ASSIGNED TO THE INDIVIDUAL
COMPONENTS OF THE PROJECT BEING SOLD. AN AMENITY, FOR EXAMPLE, MAY BE
OPERATED BY THE DEVELOPER AT A LOSS DURING THE SALE OR RENT-UP PERIOD TO
PROMOTE DISPOSITION OF THE PROPERTY. THESE LOSSES SHOULD BE CONSIDERED
IN THE DETERMINATION OF TOTAL COSTS OF THESE AMENITIES.
IF SPECIFIC IDENTIFICATION IS NOT PRACTICABLE, THE CAPITALIZED COSTS ARE
ALLOCATED AS FOLLOWS:
COSTS INCURRED PRIOR TO CONSTRUCTION; (I.E. LAND COST) ALLOCATED TO
EACH LAND PARCEL BENEFITTED, BASED ON THE RELATIVE FAIR MARKET
VALUE OF THE LAND VALUES BEFORE CONSTRUCTION AS DETERMINED AT THE DATE OF
ALLOCATION.
CONSTRUCTION COSTS; ALLOCATED TO INDIVIDUAL UNITS (LOTS) IN THE
PHASE OR PROJECT ON THE BASIS OF RELATIVE SALES VALUE OF EACH UNIT
IF THE METHODS OF RELATIVE VALUE ARE ALSO IMPRACTICABLE, THEN CAPITALIZED
COSTS SHOULD BE ALLOCATED BASED ON AREA METHODS SUCH AS THE SQUARE
FOOTAGE METHOD.
OTHER METHODS OF ALLOCATION ARE:
SPECIFIC IDENTIFICATION WHICH ASSIGNS COSTS BY ACTUALLY DETERMINING
WHICH COSTS APPLY TO EACH PARCEL OF LAND OR INDIVIDUAL UNIT WITHIN THE
PROJECT.
RELATIVE VALUE, WHICH IS USED WHERE VARYING TYPES OF UNITS ARE TO
BE CONSTRUCTED RESULTING IN VARYING PROJECTED SELLING PRICES FOR UNITS OR
PARCELS, AND WHERE SUBSTANTIAL IMPROVEMENTS OR AMENITIES WILL BE
PROVIDED.
THE PURPOSE OF ALLOCATING COSTS TO PARCELS ON THE BASIS OF
RELATIVE VALUE IS TO PREVENT THE DISTORTION THAT MIGHT RESULT FROM THE
SALE OF CHOICE PROPERTY FIRST. THE TWO MOST COMMON MEASURES OF RELATIVE
VALUE ARE FAIR MARKET VALUE AND SALES VALUE
THE FAIR MARKET VALUE METHOD HAS COSTS ALLOCATED ON THE BASIS OF
THE RELATIVE FAIR MARKET VALUE OF THE LAND
BEFORE THE START OF
CONSTRUCTION.
THE SALES VALUE METHOD
ALLOCATES COSTS ON THE BASIS OF THE
37
EXPECTED SALES VALUE OF EACH UNIT SOLD TO THE TOTAL EXPECTED SALES VALUE
OF THE PROJECT.
THE ALLOCATION OF RENT UP COSTS
COSTS TO RENT REAL ESTATE UNDER OPERATING LEASES SHOULD BE DEFERRED AND
CHARGED TO EXPENSE IN FUTURE PERIODS IF THEY ARE INCURRED BEFORE THE
GOODS ARE USED OR THE SERVICES ARE PERFORMED WHEN THEIR RECOVERY IS
EXPECTED FROM FUTURE RENT REVENUE.
DEFERRED RENTAL COSTS THAT ARE DIRECTLY RELATED TO REVENUE FROM A
SPECIFIC OPERATING LEASE SHOULD BE AMORTIZED OVER THE LEASE TERM,
COMMENCING WITH THE BEGINNING OF THE RENTAL PERIOD.
IF NOT DIRECTLY
RELATED TO REVENUE FROM A SPECIFIC OPERATING LEASE, THEY SHOULD BE
AMORTIZED OVER THE PERIOD OF THE EXPECTED BENEFIT, COMMENCING FROM WHEN
THE PROJECT IS SUBSTANTIALLY COMPLETE AND UNOCCUPIED.
ESTIMATED
UNRECOVERABLE AMOUNTS OF UNAMORTIZED COSTS ASSOCIATED WITH A LEASE SHOULD
BE CHARGED TO EXPENSE WHEN IT BECOMES PROBABLE THAT THE LEASE WILL BE
TERMINATED.
SUBSTANTIALLY COMPLETE PROJECT (DEFINITION):
MEETS BOTH OF THE FOLLOWING CRITERIA:
CONSTRUCTION HAS REACHED THE LEVEL WHERE MAJOR CONSTRUCTION ENDS
AND MAINTENANCE OPERATIONS BEGIN.
TENANT IMPROVEMENTS HAVE BEEN COMPLETED, OR A PERIOD OF ONE YEAR
HAS ELAPSED FROM THE CESSATION OF MAJOR CONSTRUCTION ACTIVITY, WHICHEVER
OCCURS FIRST.
WHERE A LARGE PROJECT IS PHASED, SUBSTANTIAL COMPLETION IS DEFINED BY
PHASE, NOT BY THE WHOLE PROJECT (I.E. IN A SUPER-REGIONAL MALL).
38
PERMANENT LOAN
BONGIORNO- A PERMANENT FINANCING COMMITMENT IS USUALLY OBTAINED VERY
EARLY IN THE DEVELOPMENT PROCESS, PROBABLY BEFORE GROUND-BREAKING.
PERMANENT FINANCING ALMOST ALWAYS TAKES THE FORM OF A FIRST MORTGAGE AND
OFTEN CONTAINS AN 'EXCULPATORY CLAUSE' THAT LIMITS LIABILITY UNDER THE
MORTGAGE TO THE RESPECTIVE PROPERTY. OCCASIONALLY, PERSONAL OR CORPORATE
GUARANTEES MAY BE REQUIRED.
PERMANENT FINANCING WILL NORMALLY
NOT BE
TAKEN DOWN UNTIL THE PROJECT IS COMPLETE, THE MAJORITY OF THE SPACE IS
RENTED, AND ALL TITLE DEFICIENCIES AND MECHANICS' LIENS HAVE BEEN
CLEARED. BECAUSE OF THE DIFFICULTY IN SECURING FINANCING FOR COMMERCIAL,
INDUSTRIAL AND MULTI-FAMILY PROJECTS, THE LAND UNDERLYING THE BUILDING IS
OFTEN SOLD AND LEASED BACK, THUS REDUCING THE FRONT-END CASH
REQUIREMENTS.
THE LAND IS PURCHASED BY THE PRIMARY LENDER AND LEASED
BACK. THE SALE LEASEBACK ENABLES THE LENDER TO FACTOR IN AN ADDITIONAL
RENT AND A PARTICIPATION IN THE GROSS INCOME OR NET INCOME OF THE
PROPERTY.
TAKEOUT COMMITMENT MEANS THERE IS A PERMANENT LENDER
COMMITMENT FEES ARE A FINANCING CHARGE THAT THE LENDER WILL APPLY. IT IS
A NON-REFUNDABLE FEE WHICH COVERS OUT-OF-POCKET EXPENSES.
INDIRECT CHARGES ARE CHARGED FOR FOREGONE INVESTMENT OPPORTUNITIES SINCE
FUNDS ARE COMMITTED TO YOU, THEREFORE YOU PAY FOR THE RIGHT TO THE
MONEY WHICH CAN NOT NOW GO TO SOMEBODY ELSE WHO MAY BE WILLING TO
PAY A GREATER RATE FOR THE MONEY.
THE PERMANENT LOAN HAS SOME DEGREE OF VARIABILITY, BUT NOT A GREAT DEAL
39
40
THE RULES:
PERCENTAGE OF COMPLETION METHOD
RECOGNITION IS GIVEN TO EXPENSE AND INCOME AS PROGRESS IS COMPLETED ON
CONTRACTS (PERCENTAGE OF COMPLETION METHOD)
THE CONTRACTOR'S ABILITY TO MAKE REASONABLE ESTIMATES UNDERLIES THE
ASSUMPTION THAT THE PERCENTAGE OF COMPLETION METHOD IS BEST.
SEE PAGE 139-40 OF WILEY
SEE PG 10.34, BONGIORNO, P.O.C. METHOD
COST INCURRED TO DATE
THE PERCENTAGE OF COMPLETION =
ESTIMATED TOTAL COST
FORMULA FOR PROFIT RECOGNITION (P.O.C. METHOD)
GROSS PROFIT FOR THE UNIT x PERCENT OF COMPLETION = RECOGNIZABLE PROFIT
COMPLETED CONTRACT METHOD
ALL COMPLETED REVENUE AND EXPENSE ON JOBS IN PROGRESS IS DIFFERED WITH
RECOGNITION ON THE INCOME STATEMENT ONLY WHEN THE PROJECT IS COMPLETED.
WHEN IS IT ACCEPTABLE?
41
GENERAL NOTES:
BEGINNING OF CONSTRUCTION IS DEFINED BY CONTRACT FOR FINANCING.
IF YOU SEE THE COMPLETED CONTRACT METHOD BEING USED, ASK QUESTIONS AND BE
SUSPICIOUS.
FOR NOV. 30, REVIEW SYNDICATION, CHAPTERS 13 AND 14. YOU CAN SKIP CHAPTER
18 ON SYNDICATION OF TAXATION.
ALSOACCOUNTING FOR LEASING.
END OF CLASS TEN
11/30/89
IF GIVEN A CLAIM FOR ONE MILLION DOLLARS IN 15 YEARS, DO YOU PUT AN ENTRY
IN THE NOTES RECEIVABLE SECTION OF THE FINANCIAL STATEMENT SAYING
"1,000,000? NO. CONSIDERING THE TIME VALUE OF MONEY, TO DO THIS WOULD BE
MISLEADING, AND SHOULD NOT BE SO ENTERED ON THE BALANCE SHEET.
A LONG TERM ASSET (LONGER THAN ONE YEAR) MUST BE CALCULATED USING PRESENT
VALUE . ON LIABILITY SIDE, YOU STATE THE WHOLE LIABILITY, WHILE STATING
IN THE NOTES THAT IT IS 15 YEARS IN THE FUTURE AND ITS VALUE IS SO AND
SO.
SHORT TERM COMMERCIAL LOANS ARE NOT AMORTIZABLE. INTEREST AND PRINCIPLE
IS OWED ON THE DATE OF THE LOAN.
I.E. I BORROWED 48,000 FROM THE BANK WHICH ISSUED A 90 DAY NOT PAYABLE
WITH A STATED INTEREST RATE OF 15 PERCENT.
ASSETS
LIABILITIES
48,000
48,000
CREDIT
LAND
92,000
CASH
20,000
NOTE PAYABLE
78,480
PREPAID INTEREST
INTEREST EXPENSE
42
CURRENT ASSET
6,480
98,480
98,480
WORK?
PEOPLE WHO GIVE YOU A LOAN TO SEE YOUR INTEREST IN THE PROPERTY, OR YOUR
EQUITY. RARELY DO THEY RELEASE 100 PERCENT.
CONSTRUCTION LOANS ARE ONLY FOR CONSTRUCTION COSTS. THEY ARE NOT TO PAY
FOR THE LAND.
TO GET LAND, YOU NEED EQUITY FINANCING.
CONSTRUCTION LENDERS INTERESTED IN SHORT TERM WHILE EQUITY INVESTORS ARE
INVESTED FOR A LONG PERIOD OF TIME, THEREFORE THEY ARE TWO DIFFERENT
CLASSIFICATIONS OF FINANCING.
KEY POINTS OF SYNDICATION. (SEE BONGIORNO CHAPTER 14 FOR DETAILS)
SYNDICATION IS THE RAISING OF CAPITAL FROM INVESTORS TO ACQUIRE AN
INVESTMENT IN REAL ESTATE.
I.E. PARTNERSHIP, CORPORATION, JOINT VENTURE
BENEFITS
1.
3.
4.
5.
HELPS THOSE WHO ARE NOT EXPERTS TO MAKE MONEY IN REAL ESTATE
6.
43
PORTFOLIO INCOME
EARNED INCOME
10,000
90,000
BEFORE 1986:
10,000 + 90,000 = 100,000 - 8,000 = 92,000 TAXABLE INCOME
AFTER 1986:
10,000 + 90,000 = 100,000 = TAXABLE INCOME
FASB ETF - REAL ESTATE STATEMENT FOR ACCOUNTING AND CAPITALIZATION FOR
LIMITED PARTNERSHIPS AND SYNDICATIONS
END OF CLASS ELEVEN
12/7/89 SUMMARY OF THE COURSE
FINANCIAL VS. MANAGERIAL ACCOUNTING
FINANCIAL IS FOR EXTERNAL USE
MANAGERIAL IS FOR INTERNAL USE
FINANCIAL: A.K.A. COMPLIANCE ACCOUNTING
MANAGERIAL:
A.K.A.
ACCRUAL IS THE METHOD OF ACCOUNTING USED
THE PREFERRED METHOD OF FASB.
CONTROL
ACCOUNTING
MOST BY BUSINESSES, AND IT IS
44
ENTIRE RECEIPT.
PERCENTAGE OF COMPLETION METHOD IS USED ALMOST EXCLUSIVELY
CONSTRUCTION INDUSTRY, PREFERABLE TO COMPLETED CONTRACT METHOD.
BY
45
EASY TO APPLY
NO ELEMENT OF PRESENT VALUE,
INFLATION IS NOT CONSIDERED,
NOT SENSITIVE TO PAYMENT
PERIODS,
REGARDS ALL PAYMENTS, EVEN
THOSE
MADE IRREGULARLY, AS EQUAL
KNOW THE METHOD AND THE ADVANTAGES AND DISADVANTAGES.
FINANCIAL REPORTING
THE ACCOUNTANT GIVES AN OPINION CONCERNING FINANCIAL STATEMENTS.
STATEMENTS ARE PRESENTED AND OPINIONS HAVE SIGNIFICANCE.
THE WAY
BEST
CERTIFIED FINANCIAL STATEMENT (CLEAN) - STATEMENT REPRESENTS THE STATE OF
THE COMPANY ON A DATE, NO EXCEPTIONS, ACCORDING GAAP.
CERTIFIED FINANCIAL STATEMENT WITH EXCEPTIONS - SAME AS ABOVE, BUT WITH
EXCEPTIONS.
REVIEW REPORT - CIRCUMVENTS THE C.F.S. THE ACCOUNTANT SIMPLY STATES THAT
HE HAS NO RESPONSIBILITY FOR THE STATEMENT, ONLY THAT HE PRESENTS IT TO
YOU.
46
AS
ADJUSTED
BASIS
OR
COST,
LESS
LAND
500,000
500,000
BUILDING
2,500,000
ACCUMULATED DEPRECIATION
500,000
2,000,000
DEPRECIATION:
5,000,000
(500,000)
(2,000,000)
---------GAIN ON DISPOSAL OF LAND AND BUILDING
2,500,000
KEEP CAPITAL ASSETS SEPARATE FROM OTHER ASSETS.
TAXATION AND DEPRECIATION
PRIOR TO 1981, BASED ON ESTIMATED ECONOMIC LIFE OF THE ASSET.
1/1/81 TO 12/31/86 - 5, 10, OR 15 YEAR CATEGORIES, A POLICY WHICH LASTED
ONE YEAR.
"ECONOMIC LIFE WAS THROWN OUT THE WINDOW" BY THE REAGAN ADMINISTRATION,
WHO INSTITUTED THE CONCEPT OF (ACRS), OR ACCELERATED COST REDUCTION
SYSTEM.
THIS WAS PART OF ERTA, OR THE ECONOMIC RECOVERY TAX ACT, 1981.
47
48
49
THE TAX DISADVANTAGES OF THE SALE LEASEBACK INCLUDE THE FACT THAT THE TAX
LIABILITY MAY HAVE BEEN INCURRED UPON THE INITIAL SALE OF THE PROPERTY,
AND THE DEDUCTIBLE LEASE PAYMENTS MAY BE LESS THAN THE INTEREST AND
DEPRECIATION DEDUCTIONS GIVEN UP.
SUBLEASES AND TERMINATIONS - SEE BONGIORNO 2.37.1 AND 2.37.2
THE EXAM WILL HAVE MULTIPLE CHOICE AND 4 ESSAY QUESTIONS, WITH 30 SHORT
ANSWER QUESTIONS.
END OF COURSE
50
48
PREVIOUS
TO
THEN
THE
ONCE THE AMENDMENT WAS PASSED, THE CONGRESS PASSED THE INTERNAL REVENUE
CODE. REVENUE BILLS (CHANGES TO THE REVENUE CODE) MUST FIRST START IN HE
THE HOUSE OF REPRESENTATIVES. THE COMMITTEE IN THE HOUSE THAT DISCUSSES
REVENUE IS THE WAYS AND MEANS COMMITTEE. IN THE SENATE, THE COUNTERPART
IS THE SENATE FINANCE COMMITTEE. THE BILL IS DRAFTED IN THE HOUSE AND
SHUTTLED TO THE WAYS AND MEANS COMMITTEE FOR CONSIDERATION. A VOTE IS
TAKEN, AND MAJORITY RULE SENDS IT TO THE FULL HOUSE FOR A VOTE.
IT IS
THEN SENT TO THE HOUSE FINANCE COMMITTEE AND THEN SENT TO THE SENATE
FINANCE COMMITTEE. AFTER PASSAGE BY THE SENATE FINANCE COMMITTEE IT GOES
TO THE SENATE FOR A VOTE, AND THEN GOES TO THE PRESIDENT FOR A VETO OR A
SIGNATURE.
THE RULES OF TAXATION COME TO US THROUGH LEGISLATION LEADING TO STATUTES.
A STATUTE IS A LEGISLATIVE ENACTMENT.
IT SOMETIMES BEGINS WITHIN THE
GOVERNMENT, AND IT IS SOMETIMES INITIATED BY CONSTITUENTS APPROACHING
THEIR REPRESENTATIVES.
OUR LEGAL SYSTEM IS THE COMMON LAW SYSTEM. IT IS OUR HERITAGE AS PART OF
THE COLONIES OF GREAT BRITAIN. BY INTENTION, WE ADOPTED THE LEGAL SYSTEM
EXTANT IN THE COLONIES AT THE TIME OF AMERICAN INDEPENDENCE. THE COMMON
LAW SYSTEM IS BASED ON PRECEDENT, AND GIVES THE POWER OF REVIEW (JUDICIAL
REVIEW) TO THE COURTS. THE COURTS HAVE THE POWER TO REVIEW LEGISLATION
AND ANNUL IT IF IT IS DEEMED INCONSISTENT WITH PRECEDENT OR THE
CONSTITUTION.
THE INTERPRETATION OF RULES IN THE CODE ARE OFTEN NOT
KNOWN UNTIL THERE IS A COURT CASE. TAXATION LAW HAS A TWO-SIDED NATURE;
LEGISLATIVE AND JUDICIAL. JUDICIAL REVIEW IS, OF COURSE, THE LAST WORD IN
TAXATION.
BECAUSE BOTH CONGRESS AND THE COURTS ARE SOURCES FOR THE RULES AND
RULINGS, IT IS DIFFICULT TO KEEP UP WITH CHANGES IN THE CODE.
OTHER
SOURCES OF RULINGS ARE THE INTERNAL REVENUE CODE.
IN THE IRC, CONGRESS MAY PROVIDE THAT A GIVEN RULE WILL BE "DETERMINED
UNDER REGULATIONS TO BE ISSUED BY THE SECRETARY". HERE THE CONGRESS IS
SAYING THAT THEY ARE NOT TAX EXPERTS, SO THE SECRETARY OF THE TREASURY
WILL DECIDE WHAT MEANS TO EMPLOY IN CARRYING OUT THE INTENT OF THE LAW.
THE INTERNAL REVENUE SERVICE COMMISSIONER AND HIS STAFF, WORKING FOR THE
SECRETARY, DETERMINE THE REGULATIONS. THE PURPOSE OF THE REGULATIONS ARE
TO GUIDE THE TAXPAYER AS TO , FOR EXAMPLE, "WHAT IS PORTFOLIO INCOME",
AND "HOW DO WE CALCULATE DEPRECIATION", ETC.
WHAT HAPPENS IF THE IRS
COMMISSIONER INTERPRETS THE CODE IN A WAY WHICH IS NOT IN LINE WITH THE
LEGISLATION? SOMEONE SUES SAYING THE REGULATION IS UNFAIR,A ND THE COURT
MAY INSIST THAT THE REGULATION BE ELIMINATED OR CHANGED.
BECAUSE MOST ACCOUNTANTS FOLLOW THE REGULATIONS SLAVISHLY DUE TO LACK OF
LEGAL EXPERTISE, THEY MAY CAUSE THEIR CLIENTS TO PAY MORE TAXES THAN THEY
NEED TO PAY. THIS IS BECAUSE TAX ACCOUNTANTS ARE NOT FAMILIAR WITH THE
49
50
IF YOU MISSED THE DEADLINE ON YOUR 90 DAY LETTER, YOU CAN PAY THE TAX AND
SUE FOR A REFUND IN THE FEDERAL CLAIMS COURT OR THE FEDERAL DISTRICT
COURT.
"INCOME" AS DEFINED FOR TAX PURPOSES IN REAL ESTATE MAY BE DISTINCT FROM
INCOME AS DEFINED BY FASB. WE MUST BE FAMILIAR WITH IT TO DECIDE WHAT
OUR COURSE OF ACTION SHOULD BE.
END OF CLASS ONE
CLASS TWO, 5/31/90, NOT ATTENDED, NOTES INCORPORATED IN CLASS THREE
END OF CLASS TWO
51
52
HE
LIABILITY
OF
YOUR
INVESTMENT ENTITIES
THREE PARTNERS CONTRIBUTE 300,000 EACH.
PROPERTY AND THE THIRD IN SERVICES.
ONE IN
CASH, THE
SECOND IN
HOW IS BASIS MEASURED, AND WHAT RESTRICTIONS DOES THE IRS PLACE ON
PROPERTY AND SERVICE CONTRIBUTIONS IN ORDER THAT GAIN NOT BE RECOGNIZED?
PROPERTY DONATIONS VALUE IS MEASURED AT FAIR MARKET VALUE. WHEN YOU TAKE
PROPERTY YOU BOUGHT FOR 100,000 (THE BASIS) AND TRANSFER IT TO THE
CORPORATION AS A 300,000 SHARE, THEIR IS A GAIN OF 200,000 WHICH IS NOT
TAXABLE IF THE GROUP OF WHICH YOU ARE PART OWNS AT LEAST 80% OF THE
CORPORATION STOCK (SECTION 351). THE SAME IS TRUE WITH A PARTNERSHIP
UNDER SECTION 721.
IF THE 300,000 FAIR MARKET VALUE PROPERTY IS SUBJECT TO A 50,000 DOLLAR
MORTGAGE, SAY, THE CORPORATION TAKES LIABILITY FOR THE MORTGAGE. HE IS
STILL NOT TAXED EVEN THOUGH HE HAS BEEN RELIEVED OF THE LIABILITY. IF THE
ENTITY TAKES OVER HIS 100,000 DOLLAR BASIS AND 50,000 MORTGAGE, HIS
CAPITAL GAIN BECOMES HIS BASIS, OR 50,000 DOLLARS.
WHEN YOU INVEST PROPERTY, YOU CARRY OVER THE BASIS OF YOUR INVESTMENT.
B HAS A 100,000 BASIS, AND THE PROPERTY IS WORTH 300,000, HIS BASIS IS
100,000. IF IN THE SAME SITUATION HE HAS A 50,000 MORTGAGE TAKEN OVER BY
THE CORPORATION HIS BASIS IS STILL 100,000.
WHEN IN THE SAME SITUATION, HIS MORTGAGE EXCEEDS HIS BASIS, HE MUST PAY
TAX ON THE GAIN. I.E. WHEN THE MORTGAGE IS 150,000, HIS GAIN IS 50,000,
OR 150,000 MORTGAGE MINUS 100,000 BASIS EQUALS 50,000.
SERVICES- A DIFFICULT PROBLEM
WHEN A PERSON GETS STOCK IN EXCHANGE FOR SERVICES, THOSE SERVICES MUST BE
AT FAIR MARKET VALUE.
THE BASIS FOR SERVICES IS A "SUBJECT TO" ISSUE.
53
IF THERE IS NO GUARANTEE
BASIS
CONSIDERING
DEDUCTIONS
54
AND
************
END OF CLASS FOUR
CLASS FIVE 6/21/90
TEXT 6.14
DEPRECIATION
THEY
RULE ONE - WHAT EVER THE PROPERTY COST YOU, THAT IS YOUR "ORIGINAL
BASIS", WHICH IS YOUR COST AT ACQUISITION.
RULE TWO - THE RULES OF BASIS ARE CUMULATIVE.
CAPITALIZATION OR CONSTRUCTION PERIOD INTEREST
ADDITIONS) LEAD TO THE "ADJUSTED BASIS".
DEPRECIATION
(SUBTRACTIONS
AND
AND
THE UNDERSTANDING OF BASIS LEADS YOU TO COMPUTE THE GAIN OR LOSS FOR A
TRANSACTION, AND THEREFORE THE TAX EXPOSURE.
WHAT RENDERS A "TAXABLE EVENT"?
WHEN YOU HAVE A "DISPOSITION" OF THE
PROPERTY. THE DISPOSITION LEADS TO A TAXABLE GAIN OR A TAXABLE LOSS. WE
KNOW WE HAVE IT BY ANALYZING WHETHER WE HAVE CAPITAL GAINS OR LOSS AS
OPPOSED TO ORDINARY GAINS OR LOSS.
THE COMPUTATION OF GAIN OR LOSS (TEXT 11.03)
DISPOSITION IS THE TRANSFER OF AN OWNERSHIP INTEREST.
COMPUTE THE ADJUSTED BASIS AND MATCH IT WITH THE PROCEEDS OF SALE.
************************************
THE FORMULA FOR TAXABLE GAIN OR LOSS:
55
************************************
PROCEEDS OF SALE - ADJUSTED BASIS = THE TAXABLE GAIN OR LOSS
11.04 TO 11.05 ARE EXAMPLES OF PITFALLS FOR GAIN AND LOSS.
SUPPOSE WE HAVE A LOSS ON DISPOSITION OF A PROPERTY. WE HAVE A TAXABLE
LOSS OF 6 MILLION AND ON ANOTHER PROPERTY A GAIN OF 5 MILLION. WE DO NOT
HAVE TO PAY TAXES.
BEWARE HOWEVER THAT ANY LOSS WILL STAND UP UNDER THE CODE, SINCE THERE
ARE LAWS GOVERNING THE CIRCUMSTANCES UNDER WHICH THE LOSS IS RECOGNIZED.
(SEE TEXT 11.05
VERY IMPORTANT)
56
50,000 SALARY
6,000 INTEREST AND DIVIDENDS
OF REAL
CAPITAL
57
PARCEL A
100K BOUGHT
80K SOLD
20K LOSS (LONG TERM CAPITAL GAIN)
PARCEL B
200K BOUGHT
205K SOLD
5K GAIN (LONG TERM CAPITAL GAIN)
SITUATION
AS
ABOVE,
BUT
THE
ENTITY
IS
SCHEDULE
58
59
=
=
60
UNDER THE PHASE IN RULES. IN 1987, YOU COULD TAKE 65% OF YOUR LOSS, IN
1988, 40 PERCENT, IN 89, 20 PERCENT AND IN 1990, 10 PERCENT, WHEN THE
LOSSES COME FROM PROPERTY PURCHASED BEFORE 10/22/86.
IF YOU BOUGHT
BEFORE THIS DATE, THEN THE PASSIVE LOSSES MAY, UNDER THE PERCENTAGE
LIMITS, BE OFFSET BY ANY TYPE OF INCOME GAIN, NOT JUST PASSIVE.
DEPRECIATION - THE HISTORY OF DEPRECIATION RATES
FOR COMMERCIAL PROPERTY - 31.5 YEARS.
FOR RESIDENTIAL PROPERTY - 27.5 YEARS.
STARTING IN 1981, WE BEGAN THE ACRS METHOD OF DEPRECIATION (THE
ACCELERATED COST REDUCTION SYSTEM).
SINCE 1987, IT HAS BEEN THE MACRS
(THE MODIFIED ACRS).
1981 - 15 YEARS DEPRECIATION
1982 - 84 18 YEARS OF DEPRECIATION
1985 - 86 19 YEARS OF DEPRECIATION
PRIOR TO 1981, THE ESTIMATED ECONOMIC LIFE WAS USED.
A.M.T.
- THE ALTERNATIVE MINIMUM TAX.
A PERSON WHO HAS REDUCED HIS
TAXABLE INCOME BY REASON OF DEDUCTIONS SUCH AS ACRS, YOU MUST ADD BACK
THE ACCELERATED DEPRECIATION WHEN COMPUTING TAXABLE INCOME.
THEREFORE
TAX PLANNING CALLS FOR AN OPTION OF 40 OR 50 YEARS OF DEPRECIATION,
DEPENDING ON THE TYPE OF BUILDING, RATHER THAN 27.5 OR 31.5 YEARS.
END OF CLASS SIX
CLASS SEVEN
7/5/90
FINAL EXAM IS ON THURSDAY, AUGUST 9TH, 1990
TERM PAPER IS DUE THURSDAY, AUGUST 2ND, 1990
TERM PAPER
10 PAGES DOUBLE SPACED
GIVE CITATIONS, IE. SECTION XXX, IRC. 1986
MENTION THE CODE AND REGULATIONS IN A CITE AT LEAST ONCE.
COURT CASES SHOULD BE MENTIONED AS APPLICABLE.
RESEARCH
61
CREDIT
AND
ITS
IMPACT
62
ON
THE
PROVISION
OF
OR
RECOURSE DEBT,
QUALIFIED NON RECOURSE DEBT.
QUALIFIED NON RECOURSE DEBT:
SECURED (EQUIVALENT OF A MORTGAGE) BY THE REAL PROPERTY USED IN THE
ACTIVITY.
SEE THE LISTING OF THE FOUR QUALIFICATIONS IN SECTION 7.062, PAGE 7-33 OF
THE TEXT.
PASSIVE LOSS RULES - EXCEPTION (SEE TEXT 6.08[2])
THE 25,000 LOSS (FOR MOM'S AND POP'S)
UP TO 25,000 IN PASSIVE LOSS MAY BE APPLIED TO OTHER TYPES OF INCOME,
ANNUALLY, UNDER THE FOLLOWING CONDITIONS.
1. MUST BE FROM RENTAL REAL ESTATE ACTIVITIES
2. ACTIVE PARTICIPATION
"ACTIVE PARTICIPATE" MEANS THAT YOU REVIEW THE LEASES, THE PEOPLE
WHO RENT FROM YOU OR SUMMATIONS TO THIS EFFECT FROM YOUR AGENT,
ETC. YOU CAN NOT GIVE TOTAL AUTONOMY TO YOUR MANAGER IN ORDER TO QUALIFY
AS ACTIVE PARTICIPATION.
3. 10 PERCENT OR MORE OF THE PROPERTY IS OWNED BY YOU.
4. ADJUSTED GROSS INCOME CAN NOT EXCEED 100,000 . IF IT DOES, THE 25,000
IS REDUCED 50 CENTS FOR EVERY DOLLAR OVER 100,000 UP TO 150,000
DOLLARS.
PASSIVE LOSS "GOES OUT" AFTER YOU DISPOSE OF THE ACTIVITY.
FREES UP YOUR LOSS.
DISPOSITION
PASSIVE LOSS IS COMPUTED EACH YEAR. FOR EACH ACTIVITY YOU MUST DETERMINE
WHETHER
YOU HAVE GAIN OR LOSS.
IN OTHER WORDS, FOR EACH SEGMENTED
PROPERTY, YOU MUST DETERMINE GAIN OR LOSS SEPARATELY.
EACH UNIT MUST
REPORT NET GAIN OR LOSS, AND THEN YOU COMBINE THEM.
IE.
LOSS
20K
30K
40K
50K
YEAR
87
88
89
90 YEAR OF DISPOSITION, 200K GAIN
63
HISTORY OF PROPERTY:
PAID 3.2M FOR PROPERTY.
GAIN IS 200K
THE LOSSES ARE FIRST APPLIED TO THE SALE TRANSACTION AND ONLY THEN IS IT
FREED TO COVER OTHER PROPERTIES.
SECTION 469 - PASSIVE LOSS RULES
REGULATION 1.469, MARCH 89, AND MARCH 90 130 PAGES, VERY COMPLEX
THE CAMPBELL CASE (REFER TO LECTURE ONE) HAS BEEN WRITTEN ABOUT IN THE
JOURNAL OF TAXATION, JULY ISSUE
WHO DO PASSIVE LOSS RULES APPLY TO?
1. TO INDIVIDUALS
2. TO PARTNERSHIPS
1065 FORM SHOWS THE BOTTOM LINE TAXABLE INCOME.
IT WILL BE
DISTRIBUTED TO THE PARTNERS AS PER SHARE, SHOWN ON THE K-1. THE
K-1 STATES WHETHER LOSS IS ACTIVE OR PASSIVE.
3. S CORPORATION
THE 1120-S FORM SHOWS THE BOTTOM LINE TAXABLE INCOME. THE K-1 IS
GENERATED SHOWING THE SHAREHOLDER'S PORTION OF LOSS OR INCOME
4. C CORPORATION
THOSE CALLED "CLOSE CORPORATIONS", THAT IS WITH 5 OR LESS
STOCKHOLDERS.
READ SECTION 7.06 TO 7.12 IN TEXT ON DEDUCTION OF INTEREST
END OF CLASS SEVEN
CLASS EIGHT
7/12/90
FORM 1065 (K-1) PASSED OUT
K-1 - THE PARTNER'S SHARE OF INCOME, CREDITS, DEDUCTIONS, ETC.
ALL PARTNERSHIPS, BE THEY REAL ESTATE INVESTMENT, ACCOUNTING, LAW, SMALL
BUSINESSES, ETC., MUST FILE THE K-1.
ITEM A: GENERAL PARTNER? TRY TO GET A COPY OF RECENT TAX RETURNS FOR THE
PAST YEARS WHEN EVALUATING THE PURCHASE OF AN INTEREST IN THE
PARTNERSHIP.
ITEM B: NON-RECOURSE?
ITEM C: TRUST? ESTATE? CORPORATION?
64
65
66
PERSON
MAY
BE
RESPONSIBLE
FOR
REPAYMENT
OF
THE
67
TWO WEEKS FROM TODAY, ONE OF THE MOST IMPORTANT LECTURES; LIKE-KIND
EXCHANGES.
SECTION 10.31 OF THE IRC, ITEM C, ON PAGE 2, 7 AND 8.
LIKE-KIND EXCHANGES CAN BE FOUND IN SECTION 12.04 OF THE TEXT.
EXTREMELY IMPORTANT, YOU WILL SEE IT ON THE FINAL.
********
RECOGNITION OF GAIN OR LOSS
X, AN INDIVIDUAL, STARTS THE X CORPORATION.
IN SO DOING HE CONVEYS
PROPERTY, AN OFFICE BUILDING, WITH X'S TAX BASIS OF 1 MILLION DOLLARS TO
THE CORPORATION. UPON TRANSFERENCE X, WHO OWNS 100 % OF THE CORPORATION,
TRANSFERS THE BASIS AS CARRYOVER BASIS, AND THE CORPORATION'S BASIS IS 1
MILLION DOLLARS. IF 5 YEARS FROM NOW THE ADJUSTED BASIS AFTER
DEPRECIATION IS 500,000 AND THE PROPERTY IS SOLD BY THE CORPORATION FOR 5
MILLION. TAX PAID BY THE CORPORATION ON 4,500,000 DOLLARS.
IF YOU HAVE A TRANSFER BY WAY OF A GIFT:
A IS DAD, WHO BUYS A BUILDING FOR 5 MILLION.
MILLION. HE GIFTS IT TO B, HIS SON.
HE DEPRECIATES IT TO 2
AS A RECEIVER OF THE GIFT, B TAKES THE BASIS OF THE DONOR, A, HIS DAD.
ON THE DATE OF THE GIFT (OR DEATH, SEE BELOW), THE FMV IS 20,000,000
MILLION DOLLARS. IF THE PROPERTY IS CEDED THROUGH WILL, THE FORM 706 FOR
ESTATES WILL BE USED. THE FMV ON THE DATE OF DEATH IS THE BASIS FOR THE
SON. THE ADJUSTED BASIS FOR B IS NOW 20 MILLION. THE "ESTATE TAX" TAXES
THE PROPERTY BASED ON THE FMV AT 55%.
QUESTIONS FOR NEXT WEEK HANDED OUT.
END OF CLASS NINE
CLASS TEN
7/19/90
READING FROM THE TEXT: LEASES; 5.02, 5.07, 5.05, 2.03, 2.04
THE FACT THAT A PROPERTY WAS PURCHASED WITH A MORTGAGE DOES NOT CHANGE
THE FACT THAT ORIGINAL BASIS IS THE PURCHASE PRICE.
PURCHASE PRICE = THE ORIGINAL BASIS = MORTGAGE + CASH DOWNPAYMENT
LET'S ASSUME THAT THE VALUE OF THE LAND INCREASES TO A FMV OF 1.5 M, AND
HE TAKES OUT A 2ND MORTGAGE FOR 200K. THE BASIS IS STILL EQUIVALENT TO
68
69
70
UNLESS IT IS A CLOSELY
FINAL EXAMINATION
2 TO 3 ESSAY TYPE QUESTIONS OF THE SORT IN CLASS ASSIGNMENT DUE 7/19/90
5 PROBLEMS OF THE TYPE HANDED OUT 7/26
TOPICS:
INSTALLMENT SALES
LIKE-KIND EXCHANGES
BASIS
PASSIVE LOSS RULES
CHOICE OF ENTITY
OPEN BOOK EXAM
WILL COVER THE ENTIRE COURSE, TO BE SUMMARIZED IN CLASS NEXT WEEK.
READ SECTION 10.31 OF THE IRC - NON-RECOGNITION OF GAIN
*********************************************************
NON-TAXABLE TRANSACTIONS: 3 TYPES
1. INSTALLMENT SALES
2. LIKE-KIND EXCHANGES
3. SALE OF A PERSONAL RESIDENCE
DETERMINE WHETHER OR NOT THE GAIN IS A REALIZED GAIN OR A RECOGNIZED
GAIN.
A REALIZED GAIN IS FROM SALES PROCEEDS MATCHED AGAINST A
DETERMINED BASIS. A RECOGNIZED GAIN IS THAT PORTION OF THE REALIZED GAIN
THAT IS RECOGNIZED IN A GIVEN TAX YEAR.
KNOW ABOUT REALIZED AND RECOGNIZED GAINS, KNOW HOW THEY INTERACT, AND HOW
THEY ARE USED.
SECTION 12 OF THE TEXT, PAGES 12-2, AND 12-3 INSTALLMENT SALES
FIRST YOU HAVE TO QUALIFY FOR INSTALLMENT SALE. IF YOU ELECT TO QUALIFY
FOR INSTALLMENT REPORTING, YOU WILL RECOGNIZE GAIN IN PARTS BY POSTPONING
TAX PAYMENTS.
IF YOU LIKE, YOU MAY PAY THE TAX BY NOT ELECTING THE
INSTALLMENT REPORTING METHOD.
THE PRINCIPLE OF THE INSTALLMENT METHOD OPTION IS THAT IT IS UNFAIR TO
TAX US ON PROCEEDS ARE NOT RECEIVED WHEN THE SALE FROM WHICH YOU RECEIVE
THE GAIN IS AN INSTALLMENT SALE.
71
PAYMENT)
50%
(THE
GPR)
50,000
(THE
THE PURPOSE OF USING GPR IS THAT PAYMENT IS DIVIDED INTO "PROFIT" AND
"PAYMENT ON BASIS".
YOU
CAN ADJUST GROSS PROFIT BY ANY COST OF SALE SUCH AS BROKERAGE
COMMISSION. ADD SELLING COSTS TO BASIS.
ANY INTEREST COMPENSATION ON THE INSTALLMENT IS INTEREST INCOME AND HAS
NOTHING TO DO WITH ADJUSTMENTS TO THE GROSS PROFIT RECEIVED.
EXAMPLE:
INTEREST RATE PREVALENT AT 10%
SUPPOSE YOU FIND SOMEONE WHO WILL BY THE PROPERTY AT 3% FOR INTEREST ON
THE BALANCE. WATCH OUT FOR TAX RULE OF IMPUTED INTEREST. IF YOU SELL
PROPERTY SUBJECT TO A NOTE, MORTGAGE, OR DIFFERED PAYMENT, INTEREST IS
72
IE. IF WE HAVE A 28 PERCENT RATE NOW AND 1991 SEES A 33 TO 38 PERCENT TAX
RATE, IT MIGHT MAKE SENSE TO ACCELERATE TAX PAYMENTS RATHER THAN DIFFER
THEM WITH THE INSTALLMENT METHOD.
SECTION 10.31 OF THE CODE - THE EXCHANGE OF LIKE-KIND PROPERTY
PG. 12-32 SECTION 12.04 OF THE TEXT
INSTEAD OF PAYING TAX ON THE SALE OF PROPERTY YOU CAN POSTPONE
RECOGNIZING THE GAIN WHEN YOU GO THROUGH AN EXCHANGE OF LIKE-KIND
PROPERTY NOT EXCHANGEABLE INTO CURRENCY.
SINCE YOU HAVE NOT RECEIVED
MONEY, NO GAIN IS REALIZED AND THEREFORE THE GAIN IS NOT TAXABLE BUT IS
DIFFERED.
HOW DOES IT QUALIFY?
THREE CONDITIONS:
RISK
73
CLASS TWELVE
8/2/90
FINAL EXAMINATION INFORMATION
EXPECT QUESTIONS ON:
FORECLOSURE
RESIDENTIAL SALE
COOPS AND CONDOS
SECTION 1031 EXCHANGES OF LIKE KIND PROPERTIES
CONDEMNATIONS
TAX GAIN RECOGNIZED VS. TAX GAIN REALIZED
1. LIKE KIND EXCHANGES - TAX CONCEPT (TAX GAIN REALIZED VS. TAX GAIN
RECOGNIZED) NOT THE SAME! SECTION 1031 TRANSACTION
2. INSTALLMENT SALES - SAME IDEA (REALIZED NOT THE SAME AS RECOGNIZED)
3. SALE OF RESIDENCE
4. INVOLUNTARY
TRANSACTION)
CONVERSION
INCLUDES
CONDEMNATION
(SECTION
1033
***************
DISCUSSION OF QUESTIONS CALLING FOR COMPUTATION -- RECOGNIZING THE REAL
ESTATE TAX PROBLEM IS CRITICAL! SAY WHAT THE PROBLEM IS BEFORE ANSWERING
THE QUESTION.
IE. "THIS INVOLVES A LIKE-KIND EXCHANGE", OR "THIS
INVOLVES A CONDEMNATION". SHOW WORK, ALTHOUGH THE COMPUTATION IS NOT AS
IMPORTANT AS SHOWING YOU UNDERSTAND THE CONCEPT.
EXPECT TO SEE ON FINAL:
INSTALLMENT SALES
BASIS
PASSIVE LOSS RULES
DEPRECIATION
YOU WILL LOSE CREDIT ON THE EXAM BY NOT EXPLAINING YOUR ANSWER. IF IT
HAS TO, FOR EXAMPLE, BE A CERTAIN KIND OF PROPERTY IN ORDER TO QUALIFY,
YOU MUST STATE THIS FACT.
*************************************************************************
***********************************************************************
FORECLOSURE - SECTION 9.1 AND 10.1 OF THE TEXT: THE BORROWER'S AND
LENDER'S VIEWPOINT.
74
75
MARKET ANALYSIS
PROFESSOR ROBERT BJORKLUND
INVESTOR, REALTOR
609-737-1717,1695
MARKET ANALYSIS AND SITE SELECTION
NOT INVESTMENT ANALYSIS, IT IS MARKET ANALYSIS
TRIVIA: 1ST MOST EXPENSIVE RETAIL IS ON THE GINZA IN TOKYO
2ND IS 57TH STREET IN NEW YORK CITY
BOB'S RULE:
TYPES OF DATA, HOW THE INFORMATION IS USED, AND WHO ARE THE INFORMATION
USERS; THIS IS THE QUESTION YOU MUST ANSWER.
DATA:
SIMILAR INVENTORIES
POPULATION
INCOME
HOUSEHOLDS
AGE
SEX
GROWTH OF POPULATION
PUBLIC TRANSPORTATION
VACANCY RATE
RENTAL RATES
ABSORPTION RATE
FUTURE DEVELOPMENT
EXISTING ANCHORS
NEED FOR SPECIFIC STORES
LEASE TERMS IN AREA
LARGE USERS NEARBY
SQUARE FOOTAGE
CAPTURE RATE
CLIENT:
GENERAL TRANSPORTATION
SALES PER SQUARE FOOT
TENANT NEEDS
POLITICS AND POLITICAL CLIMATE
COMPETITIVE LAND RENT
COMPARATIVE LAND ACRE SALES
DEVELOPING INDUSTRIES
ENVIRONMENTAL RESTRICTIONS
SITE IMPROVEMENT COSTS
TRAFFIC STUDIES
HAZARDOUS WASTES
WETLAND
ENVIRONMENTAL ISSUES
PARKING
STREAMS
BUILDABLE AREA
MARKET USE CATEGORIES
HOW USED:
DEVELOPERS
IDENTIFY
TENANTS
COLLECT
BANKS (FINANCIERS, CREDITORS)
INTERPRET
MUNICIPALITY
EVALUATE
ADJACENT OWNERS
CITIZENS
COMPETITORS
75
INVESTORS
HOW TO COMPARE STUDIES
FOCUS
SPECIFIC TO SITE
SPECIFIC TO USE
LOCAL
REGIONAL
LARGER REGIONS
TYPES OF STUDIES
URBAN ANALYSIS - COULD BE AS LARGE AS A STATE
REGIONAL
ECONOMIC TRENDS
POPULATION TRENDS
EMPLOYMENT TRENDS
COMMUNITY ANALYSIS - SUB REGIONAL
ECONOMIC BASE ANALYSIS
MARKET ANALYSIS - LIMITED LOCALE
SUPPLY OF EXISTING REAL ESTATE WITHIN A DEFINED MARKET AREA
DEMAND OF EXISTING REAL ESTATE WITHIN A DEFINED MARKET AREA
MARKETABILITY
SITE SPECIFIC
USE SPECIFIC
NEED APPRAISAL, FEASIBILITY STUDY,
PROJECT SPECIFIC
AND STUDY OF HIGHEST AND BEST USE,
I.E.
THE HIGHEST DOLLAR RETURN PER USE
ACCEPTABLE IN THE COMMUNITY.
GIVEN SIMILAR INVENTORY AND ABSORPTION RATE, HOW DO WE IMPROVE AND
ENHANCE OUR CAPTURE RATE AND YIELD IN DOLLARS PER SQUARE FOOT?
A REAL ESTATE ANALYSIS FOCUSES ON THE MARKET.
IT IS A STUDY OF SUPPLY AND OF DEMAND FOR REAL ESTATE.
DETERMINANTS:
INVESTMENT PROFITABILITY
MARKETPLACE EVENTS
POPULATION
SALES
HOUSEHOLDS
RENTALS
EMPLOYMENT
OCCUPANCY/VACANCY RATES
USER'S PSYCHOGRAPHIC CHARACTERISTICS FORTHCOMING SUPPLY
ATTITUDES
TASTES
76
PREFERENCES
A MARKETABILITY ANALYSIS IS A SUBSET OF MARKET ANALYSIS. IT ANALYZES THE
USER'S PREFERENCES AND THE COMPETITION TO MAKE RECOMMENDATIONS WHICH
MAXIMIZE ABSORPTION RATES AND PROFITS.
LOCAL ECONOMIC ANALYSIS PRINCIPAL VARIABLES (MARKET FOCUS)
POPULATION
HOUSEHOLDS
EMPLOYMENT
77
OF
THE
RETURN
ON
THE
RISK ASSESSED BY :
PARTITIONING THE RATE OF RETURN
SENSITIVITY ANALYSIS
COMPUTER-BASED SIMULATION ANALYZING THE BEST MIX OF FINANCING AND
TAX CONSIDERATIONS
CASH FLOW DUE TO RENT RECEIVABLES ANALYZED IN MARKETABILITY
ANALYSIS.
MARKET ANALYSIS FOIBLES
A MARKET ANALYSIS CAN BE PROBLEMATIC DUE TO MATTERS OF:
78
DATA
STATISTICAL ANALYSIS
ANALYST/CLIENT RELATIONSHIP
LACK OF EXPERIENCE
USING OPTIMISTIC FIGURES WHEN LESS OPTIMISTIC FIGURES EXIST.
AVOID PITFALLS BY GIVING BEST, WORST, AND MOST PROBABLE SCENARIOS.
DATA PROBLEMS:
USING HISTORICAL DATA WITHOUT BEING ABLE TO PREDICT THE FUTURE.
USING DATA WHICH IS NOT SPECIFIC ENOUGH (I.E. METRO AREA AS OPPOSED
TO NEIGHBORHOOD).
SOURCES NOT CREDITED
DATA PROBLEMS (CONT)
DATA OUT OF DATE
DATA NOT GATHERED BY SAME METHOD
MARKET DATA MAY NOT COVER ENTIRE MARKET AREA (I.E. MARKET IN TWO
COUNTIES FOR SITE NEAR COUNTY BORDER.
ONLY PURE MARKET ISSUES CONSIDERED, NOT SUCH AS GEOLOGY OR TRAFFIC.
INAPPROPRIATE TECHNIQUES
UNWARRANTED OR UNSPECIFIED ASSUMPTIONS
MANAGEMENT CAPABILITIES NOT TAKEN INTO ACCOUNT
UNNECESSARY LIMITING ASSUMPTIONS
UNWARRANTED RECOMMENDATIONS
ECONOMIC OVERVIEW
QUESTIONS TO THE HEAD OF ECONOMIC DEVELOPMENT FOR A MUNICIPALITY:
PROSPECTS FOR NEW INDUSTRY LOCATION AND RELOCATION (WHAT ARE YOU DOING TO
ATTRACT INDUSTRY).
HOUSING TRENDS: WHERE IS HOUSING, HOW IS IT SECTORED, WHERE IS NEW
CONSTRUCTION TAKING PLACE.
LOCAL REGULATIONS
LIFE STYLES
NET MIGRATION
EMPLOYMENT, INCOME, S.F. RENTALS
5 YEAR PLAN, WHAT ARE DETAILS
ABSORPTION RATE OF OFFICE SPACE
POLITICAL CLIMATE FOR DEVELOPMENT IN THE NEAR TERM FUTURE
SIC CODES - CENSUS INFO WHICH BREAKS DOWN AREA INDUSTRY AND INCOME.
BASE INDUSTRIES, POPULATION, AND SERVICE INDUSTRY ARE TIED TOGETHER.
MARKETING OVERVIEW
QUESTIONS TO AN AREA BROKER
79
PRODUCT OVERVIEW
QUESTIONS TO AN AREA DEVELOPER
DEVELOPMENT COSTS/COMPLICATIONS IN AREA
POLITICAL CLIMATE
LEASE UP ISSUES
DESIGN FACTORS, AMENITIES, AREAS AND SHAPE OF FLOOR SPACE
CONTRACTORS
PROFESSIONAL CONSULTANTS IN AREA WITH A TRACK RECORD
INFRASTRUCTURE
BUILDING SPECIFICATIONS
WHAT ARE SOME OF THE PROJECTS THAT YOU ADMIRE AND WHY
MEGATRENDS
REAL ESTATE CYCLES ARE LONG BECAUSE OF LIFE OF BUILDINGS.
ELEMENTS OF MARKET:
GROSS NATIONAL PRODUCT
WHAT DRIVES THE G.N.P.?
CONSUMPTION PRODUCTION
TAXES
INVESTMENT
DEFICIT SPENDING
GOVERNMENT EXPENDITURES
INFLATION
FOREIGN IMPORTS AND EXPORTS
INTEREST RATES
SAVINGS (AS SAVINGS GO UP, INTEREST COMES DOWN, AND INVESTMENT GOES UP)
ORGANIZATIONAL BEHAVIOR:
DECENTRALIZATION AND CENTRALIZATION
INVESTMENT PATTERNS
LONG TERM VS. SHORT TERM DECISIONS
SOCIAL BEHAVIOR:
80
COMMUTING
PERSONAL COMPUTERS
WORKING MOTHERS
EDUCATION
DAY CARE
POST INDUSTRIALISM
ENVIRONMENTAL AWARENESS
RECREATION
HOMELESSNESS
SHORTER WORK WEEKS
CHANGES IN THE DISTRIBUTION OF DEMOGRAPHICS
LIVE LONGER
LESS BABIES
X
X X
--------------------
__
XSSSX
WHY DOES A CITY GROW WHERE IT IS?
__
X X X
WHY? BECAUSE OF :
HISTORIC REASONS
MILITARY REASONS
______
GOVERNMENT REASONS
AXIAL GROWTH
TRANSPORTATION
SERVICE
GEOPHYSICAL CHARACTERISTICS
__
CONCENTRIC
* X
GROWTH
X
XX
XX
__
SECTOR GROWTH
__
EXAMPLES OF DIFFERENT CITIES:
BASE
ANALYSIS
TO
SHOW
THE
81
RELATIONSHIP
BETWEEN
COMMERCIAL
ACTIVITIES.
WHAT INDUSTRIES TAKE WHAT PERCENTAGES OF AN AREA'S BUSINESS?
LOCATION QUOTIENT = AREA % OF SIC / NATION % OF SIC
IF GREATER THAN ONE, INDUSTRY IS CALLED A BASE INDUSTRY.
IT IS AN IMPORTER OF CAPITAL FROM OTHER PLACES IN THE WORLD.
EXPERTS SAY THAT A LQ OF 0.85 TO 1.15 IS PROBABLY DEFINABLE AS A BASIC
INDUSTRY.
IF BASE INDUSTRY OF A COMMUNITY IS STEEL FABRICATION, YOU COULD PREDICT
THAT DUE TO NEW TECHNOLOGY, NEW USES, AND COMPETITIVE MATERIALS, YOUR
INDUSTRY'S NON RESPONSE WILL DETERMINE ITS INEVITABLE DECLINE.
SIC CODES
STANDARD INDUSTRIAL CLASSIFICATION
0123
01 = MAJOR CATEGORY
2 = SUB CATEGORY
3 = SUB-SUB CATEGORY
FIRST TOW DIGITS ENOUGH FOR NON-COMPLICATED PROJECTS
LAST TWO DIGITS ARE USED AS PROJECTS BECOME MORE COMPLEX.
PRELIMINARY FINANCIAL FEASIBILITY
HANDOUT PASSED OUT
ONE YEAR ANALYSIS OF THE PROPERTY OPERATING DATA LEADING TO A FIGURE
CALLED:
NET OPERATING INCOME (NOI)
YOU TAKE GROSS RENTAL INCOME, DEDUCT LOSSES FROM VACANCIES AND BAD DEBT,
WHICH EQUALS NET RENTAL INCOME.
YOU TAKE NET RENTAL INCOME AND DEDUCT OPERATING EXPENSES (EXCLUDING DEBT
SERVICE) TO EQUAL NOI. OPERATING EXPENSES USUALLY AMOUNT TO BETWEEN 40
AND 60 PERCENT OF NOI.
THE GROSS LEASE: YOU PAY THE LANDLORD MONEY, HE PAYS ALL EXPENSES.
THE NET LEASE:
C.A.M.
IS A COMMON AREA MAINTENANCE CHARGE WHICH EQUALS THE TENANT'S
SHARE OF COMMON AREA EXPENSES.
82
YOU DO
QUALITY IS DETERMINED BY
1. TYPE OF CENTER
AND
2. TYPE OF OUTLET.
TYPES OF CENTERS:
COMMUNITY
CLUSTERED
NEIGHBORHOOD
REGIONAL
FREESTANDING
NEIGHBORHOOD CENTERS, TYPICALLY 30 TO 100,000 S.F., WITHIN SHORT DRIVING
TIME OF CONSUMER.
INCLUDES CONVENIENCE
NEEDS RESIDENTS
STORE,
DRUG
STORE,
SUNDRIES,
IMMEDIATE
STAPLES,
83
NEIGHBORHOOD CENTER.
SUPER REGIONAL CENTERS; SHOPPING GOODS (PRIMARY AND SECONDARY)
PRIMARY INCLUDES APPAREL, SHOES, AND CLOTHING
SECONDARY INCLUDES FURNITURE AND APPLIANCES, WHICH TAKE A LOT OF
FLOOR SPACE.
QUANTITY: HOW MUCH WILL BE ABSORBED?
COST OF SPACE AND THE ABILITY TO FINANCE THAT COST BY RENTS RECEIVABLE IS
RELATED TO THE SALES PER S.F.
NATIONAL CHAIN RETAIL, MEDIAN SIZE, (150,000 S.F.), AVERAGES 100 DOLLARS
PER S.F., AND PAYS ABOUT 2 PERCENT OF THE RENT IN A SMALL STRIP MALL.
HOW BIG WILL THE STORES BE?
WHAT WILL THE TENANT MIX BE?
UPI'S DOLLARS AND CENTS OF SHOPPING CENTERS IS A GOOD GUIDE.
WHERE IS THE COMPETITION?
TRADE AREAS ARE IMPORTANT.
PRIMARY - ONCE A WEEK
SECONDARY - ONCE A MONTH
TERTIARY - ONCE A YEAR
THE COMPANY THAT HAS DONE MORE RESEARCH ON THIS THAN ANY OTHER IS THE
ROUSE COMPANY.
AT THE SOUTH STREET SEAPORT, THEY LOOKED AT THE WORKING POPULATION WITHIN
A TEN MINUTE WALK.
THE TRADE AREA MUST BE DEFINED BY WHO SHOPS THERE, AND WHO IS NEARBY.
WHAT DO WE DO FIRST?
THERE IS A CORRELATION BETWEEN ANCHORS S.F. AND TOTAL MALL SIZE.
SURVEY PEOPLE AFTER THEY COME OUT OF THE MALL.
WHERE DO YOU LIVE? WHERE IS THE CLOSEST INTERSECTION TO WHERE YOU
LIVE? (RESPECT THEIR PRIVACY)
WHERE DID YOU LAST SHOP?
WHERE DID YOU LAST BUY A SUIT, DRESS, SHOES, FURNITURE, ETC.?
(DO NOT ASK WHICH SHOPPING CENTER THEY ARE GOING TO, GET MORE
SPECIFIC INFORMATION).
INCOME?
WHAT SIZE PURCHASE?
REILLY'S LAW
84
REILLY'S LAW
LARGE CENTER
SMALL CENTER
MAIN HIGHWAY
1/2
SIZE OF LARGER CENTER
1 +
SIZE OF SMALLER CENTER
X IS MEASURED IN TIME
WHEN YOU ARE STUDYING A SHOPPING CENTER TO DETERMINE ITS PRIMARY TRADE
AREA AND COMPETITION, EXPECT TO SPEND A WEEK TO DO THE FIELD WORK.
A SPECIALTY CENTER IS USUALLY ON THE WAY TO ANOTHER CENTER.
THE McGAFFNEY PROCESS
CT = 02
CT = 01
SHOPPING CT = 03
CENTER
CT = 04
CT = 05
CT = CENSUS TRACT
NEED:
85
EQUALS
AGGREGATE HOUSEHOLD INCOME
TIMES
PERCENT CAPTURE
EQUALS
INCOME AVAILABLE TO THE SUBJECT PARCEL
START BY DEALING WITH THE ANCHORS - SAY, 4 ANCHORS OF 100,000 S.F. =
400,000 S.F.
TRUST YOUR JUDGEMENT AFTER DOING THE FIELD WORK AS TO HOW CAPTURE TAKES
PLACE.
WHAT IS THE PERCENT CAPTURE FOR EACH SEPARATE CENSUS TRACT.
PERCENT CAPTURE (CAPTURE RATE)IS THE ONLY MATTER OF JUDGEMENT IN THE
EQUATION.
ADD UP ALL THE INCOME AVAILABLE TO THE SUBJECT FROM EACH CT.
MULTIPLY THE PROPENSITY TO SPEND TIMES THE INCOME AVAILABLE TO EQUAL THE
GROSS VOLUME OF EXPECTANCY, OR THE G.V.E.
FOR PROPENSITY TO SPEND, LOOK IN THE RETAIL TRADE CENSUS WHICH LISTS
THE NUMBER OF DEPARTMENT STORES
DOLLARS IN SALES
S.F. OF STORES
TAKE DOLLARS IN SALES, DIVIDE BY THE NUMBER OF HOUSEHOLDS, MULTIPLY BY
THE AVERAGE INCOME PER HOUSEHOLD IN EACH CT.
TAKE THE G.V.E.;
DIVIDE BY SALES PER SQUARE FOOT
SQUARE
FOOTAGE
BE CAREFUL TO NOTE WHETHER SALES PER S.F. IS FOR GROSS LEASABLE OR
SALEABLE AREA. SOLVE ALL FIGURES THE SAME WAY (MAKE THE METHODS MATCH).
ECONOMIC MARKET ANALYSIS
EMPLOYMENT INFORMATION _POPULATION INFORMATION
_
_
INDUSTRIAL
RESIDENTIAL
OFFICE
RETAIL
_HOTEL _
86
EXPANDABILITY
SHAPE OF THE BUILDING
ELECTRICITY AVAILABLE
TRAIN TRACK ACCESSIBLE
CLEAR SPAN SPACE
WAREHOUSING, LONG AND RECTANGULAR
MANUFACTURING, SQUARE
LOCATION CONSIDERATIONS
CLOSE TO VENDORS
SOME COMPANIES WANT TO BE CLOSE TO VENDORS
CUSTOMERS
SOME
CUSTOMERS
COMPANIES
WANT
TO
87
BE
CONVENIENT
DISTANCE
FROM
LOT
LINKAGES
BEYOND ROAD ACCESSIBILITY, INCLUDES BUSINESSES OF A SIMILAR
TYPE. (I.E) DO YOU NEED TO BE IN AN AREA WHERE THERE ARE A
OF BUSINESSES AROUND TO CREATE BUSINESS FOR YOU.
SHIPPING CHARGES
LABOR MARKETS
EXISTENCE OF TRANSPORTATION SERVICES
I.E. RAILROAD ACCESSIBILITY
COMPETITORS
SUPERMARKETS DO
THEY HAVE
THEY HAVE
THEY RENT
EXECUTIVE RESIDENCES
HOUSING COSTS, SCHOOLS, SERVICES
DEMOGRAPHIC CONSIDERATIONS
POPULATION STATISTICS
TRAFFIC PATTERNS
INCOME STATISTICS
HOUSING PATTERNS
EXAMPLE:
A BREWERY
NEEDS:
WATER
PRIORITY TWO
LABOR FORCE
PRIORITY FOUR
SHIPPING AND TRANSPORTATION
PRIORITY THREE
CONSUMERS
PRIORITY ONE
SINCE BEER IS MOSTLY WATER AND EXPENSIVE TO SHIP, THE BREWERY FINDS IT
MOST IMPORTANT TO BE NEAR THE CONSUMER.
AUTO PARTS MANUFACTURER
NEEDS:
LABOR AND CUSTOMERS
VENDORS
BUILDING COST EFFICIENCY
PRIORITY ONE
PRIORITY THREE
PRIORITY TWO
HOUSING:
DEMOGRAPHICS
GROWTH TRENDS
UTILITIES
PRICE
WHAT KIND OF PRODUCT CAN BE SOLD? 25% OF THE COST OF THE HOME IS IN THE
LAND DEVELOPMENT.
88
STRIP CENTERS:
CAR TRAFFIC
VISIBILITY
APARTMENT HOUSE INVESTOR:
DEMOGRAPHICS
RETAIL LAUNDROMAT:
PROXIMITY TO RENTERS
2500 TO 3000 APARTMENTS
TRAFFIC
VISIBILITY
CORNER LOCATION PREFERABLE
SOME LIKE TO BE ON THE WAY TO
WORK, SOME LIKE TO BE ON THE WAY
BACK.
MOTEL:
LOW LAND COST
1-4 ACRES OF LAND
NEAR TRANSPORTATION
END OF COURSE
89
PERTAIN
TO
ZONING;
HOW
DIFFERENT
AGENCIES
CONTROL
89
NATURE OF ASSIGNMENT
EXECUTIVE SUMMARY
PROJECT HISTORY
PROJECT DESCRIPTION
PROJECT GOALS AND OBJECTIVES
PROJECT FINANCING AND ECONOMIC INCENTIVES
ENVIRONMENTAL IMPACT / MITIGATION
ARCHEOLOGICAL AND HISTORICAL ISSUES
REGULATORY ISSUES
AS-OF-RIGHT ALTERNATIVES
CONCLUSION
BIBLIOGRAPHY
APPENDIX
EXHIBITS
"KNOW WHAT HAPPENS WITH THE REGULATION OF PROPERTY WHEN YOU ARE
DEVELOPER; IGNORANCE OF REGULATION COULD STOP YOU IN YOUR TRACKS."
IN 1916, NEW YORK DEVELOPED THE NATIONS FIRST ZONING ORDINANCE. IT WAS IN
RESPONSE TO A GROUNDSWELL OF ANGER GENERATED BY THE EQUITY LIFE INSURANCE
BUILDING AT 120 BROADWAY.
ITS HEIGHT AND BULK WERE NOT REGULATED IN
1914, PERMITTING DEVELOPMENT IN A MANNER THAT CAUSED LOSS OF LIGHT AND
AIR.
THE NEW YORK CITY BOARD OF STANDARDS AND APPEALS (BSA)
IT IS LOCATED AT 161 6TH AVENUE.
GRANTS VARIANCES.
THE NEW YORK CITY PLANNING COMMISSION DECIDES ON OVERALL ZONING ISSUES.
DOWNZONING IS TAKING A USE AND MAKING IT LESS INTENSE.
UPZONING IS TAKING A USE AND MAKING IT MORE INTENSE.
AS-OF-RIGHT PROJECT - ONE THAT DOES NOT GO THROUGH THE APPROVAL PROCESS.
YOU CAN BUILD IT WITHOUT SPECIAL PERMITS, AND WITHOUT SPECIAL EXCEPTIONS.
HOW DO YOU KNOW WHERE YOU STAND AS A DEVELOPER?
1. LOOK AT THE ZONING MAPS; WHAT ZONE ARE YOU IN?
2. CAN YOU BUILD WHAT YOU WANT?
3. IF YOU CAN NOT, YOU NEED TO GO THROUGH THE SPECIAL PERMIT AND VARIANCE
PROCESSES,
OR DO NOT COUNT ON DEVELOPING THE PARCEL IN YOUR DESIRED
FASHION.
END OF CLASS ONE
90
CLASS TWO
9/17/90
CONDEMNATION
GOVERNMENT
REGULATION
^
"BALANCE"
OF THE FORCE OF LAW
THERE IS A MID-LEVEL OF CASES, REPRESENTED BY SEAWALL, NOLLAN, PENN
CENTRAL, ETC. THAT ANSWER THE QUESTION OF "WHEN" REGULATIONS ARE SEVERE
ENOUGH TO BE CONFISCATORY, IN EFFECT EVIDENCING CONDEMNATION.
IN EFFECTIVELY CONDEMNING DOES COMPENSATION CONSIST OF ALLOWING TRANSFER
OF DEVELOPMENT RIGHT BONUSES, TAX CREDITS, ETC. ( SUCH AS WITH LANDMARK
BUILDINGS )?
***************
HOW DO BUILDINGS BECOME LANDMARKS?
THE BUILDING IS PLACED ON THE REGISTER OF A RECOGNIZED HISTORICAL GROUP
SUCH AS THE NATIONAL HISTORIC REGISTRY. IN NEW YORK CITY, THE MUNICIPAL
ART SOCIETY OR OTHER GROUP COULD SUGGEST TO THE LANDMARKS COMMISSION THAT
IT ELECT A GIVEN BUILDING AS A LANDMARK.
IT MUST BE 30 YEARS OLD OR
OLDER, AND HAVE A SPECIAL FEATURE OR HISTORY SUGGESTING SOCIAL OR
ARCHITECTURAL IMPORTANCE.
****************
WHY WOULD THE GOVERNMENT HAVE EVER THOUGHT THAT THEY COULD FORCE OWNERS
IN SEAWALL TO BUILD SRO'S WITHOUT GIVING THEM COMPENSATION? BECAUSE BASED
ON THE PRECEDENT OF LAW AT THE TIME AND THE LEANINGS OF THE SUPREME
COURT, THEY THOUGHT THEY COULD GET AWAY WITH IT.
****************
SCOTT MARKOWITZ - GUEST LECTURER
CONSTITUTIONAL ASPECTS OF LAND USE REGULATION
HANDOUTS - RENT STABILIZATION CODE (PROPOSED) WITH EXPANDED FAMILIAL
91
RIGHTS,
THE FIFTH AMENDMENT - PRIVATE PROPERTY SHALL NOT BE TAKEN FOR PUBLIC USE
WITHOUT JUST COMPENSATION.
92
93
"LESS THAN ONE TENTH OF ONE PERCENT OF NEW YORK CITY'S CITIZENS KNOW
ANYTHING ABOUT THE WAY THE CITY HANDLES ITS PLANNING ISSUES".
MARTY
GALLENT.
PLANNING COMMISSION ORGANIZED IN 1937 BY LaGUARDIA.
"GOOD GOVERNMENT"
GROUPS INSISTED THAT THERE SHOULD BE A NON-POLITICAL GROUP DIRECTING THE
PLANNING FOR THE CITY. A CHARTER REVISION WAS INSTITUTED PROPOSING THAT
SEVEN MEMBERS BE APPOINTED THE CITY PLANNING COMMISSION. THE COMMISSION
SELECT A CHAIRMAN, WHO REPORTS TO THE MAYOR.
HE LOOKS AT FRANCHISES,
ZONINGS, ETC.
PLANNING COMMISSION MEMBERS WERE PART TIME AND HAD EIGHT YEAR TERMS.
THEY COULD NOT BE REMOVED EXCEPT FOR MISFEASANCE OR MALFEASANCE, AS
CHARGED BY THE MAYOR.
THE CHAIRMAN EVENTUALLY BECAME AN APPOINTEE OF THE MAYOR WITHOUT TENURE.
THE RELATIONSHIP DETERMINED WHETHER THE COMMISSION WOULD BE STRONG OR
WEAK.
THE YEAR 1964 SAW A NEW CHARTER. THE COMMISSION STAYED THE SAME, BUT THE
1964 CHANGE WAS NOT WELL THOUGHT OUT SO 1976 SAW A NEW CHARTER THAT
SOUGHT TO ELIMINATE THE CITY PLANNING COMMISSION.
PEOPLE BLAMED THE
CITY'S PROBLEMS ON THE PLANNERS, CLAIMING THAT THE PLANNING SHOULD HAVE
FORESEEN AND PREVENTED THE PROBLEMS. THE PEOPLE THOUGHT THAT RATHER THAN
ELIMINATE THE COMMISSION, THEIR POWERS SHOULD BE RECONFIGURED.
DIRECTOR OF CITY PLANNING
THEY ARE THE SAME PERSON.
BEFORE 1976 YOU COULD FILE AN APPLICATION AND NOTHING WOULD HAPPEN.
ULURP SOUGHT TO FINISH OFF THE DECISION WITHIN 6 MONTHS.
THE COMMUNITY PLANNING
BOROUGH PRESIDENT.
BOARDS
REPORT
TO
COMMISSION
OF
PLANNING
AND
94
RENEWAL
THESE
OTHER MATTERS, SPECIAL PERMITS, ETC. - THESE DECISIONS ARE PASSED BY THE
CITY PLANNING COMMISSION.
IF THE COUNCIL DOES NOT CALL UP A VOTE OF THE COMMUNITY BOARDS WITHIN 30
DAYS FOR DISCUSSION, THE NON-ELECTED PLANNING COMMISSION CAN VOTE IT
DOWN.
THE PROCESS:
IF A MATTER IS IN THE ULURP PROCESS IT GOES,
1. TO THE COMMUNITY BOARD...IF THEY SAY NO,
IT TAKES A SIDE TRIP TO THE BOROUGH COUNCIL, CHAIRED BY THE BOROUGH
PRESIDENT AND COUNTY BOARDS & COUNCILMEN.
IF THE BOROUGH PRESIDENT SAYS NO,
IT GOES TO THE CITY PLANNING COMMISSION. IF THEY VOTE YES, THE BOROUGH
PRESIDENT CAN VOTE THAT IT BE SENT DIRECTLY TO THE COUNCIL FOR A
VOTE.
IF ALL OF THE THREE VOTES WERE "NO", THE DECISION CAN NOT GO TO THE
COUNCIL.
IF THE COMMUNITY BOARD VOTES YES AND THE BOROUGH PRESIDENT
VOTES NO, IT CAN'T GO TO THE COUNCIL.
END OF CLASS THREE
CLASS FOUR
10/1/90
EUCLID V. AMBLER
CHALLENGED ZONING RESOLUTION
RESOLUTION WAS CONFIRMED.
WENT
TO
THE
SUPREME
COURT.
ZONING
95
WHEN YOU WANT TO GO THROUGH THE ZONING CHANGE, OR WHEN YOU WISH TO BE
GRANTED SPECIAL RELIEF FROM THE ORDINANCE BY THE CITY PLANNING COMMISSION
YOU ENTER THE ULURP PROCEDURE. IT IS A SIX MONTH PROCESS.
YOU GET CERTIFIED PRIOR TO THE SIX MONTH PERIOD. AS THE APPLICATION IS
REVIEWED, COMMENTED ON, REVIEWED ONCE AGAIN IT WILL EVENTUALLY BE SIGNED
OFF ON (CERTIFIED) AND THE ULURP PROCEDURES CAN BEGIN.
EIS :
STATE REQUIREMENT
IF AN APPLICATION, REQUEST DISCRETIONARY RELIEF.
NON-DISCRETIONARY APPROVAL IS AS-OF-RIGHT.
PDS : PROJECT DATA STATEMENT
FILED WITH THE LEAD AGENCIES - EPA & CPC
DONE WHEN GOING FOR DISCRETIONARY RELIEF.
NEGATIVE DECLARATION - STATES THERE ARE NO NEGATIVE ENVIRONMENTAL
CONSEQUENCES TO THE PROPOSED ACTION. NO DRAFT ENVIRONMENTAL IMPACT
STATEMENT (DEIS) WILL BE REQUIRED.
CONDITIONAL NEGATIVE DECLARATION - STATES THAT NO DEIS IS REQUIRED, AND
THAT CERTAIN STATED ITEMS SHOULD BE ADDRESSED IN ORDER TO PERMIT
DEVELOPMENT.
POSITIVE DECLARATION - TO PROCEED WITH APPLICATION INTO ULURP, A DEIS
MUST BE DONE SINCE THE PROJECT MAY BE ENVIRONMENTALLY SENSITIVE.
WHEN EIS IS COMPLETE AND ACCEPTED, IT CAN GO THROUGH THE ULURP PROCESS.
VESTING RIGHTS - GETTING THE FOUNDATIONS OF THE STRUCTURE INTO THE GROUND
TO DEMONSTRATE SIGNIFICANT EFFORT AND INTENT IN BUILDING A PROJECT. THIS
ACTION OF VESTING RIGHTS PRESERVES THE ZONING UNDER WHICH THE PROJECT WAS
APPROVED, AND DISQUALIFIES A MUNICIPALITIES ATTEMPT TO FURTHER LIMIT
DEVELOPMENT ON A PROPERTY.
SPECIAL DISTRICTS - GOVERNS CHANGE IN AN EXISTING SINGLE USE DISTRICT.
FOR EXAMPLE, WHEN THE DEMOGRAPHIC AND ECONOMIC TRENDS SUGGESTED THAT THE
ABANDONED MANUFACTURING DISTRICT COULD BE USED FOR RESIDENTIAL OR OFFICE
USES, A SPECIAL DISTRICT CAN BE DESIGNED TO ENCOMPASS AN AREA THAT COULD
ACCOMMODATE THIS AS OF RIGHT WHILE MAINTAINING CERTAIN OF THE OBJECTIVES
THAT THE PRIOR USES HAD, THEREBY NOT REDUCING THE LAND ALLOCABLE TO
MANUFACTURING.
USE GROUP SIX - SPECIAL DISTRICT DESIGNED TO PRESERVE PARTICULAR AREAS.
96
TRANSFER OF DEVELOPMENT RIGHTS ( AS USED IN NEW YORK CITY) * ZONING LOT MERGER: CREATES GREATER BULK.
* SELL AIR RIGHTS TO CONTIGUOUS PROPERTIES TO CREATE ONE ZONING LOT.
* CAN'T "JUMP OVER" BUILDINGS.
3
* LOT DIAGRAM *
IF "3" WANTS TO SELL TO "1", THEN "2" MUST SELL ALSO TO TRANSFER THE
DEVELOPMENT RIGHTS. THERE MUST BE AT LEAST TEN FEET OF CONTIGUITY AND
ADJACENCY IN ORDER TO TRANSFER DEVELOPMENT RIGHTS IN AN AS-OF-RIGHT MODE.
*IF YOU HAVE A LANDMARK BUILDING, YOU CAN TRANSFER ACROSS THE STREET.
THIS IS NOT AS-OF-RIGHT.
WHEN THESE TYPES OF TRANSFERS OCCUR, THE
LANDMARKS COMMISSION HAS THE RIGHT TO DETERMINE WHETHER OR NOT THE
PROPOSED DEVELOPMENT IS IN CONSONANCE WITH THE ARCHITECTURAL STATEMENT
MADE BY THE LANDMARK.
AMENITIES: PLAZAS GET UP TO 20 PERCENT BONUS ON FLOOR AREA
IMPROVED SUBWAY STATIONS GET INCREASED F.A.R.'S OF UP TO 3.0.
END OF CLASS FOUR
CLASS FIVE
10/8/90
INCLUSIONARY HOUSING BONUS - AN EXAMPLE OF ZONING BEING ENLISTED TO
REDRESS A SOCIAL OR ENVIRONMENTAL ISSUE.
IF WITHIN A COMMUNITY BOARD
DISTRICT (OR WHEN ON THE EDGE OF A DISTRICT, WITHIN A 0.5 MILE DISTANCE
OF THE BORDER TO THE SITE) DEVELOPERS PUTTING UP A DEVELOPMENT OR
RENOVATIONS TO BENEFIT LOW INCOME FAMILIES ARE GRANTED BONUS POINTS THAT
CAN BE BOUGHT TO INCREASE DENSITY FOR A LUXURY BUILDING ELSEWHERE. THIS
IS DIFFERENT FROM THE SECTION 421a PROGRAM IN THAT IT IS NOT A PROGRAM OF
TAX DEFERMENT.
SECTION 421a BEGAN IN 1972. WHEN BUILDING ON VACANT LAND, THE LAW ALLOWS
A TEN YEAR LIMITED EXEMPTION FROM TAXES.
SEE LAW NOTES FOR FURTHER
DETAILS.
EXCEPT FOR NORTH OF 96TH STREET, 421a BENEFITS ARE NO LONGER AVAILABLE IN
MANHATTAN AS OF YEAR END 1985. FOR THE AREA NORTH OF 96TH STREET, THE
LIMITED EXEMPTION WAS INCREASED FROM TEN TO FIFTEEN YEARS IN DURATION.
EUCLID V. AMBLER
THE FIRST SUPREME COURT DECISION DELINEATING CONSTITUTIONAL LEGITIMACY OF
PUBLIC POLICY THAT LIMITS AN INDIVIDUAL'S PROPERTY RIGHTS IN PROTECTING
97
PUBLIC HEALTH, SAFETY, MORALS AND WELFARE. IT STATES THAT A ZONING LAW
MUST NOT BE ARBITRARY OR CAPRICIOUS, AND THAT IT MUST PROTECT THE HEALTH,
SAFETY AND WELFARE OF RESIDENTS SURROUNDING THE AFFECTED PARCEL.
GUEST SPEAKER, MICHAEL ZENREICH - ARCHITECT
EXAMPLE OF DEVELOPMENT PROJECT AND ITS REGULATORY PROCESS.
KALIKOW HOTEL, 195 BROADWAY, THE FORMER AT&T BUILDING.
LOCATED OPPOSITE THE WORLD TRADE CENTER, ACROSS FROM CITY HALL PARK.
AN EXISTING 1 MILLION S.F. BUILDING, INVOLVING A DEIS AND DEMAPPING.
REQUIRED ARCHEOLOGICAL STUDIES, SHADOW IMPACT STUDIES, HORTICULTURAL
IMPACT STUDIES AND CULTURAL IMPACT STUDIES.
*******************************************
TWO PAGE OUTLINE FOR PROJECT DUE NEXT WEEK
*******************************************
END OF CLASS FIVE
CLASS SIX
10/15/90
TODAY, WE REVIEWED THE PROPOSED CLASS PROJECTS.
A SAMPLING INCLUDED:
WORLDWIDE PLAZA
CITY SPIRE
MT. LAUREL DECISION
CARNEGIE CENTER
TIMES SQUARE REDEVELOPMENT
COLISEUM CENTER
ENVIRONMENTAL REVIEW PROCESS
ORIGINALLY, AS OF RIGHT BUILDINGS DID NOT REQUIRE REVIEW. ANY BUILDING
REQUIRING DISCRETIONARY APPROVAL REQUIRED AN ENVIRONMENTAL IMPACT
STATEMENT.
YOU MUST FILE A PROJECT DATA STATEMENT FOR ANY DISCRETIONARY PROJECT
UNDER CEQRA (CITY ENVIRONMENTAL QUALITY REVIEW AGENCY) WHICH DETERMINES
THE NEED FOR A STATEMENT. THEY ISSUE A POSITIVE DECLARATION, NEGATIVE
DECLARATION OR CONDITIONAL NEGATIVE DECLARATION STATEMENT.
THE STATE
AGENCY FOR ENVIRONMENTAL REVIEW IS THE STATE ENVIRONMENTAL QUALITY REVIEW
AGENCY (SEQRA).
TYPICAL SECTIONS IN A DRAFT ENVIRONMENTAL IMPACT
STATEMENT MUST INCLUDE SUCH THINGS AS:
AUTO EMISSIONS
TRANSPORTATION
SUBWAY
98
SCHOOLS
WATER SUPPLY
SEWER
TAXES
POLICE AND FIRE PROTECTION
LANDMARKS
END OF CLASS SIX
CLASS SEVEN
10/22/90
SECTION 72-21
THIS IS THE SECTION OF THE ZONING RESOLUTION
JURISDICTION OF THE BOARD OF STANDARDS AND APPEALS.
PERTAINING
TO
THE
FIVE FINDINGS MUST OCCUR BEFORE THE BOARD OF STANDARDS AND APPEALS MAY
ISSUE A VARIANCE.
1. THE PROPERTY IS UNIQUE WITH RESPECT TO PHYSICAL CONDITIONS, AND THIS
UNIQUENESS IS WHAT MAKES IT DESIRABLE TO GRANT A VARIANCE. IE. A
TRIANGULAR PARCEL
2. TO DEVELOP THE PROPERTY WITHOUT THE VARIANCE WOULD CAUSE HARDSHIP DUE
TO THE UNIQUENESS OF THE PARCEL. HARDSHIP IS DECIDED BY THE RETURN
OF AN ACCEPTABLE CASH FLOW, AS MEASURED BY INTERNAL RATE OF RETURN
BASED ON MARKET BOND RATES FOR CONFORMING USE AS COMPARED TO THAT
OCCURRING AFTER A VARIANCE WOULD BE GRANTED.
THE LACK OF A
REASONABLE RETURN CANNOT BE RELATED TO MARKET CONDITIONS, BUT ONLY
TO THE UNIQUENESS OF THE LOT.
3. THE HARDSHIP WAS NOT SELF-CREATED.
4. THE VARIANCE IS AS MINIMAL AS IS PRACTICAL.
A 20 STORY BUILDING
SHOULD NOT BE GRANTED WHEN 15 STORIES WOULD BE ADEQUATE AND SOLVE
THE HARDSHIP. VARIANCES SHOULD MITIGATE NEGATIVE IMPACTS AS MUCH
AS IS POSSIBLE.
5.
IF
NOT
ADVERSELY
AFFECT
THE
99
WHEN YOU ASK FOR A BULK VARIANCE THE DEGREE OF PROOF REQUIRED IS LESS
THAN THAT REQUIRED FOR A USE VARIANCE.
IE. A 2-FAMILY
APARTMENTS.
ZONE:
YOU
WANT
TO
BUILD
BUILDING
WITH
TO
ARTICLE 78 - STATE OF NEW YORK CIVIL PRACTICE LAW AND RULES - ALLOWS YOU
TO APPEAL A BOARD OF STANDARDS AND APPEALS DECISION BASED ON THE
PERCEPTION OF AN ARBITRARY AND CAPRICIOUS ACTION.
GUEST SPEAKER:
ROGER BENNETT - CHAIRMAN OF THE BOARD OF STANDARDS AND
APPEALS, 33 YEARS WITH THE CITY. PROFESSIONAL ENGINEER BY TRADE.
CAROL SLATER - COUNCIL TO THE DEPARTMENT OF BUILDINGS AFTER SERVING WITH
THE CORPORATION COUNCIL'S OFFICE AND THE BOARD OF STANDARDS AND APPEALS.
ZONING RESOLUTIONS REGULATE DEVELOPMENT AND TELLS A PROPERTY OWNER WHAT
HE CAN EXPECT TO BE ALLOWED TO DO ON HIS PROPERTY.
THE BOARD OF STANDARDS AND APPEALS, IN ADDITION TO ITS ROLE AS GRANTOR OF
VARIANCES, ALSO APPROVES METHODS OF CONSTRUCTION FOR MATERIALS THAT ARE
NOT GOVERNED BY THE BUILDING CODE.
END OF CLASS SEVEN
CLASS EIGHT
10/30/90
MIDTERM EXAMINATION GIVEN TODAY
TONIGHT'S TOPIC IS ENVIRONMENTAL REVIEW.
EACH PROJECT IN NEW YORK STATE REQUIRES A LEAD AGENCY. A LEAD AGENCY IS
AN AGENCY OF THE STATE OR MUNICIPAL GOVERNMENT THAT TAKES THE LEAD IN
ARRANGING FOR THE ENVIRONMENTAL REVIEW. THE STATE OF NEW YORK WILL HAVE
ITS OWN LEAD AGENCY THROUGH WHICH STATE AGENCIES ARE DIRECTED, AND
100
MUNICIPAL GOVERNMENTS WILL HAVE THEIR OWN LEAD AGENCIES THROUGH WHICH
MUNICIPAL AGENCIES ARE DIRECTED.
IN NEW YORK CITY, THERE ARE AT LEAST TWO LEAD AGENCIES FOR EACH PROJECT.
THEY ARE THE DEPARTMENT OF CITY PLANNING AND THE DEPARTMENT OF
ENVIRONMENTAL PROTECTION.
A PROJECT DATA STATEMENT IS FILED WITH THE LEAD AGENCIES. THIS IS THE
SAME AS AN ENVIRONMENTAL ASSESSMENT FORM, WHICH IS THE PROJECT DATA
STATEMENT REQUIRED UNDER THE STATE ENVIRONMENTAL QUALITY REVIEW ACT. FOR
VARIANCES IN NEW YORK CITY, THE BOARD OF STANDARDS AND APPEALS REPLACES
THE PLANNING BOARD AS LEAD AGENCY, TEAMING UP WITH THE DEPARTMENT OF
ENVIRONMENTAL PROTECTION.
AN ADMINISTRATIVE DETERMINATION IS A STATEMENT BY THE LEAD AGENCY THAT AN
ENVIRONMENTAL IMPACT STATEMENT IS NOT REQUIRED.
THIS DETERMINATION IS
CHALLENGEABLE UP TO 4 MONTHS FROM ISSUE. THIS IS THE SAME AS A NEGATIVE
DECLARATION.
END OF CLASS EIGHT
CLASS NINE
11/5/90
GUEST SPEAKER, KEVIN CARRIGAN
THE GUEST SPEAKER WAS PREVIOUS COUNCIL TO CONGRESSMAN TOM MANTON. HE IS
A MEMBER OF THE COMMUNITY BOARD IN QUEENS THAT CONTAINS THE NEW COMPLEX
BUILT BY CITIBANK.
THE COMMUNITY BOARD PLAYS AN IMPORTANT ROLE IN CITY GOVERNMENT. IT IS
THE MOST BASIC LEVEL OF GOVERNMENT THAT A CITIZEN CAN INVOLVE HIMSELF IN.
THERE ARE 59 COMMUNITY BOARDS WITH UP TO 50 PEOPLE IN EACH, CONSISTING OF
RESIDENTS AND LOCAL BUSINESSMEN. YOU NEED NOT RESIDE IN THE PARTICULAR
DISTRICT IF YOU ARE A BUSINESSMAN THERE. IT IS ONLY REQUIRED THAT YOU
LIVE IN ONE OF THE FIVE BOROUGHS.
THERE MUST BE A "BALANCE" ON THE BOARD. THIS MEANS THAT ALL PARTS OF THE
DISTRICT MUST BE REPRESENTED FAIRLY, AS WELL AS HAVING A FAIR
REPRESENTATION OF BUSINESS OWNERS AND RESIDENTS (ACCORDING TO THE REVISED
CITY CHARTER). THE COUNCIL PEOPLE FROM THE DISTRICT CAN RECOMMEND UP TO
ONE-HALF OF THE MEMBERS OF THE COMMUNITY BOARD, WHICH MUST BE APPROVED
FOR APPOINTMENT BY THE BOROUGH PRESIDENT.
THE BOROUGH PRESIDENT CAN
APPOINT UP TO ONE-HALF OF THE MEMBERS WITHOUT THE APPROVAL OF THE
COMMUNITY BOARD.
THERE ARE THREE FUNCTIONS OF THE COMMUNITY BOARD.
THEY ARE:
101
CAPITAL
AND
3. HAS A FORMAL ROLE IN THE URBAN LAND USE REVIEW PROCESS (ULURP).
COMMUNITY BOARDS NOW HAVE A FORMAL ROLE IN SITTING IN ON ENVIRONMENTAL
REVIEW SCOPING SESSIONS.
THE ULURP PROCESS AND THE COMMUNITY BOARD - AFTER THE APPLICATION FOR
DEVELOPMENT IS CERTIFIED, IT GOES TO THE COMMUNITY BOARD FOR A 60 DAY
REVIEW. THE BOARD DECIDES WHETHER TO HOLD A PUBLIC HEARING AND/OR TAKE A
POSITION ON THE ISSUE. AFTERWARDS, IT GOES TO THE BOROUGH PRESIDENT, WHO
HAS THE SAME OPTIONS.
LIKEWISE THIS FOLLOWS WITH THE CITY PLANNING
COMMISSION, WHICH HAS THE SAME OPTIONS.
BEAR IN MIND THAT THE COMMUNITY BOARD IS MADE UP OF VOLUNTEER CITIZENS.
WHEN THEY HEAR AN APPLICATION, THEY FEEL THAT EVERYBODY IS AGAINST THEM.
THEY FEEL EXCLUDED FROM THE PROCESS, AND FEEL THAT "DEALS" ARE BEING
STRUCK ALL AROUND THEM WITHOUT THEIR NOTICE. THEY DO NOT FEEL A PART OF
THE 9 TO 5 CITY GOVERNMENT, WHO GET PAID TO REVIEW THE PROJECT DURING THE
DAY. THEY ARE AT A DISADVANTAGE THEREFORE, SINCE THEY ARE NOT ABLE TO BE
FULLY INVOLVED OR INFORMED ABOUT THE PROCESS.
THEY WILL USUALLY BE
DEFENSIVE, WILL DEMAND INVOLVEMENT IN THE PROCESS, AND WILL MAKE IT CLEAR
TO YOU THAT THEY KNOW THEIR COMMUNITY BEST AND WHAT IS GOOD FOR IT.
END OF CLASS NINE
CLASS TEN
11/12/90
LANDMARK - A BUILDING, PARK OR OTHER ELEMENT OF HISTORICAL, SOCIAL OR
AESTHETIC IMPORTANCE THAT IS DESIGNATED A LANDMARK BY THE LANDMARKS
COMMISSION, STATE OR NATIONAL HISTORICAL REGISTRY.
STATE, NATIONAL AND CITY HISTORICAL REGISTRIES ARE INDEPENDENT AND WHAT
MAY BE IN ONE REGISTRY IS NOT AUTOMATICALLY CONTAINED IN THE OTHER
REGISTRIES.
NATIONAL REGISTRATION QUALIFIES YOU FOR SPECIAL TAX CREDITS.
REGISTRATION, UNLIKE NEW YORK'S, CANNOT BE FORCED UPON YOU.
NATIONAL
THERE ARE THREE CRITERIA TO BEING LISTED IN THE CITY'S LANDMARK REGISTRY:
102
1. ARCHITECTURAL UNIQUENESS
2. SOCIAL UNIQUENESS
3. AESTHETIC UNIQUENESS
NOTHING ELSE SHOULD BE CONSIDERED BY THE LANDMARKS COMMISSION. IF A SITE
IS THREATENED BY DEVELOPMENT, LANDMARKS DESIGNATION SHOULD NOT BE A
PRETEXT FOR PREVENTING IT.
WHEN A LANDMARKS COMMISSION LOOKS AT A PROPERTY, THEY EITHER DECIDE IT IS
A LANDMARK, OR THEY PASS ON A DECISION SO AS NOT TO FOREGO A POTENTIAL
LANDMARK STATUS AT A FUTURE DATE.
THE LANDMARKS COMMISSION IS FORMED OF ELEVEN PEOPLE, APPOINTED BY THE
MAYOR, ONE OF WHOM IS THE PAID POSITION OF CHAIRMAN. THE CHAIRMAN HOLDS
A FULL TIME POSITION WITH THE CITY, WHILE THE OTHER MEMBERS ARE NOT PAID
FOR THEIR TIME OR SERVICES.
GIVEN THE NATURE OF SOME NON-PROFIT INSTITUTIONAL FINANCES, THE LANDMARKS
COMMISSION HAS A 5 PERSON PANEL THAT REVIEWS LANDMARKS DECISIONS THAT
WOULD CAUSE UNBEARABLE HARDSHIPS.
THIS PANEL IS MADE UP NOT ONLY OF
HISTORIANS AND ARTISTS (LIKE THE LANDMARKS COMMISSION), BUT ALSO CONTAINS
BUSINESSMEN AND OTHER PROFESSIONS. THEY ARE APPOINTED BY THE MAYOR.
END OF CLASS TEN
CLASS ELEVEN
11/19/90
RENT REGULATION
THE FEDERAL GOVERNMENT INSTITUTED RENT REGULATIONS AFTER THE SECOND WORLD
WAR. THE AGENCY OF THE FEDERAL GOVERNMENT RESPONSIBLE FOR THIS WAS THE
OFFICE OF PRICE ADMINISTRATION (OPA).
IN 1948, THE CITY ADOPTED A RENT CONTROL LAW AFTER THE FEDS GOT OUT OF
REGULATING RENTS.
IT AFFECTED RETAIL AND RESIDENTIAL DEVELOPMENT.
IN
1952, THE END OF RENT CONTROL FOR RETAIL REAL ESTATE HAD TAKEN PLACE.
THE DEPARTMENT OF HOUSING AND COMMUNITY RENEWAL (DHRC), A STATE AGENCY,
REGULATES ALL RENTAL UNITS IN THE CITY AND STATE, OR ANY OTHER
MUNICIPALITY THAT WISHES TO HAVE RENT CONTROL.
THE MAXIMUM BASE RENTAL FORM (MBR) IS FILED ANNUALLY BY THE LANDLORD AS
THE PROCEDURE FOR GETTING RENT INCREASES UNDER RENT CONTROL.
IT LISTS
THE EXPENSES OF THE BUILDING AND GOVERNS THE DEGREE OF RENT INCREASE.
THE RENT STABILIZATION ASSOCIATION WAS AN INDUSTRY GROUP THAT VOLUNTARILY
OVERSAW RENT STABILIZATION. WHEN IT FAILED TO DO SO, THE DHRC ENFORCED
IT.
103
YOU ARE UNDER RENT CONTROL IF YOU WERE IN YOUR APARTMENT BEFORE 1961.
AFTER 1969, ALL NEW BUILDINGS WERE UNDER RENT STABILIZATION. ONCE A RENT
CONTROLLED APARTMENT IS VACATED, IT BECOMES A RENT STABILIZED APARTMENT.
IN A RENT STABILIZED APARTMENT, YOU CAN NOT BE EVICTED NOTWITHSTANDING
NONPAYMENT OF RENT, ILLEGAL ACTIVITY, OR DAMAGE TO BUILDING.
IF YOU TAKE A 421a ABATEMENT FROM THE CITY ON YOUR RENTAL BUILDING, YOU
MUST PUT ITS APARTMENTS UNDER RENT STABILIZATION.
THE RENT GUIDELINES BOARD DECIDES ON ANNUAL OR BIANNUAL INCREASES IN
RENTS TO TENANTS.
IF YOU HAVE A BUILDING WITH 20 PERCENT OF THE UNITS SOLD, IT IS AN
EFFECTIVE CONDOMINIUM AND THE REMAINING 80 PERCENT CAN BE RENTED WITHOUT
REGULATION.
-UNLESSIF YOU OWN MORE THAN TEN UNITS IN ONE BUILDING, THE UNITS ARE UNDER
REGULATION. IN A PROJECT WITH 100 UNITS AND YOU OWN ONE UNIT IN EACH OF
THE TEN BUILDINGS OF TEN UNITS, THEY ARE NOT UNDER REGULATION.
HOW TO INCREASE RENTS
IN A RENT CONTROLLED BUILDING, THROUGH IMPROVEMENTS.
IN A RENT STABILIZED BUILDING, THROUGH THE FOLLOWING METHODS:
MAJOR CAPITAL IMPROVEMENT INCREASE
(MCI) - A PROGRAM TO IMPROVE THE
BUILDING. WHEN COSTS ARE PASSED ON TO RENTERS, THE NEW EXPENSE OF RENT
COMES IN LINE WITH MORTGAGE AND MAINTENANCE PAYMENTS REQUIRED TO PURCHASE
THE UNIT. THE NEW COST PROVIDES THE INCENTIVE TO PURCHASE RATHER THAN
RENT.
IMPROVEMENTS MUST BE DONE TO THE ENTIRE BUILDING, IE., THE ROOF,
ELEVATOR, WATERPROOFING AND WINDOWS MUST BE FOR THE ENTIRE BUILDING, NOT
JUST PART OF IT.
IN DOING THE IMPROVEMENTS, THE MAJOR CAPITAL IMPROVEMENTS DO NOT INCLUDE
THE COST OF USING MONEY OR BORROWING IT. J-51 ABATEMENTS ARE GIVEN FOR
THESE IMPROVEMENTS AS WELL.
HARDSHIP
IE. IN EVICTIONS AND RENT INCREASES DUE TO DEMOLITION AND IMPROVEMENTS.
WHEN TENANTS ARE IN PLACE, THEY ARE USUALLY BOUGHT OUT BY THE LANDLORD.
ONLY WHEN PROOF IS GIVEN TO THE DHRC THAT:
104
NOT
POSSIBLE
AGAINST
THE
ASSESSED
THE ASSESSED VALUATION IS OFTEN FAR LESS THAN THE ACTUAL VALUE.
MAY NOT INCLUDE INTEREST.
EXPENSES
TAXATION ISSUES
ASSESSMENTS
VINCENT PATRERO, GUEST SPEAKER
3 MAJOR PROGRAMS: ONE RELATES TO NON-COMMERCIAL USES AND THE OTHERS TO
RESIDENTIAL USES.
IN 1984 INDUSTRIAL / COMMERCIAL INCENTIVE PROGRAM REPLACED THE ICI BOARD,
WHICH WAS FORMED IN 1977.
THE ICIB CAME UNDER FIRE BECAUSE OF ITS DISCRETIONARY NATURE.
105
THEREFORE,
IN 1984 AN AS OF RIGHT PROGRAM CALLED THE ICI PROGRAM WAS BROUGHT ON LINE
TO REPLACE IT.
YOU MUST FILE THE PRELIMINARY APPLICATION TO THE ICIP
BEFORE GETTING A BUILDING PERMIT IN ORDER TO BENEFIT FROM THE INCENTIVES.
THE INCENTIVES VARIED FOR INDUSTRIAL AND COMMERCIAL USES. FOR INDUSTRIAL
USES, THE INCENTIVES COULD BE EARNED ANYWHERE IN THE CITY.
FOR
COMMERCIAL DEVELOPMENT IT WAS LIMITED IN SCOPE BETWEEN TWO TYPES OF
INCENTIVES DEPENDING ON LOCATION IN THE CITY. AS AN IDEA OF THE TYPE OF
INCENTIVE THE ICIP PROVIDES, FOR INDUSTRIAL USES THERE IS A 13 YEAR TAX
EXEMPTION WITH A 9 YEAR PHASE-OUT. THE ICIP COVERS RENOVATIONS AS WELL
AS NEW CONSTRUCTION.
THERE ARE 421a AND 421b INCENTIVES. THEY ARE NAMED AFTER THE SECTIONS
FROM THE STATE REAL PROPERTY TAX LAW WHERE THEY CAN BE FOUND.
SECTION 421b RELATES TO 1 AND 2 FAMILY HOMES BEGUN BY JUNE 30, 1984 AND
COMPLETED BY JULY 1, 1986. IT APPLIED TO NEW CONSTRUCTION AND CERTAIN
ENLARGEMENTS AND IMPROVEMENTS.
IN THE TWO FAMILY HOMES, ONE OF THE
INHABITANTS MUST BE THE OWNER. IT FEATURES A TWO YEAR EXEMPTION AND A 7
YEAR PHASE-OUT. THIS INCENTIVE WAS AVAILABLE OVER THE ENTIRE CITY.
SECTION 421a APPLIES TO THE ENTIRE CITY. CONSTRUCTION MUST BEGIN BY DEC.
31 1993 AND BE COMPLETED BY DEC. 31, 1995.
IT APPLIES TO RESIDENTIAL
DEVELOPMENT WITH 3 OR MORE FAMILIES PER BUILDING.
THE SITES IT IS
APPLIED TO MUST BE VACANT OR UNDERUTILIZED. IF YOU BUILD MORE THAN ONE
HUNDRED UNITS, A CERTAIN BREAKDOWN OF ONE AND TWO BEDROOM UNITS WILL BE
REQUIRED TO AVOID THE BUILDING OF ALL STUDIOS, FOR EXAMPLE.
THE J-51 PROGRAM IS A TAX EXEMPTION PROGRAM. THE INCREASE IN ASSESSED
VALUE IS ABATED FOR A TIME. THE ABATEMENT IS ONE DOLLAR OF TAX REDUCTION
PER DOLLAR OF IMPROVEMENTS. WHEN YOU ARE GETTING BOTH J-51 BENEFITS AND
RENT INCREASES, YOU AGREE TO WAIVE 50 PERCENT OF THE INCREASES IF YOU
TAKE BOTH THE ABATEMENT AND THE INCREASE.
END OF CLASS TWELVE
CLASS THIRTEEN
DECEMBER 3, 1990
ASSIGNMENTS TURNED IN.
END OF CLASS THIRTEEN AND COURSE
106
ANALYTICAL TECHNIQUES
PROFESSOR ED MADSEN
SPRING 1990
ALSO:
THERE ARE TWO TYPES OF PEOPLE INVOLVED IN REAL ESTATE:
1. DREAMERS, AND
2. LIARS.
OF NOTE:
IN CANADA; MONTHLY PAYMENT LOANS MAY NOT HAVE INTEREST COMPOUNDING MORE
FREQUENTLY THAN TWICE YEARLY. IN CANADA, THE PERSON TAKING OUT THE LOAN
IS OBLIGATED TO BE LIABLE FOR DEFICIENCY JUDGEMENT IN THE CASE OF
DEFAULT.
IN THE UNITED STATES, THIS IS NOT THE CASE.
WE HAVE "NONRECOURSE" LOANS, WHICH DO NOT ALLOW THE ENTITY LENDING THE MONEY TO HOLD
THE PERSON TAKING OUT THE LOAN LIABLE FOR MONIES OUTSTANDING AFTER THE
PROPERTY IS FORECLOSED AND SOLD AT A LOSS TO THE LENDING INSTITUTION.
ASSIGNMENT IN CLASS
ANOTHER URBAN NEW BRUNSWICK DEVELOPMENT OF H.K. ASSOC.
NET INCOME OF HOUSING...............1,440,000
106
..
..EQUALS 11.7M
LET US SEE.
OR, VALUE COULD BE DETERMINED PER SQUARE FOOT. FOR THE HOUSING, 62,000
S.F. WAS DIVIDED INTO 14.4M TO YIELD 230 DOLLARS PER S.F.
COMPARE THIS TO A TYPICAL YIELD AT 100 DOLLARS PER S.F. AND YOU START TO
GET SUSPICIOUS.
THEREFORE, WITH 230 -100 = 130 DOLLARS, THE PREMIUM IS 130 DOLLARS PER
SQUARE FOOT. PREMIUMS COME FROM INCOME.
130 DOLLARS X 62,000 S.F. = 8,060,000, THIS EQUALS THE PREMIUM, WHICH
AMOUNTS TO A "GIFT" FROM RUTGERS, WHICH IS HIGHLY UNLIKELY.
HOW CAN THE UNIVERSITY IN ITS PRESENT STATE AFFORD TO GIVE SUCH HIGH
PREMIUMS? LIKELY, THEY CAN NOT.
FOR THE STUDENT, A COMPARATIVE TABLE:
250 DOLLARS PER STUDENT PER MONTH IN RENT.
4 STUDENTS PER APARTMENT
1000 DOLLARS PER APARTMENT PER MONTH
12 MONTHS PER YEAR
12,000 DOLLARS PER YEAR PER APARTMENT
EACH BEDROOM IS 12 X 16
12 X 16 BEDROOM X 2 = 192 X 2= 384
8 X 8 KITCHEN
= 64
100 SQUARE FOOT LIVING ROOM = 100
6 X 8 BATHROOM
= 48
TOTAL
APPROX. 600 S.F.
12,000 PER YEAR / 600 S.F. = 20.00 PER S.F. PER YEAR
COMPARE TO 23.23 PER YEAR FROM DEVELOPER'S FIGURES
1.44M / 62,000 S.F. = 23.23
IF THE PROJECT COST IS 100 PER SQUARE FOOT, HOW MUCH NET RETURN DO YOU
HAVE TO EARN TO MAKE IT VIABLE? ANSWER IS 10.00 PER S.F. THE DEVELOPER
SAYS THAT HE WILL GET 23.23 PER S.F.
THE BANK MAKES LOAN AT 75% OF
107
= 14.4 MILLION
CAPITALIZATION".
ALSO
KNOWN
AS
THE INDICATED VALUE IS 14.4 MILLION FOR THE LAND AND THE BUILDING. TO
DETERMINE THE VALUE OF THE LAND, YOU DEDUCT THE VALUE OF THE BUILDING.
ESTIMATED COST @ 100.00 PER S.F. X 62,000 S.F.
THEREFORE BUILDING COST IS 6,200,000 DOLLARS.
THEREFORE 14.4 M - 6.2 M = 8.2 M = LAND VALUE
CASE TWO:
GIVEN A 60,000 S.F. BUILDING AT 12.00 PER S.F. NET
LEASE:
108
CONDITION ONE:
CONDEMNATION ON DAY ONE: TENANT HAS AN AGREEMENT TO OCCUPY SPACE UNTIL
YEAR 2000 AT 12 DOLLARS PER S.F. WHEN THEY LOCATE ANOTHER LOCATION, THEY
GET AN EQUIVALENT LEASE AS PER TIME PERIOD AND RENT COST, THEREFORE THERE
ARE NO DAMAGES OTHER THAN THE MONEY EXPENSE OF SEEKING AND MOVING TO A
NEW LOCATION.
CONDITION TWO:
SUPPOSE THAT MARKET RATE INCREASES TO 24 DOLLARS PER S.F. AT A STRAIGHT
LINE BASIS OVER THE TEN YEARS FROM NOW TO THE YEAR 2000. A CONDEMNATION
OCCURS IN THE YEAR 1997. MARKET RENT IS AT 18 DOLLARS PER S.F. NET, AND
FOR THE NEXT THREE YEARS TO YEAR 2000 THEY MUST THEREFORE PAY 6 DOLLARS
MORE PER S.F., WHICH IS THE PRESUMED DAMAGES.
THE DAMAGE TO THE LESSEE IS 6 DOLLARS PER S.F. FOR THREE YEARS. ANOTHER
WAY OF STATING THIS IS THAT "IN 1997, THE VALUE OF THE LEASEHOLD ESTATE
IS EQUAL TO THE PRESENT VALUE OF 6 DOLLARS PER SQUARE FOOT PER YEAR FOR
THREE YEARS.
CALCULATOR ENTRY:
1. 360000
2. ENTER
3. CHS
4. PMT
5. 3
6. N
7. 10.5
8. I
9. PV
ANSWER IS IN REGISTER (887,444.45)
THE DISCOUNT RATE IS BASED UPON THE PRESENT DISCOUNT RATE ON THE US
TREASURY BONDS, OR IN THIS CASE 3 YEAR TREASURY BILLS.
U.S 3 YEAR T-BILL IS AT 8 PERCENT.
ADD 250 TO 300 BASIS POINTS WHICH IS 2.5 TO 3.0 PERCENT TO THE 8 PERCENT
TO CONSIDER THE PREMIUM FOR RISK AND LIQUIDITY INVOLVED IN THE
TRANSACTION; THE ANSWER RESULTING WOULD BE THE VALUE OF THE INTEREST RATE
FOR THE LEASEHOLD ESTATE IN 1997.
109
5 % INCREASE
* 1997
*1996
24.00 DOLLARS
* 1995
39.00 DOLLARS
* 1994
^
* 1993
* 1992
^DEMAND INCREASES AS EXCESS
BUILD
SUPPLY DIMINISHES. DEVELOPERS NOTICE QUICK
110
*1991^ ^
^
^
^ INCREASE IN RENTS AND BUILD BUILDINGS TO
*1990
THE LEVEL OF OVERSUPPLY, RETURNING THE CYCLE
DIAGRAM OF HUGH KELLY'S THEORY
BILL ZECKENDORF'S HAWAIIAN TECHNIQUE
B.Z. OWNS A BUILDING IN MANHATTAN WITH A PARTNER WHO RARELY AGREES WITH
HIM. AS A 50 PERCENT PARTNER, HE OFFERS HIS SHARE FOR SALE, OF A 10 M
PROPERTY. HE SAID "PAY 5 MIL FOR MY HALF INTEREST, OR I WILL PAY 6 MIL
FOR YOUR INTEREST. I WANT TO OWN THE BUILDING AND PROPERTY ALONE".
IT WAS KNOWN THAT THE BUILDING WAS NOT WORTH 11 MILLION DOLLARS.
ON
PAPER, HE SEPARATED THE BUILDING FROM THE LAND THROUGH A DEVICE CALLED
THE GROUND LEASE WITH A NOI OF 1.1 MILLION, HE BROKE UP THE PROPERTY
ALLOTTING 50 % OF NOI TO THE LAND AND 50% TO THE BUILDING.
ZECKENDORF KNEW THAT INSURANCE COMPANIES LOVE CERTAINTY.
HE COULD
GUARANTEE THE GROUND LEASE WITH A GROUND RENT OF 0.55 MILLION AT 8%,
VERSUS THE 6% THEY COULD GET IN THE BOND MARKET.
550,000 / 8% =
6,875,000 VALUE FOR THE LAND AS AN ANNUITY.
HE THEN CAP RATED THE
BUILDING AT 9 PERCENT, OFFERING THE LEASEHOLD WITH ITS BENEFIT OF FULL
DEPRECIATION ON THE LEASE, SINCE NO LAND VALUE IS CONSIDERED IN A LEASE.
HE THEN SOLD THE PROPERTY FOR THE 13 MILLION WHICH WAS THE NEWLY COMPUTED
COMBINED VALUE OF THE LAND AND THE LEASEHOLD.
APPRAISALS:
THE STEPS OF APPRAISAL;
1.
LAYOUT THE PURPOSE; GENERALLY SPEAKING, PEOPLE WANT TO KNOW THE
MARKET VALUE OF THE PROPERTY FOR MORTGAGE LENDING PURPOSES.
2. GET THE IDENTITY OF THE PROPERTY (I.E. ADDRESS, TAX NUMBERS, BLOCK,
LOT, ETC.)
3. DEFINITION OF MARKET VALUE; MARKET VALUE IS THE MOST PROBABLE PRICE
AT WHICH THE PROPERTY SHOULD SELL WITH AN ALL CASH PURCHASE PRICE.
4.
2. TAXATION
GIVE AWAY
3. ESCHEAT (INHERITANCE BY
111
(CONDEMNATION)
5. ZONING; USES AND BULK REQUIREMENTS
6. HIGHEST AND BEST USE
7. LAND
8. IMPROVEMENTS
9. LOCATION
*************************************************************************
*
PARCEL TWO
3 ACRE SITE
180,000 FAR
TIMES 35/FAR
2.253
EQUALS
6.3 MILLION, DIVIDED BY 3
ACRES EQUALS 2.1 MILLION
PER ACRE
THE COST APPROACH IS THE LEAST ACCURATE. IT ANSWERS THE QUESTION "WHAT
WOULD IT COST TO ACQUIRE A SITE OF SIMILAR SUITABILITY TO THE ONE
STUDIED".
IT CONSIDERS LAND VALUE AND BUILDING COST. THE INDICATED VALUE IS THE
REPLACEMENT COST OF THE BUILDING.
DEPRECIATION IS A LOSS OF VALUE
ATTRIBUTABLE TO FACTORS SUCH AS AGE, USE, ETC.
THE MARKET APPROACH
THE MARKET APPROACH ANSWERS THE QUESTION "WHAT ARE SELLING PRICES FOR
SIMILAR PROPERTIES".
THE GAP BETWEEN A FIGURE DERIVED BETWEEN MARKET APPROACH
APPROACH IS OFTEN MADE UP BY THE "DEPRECIATION FIGURE".
AND
COST
112
THE INCOME APPROACH ANSWERS THE QUESTION "WHAT WOULD THE PROPERTY BE
WORTH TO AN INVESTOR BASED UPON ITS INCOME PRODUCTION".
GIVEN A SITUATION:
COST APPROACH VALUE..................5 MILLION
MARKET APPROACH VALUE................10 MILLION
INCOME APPROACH......................9 MILLION
IF YOU SEE THIS, SOMETHING IS WRONG.
IF THIS WERE TRUE THEN YOU WOULD SEE LOTS OF ACTIVITY IN THE MARKET TO
REAP THE PROFITS FROM THE GAP.
THE RECONCILIATION APPROACH
AVERAGING THE APPROACHES TO GET A VALUE.
LIMITING CONDITIONS OF AN APPRAISAL;
"I AM NOT AN EXPERT IN MATTERS PERTAINING TO CONTAMINATION ABOVE OR BELOW
THE GROUND."
THE APPRAISAL IS CERTIFIED AS OF A SPECIFIC "POINT IN TIME".
END OF CLASS TWO
CLASS THREE 2/5/90
HOWARD GELBTUCH, HISTORICAL SURVEY
HANDOUT GIVEN SHOWING 1974 THROUGH 1976 MANHATTAN LEASABLE SPACE COMPARED
TO DOW INDUSTRIAL RISES AND FALLS, AND HISTORICAL OCCASIONS.
WHY DOES NOT THE DOW INDUSTRIALS RELATE TO THE REAL ESTATE CYCLE IN THE
NEW YORK MARKET?
1. PSYCHOLOGICAL SENTIMENT AND HERD INSTINCT.
2. DOWS REFLECT NATIONAL MARKETS AND ARE DAILY RESPONSIVE TO WORLD
EVENTS.
3. REAL ESTATE IS DEPENDENT ON CONDITIONS THAT ARE FOR THE MOST PART
LOCAL.
4. REAL ESTATE REQUIRES A LEAD TIME FOR ACTIVITY. THEREFORE A GOOD AND
PROSPEROUS PERIOD OF TIME FOLLOWED BY A LESS PROSPEROUS TIME MAY SEE
DECISIONS MADE IN THE PROSPEROUS PERIOD ENTER REALITY IN THE DEEPEST
PARTS OF THE LEAST PROSPEROUS PERIODS.
TYPES OF VALUE ESTIMATION AND APPRAISAL.
TECHNIQUE ONE:
113
land
does
not
IS THERE AN EASIER AND MORE DIRECT WAY OF LOOKING AT LAND VALUE THAN CMD?
EXAMINE THE FOLLOWING.
IF THE TOTAL INVESTMENT IS 500,000 AS IN THE ABOVE CASE, THEN;
38,000 / 500,000 = 7.6%, WHICH IS THE RELATIONSHIP BETWEEN THE NET (NOI)
(38,000) AND THE VALUE (500,000).
THE 7.6% WOULD BE THE OVERALL CAPITALIZATION RATE (OCR), WHICH BRINGS US
TO THE SECOND TECHNIQUE.
TECHNIQUE TWO:
THE PROCESS OF
CAPITALIZATION.
USING
THE
OVERALL
CAPITALIZATION
RATE
IS
DIRECT
GROSS
INCOME
AFTER
ALLOWING
FOR
VACANCY
AND
EXAMPLE:
100,000 =EGI
-5,000 =NOE
-------95,000 =RESULT
-47,500 =48 TO 50 PERCENT EXPENSES
-------47,500 =NET OPERATING INCOME (NOI)
IN THE 1960S, THE PREVALENT CAP RATE WAS 0.085, OR 8.5 PERCENT.
114
115
9, g, Nj
27500 (which is the last year income added to the sale price), g, Cfj
f, IRR
IF YOU WANT TO CHANGE THE PROPERTY VALUE TO REFLECT A TEN PERCENT
INCREASE THE VALUE WOULD BE 110,000, SO THE NEW LAST VALUE (THE Cfj
entry) WOULD CHANGE FROM THE 27,500 TO 37,500 TO REFLECT THE ADDITIONAL
10,000 PROFIT.
TO ENTER THIS INTO THE HP WITHOUT RE-ENTERING THE OTHER INFORMATION,
ENTER:
37500, STO, 2
THIS IS BECAUSE CELL 2 HOLDS THE LAST Cfj VALUE.
THE NEW COMPUTATION RESULTS IN A 12.25 PERCENT INTERNAL RATE OF RETURN IN
THE FIRST YEAR.
DOING THE SAME FOR A TWENTY PERCENT INCREASE IN PROPERTY VALUE, THE
INTERNAL RATE OF RETURN WOULD BE 14.11 PERCENT.
#
*12.25% (10% INCREASE)
*
5%
#
*
#
*
#
*
*
SALE DATE
0.#*----------------------------------------------*-- 10% EQUITY LINE
= \
=\
=
-5%
\ =
\
=
*INFLATION IN VALUE
*YEARS*
116
O YEARS
10 YEARS
THE ELLWOOD FORMULA (FAN GRAPH)
117
COC = 2500
IF OAR SLIPS TO 9.99 PERCENT, THEN THE NOI IS 9990.00
9990 - 7500 = 2490
2490/25000 = 0.0996
EXAMPLE OF DISCOUNTED CASH FLOW:
PROPERTY IS 21,000
CASH IN (INVESTMENT) IS 4,800
PERIOD IS 3 YEARS
CASH OUT (WHAT YOU WALK AWAY FROM CLOSING WITH) IS 9,600
CASH FLOW IS NIL.
THE RATE OF RETURN IS 26 PERCENT.
EXAMPLE:
CASH IN IS 25,000
CASH FLOW IS 2,500 (10% GAIN)
CASH OUT IS 26,250 (1,250 GAIN) (5% GAIN)
10% + 5% = 15% = THE INTERNAL RATE OF RETURN.
THE TOTAL RETURN DERIVED FROM:
CASH FLOW
GAIN ON EQUITY
REVERSION IS WHAT THE INVESTMENT SELLS FOR AT THE END OF THE INVESTMENT
PERIOD. IT IS THE CASH FLOW IN THE INTERNAL RATE OF RETURN THAT ASSUMES
THE SALE OF THE INVESTMENT.
THE ABILITY TO SIMPLY ADD THE GAINS PERCENTAGES FROM CASH FLOW AND CASH
OUT TO ARRIVE AT THE CALCULATED INTERNAL RATE OF RETURN FALLS APART AFTER
THE FIRST YEAR BECAUSE THE PERCENTAGE OF GAIN RELATIVE TO THE PROPERTY'S
VALUE PRIOR TO THE PERIOD HAS BEGUN TO VARY, THROWING THE CALCULATION
OFF.
CASH FLOW IS NOT THE SAME AS NET OPERATING INCOME. NET OPERATING INCOME
IS THE CASH FLOW ADDED TO THE LEASING COSTS AND TENANT IMPROVEMENTS.
CASH FLOW IS THE LEASING COSTS AND TENANT IMPROVEMENTS SUBTRACTED FROM
THE NET OPERATING INCOME.
NOI - LEASING COSTS AND TENANT IMPROVEMENTS = CASH FLOW
HOW DO WE FORECAST THE VALUE OF THE PROPERTY AT REVERSION? WE TAKE THE
NOI AND DIRECT CAPITALIZE IT AT A PERCENTAGE (SAY, 8.5%). THE REVERSION
IS BASED ON A CAP RATE ON THE PREVIOUS YEAR TO THE REVERSION'S NOI,
THOUGH SOME ADVANCE IT TO THE NEXT YEAR.
END OF CLASS THREE
118
119
INTEREST=?
TERM=5
PAYMENT = 100,000
ANSWER = 7.93 =INTEREST & IRR
TWO = 85,845
THREE= 79,538
FOUR= 73,693
FIVE= 68,279
TOTAL = 400,000
THEREFORE THE 7.93 FIGURE IS CONFIRMED
SOLVING THE SAME PROBLEM WITH THE "BLUE KEY" REGISTERS;
100,000 PER YEAR PAYMENT
5 YEARS
PV=400,000
400,000, CHS, G, Cfo
100,000, G, Cfj
5, G, Nj
F, IRR, READ REGISTER 7.93
ANOTHER EXAMPLE
100,000 PAID IN THE FIRST YEAR
200,000 IN YR. TWO
400,000 IN YR. THREE
800,000 IN YR. FOUR
1,600,000 IN YR. FIVE
INTEREST = 10%
SOLVE FOR PV
0, G, Cfo
100,000, G, Cfj
F, NPV, READ REGISTER 2,096,609.15
200,000, G, Cfj
400,000, G, Cfj
800,000, G, Cfj
1,600,000, G, CfJ
ANOTHER EXAMPLE
YEAR ONE TO THREE 200,000
YEAR FOUR TO SIX 400,000
120
0% INTEREST
NPV = 600,000
YEAR
1
2
3
POP QUIZ GIVEN. EXPECT CONTENT TO REAPPEAR ON THE MIDTERM AND FINAL
THE INFORMATION BELOW IS BASED UPON THE POP QUIZ HANDOUT
PORTION OF
INVESTMENT
ANNUAL CLAIM ON
INCOME STREAM
DEBT
121
RATE
COMPONENT
SERVICE
(DEBT)
EQUITY
YIELD
(DEBT)
75% (LOAN
RATIO)
X
11.76% (MORT.
CONSTANT)
25% (DOWN
PAYMENT)
X
8.82%
15% (IRR)
3.75%
9.7%** X 6.53***
-0.48%
32.07%****X6.53%
-2.10%
***CALCULATION METHOD
8,g,n; 15,g,i; 1,FV; PMT, read register; 12, x, 100, x; end of operation
MORE INFLATION RESULTS IN A SMALLER OAR. CONVERSELY, IF INFLATION TAKES
A NOSE DIVE, THE OAR INCREASES TO COMPENSATE. AS OAR GOES UP, PROPERTY
VALUE GOES DOWN.
AS INTEREST RATES GO UP, THEN OAR GOES UP, AND VALUE GOES DOWN.
UNDERSTAND HOW THE ABOVE TABLE DERIVES THESE CONCEPTS ABOVE.
EXPECT QUESTIONS ON THE MIDTERM ON;
BETTER TO BUY OR RENT?
NOI
CASH ON CASH RATES
END OF CLASS FIVE
122
CLASS SIX
3/5/90
= PRESENT VALUE
EXAMPLE;
8 PERCENT INTEREST
1
= 0.926
YEAR ONE;
(1+.08)1
1
(1+.08)2
= 0.858
YEAR TWO;
1
(1+.08)9
= 0.5
YEAR NINE;
123
OVERALL
RATE
VALUE
MONTHLY P&I
20 YEARS
30 YEARS
1227.03
1152.64
74.39
TOTAL PAYMENTS
294,487.00
414,949.19
120,462.19
TOTAL INTEREST
186,487.63
306,949.82
120,462.19
REFINANCING
104,000 REMAINING IN BALANCE ON A LOAN
12.5% INTEREST, 17 YEARS LEFT
VS.
108,000 AT 9 3/8%, 15 YEAR TERM
TERM
17 YEARS
15 YEARS
MONTHLY P&I
12.5% (1227.03/MO.)
9 3/8% (1119.64/MO.)
TOTAL PAYMENTS
250,314
201,535
12.5%
2K
4K
124
16%
5K
10K
EXAM:
50 QUESTIONS
2:30 TO 4PM IS EXAM
4:15 TO 5:30 IS DEBRIEFING
OPEN BOOK
OPEN NOTES
BRING CALCULATOR
*********************
EXAM CONTENT
*********************
25% OAR/IRR/CASH-ON-CASH
20% DCF/FUTURE VALUE/PRESENT WORTH
20% LEVEL RENT ANNUITY
15% COMPOUND INTEREST/ RULE OF 72'S
10% MORTGAGE FINANCING
5% LEVERAGE
5% ETHICS
QUESTIONS WILL BE BASED ON ANNUAL RATHER THAN MONTHLY PAYMENTS.
*************************************************************************
*
GIVEN A LEASE OF 10 YEARS;
5 YEARS AT 100,000 PER YEAR AT 10 PERCENT
5 YEARS AT 125,000 PER YEAR AT 10 PERCENT
PROVIDES SIX MONTHS FREE RENT UP FRONT
EXPENSES PAID BY TENANT
YEAR ONE = 50,000
YEAR TWO THROUGH FIVE = 100,000 EACH
YEAR SIX THROUGH TEN = 125,000 EACH
NET PRESENT VALUE (NPV) = 627,846.67 (enter as PV, then enter period n,
then enter the discount rate and solve for the equivalent level rent per
annum, which is the payment).
example:
627,846.67 ,PV
10, i
10, n
PMT
READ ANSWER, 102,179.15
IF THE BUILDING IS 100,000 S.F., THEN THE AVERAGE LEVEL RENT PER SQUARE
125
WHEN GOLDMAN-DELORENZO TOOK TITLE TO THE LAND UNDER 1166 AVENUE OF THE AMERICAS THE GROUND RENT PAID BY
TISHMAN COVERED LOAN PAYMENTS ON THE 32.5 MILLION FIRST FEE MORTGAGE TO THE NEW YORK STATE EMPLOYEES RETIREMENT SYSTEM
AND THE 3.5 MILLION SECOND FEE MORTGAGE TO JAMAICA SAVINGS BANK.
(LEASEHOLD FIRST MORTGAGE LOAN) IN ADDITION TO INVESTING 25 MILLION DOLLARS IN THE LEASEHOLD EQUITY.
THE FOLLOWING QUESTIONS, PRIORITIZE EACH OF THE INVESTMENT POSITIONS WITH "1" BEING MOST SECURE, AND 5 BEING LEAST
SECURE.
1. FIRST MORTGAGE ON THE LEASED FEE. 2. SECOND MORTGAGE ON THE LEASED FEE.
3. FEE EQUITY
126
-186,142.63
------------84,561.52
THE DIFFERENCE OF THE FUTURE VALUE COMPOUNDED WITH NO PAYMENTS AND THE
FUTURE VALUE OF THE PAYMENTS = THE LOAN BALANCE
LEVERAGE
BUY A PROPERTY FOR 100,000 AND IT INCREASES TO 200,000 OVER TEN YEARS.
THE AVERAGE ANNUAL INCREASE WAS 7.2% COMPOUNDED OVER THE TEN YEARS (LAW
OF 72'S).
SAY YOU HAVE AN AVERAGE LOAN BALANCE OF 80,000 BORROWED AT 6%, AND YOUR
AVERAGE EQUITY IS 20,000.
100,000 X 7.2% = 7,200
80,000 X 6.0% = 4,800
-----------------------20,000 = EQUITY:2,400 = DIFFERENCE
2400 / 20,000 EQUITY = LEVERAGED ANNUAL INCREASE OF 12%, WHICH IS THE
AVERAGE EQUITY RETURN.
END OF CLASS SEVEN
CLASS EIGHT
EXAMINATION GIVEN WITH DEBRIEFING
3/26/90
IN THE EARLY 70'S WHEN TOO MUCH MONEY WAS CHASING TOO FEW INVESTMENTS, A
MYSTERIOUS DEAL WAS MAKING THE ROUNDS OF NEW YORK LENDING INSTITUTIONS.
THROUGH INTERMEDIARIES, AN UNNAMED INVESTOR WAS OFFERING TO DEPOSIT 500
MILLION IN EXCHANGE FOR THE PROMISE TO RETURN 1 BILLION DOLLARS AT THE
END OF TEN YEARS.
USING THE RULE OF 72'S, THE INVESTORS REQUIRED RATE OF RETURN WAS 7.2%.
USING THE HP12C, THE REQUIRED ANNUAL RATE OF RETURN BASED ON ANNUAL
COMPOUNDING IS 7.177%.
USING THE HP12C, THE REQUIRED ANNUAL RATE OF RETURN BASED ON MONTHLY
COMPOUNDING IS 6.952%.
BASED ON THE ABOVE ANSWERS, DOES THE RULE OF 72'S IMPLY ANNUAL OR MONTHLY
COMPOUNDING? IT IMPLIES ANNUAL COMPOUNDING. THE RULE OF 70'S RELATES TO
MONTHLY COMPOUNDING.
ON AUGUST 22,1965, THE NEW YORK TIMES CARRIED THE FOLLOWING ANNOUNCEMENT
ABOUT A DEVELOPMENT IN WILLINGBORO, NEW JERSEY:
127
LAST SUMMER (AUGUST 22, 1989), ONE OF THE GARFIELD PARK HOUSED ORIGINALLY
PRICED AT 15,000 WAS SELLING FOR 125,000.
THE MORTGAGE LOAN USED TO
FINANCE THE HOUSE HAD AN AVERAGE BALANCE OF 5000 (FROM THE TIME OF
PURCHASE THROUGH LAST SUMMER) AT AN INTEREST RATE OF 6%.
IF THE BROKERAGE COMMISSION FOR SELLING THE HOUSE LAST SUMMER WAS 5%,
WHAT WOULD THE SALE PROCEEDS HAVE BEEN (BEFORE PAYING OFF THE REMAINING
BALANCE ON THE MORTGAGE LOAN)? 118,750.
BASED ON THE INITIAL HOME PURCHASE PRICE IN 1965, AND THE SALE PROCEEDS
LAST SUMMER (AFTER PAYMENT OF THE BROKERAGE COMMISSION BUT BEFORE THE
REPAYMENT OF THE MORTGAGE LOAN BALANCE), WHAT IS THE IMPLIED AVERAGE
ANNUAL RATE OF RETURN ON THE GROSS INVESTMENT? 9%.
WHAT WAS THE IMPLIED LEVERAGED RATE OF RETURN ON THE EQUITY? (IGNORE THE
RENTAL VALUE OF THE HOME OCCUPANCY FOR THE SOLUTION TO THIS PROBLEM).
10.5%.
IF THE BUYER WHO PAID 125,000 LAST SUMMER IS FACED WITH THE PROSPECT OF
HOME VALUES INCREASING AT AN AVERAGE RATE OF 5% PER ANNUM (NET OF RESALE
COMMISSION) OVER THE NEXT 10 YEARS AND HAS FINANCED THE PURCHASE WITH A
LOAN WHICH WILL HAVE AN AVERAGE BALANCE OF 100,000 OVER THE NEXT 10 Years
AT AN INTEREST RATE OF 10% PER ANNUM, WHAT IS THE PROSPECTIVE LEVERAGED
RATE OF RETURN ON THE EQUITY (IGNORE THE RENTAL VALUE OF HOME OCCUPANCY
FOR THE SOLUTION TO THIS PROBLEM). 15%
WHAT WOULD YOUR ANSWER BE TO THE FOREGOING QUESTION IF THE AVERAGE LOAN
BALANCE WAS 50% OF THE PURCHASE PRICE? 0%.
WHAT DO THE ANSWERS TO THE PREVIOUS TWO QUESTIONS IMPLY WITH RESPECT TO
THE CONVENTIONAL WISDOM OF THE LAST THREE DECADES THAT HIGH LEVERAGE IS
THE ROAD TO HIGH EQUITY RETURNS?
GREATER EQUITY INVESTMENTS PROVIDE
BETTER INTERNAL RATES OF RETURN BECAUSE INTEREST RATES ON DEBT HAVE RISEN
TO A LEVEL HIGHER THAN ANNUAL VALUE INCREASES IN THE INVESTMENT WHICH IS
BEING LEVERAGED.
IF YOU ARE GIVEN THE FACT THAT THE PRESENT WORTH OF 1 DOLLAR DEFERRED 9
YEARS IS 50 CENTS, USING ANNUAL COMPOUNDING:
WHAT IS THE IMPLIED DISCOUNT RATE?
8.006%
WHAT IS THE FUTURE WORTH OF $1 FOR THE SAME RATE AND TERM?
$2.00.
WHAT IS THE RELATIONSHIP BETWEEN THE FUTURE WORTH FACTOR AND THE PRESENT
WORTH FACTOR? THEY ARE THE INVERSE OF EACH OTHER. NOTE THE FORMULAS FOR
128
12.491.
HOW MUCH MONEY WOULD YOU HAVE TO SET ASIDE EACH YEAR TO ARRIVE AT A
FUTURE WORTH OF 1 DOLLAR FOR THE SAME RATE AND TERM? 8 CENTS.
WHAT IS THE FACTOR CALLED THAT YOU PRESENTED AS THE ANSWER TO THE
PREVIOUS QUESTION? SINKING FUND FACTOR.
WHAT IS THE RELATIONSHIP OF THE ANSWER TO THE QUESTION BEFORE LAST AND
THE FACTOR FOR FUTURE WORTH OF 1 DOLLAR PER ANNUM? IT IS THE INVERSE OF
IT.
BASIC ASSUMPTIONS:
NOI OF 125,000
OAR OF 10 PERCENT
LOAN RATIO OF 75 PERCENT
INTEREST RATE OF 10 PERCENT
LOAN TERM OF 8 YEARS
AMORTIZATION IS BY INTEREST ONLY PAYMENTS ANNUALLY
SELLING EXPENSES ARE 5% AT THE END OF 8 YEARS.
THE PRESENT PROPERTY VALUE BASED ON OAR IS 1,250,000
THE PRESENT VALUE OF THE EQUITY IS 312,500
THE LOAN AMOUNT IS 937,500
THE ANNUAL CONSTANT IS 10 PERCENT
THE ANNUAL DEBT SERVICE IS 93,750, SINCE ONLY INTEREST IS PAID (INT.
ONLY)
ANNUAL CASH FLOW IS 31,250.00
FUTURE LOAN BALANCE AT THE END OF 8 YEARS IS 937,500
SALE PROCEEDS AT THE END OF 8 YEARS (PRIOR TO LOAN PAYOFF) IS 1,781,250.
FUTURE VALUE OF EQUITY AT THE END OF 8 YEARS ( AFTER PAYOFF) IS 843,750.
PROJECTED 8 YEAR IRR (ANNUAL COMPOUNDING) IS 20.22%
CASH ON CASH IS CASH FLOW / CASH EQUITY WHICH IS 10 PERCENT
THE COVERAGE IS NOI / DEBT SERVICE WHICH IS 1.333
IF THE CONSTANT IS RAISED BY 100 BASIS POINTS AND ALL OTHER FACTS REMAIN
THE SAME WHAT WILL THE CASH-ON-CASH BE (COMPUTE TO TWO DECIMAL PLACES)?
7.00 PERCENT. IF THE CONSTANT IS RAISED FROM 10 PERCENT TO 11 PERCENT,
THEN THE ANNUAL DEBT SERVICE WILL INCREASE TO 103,125.00, WHICH WILL
129
147.47.
130
MEAN RETURN
TRADE OF LACK OF VOLATILITY FOR LESS RETURN WHEN COMPARING REAL ESTATE TO
STOCKS AND BONDS. THE REPORT DID A SURVEY WHICH PERCEIVED THE RISK OF
REAL ESTATE RELATIVE TO COMMON STOCK TO BE ABOUT HALF THAT OF COMMON
STOCK.
NEW TRENDS IN REAL ESTATE:
THE HIGHEST AND BEST USE OF CAPITAL
SOME PRICES FOR TROPHY BUILDINGS ARE NOT JUSTIFIABLE BASED ON DOLLARS
RENT PER SQUARE FOOT, CAP RATE, IRR, OR OTHER MEANS. THE PHENOMENON OF
GIVEN PROPERTIES BEING UNIQUE, SUCH AS THE PAN AM BUILDING ABOVE GRAND
CENTRAL STATION DUE TO ITS UNEQUALED LOCATION, CAN PARTIALLY EXPLAIN THE
PHENOMENON. INVESTORS ARE BUYING ASSETS AND NOT RETURNS. PEOPLE ARE
BUYING THE IRREPLACEABLE. PAN AM WENT FOR 177 PER S.F. AND THE BELAIRE
HOTEL WENT FOR 1.1 MILLION PER ROOM.
WHAT IS THE VALUE OF AN ASSET? MANY TIMES SET BY FOREIGN INVESTORS. 2
BILLION WAS INVESTED BY GREAT BRITAIN IN PARIS, AND 1 BILLION BY JAPAN IN
PARIS.
INCREASING COSTS ARE CAUSING SHIFTS GLOBALLY.
SHIFTS TO LOW COST LOCATIONS BY HEADQUARTERS:
CHEMICAL BANK TO N.J.
MOBIL TO VIRGINIA
JC PENNEY TO DALLAS
MITSUBISHI FROM TOKYO TO N.Y.
SEARS FROM DOWNTOWN TO SUBURBAN CHICAGO
NASA FROM WASHINGTON D.C. TO HOUSTON
MIDTOWN LONDON TO CANARY WHARF
ECONOMY HAS GLOBALIZED
SHERATON IS BUILDING A 450 ROOM HOTEL IN MOSCOW
LAND IN TOKYO COSTS 10 TO 12,000 DOLLARS PER S.F.
LONG SHOT CITIES ARE BEIJING, SHANGHAI, WARSAW,
MOSCOW, AND LENINGRAD
BUDAPEST,
ISTANBUL,
VULTURE FUNDS ARE BUYING DISTRESSED PROPERTIES WITH POTENTIAL AND TURNING
THEM AROUND.
THERE HAS BEEN A DEMISE IN THE DESIRABILITY OF REGIONAL MALLS. IN THE
LAST TEN YEARS, ONE OF THE BEST IRR RETURNS WAS FROM MALLS, BUT THEY DO
NOT ALWAYS WORK WELL FOR RETAILERS ECONOMICALLY SPEAKING.
COMMON AREA MAINTENANCE (CAM)
131
THEY REQUIRE:
132
CONDOS
133
TOWNHOMES
SINGLE FAMILY DETACHED RESIDENCES
THREE TYPES OF HOUSING. WHICH ARE BEING AFFECTED BY THE DOWNTURN IN THE
METRO AREA REAL ESTATE MARKET? THE CONDOS AND TOWNHOMES SINCE THEY WERE
BOUGHT BY INVESTORS. THE INVESTOR'S MENTALITY IS TO SELL WHEN THE GOING
GETS TOUGH TO MINIMIZE YOUR LOSSES. THEY ARE NOT LONG TERM INVESTORS IN
THE WAY A HOME OWNER INVESTS. THEY DUMPING OF CONDOS AND TOWNHOMES ONTO
THE MARKET TO AVOID A LOSS IS CAUSING THE GREATER DROP IN THEIR PRICES
RELATIVE TO THAT OF DETACHED HOMES.
IN LEASE ANALYSIS, BE AWARE OF THE WAY "SQUARE FOOTAGE" IS DEFINED.
THERE ARE DIVERSE WAYS OF MEASURING THIS.
PERSONAL FINANCE DISCIPLINE:
CASH CONTROL AND BUDGETING
CREDIT CONTROL: AVOID CREDIT
AUTOMOBILES: MAINTAIN IT AND CHANGE THE OIL
BUYING ADVICE: DO NOT SPEND FOOLISHLY, BUT BUY GOOD...BUY QUALITY.
TITHING; DO YOUR SHARE
QUIZ:
LAST YEAR, UNITED JERSEY BANK IS REPORTED TO HAVE SIGNED A 5 YEAR LEASE
IN SOUTH BRUNSWICK, NJ FOR A 28,885 S.F. OFFICE BUILDING AT 18.50 DOLLARS
PER SQUARE FOOT GROSS WITH ONE YEAR OF FREE RENT UP FRONT.
1. DISCOUNTING ANNUALLY AT 12% PER ANNUM, WHAT IS THE NET PRESENT VALUE
PER SQUARE FOOT OF SCHEDULED RENT PAYMENTS?
28,885 x 18.50 = 534,372.50
12,i;O,g,Cfj;534,372.50,g,Cfj;4,g,Nj;f,NPV; read answer, and divide by
28,885 which equals 50.17 dollars per square foot.
2. WHAT IS THE EQUIVALENT LEVEL RENT PER SQUARE FOOT BASED ON A DISCOUNT
RATE OF 12% PER ANNUM?
12,i;5,n;50.17,PV;press PMT; read answer = 13.92 dollars per square foot.
3.IF ANTICIPATED LESSOR EXPENSES ARE 5.00 DOLLARS PER SQUARE FOOT, WHAT
IS THE INDICATED EQUIVALENT NET RENT PER SQUARE FOOT?
13.92-5.00 = 8.92
4. ASSUMING THAT THE FOREGOING LEASE IS INDICATIVE OF MARKET RENT FOR THE
ENTIRE BUILDING, AND FURTHER ASSUMING THAT A 9 PERCENT OVERALL RATE WOULD
BE APPROPRIATE, WHAT WOULD THE MARKET VALUE PER SQUARE FOOT BE (ASSUMING
100 PERCENT OCCUPANCY).
134
+++++++++++++++++++++++
YOU ARE PRESENTED WITH THE FOLLOWING FORECAST FROM THE APPRAISAL OF A
32,000 S.F. OFFICE BUILDING VALUED AT 3,300,000.
NOI
YR.ONEYR. TWO
YR.THREE
YR.FOUR
YR.FIVE
YR.SIX
___________________________________________________________________
265,458
337,132
245,455
339,871
368,443
382,886
LEASE
COM, -31,490
&TI
-62,541
32,455-26,486
-23,825
____________________________________________________________________
CASH 233,968
337,132
182,914
307,416
341,957
359,061
FLOW
6. WHAT IS THE IMPLIED INTERNAL RATE OF RETURN BASED ON THE 5 YEAR
FORECAST (WITH 6TH YEAR NOI CAPPED AT 9.5%)?
3,300,000,CHS,g,Cfo;233,968,g,Cfj;337,132,g,Cfj;182,914,g,Cfj;307,416,g,C
fj;382,886,enter,0.095,/;(answer is 4,030,378.95),enter,341,957,+,g,Cfj;
f,IRR;read answer = 11.877
7. DOES YOUR ANSWER TO QUESTION 6 REPRESENT THE LEVERAGED IRR?
no, since there is no mortgage, it cannot be leveraged.
8. WHAT IS THE IMPLIED 1ST YEAR OVERALL RATE?
NET OPERATING INCOME
SALES PRICE
OVERALL RATE
265,458 / 3,300,000
8.0442
ALWAYS BE CAREFUL TO COMPUTE WITH THE NOI AS OPPOSED TO THE CASH FLOW.
9. WHAT PERCENTAGE OF NPV IS DERIVED FROM THE 5 YEAR CASH FLOW?
COMPUTE THE NET PRESENT VALUE OF THE CASH FLOWS.
135
233,968,g,Cfj;337,132,g,Cfj;182,914,g,Cfj;307,416,g,Cfj;341,957,g,Cfj;
11.88(the computed IRR),i;f,NPV,read answer = 1,000,360.80
1,000,360,80 / 3,300,000 = 30.3%
10. WHAT PERCENTAGE OF THE NPV HINGES ON ASSUMPTIONS EXTENDING BEYOND THE
5TH YEAR?
70%. CASH FLOWS ARE: 233,968;337,132;182,914;307,416;341,957
THE NPV OF THE NOI OF 382,886 (NOT THE CASH FLOW OF 341,957) CAPPED AT
9.5% IS 4,030,378.95
WHEN YOU ADD THE FINAL CASH FLOW OF 341,957 FOR THE REVERSION, YOU RESULT
IN 4,372,236.
THE OPERATION IS DONE THUS;
3,300,000,g,Cfo;233,968,g,Cfj;337,132,g,Cfj;182,914,g,Cfj;307,416,g,Cfj;4
,372,236,g,Cfj;f,IRR; READ ANSWER 11.88.
NOW, PARTITION THE IRR INTO TWO COMPONENTS:
THE NPV OF THE CASH FLOW AT 11.88% = 1,000,360.81
THE NPV OF THE REVERSION AT 11.88% = 2,299,231
THE TWO ADDED TOGETHER
= 3,299,591
THE ANSWER IS 2,299,231 / 3,299,591 = 70 PERCENT
****************
LOOK VERY CLOSELY AT LEASE ANALYSIS INFORMATION PROVIDED IN PROF.
MADSEN'S MAILING OVER PASSOVER VACATION. IT HAS IMPORTANT INFORMATION ON
THE USE OF STATISTICS IN SPREADING RISK OF VACANCY AND THE NEED FOR
TENANT IMPROVEMENTS AND LEASING COMMISSIONS OVER THE ENTIRE LEASEHOLD.
END OF CLASS ELEVEN
CLASS TWELVE
4/30/90
REVIEW:
LEASE YEAR
1
2
3
4
5
DEAL A
10
11
12
13
14
136
DEAL B
14
13
12
11
10
12
11.81
44.77
12
12.19
46.21
MONTHLY PAYMENT
TOTAL PAYMENTS (k)
30
40
99
952.32928.29916.69 (10%)
342.8
445.6
1,089
MONTHLY PAYMENT
TOTAL PAYMENTS (k)
536.82482.2
419.7 (5%)
193.2
231.5
498.6
LEASE ANALYSIS:
YEAR
1
mkt rent per s.f. 10
contract
rent per s.f.
7
2
11
3
12
4
13
5
14
6
15
3.50 13
13
13
NEW 5 YEAR LEASE BEGINS
VACANT SIX MONTHS AS LEASE
ENDS(ASSUMPTION)
LEASING COMMISSIONS (LS. COM.) = 3.00 PER S.F.
TENANT IMPROVEMENTS (T.I.) = 10.00 PER S.F.
CASH FLOW
ASSUMING NO
DEBT SERVICE 7
7
9.50 13
13
13
PROBABILITY IN LEASE BY LEASE ANALYSIS : TWO FACTORS
137
1. VACANCY
2. TENANT IMPROVEMENTS
EXPECTATION: IF THE TENANT DECIDES TO LEAVE, AFTER EXPIRATION OF LEASE,
IT WILL TAKE 6 MONTHS TO FIND A NEW TENANT.
HOWEVER, IT IS ALSO
REASONABLE TO ASSUME THAT NOT ALL TENANTS WILL LEAVE, THEREFORE, ONLY 1
OUT OF 3 WILL LEAVE (AN ARBITRARY ASSUMPTION BASED ON EXPERIENCE), WHILE
TWO OF THE 3 WILL STAY. WE HAVE TWO PROBABILITIES:
1. A PROBABILITY OF 6 MONTHS VACANCY AT LEASE EXPIRATION
2. A 1 CHANCE IN 3 PROBABILITY THAT THIS VACANCY WILL OCCUR
THEREFORE THERE IS A 100 PERCENT PROBABILITY OF 2 MONTHS VACANCY AT EVERY
EXPIRATION OF A LEASE.
THEREFORE, ON A CASH FLOW, WHEN AN EXPIRATION
TAKES PLACE, SLAP ON THE TWO MONTHS VACANCY AS A DEDUCTION TO ACCOUNT FOR
THE POTENTIAL OF VACANCY.
YEAR
MKT. RENT
LEASE EXPIRES
3
4
5
6
12
12/31 10
IF THE FACTS OF THE CASE WARRANT A DIFFERENT ASSUMPTION THAN 1:3 FOR
VACANCY FOR A USE, THEN YOU CAN USE IT, EVEN ON A LEASE BY LEASE BASIS
RATHER THAN ON A GLOBAL BASIS.
THE ABOVE IS PART OF AN OVERALL VACANCY ASSUMPTION, AND IS ADDED TO
TYPICALLY, A 2% OF EFFECTIVE GROSS INCOME AS A VACANCY ALLOWANCE.
POINTS
BUYING DOWN MORTGAGES
1 POINT PER 1/8 PERCENT DISCOUNT ON A 30 YEAR LOAN (RULE OF THUMB)
A POINT IS THE ONE TIME CHARGE EQUALING ONE PERCENT OF THE LOAN AMOUNT.
A LOAN OF 100,000
25 YEAR LOAN
11 PERCENT PER ANNUM
WHAT ARE THE PAYMENT PER MONTH?
980.11
138
5/7/90
139
FV = 26k
n = 3
solve for PV = 18,506.29
FV = 28k
n = 4
solve for PV = 17,794.51
FV = 30k
n = 5
solve for PV = 17,022.86
taking the NPV for 950,000 at five years it should equal the some of the
PV's above at 12%.
WHAT IS THE INTERNAL RATE OF RETURN?
12 PERCENT , WHICH IS THE INITIAL EQUITY INVESTMENT
88,719 = NPV OF CASH FLOWS
88,719, CHS, Cfo
PUT IN CASH FLOWS AT g,Cfj;f,IRR; READ REGISTER, 12%
THE INTERNAL RATE OF RETURN IS THE DISCOUNT RATE IN THIS CASE.
WHAT IS THE EQUIVALENT RENT ANNUITY OF THESE CASH FLOWS?
24,612
LOOK FOR A QUESTION ON THE PARTITIONING OF THE IRR, WHICH DETERMINES THE
PERCENTAGE OF THE PURCHASE PRICE THAT IS IN THE CASH FLOW.
140
ECONOMICS NOTES
1/22/90 HUGH KELLY
REGIONAL ECONOMICS = SUBSET OF ECONOMIC GEOGRAPHY
CLASS 1/22/90 STRUCTURE
1.
2.
3.
4.
5.
INTRODUCTION
SYLLABUS
DREAMER'S SCALE
URBANOLOGY BREAK
REGIONAL ISSUES
SEGMENTED BY
139
NAME GAME
PRESENTATION DETAILS
THEORIES OF URBANIZATION
GARREAU ON NEW ENGLAND
HOUSING IN BOSTON
S I M P L I C I T Y
REMEMBER
4. TIME - KNOW THAT YOU ONLY HAVE 7 TO 10 MINUTES.
5. COMMUNICATION - REMEMBER THAT THE PROCESS IS A TWO-WAY STREET. YOU DO
NOT NEED TO DO A MONOLOGUE.
6. DELINEATE, CORRELATE, AND ELABORATE. LINE UP, TIE TOGETHER, AND FILL
IN THE POINTS WHICH COMBINED SUPPORT YOUR THESIS.
7. KNOW WHAT YOUR LAST SENTENCE IS.
OVERHEAD PROJECTORS WILL BE AVAILABLE.
HANDOUTS ARE GOOD IF YOU HAVE A LOT OF INFORMATION THEM, AND DO NOT USE THEM IN THE VISUALS.
BE YOURSELF
THEORY OF URBANIZATION
THE GATHERING OF PEOPLE INTO CITIES IS IN ITSELF A SIGN OF ECONOMIC
140
DEVELOPMENT.
CITIES IMPLY:
BARTERING?
- ADAM SMITH SAYS "IF IT TAKES TWO DAYS TO HUNT A
DEER AND ONE DAY TO FASHION A HORSESHOE, THEN A DEER IS WORTH TWO
HORSESHOES. THIS IS THE LABOR THEORY OF VALUE, AND WE FIND EVIDENCE OF
THIS IN THE CITY.
DIVISION OF LABOR AND URBAN SPECIALIZATION
ORDERING OF SOCIETY IS LAW, WHICH PERTAINS TO INTERNAL RELATIONS.
DEFENSE OF SOCIETY PERTAINS TO EXTERNAL RELATIONS.
FOUR ELEMENTS ARE CONTRIBUTED BY THE CITY;
LAW, THE CODIFICATION AND ADMINISTRATION OF LAWS
DEFENSE, SAFETY IN NUMBERS, CONSOLIDATING FOR SELF-PROTECTION
COMMERCE, TRADING POST- EFFICIENCY OF BUYING AND SELLING BY BRINGING
GOODS TO A CENTRAL LOCATION
COMMUNICATION- EFFICIENCY OF EXCHANGING INFORMATION AND SOCIALIZATION
CONCENTRATION VERSUS CENTRALIZATION
CONCENTRATION IS THE MOVEMENT OF PEOPLE FROM THE RURAL AREAS TO URBAN
CENTERS.
CENTRALIZATION IS THE POPULATION CENTERING IN THE URBAN CORE, WITHIN THE
URBAN CENTER.
THREE PERIODS CAN BE DELINEATED WITH RESPECT TO URBANIZATION
1770 TO 1920 - HAD BOTH CONCENTRATION AND CENTRALIZATION WITH GROWTH OF
CENTER CITIES AT A RATE GREATER THAN THE PERIPHERY.
1920
TO
1970
DECENTRALIZES.
CONCENTRATION
CONTINUED,
BUT
URBAN
POPULATION
141
CENTRALIZATION?
142
143
HOUSING
AFFECTS
JOBS,
HOUSE KEEPING
TERM PAPERS
BOSTON CATCH-UP
INTO TO PITTSBURGH AND INDUSTRIAL PROPERTIES
SOURCES FOR INDUSTRIAL PROPERTIES STUDIES
TAXONOMY OF INDUSTRIAL PROPERTY
144
FOUR YEARS AGO RAND MCNALLY RATED PITTSBURGH NUMBER ONE IN THE COUNTRY AS
A PLACE TO LIVE. TODAY, IT IS STILL HIGHLY REGARDED, THOUGH IT HAS
SLIPPED TO THIRD PLACE.
FACTORS WHICH WEIGH IN THIS CONSIDERATION
INCLUDE THE FOLLOWING:
THE COST OF LIVING
TRENDS IN JOBS
LOCAL CRIME
THE AMOUNT AND QUALITY OF HEALTH CARE
TRANSPORTATION
EDUCATION
ENVIRONMENT
ARTS AND RECREATION
THE COST OF LIVING IS ONE OF THE BIGGEST FACTORS. THE LOSS OF BLUE COLLAR
JOBS CONTINUES, BUT WHITE COLLAR AND SERVICE JOBS HAVE INCREASED QUITE A
BIT.
CHANGE IN BAD FORTUNE FOR PITTSBURGH CAME ABOUT TWENTY YEARS AGO WHEN THE
MAYOR SEVERAL MAJOR BUSINESSMEN TOGETHER TO FOUND THE "COUNCIL OF 24",
WHICH HAS AS ITS PURPOSE TO REPORT ON AND SUGGEST IMPROVEMENTS FOR
PITTSBURGH, WHILE SETTING GUIDELINES FOR PRIVATE INDUSTRY TO HELP ALONG.
SOURCES OF INFORMATION ON INDUSTRIAL PROPERTY
WHERE DO YOU FIND RELIABLE INFORMATION ON INDUSTRIAL PROPERTY?
SEE CHAPTERS 5 AND 6 OF STERNLIEB AND HUGHES'S AMERICA'S NEW MARKET
GEOGRAPHY.
ALSO SEE A BOOK FROM THE SUPPLEMENTAL READING LIST CALLED MANUFACTURING
MATTERS BY COHEN AND ZYSMAN.
ALSO, YOU CAN CONTACT PEOPLE AND RESEARCH HEADLINES AND ARTICLES IN
NEWSPAPERS TO GET THE LOCATIONAL BAROMETER OF INDUSTRIAL HEALTH IN A
LOCALE.
EQUITABLE REAL ESTATE DOES A SURVEY OF 100 TOP LEADERS IN THE U.S. TO SEE
HOW THEY PREDICT THE MAJOR TRENDS IN REAL ESTATE.
SALOMON BROTHERS HAS A SEMI ANNUAL REAL ESTATE MARKET REVIEW AND MORE
FREQUENT LOCAL MARKET REVIEWS.
THE AMERICAN ASSOCIATION OF INDUSTRIAL AND OFFICE PARKS PUTS OUT
AMERICA'S FUTURE IN INDUSTRIAL SPACE NEEDS. THE PUBLICATION IS WRITTEN
BY A WRITER FOR INC. MAGAZINE NAMED DAVID BIRCH. HIS METHODOLOGIES ARE
SUSPECT AND YOU CAN NOT TRUST HIS FIGURES FOR VACANCY RATES, BUT SOME OF
HIS CONCLUSIONS ARE WORTHWHILE.
145
MAGAZINE
IS
AVAILABLE
FOR
CORPORATE
REAL
ESTATE
************************************************************************
MARKET DRIVEN
146
147
QUALITY OF LIFE
HIGH TECH IND. LOCALLY
R&D "BALANCE"
FEASIBILITY
YIELDS
148
BLUE COLLAR
SERVICES
LABORERS
OPERATIVES
TRADESMEN
IN EACH INDUSTRY IN THE SIC, THERE ARE BLUE COLLAR AND WHITE COLLAR
SOC'S.
ELEMENTS TO NOTE FOR GOOD R&D LOCATIONS:
SCHOOLS- SOURCE AND CHANNEL FOR RESEARCH GRANTS FROM GOVERNMENT.
(RESEARCH FUNCTIONS) LARGE SCIENCE AND ENGINEERING PROGRAMS WITH
FACILITIES, AND HIGHLY TRAINED STUDENTS.
HIGH TECH COMPANIES - DO OTHER HIGH TECH COMPANIES HAVE MAJOR PLANTS IN
THE LOCATION?
QUALITY OF LIFE RATING- UNSCIENTIFIC STUDY OF QUALITY OF LIFE.
PLACES
RATED ALMANAC USED AS A SOURCE WHICH IS AS GOOD AS ANY.
YOU HAVE TO
ATTRACT AND KEEP EMPLOYEES WHO CAN CHOOSE FROM MANY PLACES IN WHICH TO
LIVE.
149
FEASIBILITY AND YIELDS - HOW MUCH DOES IT COST TO BUILD THE FACILITY?
HOW MUCH WILL THE RETURN ON THE INVESTMENT BE, AND WILL THE INVESTMENT
MAKE SENSE? WHAT IS THE RENT OVER THE PRICE? (RENT/PRICE = YIELD)
**************************
ASSEMBLY PLANTS
ABSORPTION OF THE MANUFACTURING FUNCTION
AREAS OF CONCERN; R&D
MANUFACTURING
DISTRIBUTION
VACANCY; SAME MEASURE AS IN R&D, BUT FOR ASSEMBLY. (SEE ABOVE)
BALANCE; (SEE R&D "BALANCE" ABOVE)
JOB GROWTH; DRIVEN BY LABOR MARKET - SEE OCCUPATIONAL RATIO- THE MIRROR
IMAGE OF R&D...YOU PREFER GROWTH IN MANUFACTURING WITH DISPROPORTIONATE
REPRESENTATION OF BLUE COLLAR WORKERS AS OPPOSED TO WHITE COLLAR WORKERS.
OCCUPATIONAL RATIO; BLUE COLLAR PREPONDERANCE.
BUSINESS COSTS; NEED A LOW TAXING ENVIRONMENT, LOW ENERGY COSTS, LOW FEES
AND PERMITS AND INFRASTRUCTURE COSTS IMPOSED BY GOVERNMENT.
WAGES; CHEAP, SKILLED LABOR, THOUGH NOT HIGHLY SKILLED... NEED LOW WAGES
BECAUSE OF THE INTENSITY OF THE LABOR FUNCTION.
FEASIBILITY / YIELDS;
RENTS/SALES PRICES
*************************
WAREHOUSING AND DISTRIBUTION PLANTS
MARKET ORIENTED AS OPPOSED TO LABOR ORIENTED
ABSORPTION; SAME AS ABOVE BUT FOR THE DISTRIBUTION CLASS OF INDUSTRIAL
PROPERTY.
VACANCY; SAME AS ABOVE BUT FOR THE DISTRIBUTION CLASS OF INDUSTRIAL
PROPERTY.
JOB GROWTH; LOOK FOR SIGNS OF GROWTH IN WHOLESALE TRADE JOBS AND IN THE
TRANSPORTATION INDUSTRY.
WAREHOUSE BALANCE;
WAGES;
STORING GOODS DOES NOT REQUIRE MANY EMPLOYEES, THEREFORE WAGES
ARE NOT AN IMPORTANT ELEMENT FOR WAREHOUSING TYPES OF INDUSTRIAL REAL
150
ESTATE.
CENTROIDS;
WHERE AND HOW IS THE MARKET DISTRIBUTED AND WHERE IS THE
MARKET'S GEOGRAPHIC CENTER. HOW DOES THE SITE RELATE TO THIS GEOGRAPHIC
CENTER?
POPULATION GROWTH; WHERE IS POPULATION GROWING OR SHRINKING AND WHERE IS
THE MARKET IN THE FUTURE?
INVENTORY/POPULATION RATIO; HOW MANY SQUARE FEET OF DISTRIBUTION SPACE
IS THERE IN THE MARKET TO SERVICE THE POPULATION? SQUARE FEET/POPULATION
AIDS IN MEASURING THE ABUNDANCE OF WAREHOUSING SPACE, AND CAN INDICATE IF
THE LOCATION UNDER CONSIDERATION IS APPROPRIATE FOR THIS TYPE OF
INDUSTRIAL USE.
HUB CITY;
FEASIBILITY / YIELDS;
CONSIDERED.
BREAK***********
ATLANTA AIRPORT; CUSHMAN AND WAKEFIELD SAY THAT IT IS A KEY FACTOR IN
SELECTING LOCATION OF ATLANTA FOR CORPORATE MOVES.
2 HOUR FLY TIME TO 80 PERCENT OF THE POPULATION OF U.S.
PROXIMITY TO KEY INDUSTRIES
7.7 BILLION DOLLARS OF FOREIGN INVESTMENT RELATED TO AIRPORT
**********************
THE TWO SOUTHS
**********************
TEXAS, FLORIDA, VIRGINIA, GEORGIA; THE PROTOTYPES OF SOUTHER GROWTH, FAR
EXCEEDS THE 58% GROWTH OF U.S. AS A WHOLE FROM 1950 TO 1985.
LOUISIANA, OKLAHOMA, NORTH AND SOUTH CAROLINA; ON PAR WITH THE REST OF
THE COUNTRY.
TENNESSEE, ALABAMA, ARKANSAS;
THE LAGGING SOUTH.
THESE STATES ARE
LOSING POPULATION SHARE AND BECOMING POORER WITH RELATION TO THE REST OF
THE U.S.
ONLY THE EASTERN SEABOARD OF THE SOUTH SAW INCOMES GREATER THAN THE 7.2%
AVERAGE OF THE U.S., WITH THE EXCEPTION OF TENNESSEE WHICH IS CONTIGUOUS
TO THE SEABOARD STATES.
PER CAPITA INCOME PERCENTAGE OF U.S. AVG. WAS GREATER THAN THE AVERAGE
ONLY IN FLORIDA (101%) AND VIRGINIAN (107%); THE OTHERS WERE BELOW, AS
151
OF
5.4%.
VIRGINIA
AND
NORTH
***********
REAL ESTATE DIFFERENCES BETWEEN THE TWO SOUTHS IS THAT ONE HAS GONE THE
WAY OF IMPORT REPLACEMENT AND THE OTHER HAS GONE THE WAY OF REMAINING
RESOURCE BASED.
ATLANTA BECAME THE CAPITAL OF THE RESOURCE BASED AND
IMPORT REPLACEMENT ECONOMIES. IT HAD THE RAILROAD WHICH WAS A TERMINUS
ON THE CHATTANOOGA LINE, GIVING ACCESS TO THE REST OF THE U.S.
WHAT DOES IT TAKE TO MAKE THE CHOICE OF ATLANTA VS. SAVANNAH GEORGIA?
STATED ANOTHER WAY, WHAT DOES IT TAKE TO CHOOSE A RAIL TRANSPORT ECONOMY
VS. A WATER TRANSPORT ECONOMY?
1.
2.
3.
4.
MARKET NEED
TECHNICAL FEASIBILITY
CAPITAL
POLITICAL WILL
END OF CLASS 4
PRESENTATIONS
SYNOPSIS OF REGIONAL CYCLES OF ECONOMY
BREAK
NUMBERS (HOW TO ESTIMATE, WITH STATISTICS, OFFICE EMPLOYMENT)
152
MUC.
BREAK.
*********
THE DEVELOPMENT OF MANHATTAN'S R.E. ECONOMY
1.
2.
3.
4.
5.
THE DIFFERENCES BETWEEN THE CRITICAL ERA AND THE ADJUSTMENT ERA IS THAT
THE FIRST WAS MARKED BY RECESSION OF OBSOLESCENCE, MANUFACTURING,
SHIPPING APPAREL INDUSTRIES LEFT FOREVER.
THE ADJUSTMENT PERIOD LOST
CORE JOBS WHICH WILL BE REBUILT WHEN THE ECONOMY BOUNCES BACK.
URBAN OPTIMISM
VISTA PROGRAM
LET'S SOLVE PROBLEMS ATTITUDE (I.E. MOON LAUNCH, CITY BEAUTIFUL MOVEMENT)
LOW UNEMPLOYMENT
NO RECESSION
1969- PEAK EMPLOYMENT LEVELS IN N.Y.C.
STRESS AND STRAIN
OCCUPANCY RATES LOW, RENTS RISE
1968- KENNEDY AND KING SHOT ; LONG HOT SUMMER
1969- DOW JONES FALLS SHARPLY
37% DECLINE IN STOCK MARKET-BAD NEWS FOR THE CITY
1971-100,000 JOB RATE IN FIRE INDUSTRIES
RESIGNATION OF PRESIDENT, INDICTMENT AND RESIGNATION OF V.P.
EMBARRASSING WITHDRAWAL FROM VIET NAM
INFLATION RISING TO 10%
OIL TRIPLES IN COST OVER NIGHT
IN N.Y.C. RISE IN RENTS IN 1967, AND DECLINE OF VACANCY CAUSED MANY TO BE
ENCOURAGED TO BUILD OFFICE BUILDINGS.
5.5 MILLION S.F. BUILT IN THE
YEARS 1969 TO 1972. VACANCIES ROSE AS EMPLOYMENT DROPPED. 35 MILLION
S.F. WAS EMPTY.
1969 - 100/S.F. SALE PRICE OF MANHATTAN R.E.
1975 - 54/S.F. SALE PRICE OF MANHATTAN R.E.
CRITICAL PERIOD
100,000 WALL STREET JOBS DROP TO 69,000.
153
DECENTRALIZATION.
BUSINESSES MOVE, DISCOURAGED BY UNAVAILABILITY OF SPACE IN MANHATTAN IN
1969.
CITY'S CREDIT IS ERODED BY "CREATIVE FINANCING"
REVENUE ANTICIPATION NOTES (RAN)
TAX ANTICIPATION NOTES (TAN)
MORAL OBLIGATION NOTES : NO GUARANTEES TO RAISE TAXES OR REVENUE, BUT WE
THE CITY RECOGNIZE OUR MORAL OBLIGATION TO PAY YOU BACK.
1974-76
1974-75 RECESSION; WASHINGTON HAD NO CASH TO GIVE AWAY TO KEEP N.Y.C. OUT
OF BANKRUPTCY. OIL TRIPLED FROM 6 TO 18 DOLLARS PER BARREL. 50 BILLION
DOLLARS REMOVED FROM U.S. ECONOMY AND SENT TO OPEC.
RECOVERY
EXCESS OF OFFICE SPACE WAS ABSORBED, AND COST OF NEW BUILDINGS CAUSED
RENTS TO SKYROCKET. FROM 69,000 TO 160,000 IN SERVICE ECONOMY.
TAXES WERE REDUCED, INTEREST RATES WERE REDUCED, AND BENEFITS OF ECONOMY
HELPED THE RECOVERY OF N.Y.C.
END OF CLASS FIVE
CLASS SIX
3/5/90
154
THEN;
MANHATTAN OFFICE JOBS = {M*(W/T)} + [{M*(1-(W/T))}*{M/T}]
= MANHATTAN + OCCUPATIONAL * CONCENTRATION
155
BASIC SHARE
RESIDUAL
FACTOR
IT IS THE MINIMUM
= MANHATTAN
LOCATIONAL * CONCENTRATION
156
THIS FORMULA IS USED WHEN THE LOCATION IS THE DOMINANT FACTOR IN THE
INDUSTRY.
IT SAYS THAT THE WHITE COLLAR WORKERS WILL BE IN MANHATTAN THE DEGREE
THAT THE INDUSTRY IS IN MANHATTAN.
THE FIGURES FOR MANHATTAN BASIC SHARE AND CONCENTRATION FACTOR ARE THE
SAME FORMULAE THAT WERE IN THE EXAMPLE FOR INDUSTRY A ABOVE.
W=34,800
M=71,600
T=102,000
W/T = 34.1%
M/T = 70.2%
(71,600 X .341) + ((34,800 - (71,600 X .341))) X 0.702)
24,415 + (34,800 - 24,415) X 0.702)
24,415 + (10,385 X 0.702)
24,415 + 7290 = 31,705
ANSWER; THERE ARE 31,705 APPAREL WORKERS IN MANHATTAN OFFICES
END OF CLASS SIX
CLASS SEVEN ; 3/19/90
CLASS HOSTED BY JACQUES GORDON
SUBSTITUTING FOR HUGH KELLY
MICRO ANALYSIS OF REAL ESTATE MARKETS
I. MARKET AREA CHARACTERISTICS
A. DEMOGRAPHICS
B. ECONOMIC BASE ANALYSIS
C. LOCAL GOVERNMENT/REGULATORY ENVIRONMENT
D. QUALITY OF LIFE ISSUES
E. INFRASTRUCTURE ISSUES
F. DETAILED ANALYSIS OF MICRO ENVIRONMENT
MICRO ANALYSIS DEALS WITH A SPECIFIC GEOGRAPHY
II. DEMAND ANALYSIS
III. SUPPLY ANALYSIS
IV. EVALUATION OF MICRO-MARKET RESEARCH
PART IV IS BECOMING MORE NECESSARY AND COMMON BY NECESSITY, THOUGH UNTIL
NOW WAS NOT OFTEN REQUESTED.
MICROECONOMICS IS FOR THE ECONOMIC PICTURE OF A SPECIFIC GEOGRAPHIC AREA.
MACROECONOMICS DESCRIBES THE TRENDS OF, FOR EXAMPLE, INTEREST RATES AND
EMPLOYMENT AND OTHER ISSUES WHICH GOVERN THE WELL-BEING OF THE GEOGRAPHIC
AREA UNDER CONSIDERATION IN THE MICRO ECONOMIC STUDY.
157
MACRO TRENDS
A NATION OF CONSUMERS
SAVINGS RATE VS. CONSUMPTION RATES; INTERNATIONAL COMPARISONS
RETAIL...A GOOD INVESTMENT?
THE DEPARTMENT STORE...FOR SALE
RETAILER LOYALTY VS. BRAND LOYALTY VS. NO LOYALTY
UNDERSTANDING THE CONSUMER
CYCLICAL DEMAND VS. RECESSION-RESISTANT DEMAND
LANCASTRIAN DEMAND FOR HETEROGENOUS DURABLE GOODS
REAL ESTATE SENSITIVITY TO THE CONSUMER; SELLING THROUGH LOCATION AND
ARCHITECTURE.
A NATION OF CONSUMERS
THE U.S. CONSUMER COMPARED TO OTHERS AROUND THE GLOBE CONSUME MORE, SAVE
LESS ON OUR OWN (WE SAVE THROUGH PENSION PLANS).
FOR REAL ESTATE
IMPACTS, WE HAVE MORE RETAIL S.F. PER CAPITA BY A FACTOR OF 3, AND ON A
GROSS BASIS BY A FACTOR OF 10. ASSET SIZE OF RETAIL IS GREATER IN THE
U.S. THAN ANYWHERE ELSE.
RETAIL INVESTMENTS
FROM AN INVESTMENT PERSPECTIVE, THE FRANK RUSSEL PERFORMANCE INDEX
MEASURING THE REAL ESTATE MARKET'S RETURN ON INVESTMENT SHOWS RETAIL AS A
GOOD PERFORMER. THE BEST OF ANY REAL ESTATE ASSET CLASS SUB-MARKET FOR
THE LAST FOUR YEARS WAS RETAIL. THIS WAS BECAUSE LEASES FOR RETAIL OFTEN
ARE BASED ON A BASE COST PLUS AN OVERAGE WHICH IS THE EQUIVALENT OF A
PERCENTAGE OF SALES.
SINCE PURCHASES HAVE BEEN UP, THE NET OPERATING
INCOME FROM RENTS AND OVERAGES IS UP, AND THE VALUE OF THE PROPERTIES
THEREFORE GOES UP.
PERCENT INTERNAL RATE OF RETURN
HOLD
RETAILOFFICEINDUSTRIAL OVERALL
------------------------------------------------------------------------1
9
6
7
7
3
12
8.5
15
11
12
158
WHAT HAPPENS WHEN THE ANCHOR GOES BUST? THE SMALL STORES PRODUCING THE
90% OF CASH FLOW CAN NOT DRAW CUSTOMERS. NOBODY HAD A FORECAST THAT TOOK
INTO ACCOUNT THE POTENTIAL LOSS OF LARGE RETAIL STORES, AND THE IMPACTS
OF THIS MAY CAUSE THE INTERNAL RATE OF RETURN FROM RETAIL USES TO DIP
SLIGHTLY.
INVESTOR DEMAND VS. CONSUMER DEMAND; HOW DO THEY CORRELATE?
THE "POOR SHMUCKS" WHO WORK IN AN OFFICE HAVE NO DISCRETION ON WHERE THEY
WORK. WHERE THEY SHOP IS A MATTER WHICH IS UNDER THEIR DISCRETION.
CONSUMER LOYALTY HAS LESSENED DUE TO CONSUMER DISTRUST, AND THE TRADE-OFF
BETWEEN PRICE AND SERVICE. NO ONE WANTS TO PAY FOR SERVICE THEY ARE NOT
GETTING, AND THIS GIVES RISE TO THE DISCOUNTER WHICH IS A SELF-SERVICE
RETAILER. CONSUMERS ARE EITHER LOYAL TO BRANDS AS OPPOSED TO VENDORS, OR
GOODS, WHICH GIVES RISE TO GENERIC GOODS.
TO UNDERSTAND THE CONSUMER, YOU NEED TO SEPARATE THE CONSUMERS THAT ARE
DEPENDENT ON CYCLICAL DEMAND AS OPPOSED TO THOSE WHICH BUY PRODUCTS THAT
ARE BASED ON RECESSION-RESISTANT DEMAND. YOUR CAPITALIZATION RATES WILL
APPLY DIFFERENTLY TO A RETAIL STORE SPECIALIZING IN ONE AREA AS OPPOSED
TO ONE SPECIALIZING IN THE AREA, DUE TO THE STORES SENSITIVITY TO
ECONOMIC CYCLES.
WHEN YOU BUY AN AUTOMOBILE, YOU ARE REALLY BUYING ITS ATTRIBUTES. THIS
PHENOMENON IS ESPECIALLY TRUE WITH DURABLE GOODS. IN ORDER TO UNDERSTAND
DEMAND YOU NEED TO UNDERSTAND THE DEMAND FOR "ATTRIBUTES", NOT THE GOODS
WHICH MAY OR NOT HAVE THEM.
TRY TO UNDERSTAND THE DEMAND FOR BABY BOOMERS NEEDS WHEN THEY RETIRE, OR
SEND THEIR KIDS TO COLLEGE, OR WHATEVER, TO FORECAST DEMAND FOR SPECIFIC
GOODS OR FOR NEW GOODS. ALWAYS REMEMBER WHO YOUR CONSUMER IS.
DESTINATION VS. IMPULSE....WHERE DO WE SHOP?
SERVICE VS. PRIDE...A TRADEOFF?
SPECIALTY STORE VS. DEPARTMENT STORE...INTEGRATION OR DISINTEGRATION?
OFF-PRICE DISCOUNTER VS. MANUFACTURER'S OUTLET
SHOPPING VS. ENTERTAINMENT?
TRAFFIC: THE SINE QUA NON OF RETAILING
YOU HAVE
1.
2.
3.
159
YOU CAN:
AREAS,
EFFECTIVE
BUYING
INCOME,
160
MINNEAPOLIS CHARACTERISTICS
1.
2.
3.
4.
5.
6.
HEADQUARTERS CITY
REGIONAL CENTER
TECHNOLOGY EMPHASIS
EXCELLENT SCHOOLS
GOOD NATIONAL ACCESS
ANCILLARY SYSTEMS AND QUALITY OF LIFE
HI-TECHNOLOGY
PRODUCERS AND USERS....WHO ARE THEY?
PRODUCERS
ELECTRIC MACHINERY
INSTRUMENTS
TRANSPORTATION EQUIPMENT
COMMUNICATIONS
COMPUTER SERVICES
USERS
VIRTUALLY ANYONE
MANUFACTURING, ROBOTICS
TRADE, INVENTORY TRADING
F.I.R.E., E.F.T. (ELECTRONIC FUNDS TRANSFER)
AND ALL OPERATIONS
BIO-MEDICINE
LEXIS/NEXIS
ETC.
SMART BUILDINGS
TECHNOLOGY ENHANCED:
1. TENANT SERVICES
2. BUILDING SYSTEMS
TENANT SERVICES:
1. VIDEOCONFERENCING
2. PBX (PRIVATE BRANCHING EXCHANGE)
3. LEAST-COST LONG DISTANCE CALLING
4. DATA AND WORD PROCESSING
5. SYSTEMS CONSULTING
6. SERVICES AND MAINTENANCE
7. WIRING SCHEME
8. EXTERNAL COMMUNICATIONS
OLYMPIA & YORK IS KNOWN FOR ITS PROVISION OF CLASS A SMART BUILDINGS.
THEY OFFER, FOR EXAMPLE, TELECONFERENCING BETWEEN ITS LEASEHOLDS IN THE
161
FOLLOWING CITIES.
BOSTON, SPRINGFIELD,
ANGELES, AND SAN FRANCISCO.
HARTFORD,
N.Y.C.,
DALLAS,
PORTLAND,
LOS
NOTE
40
30
CBD
SUBURBS
N.C.
BUILDING SYSTEMS
1.
2.
3.
4.
HVAC
ENERGY MANAGEMENT
LIFE SAFETY / FIRE
SECURITY
DUMB BUILDING
162
**************
RETAIL MATRIX
**************
median
100
GROWTH
WORST (AVOID)
0
VOLUME
100
THIS MATRIX IS A MODEL WHICH ALLOWS ONE TO USE CRITERIA TO PLOT AN
INVESTMENT, ENABLING US TO MAKE A DECISION OF THE INVESTMENT-WORTHINESS
OF ONE VERSUS ANOTHER PROPERTY.
ANY MODEL SHOULD HAVE 4 QUALITIES:
IT SHOULD BE
1. DEFENSIBLE 3. DISCUSSIBLE
2. DERIVABLE
4. DEBATABLE
THERE SHOULD BE A DIFFERENT STRATEGY FOR A LARGE MARKET GROWING SLOWLY
AND A SMALL MARKET GROWING QUICKLY.
THE MATRIX REDUCES DATA TO SEVEN CONCEPTS, WEIGHTS THEM AND PLACES THEM
INTO A MATRIX.
***************
RANKING SYSTEM
***************
CONCEPTS (VOLUME)
33% WEIGHT TO PER CAPITA INCOME (OR HOUSEHOLD INCOME, OR TOTAL OR FAMILY
INCOME). ANSWERS THE QUESTION; HOW MUCH IS AVAILABLE FOR SPENDING?
INFORMATION IS FOUND IN CACI, CENSUS, ETC.
163
=
=
REVENUE
INCOME
PRESENTATIONS
ECONOMIC BASE
BACK TO EDEN ARTICLE
AGRIBUSINESS
DEVELOPMENT PRESSURES
***********************************
BREAK BULK WAREHOUSING VS. BULK WAREHOUSING
BREAK BULK WAREHOUSING IS USED WHEN GOODS ARE BROKEN DOWN AND DISTRIBUTED
164
TO RETAIL LEVEL.
BULK WAREHOUSING IS USED WHEN PRODUCTS ARE STORED FOR EVENTUAL SHIPMENT
TO BREAK-BULK FACILITIES. POINT-OF-PRODUCTION TENDENCY, TENDS TO LOCATE
IN THE CENTER OF THE COUNTRY.
HI-CUBE SPACE
MOST SPACE IS MEASURED FOR PRODUCTIVITY BY SQUARE FEET. WAREHOUSE SPACE
IS MEASURED IN CUBIC FEET. HI-CUBE SPACE MEANS 24 TO 36 FEET CLEAR FROM
FLOOR TO THE CEILING.
********************************************
COMPARISONS OF KANSAS CITY AND MINNEAPOLIS
********************************************
TOP EMPLOYERS
K.C.
MINNEAPOLIS
*********************************************************************
ALLIED BENDIX
HONEYWELL
HALLMARK
CONTROL DATA
FORD MOTORS
UNISYS
ARMCO STEEL
3M
OLIN
PILLSBURY
INDUSTRY
+++++++++++++++++++++++++++++++
MANUFACTURING
UNITED TELECOM
FARMLAND INDUSTRIES
ST. LUKES HOSPITAL
TWA MAINTENANCE
UTILITIES
CONTROL DATA
UNIVERSITY OF MINNESOTA
NORWEST BANK
NORTHWEST AIR
DAYTON HUDSON
MINNEAPOLIS HAS
A HIGHLY
::::::::::::::::::::::::::::::::::::
PART OF THE DIFFERENCE IN THE TWO CITIES IS SIZE....AS A LARGER CITY,
MINNEAPOLIS PERFORMS HIGHER ORDER FUNCTIONS, AS REFLECTED IN THE TYPES OF
EMPLOYERS.
PERCENTAGE TO PERCENTAGE, BROKEN DOWN, THE RELATIONSHIPS
INDUSTRY TO INDUSTRY ARE SIMILAR.
WHEN EXAMINING AN
ECONOMY.
AGRONOMISTS,
ECONOMY FOR
VETERINARIANS,
BREADTH, EXAMINE
CROP
DUSTERS,
165
THE LINKAGES
EQUIPMENT
OF THE
MANUFACTURERS,
A G R I B U S I N E S S
AGRIBUSINESS IN KANSAS CITY CREATES A LOT OF REAL ESTATE BUSINESS, THOUGH
MUCH IS MEASURED IN THE NON-AGRICULTURAL ECONOMY. WHEN YOU LOOK AT THE
LINKAGES YOU BECOME CONVINCED THAT THE KANSAS CITY ECONOMY IS A FARMING
ECONOMY. IF THE FARMING ECONOMY GOES DOWN, THEN SO DO THE OTHER ASPECTS
OF THE ECONOMY GOING INTO FARMING AND OUT-PUTTING FROM IT ARE ALSO
AFFECTED.. ************ALWAYS LOOK AT LINKAGES TO DEFINE WHETHER OR NOT
AN ECONOMY IS TRULY BROAD*************.
BACK TO EDEN ARTICLE DISCUSSED
SEE OUTLINED PARAGRAPH ON PAGE 57
********************************
"FARM STRUCTURE" FROM FEDERAL RESERVE BANK BULLETIN OF KANSAS CITY.
GREAT SOURCE OF LOCAL INFO FOR EACH FEDERAL RESERVE DISTRICT.
100
M
M
MED
75
MED
50
25
MED
S
NO. OF FARMS
DEBT
NET INCOME
166
SIZE
SMALL
MEDIUM
LARGE
MEGA
SALES GROSS
UP TO 40,000
40 TO 100,000
100 TO 500,000
OVER 500,000
900
*823
VALUE OF FIELD
*
*
737
*679
500
*
*548
*340
*
300
*
PRODUCTIVITY
FORCED
* * 196
INCREASE*LIQUIDATION
SALE, DROUGHT,
LOSS OF PRODUCTIVITY
0
1970
1975
1980
1985
AS PRODUCTIVITY INCREASED, LAND VALUE INCREASED. THE RESIDUAL VALUE OF
REAL ESTATE INCREASED TO INCREASE COLLATERAL ON LOANS.
AFTER
OVEREXTENSION, PRODUCTIVITY DECREASED, AS THEN DID LAND VALUES.
167
*
P
*
O
*
P
*
U
*
L
*
A
*
T * * *
I TIME
O
N
AS POPULATION UNDERGOES NATURAL INCREASE, THERE IS AN EXPONENTIAL GROWTH
OVER TIME, AS LONG AS THERE ARE ABUNDANT RESOURCES TO SUPPORT THE GROWTH,
AND THE AFTER THE RESOURCES ARE EXPENDED THE CURVE FLATTENS OUT.
A
SIMILAR OUTLOOK CAN BE APPLIED TO THE PREDICTIONS OF FUTURE GROWTH ON
LAND WHICH WILL EVENTUAL NO LONGER BE FEASIBLE FOR FARMING.
SCHEMATIC ANALYSIS OF PRE-DEVELOPMENT LAND VALUE CURVE
*
*
*
*
*
*
*
*
*
AGRICULTURAL.......PRE-DEVELOPMENT...............DEVELOPMENT
*
* M
S
*
* R
A
* A
A
*
+
+
* E
C
* N
L
*
* S
Q
* A
E +
*
* E
U
* G
S
*
* A
I
* E
*
* R
S
* M
+
*
* C
I
* E
*
* H
T
* N
*
*
I +* T
*
*
O
*
*
*
+ N
*
*
*
*
*
+
*
USER
*
+
+
* SPECULATIVE *
PRESSURE
*
* PRESSURE
*
*
*
*
*
*
*
*
\.........5 TO 7 YEARS...........\
EXPLANATION OF THE ABOVE
168
WHEN CONSIDERING THAT FARM FUNCTIONS AND THEIR PRACTICALITY ARE TIED IN
WITH PROXIMITY TO MARKET AND A PARTICULAR FARM'S DEPENDENCY ON VAST LAND
AMOUNTS, THE AREAS WITH THE LARGEST AMOUNTS OF LAND WOULD BE AWAY FROM
THE CITY CENTER. PLACES LIKE THIS WOULD BE MORE LIKELY TO GROW WHEAT,
SAY, THAN BE A DAIRY FARM, WHICH IS MORE DEPENDENT ON PROXIMITY TO THE
MARKET DUE TO THE EXPENSE OF TRANSPORTATION.
EVENTUALLY, THE COST OF
DOING BUSINESS CLOSE TO THE CITY CENTER WILL MAKE IT IMPOSSIBLE TO
CONTINUE WITH THE FARM USE PREVALENT IN PAST YEARS, SINCE ONLY VAST SCALE
OPERATIONS ARE ABLE TO CONTINUE MAKING PROFITS. THEREFORE, THE FARMLAND
COMES UNDER PRESSURE FOR DEVELOPMENT.
THE ABOVE GRAPH DEMONSTRATES LAND AS THE "RESOURCE" OF THE SIGMOID CURVE.
THE SPECULATOR WILL SEE INTEREST IN THE DIRECTION OF THE CITY'S GROWTH
AND MAKE A MOVE TO SECURE THE LAND. HE THEN WILL MANAGE THE RESOURCE BY
SECURING APPROVALS TO UTILIZE THE LAND FOR HOUSING OR ANOTHER USE OR
COMBINATION OF USES. THEN, ONCE THIS IS ACCOMPLISHED, HE WILL SELL THE
LAND ACCORDING TO ITS NEW VALUE AS SITES FOR BUILDING, RATHER THAN ITS
OLD VALUE AS OBSOLESCENT FARMLAND.
AT SOME POINT IN TIME A FARM PARCEL IN THE DIRECTION OF A CITY'S GROWTH
WILL BE RESEARCHED AND IDENTIFIED BEFORE GROWTH REACHES IT AND THE LAND
IS VALUED AT FARM PRODUCTION PRICES. DO NOT ACQUIRE IT, HOWEVER, UNTIL
OTHER PEOPLE NOTICE THE AREA.
BEFORE THE CITY GROWS, REZONE YOUR
AGRICULTURAL LAND TO SOMETHING ELSE, LIKE RESIDENTIAL OR OFFICE OR
INDUSTRIAL.
THIS IS THE MANAGEMENT STAGE. YOU THEN MAY ADD THE LEAST
AMOUNT OF INFRASTRUCTURE AS IN NECESSARY AND ADD A SALES PROGRAM, WHERE
YOU SELL TRACTS OF LAND OFF TO DEVELOPERS WHO ADD FURTHER CAPITAL TO
CREATE A PRODUCT. IT IS LIKE A SIGMOID CURVE BECAUSE IT IS A CURVE OF
VALUES OF LAND, AND FLATTENS OUT WHEN IT REACHES ITS HIGHEST USE.
FURTHER VALUE IS GAINED FROM IMPROVEMENTS ON THE LAND RATHER THAN FROM
THE LAND ITSELF.
REMEMBER THAT THE HIGHEST AND BEST USE OF LAND IS
DEFINED AS:
1. PHYSICALLY POSSIBLE
2. LEGALLY PERMISSIBLE
3. FINANCIALLY FEASIBLE
4. MAXIMUM PRODUCTION
END OF CLASS NINE
CLASS TEN WAS NOT ATTENDED DUE TO PASSOVER HOLIDAY
4/16/90
THIS CLASS WAS ON DALLAS.
DALLAS - DIVERSIFICATION
DALLAS/ATLANTA
COMPARISON
169
IMPORT
BASE
ECONOMIES
AND
170
171
HOUSEKEEPING
PRESENTATIONS
L.A. / OFFICE - INDUSTRIAL SUBMARKETS
REVIEW: PART I
172
AND HISPANICS.
215,000= MEDIAN LA HOME PRICE DUE TO DEMAND AND IMMIGRATION.
OFFICE INTENSIVE JOBS WERE AFFECTED MOST BY PACIFIC RIM TRADE, INCREASING
TO 16.9 PERCENT OF ECONOMY.
OFFICE: 5TH LARGEST MARKET.
400 TO 500 DOLLARS PER S.F. PURCHASE RATE IN 1989.
DOWNTOWN HAS 28 PERCENT OF THE LA OFFICE MARKET S.F., AT 16.4 PERCENT
VACANCY RATE.
100 FOREIGN BANKING FIRMS IN LA.
36 USA
OPERATIONS ALL HAVE PROXIMITY TO CUSTOMERS.
INTERNATIONAL
RECEIVING.
TRADE CARRIED
LA TO
BANKS
BE SECOND
WITH
INTERNATIONAL
BEHIND N.Y.
IN CUSTOMS
PROPOSITION U
ANTI-GROWTH OR CONTROLLED GROWTH?
REDUCED BY 50% FAR OF DISTRICT 1 COMMERCIAL, AFFECTING 80% OF ACREAGE IN
THE CITY.
THE 20% EXCEPTION WERE CENTERS WHERE HIGH INTENSITIES WERE PERMITTED.
********************************************
THE PACIFIC RIM ECONOMY IS NOT SYNONYMOUS
RELATIONSHIP INCLUDES MANY OTHER PLAYERS.
WITH
JAPAN,
AND
173
LA'S
EAST ASIA:
JAPAN
CHINA
SOUTH KOREA
TAIWAN
HONG KONG
SINGAPORE
THEY
THEY RELATE TO LA AS A MARKET, SINCE THEY ARE THE TRADING CENTER OF THE
PACIFIC RIM.
THESE ARE CAPITAL SOURCES FOR LOS ANGELES....THEY ARE MARKETS FOR LOS
ANGELES PRODUCTS.
OCEANIA
NEW ZEALAND
AUSTRALIA
INDUSTRIAL MARKETS
LOS ANGELES = 9 DES MOINES LAID END TO END.
174
INDUSTRIAL SPACE
WHAT IS THE TRANSFERABILITY OF TECHNOLOGY?
HOW QUICKLY
PITFALLS?
CAN
THEY
TRANSFER
THEIR
TECHNOLOGY
TO
AVOID
ECONOMIC
NON-DEFENSE ORIENTED.
HAS
ITS
OWN
SET
OF
175
176
3. EVALUATIONS
BREAK
4. REVIEW PART II
5. EXAM (SAMPLES FROM PAST SEMESTERS WILL BE ON FILE IN LIBRARY)
PURPOSE:
"THE EXAM IS PART OF THE COURSE"
IT IS NOT A REGURGITATION OF WHAT YOU LEARNED BUT IT IS AN APPLICATION OF
WHAT YOU LEARNED.
"WHAT DID HEILBRUN MEAN BY "SO & SO", AND HOW DID IT APPLY TO CHICAGO?"
WOULD BE A TYPICAL QUESTION.
WHAT YOU SHOULD REVIEW:
* REREAD PP. 328 TO 361 OF GARREAU: THE BREADBASKET.
ONE QUESTION WILL UTILIZE IT.
* HEILBRUN: PP 81 TO 106: URBAN HIERARCHIES
*STERNLIEB AND HUGHES: PP 161 TO 178: REGIONAL CHANGE
*FROM NOTES: REREAD NEW YORK CITY OFFICE EMPLOYMENT ESTIMATION
NO ARITHMETIC WILL BE NECESSARY, JUST UNDERSTAND THE CONCEPTS INVOLVED.
THE FORMAT
*8 QUESTIONS: CHOOSE 4 OUT OF THE 8 TO ANSWER
*7 QUESTIONS WILL BE IN ESSAY FORM AND WILL REQUIRE NARRATIVE ANSWERS.
*THE 8TH QUESTION WILL BE OBJECTIVE WITH TRUE AND FALSE, MULTIPLE CHOICE,
FILL IN THE BLANK, ETC. QUESTIONS IN IT.
BUDGET YOUR TIME.
STUDY HARD, REVIEW NOTES, TAKE EMPHASIS FOR EXAMINATION FROM THE EMPHASIS
IN THE LECTURES. UNDERSTAND THE BROAD THEMES, NOT THE MINUTIAE.
*************************************************************************
*
WHAT IS THE 4 LEG METAPHOR? IT MUST HAVE BEEN DISCUSSED DURING THE DALLAS
LECTURE. ASK PROF. KELLY.
************************************************************************
SAN FRANCISCO
PROPOSITION M
CONSTRUCTION STARTED BY BEING LIMITED TO 950,000 S.F. IN SAN FRAN EXCEPT
FOR BUILDINGS BELOW 50,000 S.F. LATER CUT TO 475,000 WITH NO EXEMPTIONS.
177
ORLANDO, CONCORD, AND OTHER SUBURBAN AREAS ARE RECEIVING LARGE AMOUNTS OF
EMPLOYMENT SEEKING LARGE AMOUNTS OF S.F. WHICH IS NOT AVAILABLE IN THE
CITY.
WHAT MAKES UP THE HIGHEST AND BEST USE?
PHYSICALLY POSSIBLE (PHYSICAL ELEMENT)
LEGALLY PERMISSIBLE (POLITICAL ELEMENT)
ECONOMICALLY FEASIBLE (ECONOMIC ELEMENT)
MAXIMALLY PRODUCTIVE (SOCIAL ELEMENT)
THE DEFINITION OF MAXIMALLY PRODUCTIVE USUALLY HAS MEANT THE HIGHEST
PROFIT. OF LATE, IN ADDITION, IT HAS COME TO MEAN SOCIALLY PRODUCTIVE.
MACRO VARIABLES
MIXED
BENEFICIARY MSA
EFFECTS ON MSA
DAMAGED MSA
PROPERTY HELPED
PROPERTY HELPED
PROPERTY
PROPERTY
HURT
HURT
BENEFITS OR DETRACTIONS OF THE OVERALL ECONOMY TRICKLES DOWN AND FILTERS
THROUGH MSA'S TO HAVE IMPACTS ON PROPERTY TYPES. THE ENERGY CRISIS FOR
EXAMPLE HAD A BENEFICIAL IMPACT ON THE N.E., WHILE DALLAS WAS HURT,
ALLOWING ATLANTA TO BE A BENEFICIARY IN THE SOUTH WITH ONE LESS
COMPETITOR. THE FLIGHT OF PEOPLE FROM THE NORTH TO SOUTH WAS MITIGATED
SOMEWHAT BY THE FACT THAT IT WAS NO LONGER AS NECESSARY TO MOVE WHERE
HEATING FUEL WAS NOT NEEDED.
E X E R C I S E
THE AFFECTS OF THE FOLLOWING EVENTS WILL TRICKLE DOWN INTO THE ECONOMY
178
HOW
THE IMPETUS:
A FOUR NATION CONSORTIUM CONSISTING OF THE USA, USSR, JAPAN AND THE
UNITED GERMANYS CONSPIRES TO LAUNCH A JOINTLY PLANNED AND BUILT SPACE
VEHICLE TO MARS BY 1991. WHAT WILL THE IMPACTS BE?
************************************************************************
DETERMINE THE BENEFICIARIES.
DETERMINE THE LOSERS.
DETERMINE THE RECEIVERS OF MIXED BENEFITS.
*************************************************************************
DROUGHT SCHEME:
BENEFICIARIES;
BREADBASKET STATES OF OHIO, MISSOURI, ETC. ARE BENEFICIARIES BECAUSE OF
AGRICULTURAL BASE.
KANSAS CITY AND CHICAGO ARE BENEFICIARIES.
NO SNOW IN EUROPE DUE TO
DROUGHT. VERMONT'S SNOW AREAS BENEFIT FROM TOURIST TRADE.
LOSERS;
NATIONWIDE, HIGHER COMMODITY PRICES, INFLATIONARY CYCLES, CENTERS FOR
TOURISM SUFFER UNDER DECREASED DISCRETIONARY INCOME.
MIXED;
BECAUSE OF NATIONWIDE EFFECTS, EVERYTHING IS MIXED.
********
MARS SCHEME
179
BENEFICIARIES;
LA, SAN JOSE, WILMINGTON, WASHINGTON DC DUE TO SHIPPING, WAREHOUSING,
DEFENSE INDUSTRY AND PROXIMITY TO PARTNERS IN VENTURE.
HURT;
SEATTLE, SAN DIEGO, NORFOLK
NAVAL BASES, DEFENSE CUTS, AEROSPACE LOSS OF MARKET SHARE
MIXED;
PITTSBURGH,BOSTON
OFFICE, R&D GOOD
INDUSTRIAL, BAD
***************
BOND DIVESTMENT SCHEME
WINNERS;
AGRICULTURAL LAND GAINS VALUE WITH INFLATION AS THE COST OF FOOD RISES
AND THEREFORE MONETARY YIELD PER ACRE.
BREADBASKET
OIL INDUSTRY BOUNDS BACK AS INCREASING PETROLEUM PRICES MAKE IT
WORTHWHILE TO PRODUCE AMERICAN PETROLEUM PRODUCTS. SEE OFFICE AND TO A
LESSER DEGREE RETAIL MARKETS REBOUND, WITH STRENGTH IN RESIDENTIAL
BUILDING AT LOW AND HIGH ENDS OF THE MARKET.
OVERALL, THE ECONOMY WILL HAVE TO BE MORE SELF SUFFICIENT, BEING LESS
DEPENDENT ON IMPORTS.
THIS WILL HAVE A POSITIVE EFFECT ON AMERICAN
MANUFACTURING. MANUFACTURING AREAS WITH LOW LABOR COSTS WILL FARE WELL
IN THE BEGINNING OF THE PERIOD. HOWEVER, THERE WILL BE AN UPWARD TREND
IN LABOR COSTS TOWARD THE END OF THE PERIOD AS COSTS OF LIVING ARE MET BY
WAGE INCREASES.
EVENTUALLY, THE LESS DEBT DEPENDENT DOLLAR WILL
STRENGTHEN AMERICAN CURRENCY ABROAD, CAUSING A RELATIVE CHEAPENING OF
FOREIGN IMPORTS, THUS ENCOURAGING A FLUSH OF IMPORTS TOWARD THE LATER
PERIODS. THEREFORE, WHILE PORT CITIES MAY BE HURT IN THE BEGINNING OF
THE PERIOD THEY MAY GAIN IN THE LATER.
LOOK
FOR
INCREASES
MANUFACTURING AREAS.
IN
OFFICE
AND
WAREHOUSING
CONSTRUCTION
IN
180
NEW YORK CITY WILL SEE A MINOR RESURGENCE IN ITS FINANCE INDUSTRY AS US
INDUSTRY SEEKS NEW SOURCES OF MONEY TO FUND LIMITED AREAS OF GROWTH
AROUND THE COUNTRY. OVERALL N.Y.C. WILL BE MIXED.
INNER CITIES WILL BE SEVERELY HURT AS SOCIAL UNREST IS FUELED BY CUTBACKS
AT THE FEDERAL AND STATE LEVELS. TAXES WILL INCREASE SOMEWHAT TO MAKE UP
DEFICIT SPENDING OF THE PAST, SOMEWHAT DAMPENING RETAIL SPENDING AND
DEPRESSING RESIDENTIAL REAL ESTATE VALUES AROUND THE COUNTRY.
LENDING
WILL GET TIGHT AND INTEREST RATES WILL SOAR.
OTHER RECIPIENTS OF FEDERAL SPENDING SUCH AS SOUTHERN FLORIDA AND PHOENIX
AND OTHER RETIREMENT COMMUNITIES WILL SEE IMPACTS DUE TO SOCIAL SECURITY
CUTBACKS. THEREFORE EXPECT TO SEE RETAIL AND SERVICE SECTORS DO POORLY.
MIXED REACTIONS TOWARD WASHINGTON DC AND OTHER FEDERAL OR STATE
GOVERNMENT CENTERS.
SEVERE CUTBACKS WILL MAKE MONEY SPENDING
UNFASHIONABLE, THOUGH THERE IS NOT LIKELY TO BE SUBSTANTIAL AUSTERITY.
EXPECT TO SEE OFFICE SPACE SUFFER AS "EFFICIENCY" BECOMES KEY, AND RETAIL
WILL EITHER STAY LEVEL OR DROP SLIGHTLY.
IN ORDER TO BEAT THE DEFICIT, THE ENTIRE ECONOMY MUST BECOME MORE
EFFICIENT.
THEIR MAY BE A DESIRE TO ENLIST TECHNOLOGY TO INCREASE
PRODUCTION PER EMPLOYEE, AND THEREFORE A RESURGENCE OF R&D USES IN AREAS
LIKE BOSTON, NYC, LOS ANGELES, WASHINGTON DC, ST. LOUIS AND OTHER PLACES
WHERE IT IS STRONG. DO NOT EXPECT TO SEE A BROADENING OF THE R&D BASE
DUE TO INHERENT INEFFICIENCIES IN DOING SO.
CLASS THIRTEEN
5/7/90
1. PAPERWORK
2. PRESENTATIONS
3. COMMENTS ON GOVERNMENT
4. REVIEW III
BREAK
5. EVALUATIONS
WASHINGTON D.C.
1980'S "GET THE GOVERNMENT OFF OF THE AMERICAN PEOPLE"; RONALD REAGAN
PRIVATIZATION OF FEDERAL GOVERNMENT CAUSED AN INCREASE IN WASHINGTON DC
OFFICE SPACE WHEN IT WOULD HAVE APPEARED THAT DECREASING GOVERNMENT
SPENDING WOULD HAVE HAD A LIMITING EFFECT ON IT.
DEFENSE WAS MORE THAN HALF OF FEDERAL PROCUREMENTS IN BETWEEN 1983 AND
1988.
181
CUTTING TAXES
REDUCING BUDGET
REALLOCATING FUNDS
REDUCTION OF MILITARY SPENDING
182
WHICH ALLOWS THEM TO MAKE UP THEIR OWN MINDS. THEY DO NOT CONFINE
THEMSELVES TO BUILDING EMPIRES BUT TRY TO TRANSLATE IT INTO THEIR LIFE AS
CITIZENS.
REAL ESTATE MARKET FORECAST 1990
A "SUBSIDENCE" ECONOMY
FACTORS SUCH AS MODERATE INFLATION, LOWER REAL INTEREST RATES, A GRADUAL
SOFTENING
OF
THE
DOLLAR
LEADING
TO
IMPROVEMENT
IN
EXPORT
ACTIVITY....UNDERLIE LANDAUER'S ASSESSMENT OF NEAR TERM PROSPECTS.
SUBSIDENCE, AS IN WHEN THE WAVES OF AN OCEAN SUBSIDE TO GENTLE ACTION.
HOW, YOU MAY ASK, DO WE NAVIGATE IN LIGHT WINDS?
AMOUNT OF NEW EMPLOYMENT AND LITTLE DEMOGRAPHIC TRANSMIGRATION ARE LIMITS
THAT ARE STILL IN A SUBSIDENCE ECONOMY.
WILL SEE LESS PRESSURE ON
INCREASED EMPLOYMENT ENTRY POSITIONS AND LESS DEMAND FOR THEM IN THE
1990'S.
THE PEAKS OF UNEMPLOYMENT IN RECESSION OF THE 1990'S WILL BE
LESSENED WHEN COMPARED TO THE 60'S AND 70'S AND 80'S DUE TO LACK OF LARGE
AMOUNTS OF NEW ENTRY LEVEL POSITIONS PRESSURING THE ECONOMY.
INTEREST RATES WILL BE LESS VOLATILE IN THE 90'S.
THE INSTITUTIONAL
MEMORY OF INFLATION IS DECREASING, AND WILL CONTINUE TO DECREASE INTO THE
90'S.
AS THE INFLATION RATE GOES DOWN AND THE INTEREST RATE TO CPI
MARGIN GOES DOWN, SO WILL INTEREST RATES GO DOWN.
R&D...WHITE COLLAR LABOR ETC.
REVIEW NOTES ON LIGHT INDUSTRY
WHAT IS EACH TYPE OF INDUSTRIAL REAL ESTATE RUN ON?
1. EXPERIENCE
2. INSTINCT
3. EXIGENCY
4. AMBITION
183
184
**************************************
IMPORTANT ISSUES OF FINANCE IN REAL ESTATE
**************************************
WHAT LEGAL ISSUES IMPACT REAL ESTATE?
1. ZONING
2. RENT CONTROL
3. ENVIRONMENTAL
4. REGULATION (BUILDING CODES)
186
5. TAX
WHAT VALUATION ISSUES IMPACT REAL ESTATE?
1. WHAT IS THE PROPERTY WORTH BEFORE AND AFTER CONSTRUCTION?
2. HOW MUCH AM I PUTTING INTO THE PROJECT?
3. WHAT ARE THE RISKS?
IMPLEMENTATION, ENGINEERING AND ARCHITECTURAL ISSUES?
1. ARE YOU ABLE TO BUILD WHAT YOU WANT?
2. IS WHAT YOU ARE BUILDING A MARKETABLE AND APPROPRIATE PRODUCT?
3. IS YOUR PRODUCT GOING TO REQUIRE MORE EQUITY THAT YOU LIKE?
LEGAL
ISSUES
>
FINANCIAL
VALUATION
>>AND
ISSUES
INVESTMENT
ANALYSIS
>
IMPLEMENTATION
ISSUES
SOCIAL
ECONOMIC
GOVERNMENT
ENVIRONMENTAL FORCES
187
188
EVERYBODY.
LIEN - LEGAL RIGHT OF CREDITOR TO HAVE BE PAID BACK FROM THE TAKER OF THE
CREDIT.
LIEN WAIVERS - FOR CONSTRUCTION LENDERS TO RETAIN THEIR PRIORITY
POSITIONS, THEY GET AFFIDAVITS FROM SUBCONTRACTORS STATING THAT THEY ARE
PAID TO DATE.
STATUTE OF FRAUDS- REQUIRES CONTRACTS TO BE IN WRITING WHEN CONVEYING
REAL ESTATE, AND REQUIRES THAT THE CONTRACT DEMONSTRATE INTENT TO CONVEY
A SECURITY INTEREST IN REAL PROPERTY.
**************************************
KEY COVENANTS OF CONCERN IN A MORTGAGE
**************************************
PRINCIPAL AND INTEREST CLAUSE - DUE DATES NEGOTIATED; TERM; RATE; ETC.
TAXES & INSURANCE CLAUSE - ESCROW AMOUNTS- WILL THE BANK PAY THROUGH
ESCROW OR WILL YOU DO IT YOURSELF AND GIVE THE BANK PROOF OF YOUR TIMELY
PAYMENT?
HAZARD INSURANCE / CONDEMNATION CLAUSE - CONSTRUCTION LOAN > INSURANCE TO
COVER PROBLEMS AND ACCIDENTS. IN A CONDEMNATION PROCEEDING ON A PIECE OF
THE LAND, WHAT HAPPENS TO THE PROCEEDS? THE LENDER WILL WANT IT TO PAY
DOWN THE LOAN. YOU WANT IT TO HOLD ON TO, OR GIVE IT TO THE BANK AND LET
THEM DOLE IT BACK TO YOU FOR PROPERTY IMPROVEMENTS ON THE PORTION OF
PROPERTY THAT REMAINS.
AFFIRMATIVE COVENANTS - FINANCIAL STATEMENTS MUST BE SUPPLIED, PROPERTY
MUST BE MAINTAINED, BANK RETAINS RIGHT OF INSPECTION, ETC.
NEGATIVE COVENANTS - CAN NOT HAVE MORE LIENS THAN ALREADY EXIST. CAN NOT
HAVE SUBORDINATED DEBT.
THE SUBORDINATOR CAN CREATE A DEFAULT FORCING
YOU AS THE SENIOR LENDER TO DO SOMETHING YOU DO NOT WANT TO DO.
189
190
INTEREST
PRINCIPAL
RATE
FUTURE VALUE:
IF I INVEST 100.00 DOLLARS TODAY, AT 8%, IT IS WORTH
108.00 DOLLARS AT THE END OF YEAR ONE. AT THE END OF YEAR TWO, IT IS
191
TIME (10%)
YR.
12
3
4 5
6
7
8
$
110.00
121.00
133.10
146.41 161.05 177.16 194.87 214.36
AS COMPOUNDING BECOMES MORE FREQUENT, VALUES GO UP.
AT 10 PERCENT, $100 = $110 IN ONE YEAR COMPOUNDED ANNUALLY.
AT 10 PERCENT, $100 = $110.47 IN ONE YEAR COMPOUNDED MONTHLY.
AT 10 PERCENT, $100 = $110.52 IN ONE YEAR COMPOUNDED DAILY.
EXAMPLE: I HAVE 1000.00 DOLLARS AT 8 PERCENT PER ANNUM, AND I WANT THE
PV AT ANNUAL, SEMI-ANNUAL, MONTHLY AND DAILY TIME INTERVALS.
FORMULA:
192
OF PERIODS
AMOUNT
1000
1000
1000
1000
1000
IF
FUTURE VALUE
1.21551215.51
1.15767
1157.63
1.10251102.50
1.050
1050.00
1.000
1000.00
5525.63
YOU COULD GO TO THE 5% TABLE AMOUNT OF 1.00 DOLLAR AT COMPOUND INTEREST (
COLUMN ONE ) AND FINE THE FACTOR OF 5.525631. 1000 X 5.525631 = 5525.63
AT 10 PERCENT IT WOULD BE 1000 X 6.105100 = 6105.10
AT 15 PERCENT IT WOULD BE 1000 X 6.742381 = 6742.38
REVERSING THE ABOVE TO FIND THE PRESENT VALUE OF A SERIES OF ANNUAL
RECEIPTS (MEANS TO BE RECEIVED IN THE FUTURE) AS FOLLOWS:
(500 X (PVIF,6%,1 YR.)
TIME
1
2
3
4
5
6
AMOUNT
500
500
500
500
500
500
IF
PRESENT VALUE
0.9434471.70
0.8900445.00
0.8396419.81
0.7921396.05
0.7473373.03
0.7050352.48
500
4.917324 = 2458.66
193
AT ONE YEAR
ANSWER IS 15,192.93
10, n; 9, i; 1000, PMT; FV; READ ANSWER
=====================
TO ACCUMULATE 25,000 10 YEARS FROM NOW, WITH 10 DEPOSITS AT 9 PERCENT AND
THE FIRST DEPOSIT MADE IMMEDIATELY, WHAT ARE YOUR PAYMENTS?
g 7(BEGIN); 25000, FV; 9, i; 10, n; PMT; READ ANSWER (1,509.64)
THIS PROBLEM IS TRICKY BECAUSE YOU HAVE TO NOTICE THAT THE PAYMENTS ARE
MADE AT THE BEGINNING OF THE PERIOD AS OPPOSED TO THE END.
INTERNAL RATE OF RETURN: THE SINGLE RATE THAT EQUATES THE NET PRESENT
VALUE (NPV) OF A SET OF CASH FLOWS TO ZERO.
IT IS THE PERCENTAGE AT
WHICH THE INVESTMENT STREAM MUST BE DISCOUNTED TO EQUAL ZERO.
INTERNAL RATE OF RETURN (CONTINUED)
THE LIMITATIONS:
NEGATIVE
OFF DUE
RATE OF
INTEREST CONVERSIONS
GIVEN AN INTEREST RATE OF 12 PERCENT (ANNUAL) WHAT WOULD IT BE ON A SEMIANNUAL, MONTHLY OR DAILY BASIS IN THE SAME TERMS?
FORMULA FOR
MONTHLY)
LESS
FREQUENT
RATE
(IE.
ANNUAL)
TO
MORE
FREQUENT
OF COMPOUNDING PERIODS
194
(IE.
*********************
REAL ESTATE MATH
*********************
IE. 5 YEAR OLD COMPLEX WITH 84 APARTMENTS
64 1 BEDROOM UNITS; AVG.SIZE 600 S.F.
20 2 BEDROOM UNITS; AVG.SIZE 850 S.F.
ASKING PRICE; 1,000,000 DOLLARS
FINANCE 800,000 DOLLARS AT 9.25 PERCENT FOR 28 YEARS
EQUITY 200,000 DOLLARS
STEP ONE - CREATE A PRO FORMA CASH FLOW
PRO FORMA MEANS HYPOTHETICAL.
- $8349.00
- $66,792.00
EQUALS 91,839.00
- $80,000.00
CASH FLOW..........................................$11,839.00
THIS PRO FORMA DOES NOT CONSIDER EQUITY BUILD UP THROUGH DEPRECIATION OR
APPRECIATION, NOR DOES IT CONSIDER INCOME TAXES.
195
196
FORMULA:
CLASS THREE
9/25/90
THERE WILL BE NO MIDTERM.
ANGUS CARTWRIGHT WILL BE DUE ON OCTOBER 23RD (IN LIEU OF MIDTERM)
FINANCING CASE WILL BE DUE EITHER ON NOV. 6 OR NOV. 13TH.
BE HANDED OUT WITHIN THE NEXT TWO WEEKS.
************
MORTGAGE CONSTANTS ASSUME MONTHLY PAYMENTS, MADE AT THE BEGINNING OF THE
MONTH.
REWORK THE ROCKEFELLER CENTER PROPERTIES PROJECT BASED ON CHALLENGED
ASSUMPTIONS MADE BY THE PROSPECTUS.
FINANCIAL PROJECTIONS - NOT SIMPLY MECHANICAL CALCULATIONS, BUT THE ART
OF CONSTRUCTING ASSUMPTIONS TO FORMULATE A PROJECTION OF FINANCIAL GROWTH
IN AN INVESTMENT.
WHEN FINANCIALLY ANALYZING PERFORMANCE, LOOK AT:
1.
CAPITAL BUDGET
A. INCOME PROJECTIONS (ON A STABILIZED CASH BASIS)
B. THE CONSEQUENCES OF THE INVESTMENT
197
YOU
NECESSARY AND
UNDERSTAND THE
198
COST WITH THE INHERENT PROFIT OF THE SALE REMAINING AS SAFETY BUFFER FOR
THE BANK'S INVESTMENT IN THE EVENT OF FORECLOSURE.
IMPROVEMENTS ON THE LAND THAT INCREASE THE VALUE AND COST OF THE LAND ARE
ADDED BACK INTO THE COST FACTORS.
2. BUILDING COSTS ( HARD COSTS )
DEVELOP A PRELIMINARY COST ESTIMATE. COSTS NEED TO BE MONITORED AND ARE
CHANGED FROM TIME TO TIME. ONCE YOU HAVE A PRELIMINARY BUDGET BASED ON
COSTS PER SQUARE FOOT, YOU WILL GO TO AN ESTIMATOR TO CONFIRM THE COSTS.
ESTIMATE METHODS VARY WIDELY, BUT BASICALLY THEY ARE FROM THE STANDARD
SYSTEMS SUCH AS MEANS COST ESTIMATES TO DERIVE COSTS. YOU LOOK AT BOTH
QUANTITY AND UNIT COST BASIS.
THE OTHER VARIABLE IN DEVELOPMENT IS
"QUALITY". IF YOU BUILD, YOU WILL WANT TO BUILD WITH QUALITY TO AVOID
EXPENSIVE "FIXES" LATER ON.
CORE & SHELL MEANS THE WALL, CEILINGS, FLOORS, UTILITIES, AND NOTHING
ELSE. THE REST IS DONE AS TENANT IMPROVEMENTS. IN EACH BUDGET, YOU WILL
ALLOCATE 20 TO 50 DOLLARS PER S.F. TO TENANT IMPROVEMENT WORK.
THE
TENANT WILL NEGOTIATE BASED ON HIS WORK LETTER WHAT YOU MUST PROVIDE HIM,
AS WELL AS THE QUALITY.
ITEMS COULD INCLUDE, FOR EXAMPLE, LIGHT
FIXTURES, WALL COVERINGS, ELECTRICAL DISTRIBUTIONS, HVAC, ETC.
TENANT
IMPROVEMENTS ARE PAID FOR BY THE LANDLORD AS DESCRIBED IN THE WORK
LETTER. YOU MAY WANT TO EXAMINE THE WORK LETTER. THE WORK IN IT MAY
APPRAISE FOR AN AMOUNT GREATER OR LESSER THAN THAT STATED AS A FACE
VALUE. FOR EXAMPLE, A 30 DOLLAR WORK LETTER MAY IN FACT BE A 90 DOLLAR
WORK LETTER WHEN THE ESTIMATE IS ACTUALLY PERFORMED.
THE WORK LETTER
DOES NOT NECESSARILY STATE THE COST OF THE WORK, BUT WHICH WORK MUST BE
PERFORMED, AND ITS QUALITY.
INDIRECT COSTS ( SOFT COSTS ) - THOSE COSTS THAT ARE DISTINGUISHED FROM
HARD COSTS OR LAND COSTS. THEY INCLUDE PROFESSIONAL SERVICES, INTEREST,
FEES, CLOSINGS COSTS, APPRAISALS, AND OTHER FINANCING COSTS, DEVELOPMENT
FEES, LEASE UP COSTS, CARRYING COSTS AND CONSTRUCTION INSURANCE.
IF YOU ARE LOOKING AT THE CONSTRUCTION INTEREST, AS A RULE OF THUMB:
IF YOU HAVE THE LAND COMPONENT, AND A ONE MILLION DOLLAR PROJECT, TAKE...
************************************************************************
THE LAND COMPONENT PLUS THE CLOSING DRAW*
200,000 DOLLARS + 100,000 DOLLARS = 300,000 DOLLARS (DRAWN ON DAY ONE)
CLOSING DRAW X INTEREST RATE X CONSTRUCTION PERIOD = INT. PAYMENT
$300,000 X 12% X 2 YEARS = 72,000 DOLLARS
(PROJECT PRICE - CLOSING DRAW) X INT. RATE X CONST. PERIOD X PERIOD LOAN
IS OUTSTANDING = INT. PAYMENT
199
YEAR 1 YEAR 2
100,000
120,000
(20,000)
YEAR 3
YEAR 4
200
FREE & CLEAR EVALUATION - AN ANALYSIS OF CASH FLOWS BEFORE DEBT SERVICE.
HOW DO YOU DETERMINE THE DISCOUNT RATE TO USE ON A PROJECT?
1. ASSESSMENT OF RISK FOR INVESTMENT
2. OPPORTUNITY COSTS
3. "BAND OF INVESTMENT METHOD" - THE PROPERTY IS BROKEN DOWN INTO 75%
DEBT, AND 25% EQUITY. WHAT IS THE COST OF DEBT; WHAT RATE COULD I BORROW
FOR?
EXAMPLE OF THE BAND OF INVESTMENT METHOD:
*****************************************
I COULD COMPARE A TREASURY YIELD FOR AN EQUIVALENT PERIOD, ADD A SPREAD,
AND ARRIVE AT A RATE.
ASSUME A 10 YEAR T-BILL AT 9 PERCENT
ASSUME A 150 BASIS POINT SPREAD.
SPREADS ARE THE RISK PREMIUM PAID ON THE PROJECT, PLUS THE DESIRED YIELD
ON THE MONEY.
9 PERCENT + 1.5 PERCENT = 10.5 PERCENT
DISCOUNT RATE:
75% RELATES TO THE 10.5 PERCENT RATE
25% RELATES TO A TYPICAL LOAN RATE, SAY 10 PERCENT
75% X 10.5 =
7.875
25% X 10.0 = + 2.5
10.375% = 10 3/8%
YR 1
NCF
2374
X
IF
X 0.909041
= PV
=2158
201
2 3688
3 4223
4 4411
5 4169
6 4286
7 3536
8 2342
9 4027
10 4840
+50632
$55472
0.826446
0.751315
0.0683013
0.620921
0.564474
0.513158
0.466507
0.424080
0.385543
=3048
=3173
=3013
=2589
=2419
=1815
=1093
=1708
=21387
42198
202
THE
MORTGAGE
CONSTANT
AND
THE
******************
FOR A PROPERTY COSTING 1,000,000 DOLLARS
PROJECTED NOI = 12%, OR 120,000 DOLLARS PER ANNUM
DEMONSTRATION
LEVERAGE RATIO
0%
25%
50%
75%
90%
LOAN AMT.
0
250,000
500,000
750,000
900,000
ROI (12%)
12%
12%
12%
12%
12%
MORT.CONST.
10%
10%
10%
10%
10%
CASH ON CASH
12%
12.7%
14%
18%
30%
SWITCHING THE RATE FOR ROI AND MORTGAGE CONSTANT, WE HAVE THE FOLLOWING
RESULTS:
203
LEVERAGE RATIO
0%
25%
50%
75%
90%
LOAN AMT.
0
250,000
500,000
750,000
900,000
ROI (10%)
10%
10%
10%
10%
10%
MORT.CONST.
12%
12%
12%
12%
12%
CASH ON CASH
10%
9.3%
8%
4%
NEGATIVE
204
YEAR ONE
NET REVENUE
OPERATING EXP.
RETURN
VARIABLE
PERCENT
FIXED
250,000
275,000
150,000
165,000
RATE
OF
RATE
OF
IS
10
LEVERAGE
1.0
NOI
100,000
110,000
CASE 2
RETURN
YEAR ONE
NET REVENUE
OPERATING EXP.
RETURN
VARIABLE
PERCENT
FIXED
250,000
275,000
100,000
110,000
50,000
150,000
50,000
160,000
RATE
OF
RATE
OF
IS
15
LEVERAGE
1.5
NOI
100,000
115,000
CASE 3
RETURN
YEAR ONE
NET REVENUE
OPERATING EXP.
RETURN
VARIABLE
FIXED
250,000
275,000
75,000
75,000
150,000
75,000
75,000
157,500
205
RATE
OF
RATE
OF
IS 17.5%
LEVERAGE
=1.75
NOI
100,000
117,500
FIXED COSTS SHOULD BE KEPT DOWN TO A LIMIT BECAUSE AT A POINT, THEY MAY
BE SO LARGE AS TO SINK AN INVESTMENT BECAUSE OF THEIR WEIGHT. INCREASING
THE FIXED COSTS PORTION OF OPERATING EXPENSES AS OPPOSED TO THE PORTION
OF VARIABLE COSTS DOES NOT ALWAYS MAKE SENSE.
*************************************
ROCKEFELLER CENTER - CLASS DISCUSSION
*************************************
PRO-INVESTMENT OPINIONS
1. PREMIERE LANDMARK INVESTMENT
2. GOOD RATE OF RETURN (13.25%)
3. IN VIEW OF THE CURRENT STOCK AND REAL ESTATE MARKET, CURRENT PRICES OF
STOCK ARE LOW AND IT WOULD BE A GOOD TIME TO BUY IT. HOWEVER, THE
PROJECT REQUIRED LOOKING AT THE CONDITIONS AS OF 1985.
4. LARGE SPACE ROLLOVER IN 1994, GOOD OPPORTUNITY.
5. PORTFOLIO BALANCING
6. HIGHLY MARKETABLE STOCK - GOOD LIQUIDITY
7. LIC - SECURITY
8. 95% PAYOUT OF INCOME
9. CONVERSION OPTION
ANTI-INVESTMENT OPINIONS
1. CASH FLOW INSUFFICIENT TO PAY DEBT SERVICE
2. OPTIMISTIC PROJECTIONS
3. CASH FLOW ANALYSIS EXTENDS TOO FAR OUT.
4. RENTAL PROJECTIONS. HOW COULD THEY EXPECT 75.00 DOLLARS PER S.F. WHEN
THEY ARE RELEASING 2/3 OF THE SPACE IN 1994?
************************************
REIT - REAL ESTATE INVESTMENT TRUSTS
* THEY PAY NO FEDERAL TAX ON INCOME AND GAINS, THEY ARE PASSED THROUGH TO
THE SHAREHOLDER WHO PAYS TAX AT HIS APPLICABLE RATE.
* 95% OF INCOME MUST BE PASSED THROUGH.
* 75% OF ASSETS MUST BE REAL ESTATE OR GOVERNMENT SECURITIES.
* PUBLICLY TRADED
* 75% OF INCOME MUST BE FROM QUALIFYING REAL ESTATE INCOME.
* THEY APPEAL TO LARGE AND SMALL INVESTORS ALIKE.
IN 1974, REITS POSSESSED ENORMOUS ASSETS. BUT THEY COULD NOT FIND ENOUGH
DEALS TO DO. THE MORE INCOME THE REIT CREATED, THE MORE THE STOCK WENT
UP.
REITS TOOK ON RISKY INVESTMENTS, BECAUSE CARELESS IN THEIR
UNDERWRITING OF CONSTRUCTION AND MORTGAGE LOANS.
IN THE 1974 RECESSION,
MANY REITS TOOK A DIVE IN VALUE.
TODAY REITS ARE MORE CONSERVATIVE AND LESS LEVERAGED.
206
IN PERSPECTIVE, AND
PROPERTY, ETC.
LOOK FOR
PREFERRED RATES
WITH INTERESTS
IN THE
USING
PARTICIPATING
MORTGAGE
\/
CONVERTIBLE EQUITY
TO 71.5 PERCENT
207
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
'96
IN MILLIONS
229.
4
NOI
89.8 95.1 98.6 103.4 109.2 113.5 117.1 121.0 122.8 220.1
CAP IMPR.
29.8 26.2 20.0
T.I.
3.0
2.3
2.0
SEE ROCKEFELLER CENTER DATA
LEAS.COMM. 2.8
2.1
1.8
------------------------------------------------------------------------NCF
54.2 64.5 74.7 80.2 81.0 80.6 93.7 105.0 10.4 197.0
FREE &
CLEAR
NCF
DISCOUNT FACTOR
DISCOUNTED CASH FLOW
YEAR ONE
54
.884
48
YEAR TWO
64
.783
50
YEAR THREE 74
.693
51
YEAR FOUR
80
.613
49
YEAR FIVE
81
.542
44
YEAR SIX
81
.480
43
YEAR SEVEN 94
.425
40
YEAR EIGHT 105
.376
39
YEAR NINE
10
.302
3
YEAR TEN
197
.294
58
847
425 + 729 = 1,154,000,000
TAKING THE 1996 INCOME STREAM CAPPED AT 9 PERCENT = 2,549,000,000, LESS
COMMISSIONS, ETC. = 2,479,000,000.
THE PRESENT VALUE OF THIS AT A 13
PERCENT DISCOUNT IS 729,000,000.
THE NET PRESENT VALUE OF THE CASH
STREAMS IS 425,000,000, WHICH WHEN ADDED TO 729,000,000 GIVES A VALUE OF
THE PROPERTY OF 1.154 BILLION DOLLARS AT A 9 PERCENT CAP RATE, WHICH IS
450 MILLION DOLLARS BELOW THAT OF THE APPRAISAL OF 1/1/86.
END OF CLASS FOUR
CLASS FIVE
10/9/90
TOPICS: MORTGAGES, INVESTMENT ANALYSIS (AS OPPOSED TO FINANCIAL ANALYSIS)
CARTWRIGHT DUE IN 2 WEEKS ON OCTOBER 23RD.
INSTRUCTIONS AND GLOSSARY TO BE HANDED OUT NEXT WEEK.
208
FINISH THE ANALYSIS ON THE OTHER THREE PROPERTIES BASED ON THE FORMAT OF
NEXT WEEK'S INSTRUCTIONS.
*************************
RESIDENTIAL MORTGAGES
FROM AN UNDERWRITER'S PERSPECTIVE:
THE EVALUATION OF A BORROWER'S
DEFAULT RISK AND THE LOAN'S TERMS IS THE CONCERN OF THE UNDERWRITER.
UNDER THE FAIR PRACTICES ACT FULL DISCLOSURE MUST BE MADE OF BORROWER
CREDENTIALS, YET CERTAIN FACTORS SUCH AS RACE AND RELIGION CAN NOT BE
CONSIDERED.
ONCE THE APPLICATION IS COMPLETE, THE BANK TAKES OUT AN
APPRAISAL. USUALLY, FOR INDIVIDUAL HOUSING, THIS COSTS APPROXIMATELY 200
TO 250 DOLLARS.
FOR RELOCATIONS, THE APPRAISAL IS MORE INVOLVED AND
COSTS ROUGHLY 500 DOLLARS.
FOR COMMERCIAL OR CONDO RESIDENCES, THIS
FIGURE IS USUALLY 10 TO 25 THOUSAND DOLLARS, YET CAN BE AS LOW AS 3,000
DOLLARS.
AN APPRAISER GOES THROUGH THE SAME ANALYSIS AS YOU DO OF MAINTENANCE,
UPKEEP, INCOME FLOWS, CAPITAL IMPROVEMENTS, OPERATING EXPENSES, MARKET
RENTS, LEASES, ETC. HE IS HIRED TO GIVE AN INDEPENDENT OPINION OF VALUE.
SALES COMPARABLE METHOD, COST REPLACEMENT, AND OTHER METHODS ARE USED TO
DETERMINE VALUE.
IN EACH LENDING INSTITUTION, ESPECIALLY THOSE WHO SELL OFF THEIR LOANS ON
THE SECONDARY MORTGAGE MARKET TO FNMA (FANNIE MAE) AND FHLMC (FREDDIE
MAC) BUNDLE THE PROPERTIES AND SELL THEM AT A DISCOUNT, OR PREMIUM, TO
THE MARKET DEPENDING ON THE MARKET CONDITIONS.
LEGAL OPINIONS,
APPRAISALS, ETC.TAKE A SIMILAR FORMAT BECAUSE THE SECONDARY MORTGAGE
MARKET REQUIRES THE FORMAT TO QUALIFY FOR PURCHASE WITHIN THE BUNDLE.
THE LIMIT OF MORTGAGES THAT THE SECONDARY MORTGAGE MARKETS WILL BUY IS
187,500 DOLLARS AS OF 9/90.
ABOVE THAT, MORTGAGE ARE CALLED JUMBO
MORTGAGES, OR JUMBO LOANS, AND WILL GENERALLY BE KEPT WITHIN THE
INSTITUTION'S PORTFOLIO RATHER THAN BEING SOLD, AT A HIGHER RATE THAN
THAT TYPICAL OF FNMA AND FHLMC BACKED LOANS. EXPECTED PAYMENT TO INCOME
RATIO AND LOAN TO VALUE RATIOS ARE USED TO ANALYZE RISK. THE INCOME RATIO
STATES THAT MORTGAGE + INSURANCE + TAXES SHOULD NOT EXCEED 1/3 OF THE
PURCHASER'S MONTHLY GROSS INCOME.
THIS 1/3 FIGURE IS THE PAYMENT TO
INCOME RATIO. LOAN TO VALUE IS GENERALLY 75 TO 80 PERCENT, DEPENDING ON
THE TYPE OF MORTGAGE USED. FHA MORTGAGES ALLOW UP TO 90 PERCENT BECAUSE
OF THE INSURANCE PROVIDED AGAINST DEFAULT. VA MORTGAGES PROVIDE AN LTV
OF 95%.
THE TYPES OF MORTGAGES ARE:
1. CONVENTIONAL
- FIXED RATE
- ADJUSTABLE RATE
2. FHA (FEDERAL HOUSING ADMINISTRATION)
- INSURED BY FED. GOV'T. TO LENDERS AGAINST DEFAULT. CREATED IN
209
1934
210
2.
3.
4.
5.
6.
7.
8.
9.
10.
FILLED
OUT
AND
DISTRIBUTED
TRUTH IN LENDING ACT
**********
211
RETAIL USES
REGIONAL MALLS (600 TO 800K S.F.)
SUPER REGIONAL MALLS (1000K S.F.)
NEIGHBORHOOD CENTER (200 TO 300K S.F.)
STRIP CENTER
SPECIALTY CENTER
DISCOUNT CENTER
INDUSTRIAL
HEAVY MANUFACTURING
LIGHT MANUFACTURING
FLEX SPACE (OFFICE/WAREHOUSE)
RESEARCH AND DEVELOPMENT
WAREHOUSE SPACE
HOTEL/MOTEL
CONVENTION/BUSINESS CENTERS
TOURIST/RESORT CENTERS
RECREATIONAL
GOLF CLUBS
MARINAS
SPORTS COMPLEXES
AMUSEMENT PARKS
INSTITUTIONAL
HOSPITAL
UNIVERSITY
GOVERNMENT
IN LOOKING AT THE PRODUCTS YOU EVALUATE IN YOUR ANALYSIS, DETERMINE WHAT
YOUR MOTIVATION IS TO INVEST, SUCH AS: RETURN, CASH FLOW, SALE, TAX
CONSIDERATIONS, ETC.
IN PROJECTING INCOME AND OPERATING EXPENSES, LOOK AT MARKET RENTS AND THE
LIKELIHOOD FOR INCREASES BY EVALUATING SUPPLY, DEMAND (ABSORPTION), AND
COMPARABLE VALUES. ASSUME 95% MAXIMUM OCCUPANCY TO CONSIDER FOR VACANCY
AND NON-PAYMENT OF RENT IN A GOOD MARKET. USE LESS THAN 95% IN A POOR
MARKET.
**************
LEASING
**************
LEASING STARTS WITH:
* A BASE RENT, SAY 10.00 DOLLARS PER S.F., FOR EXAMPLE.
* A TERM, SUCH AS FIVE YEARS.
FIVE YEAR LEASES ARE TOUGH TO FINANCE
BECAUSE OF THE REFINANCING RISK. AT THE END OF 5 YEARS IF THE LESSEE
DOESN'T RENEW THE LEASE THE LENDER IS SUBJECT TO WHO WILL TAKE OUT THE
LEASE AT THE END OF THE TERM WHEN THEY HAVE TAKEN OUT A TEN YEAR NOTE TO
COVER THE FINANCING, MAKING THEIR PROFIT ON THE MARGIN.
IF THE LEASE
DOES NOT RENEW, THERE IS A RISK THAT THE LENDER WILL BE "HUNG OUT TO
DRY".
212
* YOU HAVE ANNUAL INCREASES. YOU HAVE A PERCENTAGE RENT, SUCH AS THAT
USED IN A RETAIL LEASE ( OVERAGE ).
OPTIONS ON A LEASE OFFER RENEWAL. AT THE OPTION OF THE TENANT THEY CAN
RENEW THE LEASE BASED ON A PRE-AGREED FORMULA SUCH AS "95% OF MARKET
RENT" PER SQUARE FOOT.
***********************************
EXAMPLE OF THE USE OF EXPENSE STOPS
***********************************
TENANTS.F. RENT/S.F.
EXPIRY OF LEASE
TAX BASE
OP.EXP.BASE
PH
6000 25.00
1/1/91
40,0003.50/S.F.
WH
4000 35.00
1/1/90
80,0004.50/S.F.
-----------------------------------------------------------------------TOTAL
RENTABLE
S.F.
10,000
ASSUMPTIONS:
* 6 MONTH VACANCY BETWEEN EACH LEASE
* EACH TENANT PAYS PROPORTIONATE SHARE OF INCREASES
OPERATING EXPENSES AND TAX EXPENSES.
* 1989 OPERATING EXPENSES ARE 40,000 DOLLARS
* 1989 TAX EXPENSES ARE 90,000 FOR CALENDAR YEAR
* 1989 MARKET RENT IS 50 DOLLARS PER S.F.
* LEASING COMMISSION IS 25% OF FIRST YEAR'S RENT
OVER
BASE
FOR
ASSUMPTIONS (CONT)
* ASSUME 5 YEAR LEASES
* 5 DOLLARS PER S.F. TENANT IMPROVEMENTS
* 5% INFLATION FACTOR FOR ALL RENTS, OPERATING EXPENSES, TAXES, AND T.I.
TASK: PREPARE A 4 YEAR INCOME AND EXPENSE PROJECTION FOR THE PROPERTY.
YEAR
1989
1990
MKT.RENT
TI
50.00
5.00
52.50
5.25
150,000*
1991
55.13
57.88
5.51
5.79
RENEWAL YEAR
150,000
330,750***
3,000**
4,200
30,000
32,700
213
1992
1989
1990
MKT.RENT
TI
50.00
5.00
52.50
5.25
RENEWAL YEAR
140,000
210,000
1991
1992
55.13
5.51
57.88
5.79
NOI
197,000
155,400
234,780
400,155
LESS T.I.
0
(21,000)*
(33,075)
0
LESS COMMISSION
0
(52,500)
(82,688)**
0
214
ACTION, NOT
REFLECTIVE THINKERS.
THERE ARE SOME WHO ARE"DEAL JUNKIES" AND WISH TO
MAKE A DEAL A DAY RATHER THAN SIT AROUND AND CONCEPTUALIZE.
CONCEPTUALIZATION:
"PICK PEOPLES MINDS". NETWORKING, PICKING UP IDEAS, BOUNCING IDEAS OFF
GOVERNMENT AGENCIES.
AN IDEA HAS
ITS TIME AND OLD IDEAS MAY BE WELL
RECEIVED IF THE CONDITIONS ARE CORRECT.
AFTER YOU SELECT WHAT YOU WANT TO BUILD, EVEN CONCEPTUALLY, YOU NEED TO
LOOK AT THE MARKET. ONCE YOU START A DEVELOPMENT PROCESS, IT WILL BE
THREE TO FIVE YEARS BEFORE THE PROJECT COMES ON LINE. MARKET STUDIES ARE
THEREFORE OF LITTLE USE, ACCORDING TO BILL HAYNES.
THE CYCLICALITY OF
REAL ESTATE, APPARENTLY EVERY SEVEN YEARS, CAUSES THE HISTORICITY OF
MARKET STUDIES TO FALL SHORT. "PLAYING THE CYCLES", RATHER THAN STUDYING
THE MARKET IS A BETTER INDICATOR OF WHETHER ONE SHOULD PROCEED WITH A
DEAL. TO PROCEED, YOU NEED MONEY.
YOU GO TO PENSION FUNDS, INVESTORS, INSURANCE COMPANIES, BANKS, ETC. DO
NOT USE YOUR OWN MONEY.
STARTING IN 1991-92 FOR ON-LINE PROJECTS IN
1995-96 IS GOOD. FINDING MONEY IS TOUGH BECAUSE PEOPLE WITH MONEY HAVE
TAKEN HITS OVER THE PAST FEW YEARS AND DO NOT WANT TO PART WITH WHAT THEY
HAVE LEFT UNLESS A DEAL IS EXTREMELY CHOICE.
AT THAT POINT THERE IS
LITTLE LEFT FOR THE DEVELOPER. DEVELOPERS GO INTO DEALS TO MAKE 30 TO
50 PERCENT, NOT 10 PERCENT. WHEN WE HIT IT WE HAVE TO MAKE A LOT BECAUSE
IT IS EASY TO LOSE A LOT OF MONEY DUE TO THE INHERENT RISK. A PROJECT
PRO FORMA LISTING 15 PERCENT RETURNS WILL LIKELY "BREAK EVEN" WHEREAS A
40 PERCENT IRR WILL LIKELY END UP A 15 PERCENT RETURN.
EXAMINE ALL ASSUMPTIONS TO DETERMINE ACTUAL RISK.
THE DEVELOPMENT TEAM
SMALL OR LARGE DEVELOPERS HAVE THE SAME TEAM. IN HOUSE VS. OUTSIDE IS
THE KEY FACTOR. MOST DEVELOPERS DO NOT HAVE LARGE IN-HOUSE STAFFS. WHAT
THEY DO HAVE IS CONSTRUCTION SUPERVISORY CAPABILITY. YOU NEED KEY PEOPLE
TO REPRESENT YOUR INTERESTS.
YO NEED A STRONG IN HOUSE FINANCIAL
DEPARTMENT, NOT JUST A STRONG ACCOUNTING DEPARTMENT.
THE FINANCIAL
DEPARTMENT IS THE LIAISON WITH THE FINANCIAL INSTITUTIONS. THEY HANDLE
THE INSURANCE PREMIUMS ALSO. CHANGE ORDERS ARE HANDLED BETWEEN FINANCE
AND CONSTRUCTION DEPARTMENTS.
YOU ALSO NEED A PURCHASE MANAGER.
YOU
NEED A PERSONNEL MANAGER. THEY DEAL WITH UNION PROBLEMS. HE ALSO DEALS
WITH THE MARKETING DEPARTMENT THAT DOES LEASING AND SELLING. MARKETING
IS VERY HEAVY IN PERSONNEL.
OUTSIDE, YOU HIRE YOUR ARCHITECT AND ENGINEERS AND LANDSCAPE ARCHITECTS.
ALSO, YOU NEED DIFFERENT LEGAL FIRMS TO HANDLE DIFFERENT LEGAL ASPECTS
SUCH AS REAL ESTATE, FINANCING, AND ACQUISITION. YOU ALSO NEED A ZONING
LAWYER WHO ACTS AS A LOBBYIST MORE THAN THEY ACT AS ATTORNEYS. YOU ALSO
NEED OUTSIDE AUDITING, ACCOUNTING, AND TAX ADVICE (BOTH LEGAL AND
ACCOUNTING). YOU ALSO NEED TO HIRE CONSTRUCTION MANAGERS.
215
REMEMBER
"YOU
216
DON'T
MAKE
THE
NETWORK IT
THE BROMLEY SAVED 750,000 DOLLARS BY SELLING 1/2 THE BUILDING UP FRONT.
TEMPORARY OCCUPANCY CERTIFICATES WERE GIVEN BEFORE THE PROJECT WAS TOPPED
OFF. IT WAS IMPORTANT TO WATCH THE PROJECT'S REPUTATION AND DEAL WITH
THE INEVITABLE COMPLAINTS WHILE CONSTRUCTION WENT ON.
THEY
YOU CAN HEDGE MOST EVERYTHING. IF YOU SEE CONSTRUCTION AS RISKY, GET A
FIXED PRICE.
HEDGE ZONING BY GETTING A CONTINGENCY CLAUSE.
YOU CAN
HEDGE MARKETING BY PRELEASING OR PRESELLING.
WHEN YOUR CFO SAYS YOU WILL MAKE 50 MILLION, YOU CAN STILL GO BROKE IF
YOUR CASH FLOW PROJECTIONS SHOW THAT YOU CANNOT SUSTAIN THE PROJECT UNTIL
THE PROJECT COMES ON LINE.
IF YOUR CONSTRUCTION GOES LONGER AND SETS BACK
LEASING, THE EXTENDED
PERIOD IS CARRYING A BUILDING WHICH IS 90 PERCENT FUNDED.
YOU PAY
INTEREST ON INTEREST, COST, AND MISCELLANEOUS FEES.
END OF GUEST LECTURE
TAXES
TAX REFORM ACT OF 1986 -THE LAW THAT WE HAVE BEEN WORKING WITH. THESE
LAWS DO CHANGE, HOWEVER, AND POTENTIAL CHANGES MUST BE CONSIDERED IN
PLANNING.
PRIOR TO 1986, REAL ESTATE INVESTMENT AND FINANCING WAS CONSIDERED TO BE
217
1989
197,000
1990
1991
81,900119,018
1992
400,155
1990
1991
218
1992
PRETAX NOI
197,000
155,400
234,780
DEPRECIATION (67,460)
(67,460)
(67,460)
TI
-------(4200)*
(10,815)
LEASING EXPENSE
-------(10,500)** (27,038)
TOTAL
129,540
73,240129,467
*20% OF EXPENSES
**LEASING EXPENSE AND TENANT IMPROVEMENTS AMORTIZED OVER THE TERM OF THE
LEASE, IN THIS CASE FIVE YEARS.
SALE BASED ON 1992'S NET INCOME
NOI
400,155 / 9% CAP RATE = 4,446,167
LESS COMMISSIONS =
88,923
TOTAL =
4,357,243 = NET PRICE
85% X 2.5 MILLION / 31.5 YEARS = 67,460 ANNUAL DEPRECIATION
1989
1990
1991
TOTAL
28% TAX
129,540
36,271
73,240129,467
20,507 36,231
197,000
(36,271)
160,729
81,900119,018
(20,507)
36,251
61,39382,767
DEDUCTING TAXES FROM CASH FLOW GIVES YOU AFTER TAX CASH FLOW.
TAX ON SALE
NET SALE PRICE =
LESS PURCHASE PRICE =
PLUS DEPRECIATION = 67,460 X 3 =
PLUS ALLOCATION OF CAPITAL EXPENSES =
4,357,243
(2,500,000)
202,380
52,553
TAXABLE GAIN =
FEDERAL TAX RATE =
2,112,177
X
28%
TAXES
591,410
IF YOU LOOK AT THE INCOME FLOW, WE HAVE THE NET AFTER TAX CASH FLOW OF:
1989
1990
1991
CASH FLOW
160,729
61,39382,767
PLUS RESIDUAL VALUE
-------------4,357,243
LESS TAXES ON SALE -------------(591,410)
AFTER TAX CASH FLOW
160,729
61,3933,848,601
219
THE MARKET
MARKET STUDY OF DEMOGRAPHICS AND LOCAL
SUPPLY
MARKET CONDITIONS.
THE
VALUATION
PROCESS
THE
MARKET
EVERY MARKET IS INDEPENDENT WITH ITS OWN CHARACTERISTICS AND ITS OWN WAY
OF RESPONDING TO ACTIONS OF THE ECONOMY.
"IF YOU DO YOUR MARKET ANALYSIS WELL, THE APPRAISAL IS A SNAP".
"ALL PROJECTS HAVE MINUSES....KNOW THEM".
220
IMPACT ON THE
221
S.F.
OF
OFFICE
SPACE
IS
"MANAGEABLE".
222
MORE
THAN
THAT
IS
1989
197,000
AFTER TAX
160,729
1990
1991
1992
81,900119,018*
400155
4,357,243
61,3933,848,601
223
COLLAR CONTACTS
CAP CONTRACTS AND COLLAR CONTRACTS ARE FINANCIAL INSTRUMENTS. THE BANK
WANTS TO KNOW, THESE DAYS, THAT YOU HAVE A CEILING ON THE INTEREST RATE
YOU ARE PAYING BECAUSE THEY WANT TO BE CERTAIN YOU CAN CONTINUE TO MAKE
THE PAYMENTS.
AN 8.5 PERCENT COLLAR WITH A TEN PERCENT CAP IS TYPICAL. THE DEVELOPER
BUYS THE CAP AND SELLS THE COLLAR. IF I AM PAYING 7.5 PERCENT, I PAY
SOMEONE ELSE THE 1 PERCENT DIFFERENCE BETWEEN 8.5 AND 7.5 PERCENT. IF I
AM PAYING 11 PERCENT, I AM PAID THE ONE PERCENT MARGIN BETWEEN THE TEN
PERCENT CAP AND THE 11 PERCENT RATE BUY THE PERSON I BOUGHT THE 10
PERCENT CAP FROM.
INTEREST RATE SWAPS ARE WHEN YOU TAKE A FLOATING RATE AND EXCHANGE IT
FOR A FIXED RATE WITH AN INTERMEDIARY BANK, WHO BUYS THE FIXED RATE FROM
THE ISSUER OF THE FIXED RATE. IF YOU ARE PAYING A LIBOR + ONE FLOATING
RATE AT 9.25 PERCENT, YOU TAKE THE SWAP COST OF 55 BASIS POINTS, ADD IT
TO THE TREASURY BOND RATE AND ADD THE + ONE MARGIN FROM YOUR FLOATING
RATE LOAN TO ARRIVE AT THE NEW FIXED RATE.
TREASURY BOND = 8.25 PERCENT (AS PER APPLICABLE 5,7 OR 10 YR. T-BILL
RATE)
SWAP COST =
0.55 PERCENT
CREDIT SPREAD = 1.00 PERCENT
9.80 PERCENT FIXED RATE
IF THE LIBOR + ONE FACTOR GOES UP TO 13 PERCENT, THEN YOU PAY YOUR
FLOATING RATE AT THIRTEEN PERCENT AND ARE IMMEDIATELY REIMBURSED FOR THE
SPREAD OF 3.2 PERCENT BY THE INTERMEDIARY BANK GIVING YOU AN EFFECTIVE
FIXED RATE OF 9.8 PERCENT. THE INTERMEDIARY BANK IS BETTING THAT RATES
WONT GO UP. IF THEY GO DOWN, YOU OWE THEM.
END OF CLASS SEVEN
CLASS EIGHT
10/30/90
CLASS DISCUSSION - ANGUS CARTWRIGHT
STEP ONE - DEFINE OBJECTIVES
MARTHA DeRIGHT
1. DIVERSIFICATION
2. DOES NOT NEED THE INCOME, SO SHE IS LOOKING FOR CAPITAL APPRECIATION.
3. NEEDS PROFESSIONAL MANAGEMENT
4. MINIMUM RETURN OF 12 PERCENT.
5. CAN DO A RISKIER INVESTMENT BECAUSE SHE DOES NOT HAVE TO WORRY ABOUT
CASH FLOW.
224
DIVERSIFICATION
NEEDS CASH FLOW - SHELTERED
LESS RISKY
1.6 MILLION AVAILABLE FOR INVESTMENT.
ALISON GREEN
100 UNITS, GARDEN APARTMENTS, BUILT IN 1984, 97 PERCENT LEASED, IN AN
AREA WHERE EXISTS A SEWER MORATORIUM, THEREBY LIMITING FUTURE
COMPETITION. ADDITIONAL EQUITY MIGHT BE REQUIRED DUE TO POTENTIAL NEED
FOR IMPROVEMENTS. ALISON GREEN HAS FAVORABLE MORTGAGE TERMS.
STONY WALK
46,000 RENTABLE
MORTGAGE.
S.F.,
BUILT
IN
1978,
97
PERCENT
OCCUPIED,
20
YEAR
IVY TERRACE
80 UNIT GARDEN APARTMENTS, UNDER CONSTRUCTION.
BUILT ON A 99 YEAR
LEASEHOLD WITH PAYMENTS OF 20,000 DOLLARS ANNUALLY. 3 YEAR GUARANTEE ON
95 PERCENT OCCUPANCY.
FOWLER BUILDING
50,000 NET RENTABLE S.F., UNDER CONSTRUCTION, 80 PERCENT PRELEASED, 3
YEAR GUARANTEE, 99 YEAR LEASEHOLD AT 55,000 DOLLARS ANNUALLY.
STEP TWO - LOOK AT THE INCOME STATEMENT
ALISON GREEN
STONY WALK
GROSS RENT
600,000 470,000
VACANCY 18,000
14,100
582,000 455,900
IVY TERRACE
560,000
FOWLER BUILDING
550,000
28,000
532,000
27,100
522,500
OP. EXP.
TAXES
158,000 80,100
84,000
65,800
142,800
76,500
NOI
340,000 310,000
322,000
380,000
FINANCING
LEASE PMT.
268,125 282,550
0
0
264,560
299,060
20,000
55,000
PRETAX CF
71,880
37,440
23,936
67,200
27,450
225
66,000
EQUITY
DEBT RATIO
800,000 400,000
75%
85%
CAP AT PRCH.
CAP AT SALE
CASH ON CASH
INCR. IN VAL
10.63%
9.69%
8.98%
46.9%
NPV
IRR
PROF. INDEX
494,500 381,025
22.01
25.5
61.81
95.26
500,000
11.7%
12.22%
6.86%
28.3%
359,469
1,000,000
82%
72%
11.5%
11.66%
7.49%
32.14%
10.56%
8.49%
2.59%
66.67%
571,620
23.51
71.89
20.42
57.16
HOUSEHOLDS (SAVINGS)
HOUSEHOLDS
BUSINESS (EARNINGS)
> CONSUMER DURABLES
RESIDENCES
OTHER USES
BUSINESS
DEMAND DEPOSITS
COMMERCIAL BANKS
NOW ACCOUNTS
SAVINGS & LOANS
/\
TIME DEPOSITS
BANKS
REAL ESTATE INVESTMENT TRUSTS
/\
MORTGAGE COMPANIES
OTHERS
FEDERAL
RESERVE
/\
226
\/\/
CONSUMER LOANS
OTHER ASSETS
\/
FINANCIAL>
BUSINESS:
MORTGAGE LOANS
ASSETS
COMMERCIAL PAPER
BANK LOANS
/\
MULTIPLIER EFFECT
THE FEDERAL GOVERNMENT, THROUGH THE FEDERAL RESERVE MARKET COMMITTEE,
REGULATES THE SUPPLY OF FUNDS TO THE ECONOMY.
THE FEDERAL RESERVE
REGULATES AVAILABLE CASH BY:
1. REGULATING BANK'S RESERVE REQUIREMENTS
2. DISCOUNT RATE CHARGED TO BANKS
3. OPEN MARKET OPERATION
OPEN MARKET OPERATION - WHEN THE FED GOES TO THE MARKET AND FORCES BANKS
TO SELL GOVERNMENT SECURITIES IN THE OPEN MARKET.
WHEN THE SALE IS
FORCED, IT MAKES THE BANK LIQUIDATE ITS RESOURCES BY BUYING SECURITIES,
THEREBY REACHING LOWERING ITS RESERVES AND THE AMOUNT AVAILABLE FOR
LENDING. THIS IN TURN REDUCES THE LIQUIDITY OF THE SYSTEM. BECAUSE LESS
IS AVAILABLE TO LEND, CASH IS DRAWN OUT OF THOSE WHO WOULD OTHERWISE
BORROW AND PLACE THERE CAPITAL IN A BANK ACCOUNT. THEY PAY CASH, WHICH
IN TURN PUTS LESS IN THE RESERVES. THE OPPOSITE CAN ALSO TAKE PLACE AS A
METHOD OF DECREASING RATES. THROUGH THIS REGULATION OF FLOWS, THE FEDS
GOVERN THE AVAILABILITY AND COST OF FUNDS, AS WELL AS THE LIQUIDITY OF
THE BANKING SYSTEM.
WHEN THE FED LOWERS THE FEDERAL FUNDS RATE (ALSO CALLED THE "FED FUNDS
RATE", THIS IS THE RATE THAT BANKS USE WHEN BORROWING FROM EACH OTHER) BY
ADDING MONEY TO THE SYSTEM, SHORT TERM RATES HEAD DOWNWARD.
LONDON INTERBANK OFFERING RATE (LIBOR) - A MARKET RATE FOR CASH, OFTEN
USED IN FINANCING AS A BASIS FOR APPLYING A SPREAD TO ARRIVE AT AN
INTEREST RATE.
227
LIBOR OPTION - PRICED AT A HIGHER SPREAD OVER LIBOR THAN WOULD BE TYPICAL
OF A PRIME RATE SPREAD IN A PRIME OPTION. IE. LIBOR + (RANGE OF 100 TO
200 BASIS POINTS) = 9 TO 10 PERCENT WHEN LIBOR IS AT 8 PERCENT.
PRIME OPTION - PRICED AT 0 TO 1 PERCENT SPREAD.
WHEN PRIME IS AT TEN PERCENT.
IE. 10 TO 11 PERCENT
FINANCIAL INTERMEDIARIES
COMMERCIAL BANKS
SAVINGS AND LOANS
MUTUAL SAVINGS BANKS
INSURANCE COMPANIES
PENSION FUNDS
FINANCE COMPANIES
CREDIT UNIONS
MORTGAGE BANKERS
REITS
ALL OF THESE LENDERS CAN LEND OR INVEST MONEY
INVESTMENT COULD BE THROUGH EQUITY OR THROUGH DEBT.
FOR
REAL
ESTATE.
THE BIGGEST
GROWTH
OF
THE
FOREIGN
228
GUARANTEE OF A RETURN.
FOR
PARTNER, A 12 PERCENT TARGET
A 8 TO 10 PERCENT PREFERRED
RESIDUAL.
BY YOU TAKING THE CASH FLOW ON THE RESIDUAL OF MY RETURN BASED ON THE 12
PERCENT RETURN UNTIL THE RETURN TO YOU IS EQUAL TO 12 PERCENT (WHEN
CONSIDERING THE RESIDUAL RATE OF THE CASH FLOWS AND SALE), YOU ARE
GETTING A 12 PERCENT LOOK BACK INTERNAL RATE OF RETURN. IF THE VALUE OF
THE IRR COMES TO 11 PERCENT, THEN THE PARTNER TAKES OUT FROM MY RESIDUAL
UNTIL A RATE OF 12 PERCENT IS ARRIVED AT.
THE PARTNER WANTS THE MANAGER TO WORK FOR THE RESIDUAL. IF THE EQUITY
PARTNER MAKES THE TERMS TOO ONEROUS, HE WOULD NOT BE GIVING THE
MANAGER/DEVELOPER THE STAKE NEEDED TO PROVIDE HIM THE INCENTIVE TO MANAGE
THE PROPERTY PROFITABLY.
END OF CLASS EIGHT
CLASS NINE
11/6/90
FINANCING CASE HANDED OUT TODAY.
IT IS DUE ON TUESDAY THE 27TH OF
NOVEMBER. THE QUESTION TO ANSWER IS, "WOULD YOU APPROVE THE LOAN, ITS
TERMS AND CONDITIONS?
IF YOU REJECT OR SUPPORT THE LOAN, GIVE THE
REASONS WHY. IF YOU WANT TO UPDATE THE MARKETING INFORMATION YOU MAY,
BUT IT IS NOT NECESSARY. YOU HAVE AN EMPTY BUILDING THAT HAS JUST BEEN
PURCHASED.
THE DEVELOPER WANTS TO RENOVATE IT AND MAKE IT A CLASS A
SPACE".
TONIGHT, WE WILL GO THROUGH "CREDIT ANALYSIS", AND THE INSTITUTIONS AND
THEIR METHODS OF LENDING MONEY. ALSO, WE WILL TALK ABOUT THE DIFFERENT
FORMS OF LOANS.
DISINTERMEDIATION AS INTEREST RATES WENT UP IN THE MID 1970'S, THE
SAVINGS AND LOANS WHO INVEST IN HOME MORTGAGES COULD ONLY RECEIVE UP TO
229
SPREADS HAVE INCREASED FROM 90 TO 110 BASIS POINTS LAST YEAR ON TRIPLE A
INVESTMENTS TO 140 BASIS POINTS TODAY.
THIS INCREASE IN SPREAD IS A
RESULT OF FEAR, AND AN ATTEMPT TO MAKE UP FOR LOST PROFITS.
INSURANCE COMPANIES DO NOT LIKE PREPAYMENT. IF YOU PREPAY, THEY WILL USE
A YIELD MAINTENANCE FORMULA TO PENALIZE YOU FOR THAT PREPAYMENT.
IF THE RATE ON A 10 YEAR LOAN IS 10 PERCENT AND YOU PREPAY WHEN THE 10
YEAR TREASURY RATE IS 8 PERCENT, YOU WOULD BE OBLIGATED TO PAY THE 2
PERCENT DIFFERENCE FOR THE NUMBER OF YEARS REMAINING ON THE LOAN X THE
LOAN AMOUNT. IT IS A MATTER OF NEGOTIATION IF THIS IS TO BE PAID AT THE
PRESENT VALUE OF THE ANNUITY OR AT FACE VALUE.
INSURANCE COMPANIES WILL LEND ON ANY TYPE OF REAL ESTATE.
LOAN TO VALUE RATIOS OF 75 PERCENT.
THEY REQUIRE
230
FOR
MINI-PERMS,
AND
BRIDGE
SAVINGS AND LOANS ARE SIMILAR TO COMMERCIAL BANKS. THEY BOTH BUY THEIR
MONEY. THEIR LIABILITIES ARE IN CERTIFICATES OF DEPOSIT OR FLOATING RATE
OBLIGATIONS, WHICH IS WHY THEY NEED FLOATING RATES ON THEIR DEBT TO
COMBAT DISINTERMEDIATION TENDENCIES. 70 PERCENT OF S&L ASSETS HAVE TO BE
IN RESIDENTIAL MORTGAGES.
PENSION FUNDS CAN DO EQUITY PARTICIPATIONS AS WELL AS DEBT LENDING. THEY
LIKE PARTICIPATION AND CONVERTIBLE LENDING. THEY ARE NOT USUALLY DIRECT
LENDERS. THEY LOOK FOR A 9 TO 12 PERCENT INTERNAL RATE OF RETURN AT 5 TO
10 YEAR TERMS.
REITS- REAL ESTATE INVESTMENT TRUSTS - THEY LOOK FOR HIGH RETURNS.
TO PREVIOUS NOTES.
REFER
231
MLP'S ARE BASICALLY THE SAME AS REITS, EXCEPT THAT THEY ARE NOT REGULATED
BY THE TAX CODE AND DO NOT HAVE SPECIAL TAX BENEFITS.
************************************************************************
UNDERWRITING - ANOTHER WORD FOR CREDIT ANALYSIS.
THE CREDIT ANALYST (OR LENDER, LOAN OFFICER, CREDIT LENDER, ETC.) DRAWS
HIS DECISION FROM THE FOLLOWING DATA:
CASH FLOW ANALYSIS
LOAN ANALYSIS
EVALUATION
ARCHITECT'S OR ENGINEER'S STUDY
LEGAL ISSUES OF THE PROPERTY
FINANCIAL ANALYSIS
THESE RESULT IN THE CREDIT ANALYSIS. A GENERIC CREDIT ANALYSIS CONSISTS
OF AT LEAST FIVE ITEMS, CALLED THE FIVE P'S OF CREDIT ANALYSIS.
THEY
ARE:
1.
2.
3.
4.
5.
PEOPLE
PURPOSE
PAYMENT
PROTECTION
PERSPECTIVE
232
LOOK AT EFFECTIVE
RENTS, CONSIDERING ALL FREE RENTS AND SPECIAL TENANT WORK. LOOK AT THE
MARKET, MARKET RENTS, MARKET AREAS, TENANT MIXES, 3 TO 4 YEAR BREAK EVEN
ANALYSIS ON HOTEL DEVELOPMENTS, ETC.
ONCE CASH FLOW ANALYSIS IS DONE, YOU CAN DETERMINE THE REFINANCE RISK.
WHAT HAPPENS IF THE TENANT DOES NOT RELEASE? YOU WOULD RATHER HAVE, FOR
EXAMPLE, A FIVE YEAR LOAN AGAINST A 10 YEAR LEASE THAN A 5 YEAR LOAN
AGAINST A 5 YEAR LEASE.
YOU HAVE TO BE COMFORTABLE THAT YOU CAN
REFINANCE THE BUILDING IF, FOR EXAMPLE, LEASES ROLL OVER INTO LOWER RENT
THAN THAT AVAILABLE ON THE MARKET TODAY.
PROTECTION- SECURITY OF THE LOAN BASED UPON THE CERTAINTY OF FUTURE
INCOME AND EXPENSES.
AFTER 1990, ALL INVESTMENTS TOUCHED BY FEDERAL
MONEY, BE IT A FHA LOAN, OR EVEN FEDERAL INSURANCE FOR A BANK, MUST BE
APPRAISED BY A CERTIFIED APPRAISER HIRED BY THE BANK, NOT THE LOAN
APPLICANT.
YOU WILL WANT AT LEAST A 75 PERCENT LOAN TO VALUE RATIO, ALTHOUGH UP TO
95 PERCENT IS OCCASIONALLY JUSTIFIABLE WITH THE APPROPRIATE GUARANTEES
AND INTEREST RATES.
POSSIBLE GUARANTEES ARE COMPLETION GUARANTEES,
PAYMENT GUARANTEES, DEBT SERVICE GUARANTEES, AND TAXES & INSURANCE
GUARANTEES. IF A LETTER OF CREDIT IS PURCHASED BY THE APPLICANT, WHAT IS
THE QUALITY OF THE INSTITUTION GRANTING THE CREDIT?
A LENDER MAY REQUIRE A TAKE-OUT LOAN, ALSO CALLED A BUY AND SELL
AGREEMENT OR A TRI-PARTY BUY AND SELL AGREEMENT. THIS IS WHEN THE LENDER
ENTERS AN AGREEMENT WITH THE BORROWER AND THE TAKE-UP LENDER THAT SPELLS
OUT THE ROLES OF EACH, AND GUARANTEES THAT THE INITIAL LENDER WILL AGREE
TO SELL THE MORTGAGE TO THE TAKE OUT LENDER WHO IN TURN GUARANTEES THAT
THEY WILL BUY IT. THE BORROWER AGREES TO THIS HAPPENING.
TAKE OUT LENDERS USE TO PROVIDE STAND-BY COMMITMENTS WHEREBY FOR A FEE
THEY WOULD SAY THEY WOULD TAKE THE TAKE OUT LOAN WHEN IN PRACTICE THEY
NEVER WOULD. THIS IS WHY STAND-BY COMMITMENTS ARE NOT ACCEPTABLE.
YOU GO TO THE TAKE-OUT LENDER FIRST, GETTING A FIRM COMMITMENT WITHOUT
ONEROUS CONDITIONS (IE. 80% LEASED PROPERTY). UPON COMPLETION, WITH NO
LEASING CONTINGENCY, A CONSTRUCTION LENDER WILL BE MORE COMFORTABLE ABOUT
GIVING YOU A CONSTRUCTION LOAN.
YOU APPROACH THE CONSTRUCTION LENDER
AFTER SECURING THE TAKE-OUT LOAN.
PERSPECTIVE - LOOKING AT THE OVERALL PROJECT AND EVALUATING THE RISKINESS
OF THE PROJECT. ONCE YOU EVALUATE RISK, YOU EVALUATE REWARD ALSO WITH A
RISK/REWARD ANALYSIS. YOU HAVE TO DETERMINE WHAT PRICING OF THE PROJECT
OVERCOMES THE BASIC HURDLES OF RISK OF GETTING INVOLVED. REWARDS CAN BE
MEASURED IN FEES (IE., 1/2 TO 1 PERCENT) OR IN RETURN OVER PRIME, LIBOR,
OR OTHER STANDARD.
233
TO
234
THERE IS NOT A
*******************
LOANS
*******************
FIXED RATE MORTGAGE - (CONVENTIONAL) 15 TO 25 YEARS.
THESE LOANS ARE AT 10 YEARS.
TODAY, MOST OF
THE LOANS WERE MEANT TO APPROXIMATE THE ECONOMIC LIFE OF THE PROPERTY.
IN RECENT YEARS, DUE TO UNPREDICTABLE ECONOMIC CONDITIONS, FIXED RATE
235
10 YR MONEY
8.00
1.50
8.35
1.60
----9.5%
----9.95%
VARIABLE RATE LOANS TEND TO BE PREPAYABLE. IF YOU HAVE A SWAP TO FIX THE
VARIABLE RATE, YOU WILL HAVE TO PAY SWAP UNWIND COSTS IN THE EVENT THE
LOAN IS PREPAID. VARIABLES HAVE LITTLE IF ANY AMORTIZATION. THEY HAVE
THE SAME LOAN TO VALUE RATIOS AS FIXED MORTGAGES ( 1.1 TO 1.3 ). THEY
ARE GENERALLY FUNDED AT TERMS FROM ONE TO SEVEN YEARS.
THE INDEX IS ADJUSTED BY A CREDIT SPREAD, AS IN THE FOLLOWING EXAMPLE:
LOAN RATING
CREDIT SPREAD
AAA
AA
60 TO 75 BASIS POINTS
100 BASIS POINTS
236
ZZZ
IF 90 DAY LIBOR INDEX IS 8 PERCENT, AND THE ZZZ SPREAD IS 2.5 PERCENT,
THEN THE INTEREST RATE WILL BE 10.5 PERCENT.
A TYPICAL CASE OF DETERMINING A RATE IS AS FOLLOWS:
A PROJECT OF SEVERAL MILLIONS OF DOLLARS COULD BE FINANCED AT A RATE
DETERMINED BY THE RETURN ON COMMERCIAL PAPER ADDED TO INSURANCE FEES,
LIQUIDITY AND OTHER FEES, AND A CAP FEE BOUGHT TO STEADY THE RATE.
7.8%
(commercial paper)
+0.5%
(insurance fee)
0.5%
(liquidity and other fees)
+8.8%
floating rate
0.7%
cap fee (bought to fix the interest rate)
9.5%
fixed rate
STANDBY COMMITMENTS
BANKS DRAW A 1 TO 3 PERCENT FEE ON THE LOAN AMOUNT FOR A STANDBY
COMMITMENT. THE BANKS HAVE NO INTENTION OF TAKING ON THE LOAN, AND MAKE
THIS AN UNLIKELY EVENT IN ANY CASE DUE TO VERY POOR TERMS. IN THE PAST
(AS OPPOSED TO CURRENTLY), STANDBY COMMITMENTS WERE ACCEPTABLE TO
CONSTRUCTION LENDERS AS ADEQUATE TO INSURE THAT HE WOULD BE FINANCED OUT
AT THE END OF CONSTRUCTION AS THE STANDBY LENDER BECOMES THE PERMANENT
LENDER.
THE AGREEMENTS WEE OFTEN WRITTEN TO MAKE IT PRACTICALLY IMPOSSIBLE FOR
DEVELOPERS TO GET THE BANK TO ACT ON ITS STANDBY COMMITMENT, INCLUDING
SUCH ONEROUS CLAUSES AS:
PRELEASE RATES
MIN. RENT PER S.F.
FINANCIAL CONDITIONS GUARANTEE
3.0% + PRIME RATE
2% FINANCING FEE
15% PARTICIPATION INTEREST
CHANGE IN MATERIAL CONDITIONS CLAUSE NEVER ACCEPT THIS
CONDITION.
IT IS GUARANTEED TO FIND YOU IN LITIGATION OVER THE
DEFINITION
OF "MATERIAL".
A BANKABLE COMMITMENT - IS ONE WHERE NOTHING IS REQUIRED EXCEPT FOR THE
COMPLETION OF CONSTRUCTION FOR THE TAKE-OUT LENDER TO ADVANCE PERMANENT
LENDING TO THE PROJECT.
THIS IS WHAT CONSTRUCTION LENDERS WILL ALWAYS
WANT, SINCE THEY DO NOT WANT TO BE SURPRISED AT THE END OF CONSTRUCTION
TO SEE THAT THE TAKE-OUT LENDER REFUSES TO FINANCE BASED ON A
TECHNICALITY OF THE COMMITMENT AGREEMENT. CONSTRUCTION LENDERS WILL ONLY
LEND THE AMOUNT OF MONEY THAT THE TAKE OUT LENDER OR STANDBY COMMITMENT
237
AGREES TO COVER. NOTE THAT STANDBY SALE COMMITMENTS ALSO EXIST, WHICH IS
IN ESSENCE A FULL EQUITY FINANCING RATHER THAN A DEBT FINANCING.
TRI-PARTY BUY AND SELL AGREEMENTS.
A CONSTRUCTION LENDER MAY REQUIRE
THIS TYPE OF TAKE-OUT LOAN. THIS IS WHEN THE LENDER ENTERS AN AGREEMENT
WITH THE BORROWER AND THE TAKE-UP LENDER THAT SPELLS OUT THE ROLES OF
EACH, AND GUARANTEES THAT THE INITIAL LENDER WILL AGREE TO SELL THE
MORTGAGE TO THE TAKE OUT LENDER WHO IN TURN GUARANTEES THAT THEY WILL BUY
IT. THE BORROWER AGREES TO THIS HAPPENING.
IN ISSUING A CONSTRUCTION LOAN, THE LENDER WILL LOOK AT COMPLETION RISK.
WILL THE PROJECT BE COMPLETED AS DESIGNED AND ON TIME, IF AT ALL? WILL
THERE BE SUFFICIENT FUNDS TO BUILD THE BUILDING? IS THE DEVELOPMENT WELL
CAPITALIZED?
WHAT HAPPENS IF ANTICIPATED PRELEASES DO NOT TAKE PLACE?
ARE THE MAJOR PLAYERS DISHONEST?
WHAT IS THE LIKELIHOOD OF COST
INCREASES? ARE THE MAJOR TRADES UNDER CONTRACT IN ORDER TO AVOID COST
OVERRUNS?
THE CONSTRUCTION LENDER WILL ALSO LOOK AT THE BUSINESS FAILURE RISK OF
THE DEVELOPER. HOW STRONG IS THE DEVELOPER? WHAT IS THE MAKE-UP OF THE
DIFFERENT TRADES AND THEIR RELATIONSHIP WITH THE DEVELOPER?
WHAT
PLANNING HAS OCCURRED TO HANDLE FORCE MAJEURE (ACTS OF G-D, TRADE
STRIKES, ETC.)?
THE CONSTRUCTION LENDER WILL ALSO LOOK AT THE ECONOMIC FEASIBILITY OF THE
PROJECT. WILL THE MARKET BE THERE FOR THE PRODUCT WHEN IT IS COMPLETED?
WHAT IS THE RISK OF LOSING ONE OR MORE TENANTS?
WHAT IS THE RISK OF
EXTERNAL EVENTS, SUCH AS LEGAL OR COMMUNITY ACTIONS, OF DERAILING THE
PROJECT? ARE THE ESTIMATES OF CAP RATE AND CASH FLOW GROWTH REASONABLE?
238
239
INTEREST
OF
PRINCIPAL
AND
X X X
X X
X X XXXX
XX THROUGH GUARANTEES, THE RISK TO THE HOLDER OF THE
X XXX X
X
SECURITY IS MEANINGLESS. THE RETURNS ARE
X
XX
X X X X GUARANTEED BY THE GOVERNMENT, REGARDLESS OF WHETHER
XXX
XXX X XX A GIVEN MORTGAGE (X) PAYS OR IS FORECLOSED ON.
X X X XX X X X <
XX
X XX X
240
SENIOR
SECURITY
65 %
241
75% LOAN TO VALUE RATIO
JUNIOR
10 %
SECURITY
WITH REFERENCE TO THE DIAGRAM ABOVE, SPLIT THE CASH FLOWS COMING OFF THE
MORTGAGE INTO AN "A" PIECE (THE SENIOR PIECE) AND THE "B" PIECE (THE
JUNIOR PIECE). THE JUNIOR PIECE IS IN THE LOSS POSITION. CASH FLOWS GO
FIRST TO PAY THE SENIOR ASPECT OF THE LOAN.
THE SENIOR PIECE HAS A
CREDIT ENHANCEMENT RELATIVE TO THE JUNIOR PIECE. THE A PIECE MIGHT BE
RATED AA WHEREAS THE B PIECE WOULD BE OFFERED TO A DIFFERENT SOURCE OF
LENDING THAT IS WILLING TO FINANCE AT GREATER RISK.
o
BUY A GUARANTEE ON THE CASH FLOWS FROM A COMMERCIAL BANK IN RETURN FOR A
FEE.
CERTAIN INSURANCE COMPANIES CALLED SURETY BOND PROVIDERS OR
FINANCIAL
GUARANTORS
MAKE IT THEIR SOLE BUSINESS TO PROVIDE THESE GUARANTEES.
THEY GUARANTEE THE PERFORMANCE OF YOUR PRINCIPAL AND INTEREST PAYMENTS.
THERE ARE THREE MAJOR SURETY BOND PROVIDERS.
THEY ARE:
50
MILLION
DOLLARS
WOULD
NOT
BE
FINANCED
BY
242
AGENCIES!
A BOND UNDERWRITER, CREDIT ENHANCER AND RATING AGENCY ALL CHARGE FEES
THAT MAY BE LARGER THAN A SINGLE COMMERCIAL LENDER WOULD CHARGE, YET THE
INTEREST RATE THAT RESULTS WILL STILL BE LESS THAN THAT PAID TO A SINGLE
LENDER.
END OF GUEST LECTURE.
TRANCHE - A FACTION OF DEBT. SAY, A 140,000,000 DEBT DIVIDED INTO TEN
TRANCHES WOULD HAVE 14 MILLION DOLLARS PER TRANCHE.
NEXT WEEK - CASE III IS DUE. FINAL IS ON THE 11TH OF DECEMBER.
WILL BE SPENT IN REVIEW AND DISCUSSING CAPS AND SWAPS.
THE 4TH
THE FINAL WILL BE ALL PROBLEMS. IE. CASH FLOW ANALYSIS OF INCOME STREAM,
READING A LEASE AND TAKING APART THE FINANCIAL REQUIREMENTS, TAKING A
RENT ROLL AND SHOWING HOW TO COME UP WITH AN OPERATING BUDGET, CASH FLOW
AND EVALUATION OF PRESENT VALUE AND FINANCING STRUCTURES. THE TEST WILL
BE 1 TO 1 AND A HALF HOURS LONG.
MORTGAGES
THE JUNIOR MORTGAGE IS OFTEN USED BECAUSE THERE IS NOT ENOUGH MONEY TO
PAY FIRST MORTGAGE.
IT IS A SUBORDINATE MORTGAGE DEFINED AS A LIEN
JUNIOR TO ANOTHER SENIOR LIEN (MORTGAGE). A PROPERTY WITH MULTIPLE LIENS
ON IT WOULD GO TO PAY OFF THE FIRST MORTGAGES FIRST AND SO ON. AS SECOND
AND THIRD MORTGAGES ARE TAKEN, THE RISK OF NON-PAYMENT INCREASES AND
THEREFORE THE INTEREST RATE INCREASES.
FIRST MORTGAGES MAY NOT ALLOW JUNIOR MORTGAGES TO TAKE PLACE BECAUSE THEY
ARE A NUISANCE. THEY COULD FORCE A FORECLOSURE. THE FIRST MORTGAGEE MAY
ONLY ALLOW A SECOND MORTGAGE THAT IS A CASH FLOW MORTGAGE, OR THAT WHICH
IS BASED ON A CASH FLOW AFTER PAYMENT OF THE FIRST MORTGAGE. A SECOND
CONDITION POSSIBLY PLACED ON SECOND MORTGAGES IS THAT IT BE A NONFORECLOSURE LOAN, OR IN OTHER WORDS, DEFAULT PROOF. THIS MEANS THAT WHEN
THE CASH FLOW IS NOT THERE TO PAY THE SECOND MORTGAGE, THE PRINCIPAL AND
INTEREST ACCRUES. LACK OF CASH FLOW IS NOT A PERMISSIBLE REASON FOR A
FORECLOSURE UNDER THE TERMS OF THE FIRST MORTGAGE.
END OF CLASS ELEVEN
CLASS TWELVE
11/27/90
PARTICIPATIONS (EQUITY KICKER LOAN)
A FORM OF REAL ESTATE FINANCING THAT HAS BEEN COMMONLY USED. TODAY, THEY
ARE NOT BEING USED AS MUCH AS IN THE PAST 4 TO 5 YEARS BECAUSE BORROWERS
243
ONLY GIVE UP EQUITY IN TURN FOR LARGER LOANS (THAT IS, HIGHER LTV'S) OR
LOWER INTEREST RATES. WHEN THIS IS NOT FORTHCOMING, BORROWERS WILL NOT
ACCEPT THE EQUITY KICKER.
EQUITY KICKERS CAN TAKE THE FORM OF A PERCENTAGE OF NET CASH FLOW OR NOI
PLUS A PERCENTAGE OF RESIDUAL VALUE (IE., ON SALE OR REFINANCING).
CONVERTIBLE LOANS NEED TO BE CONSTRUCTED SO AS NOT TO CREATE A TAXABLE
EVENT ON CONVERSION.
ASSUMPTIONS:
NOI, YR 1 = 100,000
INCREASE IN ANNUAL NOI = 3 PERCENT
PURCHASE PRICE = 1 MILLION
900,000 ALLOCATED TO BUILDING
100,000 ALLOCATED TO LAND
DEPRECIATION = 27.5 YEARS
ANNUAL VALUE INCREASE = 3 PERCENT
LOAN AMOUNT = 700,000
TERM = 15 YEARS
PARTICIPATION = 50% OF NOI IN EXCESS OF 100,000 PLUS 45% PARTICIPATION IN
GAIN.
ASSUME A FIVE YEAR TIME HORIZON.
***************
NOI
DEBT SERV.
CASH FLOW
PARTICPTN
YEAR ONE
YEAR TWO
YEAR THREE
100,000 103,000 106,090 109,273 112,551
80,275
80,275
80,275
YEAR FOUR
YEAR FIVE
80,275
80,275
19,275
28,998
4,636
32,276
6,275
22,275
1,500
25,815
3,045
PRETAX CF
19,275
21,225
22,270
24,362
********************************************************************
26,001
LENDER'
RETURN*
80,275
80,275
80,275
80,275
80,275
PARTICPTN
0
1500
3,045
4,636
6,275
LOAN BACK
----------------- -----551,364
PARTICPTN
------ ------------ -----71,673
----------------------------------------------------------------------700,000**
80,275
81,775
83,320
84,911
709,587
IRR = 10.07%
SALES PRICE IN YEAR FIVE AFTER COMMISSIONS = 1,159,274
MTG BALANCE = 551,364
NET = 607,910
244
CONVERTIBLE LOANS
CONVERTIBLE LOANS ARE A HYBRID OF DEBT AND EQUITY.
IT ALLOWS THE
BORROWER TO GET A LOWER INTEREST RATE AND/OR A HIGHER LTV WITH AN OPTION
TO CONVERT ALL OR A PORTION OF THE MORTGAGE TO EQUITY.
VS.
PROCEEDS = 100,000,000
TAXES = 32,000,000
CASH GAIN = 68,000,000
CONVERTIBLE
FINANCE FOR 75,000,000 AT
BELOW MARKET RATE
TAXES = 0
CASH GAIN = 75,000,000
THIS IS A 7,000,000 ADVANTAGE
245
CLASS ONE
5/21/90
DAN ZANINI
11 YEARS PRACTICE IN REAL ESTATE
SPECIALIZES IN
CONTRACTS
CLOSINGS
MORTGAGES
EXEMPTIONS
ATTORNEY AT PARKER-DURRIER
529 5TH AVENUE
STARTED OUT WITH CITY
***************************
COURSE WILL BE RUN AS IF WE WERE SELLING A SMALL OFFICE BUILDING.
WHEN HAS THE BROKER EARNED HIS FEE AND WHEN IS THE DEVELOPER OBLIGATED TO
PAY A FEE?
WHEN IS THERE IS A MEETING OF THE MINDS AS THE PARTIES AGREE TO THE
MATERIAL CONTENT OF THE CONTRACT?
THE CONTRACT PERIOD
THE BROKER PUTS THE BUYER AND THE SELLER TOGETHER. THE MEETING OF THE
MINDS IS REPRESENTED BY THE CONTRACT, ACCORDING TO THE STATUTE OF FRAUDS,
WHICH DOES NOT PERMIT REAL ESTATE TO BE SOLD WITHOUT A WRITTEN CONTRACT
OF SOME FORM.
THE CONTRACT PERIOD
THE PERIOD BETWEEN THE CLOSING AND THE CONTRACT PERIODS. THIS IS WHERE
THE SELLER'S ATTORNEY IS DOING LESS THAN THE BUYERS. HE IS GETTING THE
PROPERTY READY FOR SALE. HE GETS THE PAYOFF LETTER FROM THE MORTGAGEE
(THE BANKER). THE SELLER IS GETTING THE TITLE INSURANCE, ALTHOUGH IT IS
NOT MANDATORY BY LAW.
ONCE THE REPORT IS PRODUCED IT IS SENT TO THE
BUYER AND THE SELLER. THE BUYER'S ATTORNEY EXAMINES THE TITLE FOR LIENS
OR MORTGAGES AND DETERMINES THE NEED FOR "CLEARING THE TITLE". THE BUYER
IS ALSO WORKING TO SECURE FINANCING FOR THE PROPERTY.
A WELL WRITTEN
CONTRACT WILL HAVE A WINDOW OF TIME FOR WHEN THIS FINANCING MUST BE
SECURED BEFORE THE BUYER CAN BACK OUT OF THE DEAL. THE SECURED FINANCING
IS GUARANTEED BY A LETTER OF COMMITMENT FROM THE BANK.
THE CLOSING
THE CLOSING IS ATTENDED BY THE BROKER, BUYER, SELLER AND COUNCIL FOR BOTH
240
SIDES WITH THE TITLE COMPANY AND THE BUYER'S AND SELLER'S BANKER.
WARRANTEE DEED - "I WARRANT THAT I FULLY OWN THE PROPERTY THAT I AM
SELLING".
QUIT-CLAIM DEED - WHATEVER I HAVE I AM SELLING TO YOU, AND I MAKE NO
CLAIMS ABOUT WHAT I OWN OR THE EXTENT OF IT.
DEEDS AND MORTGAGES ARE THE RECORDS STORED AT THE COUNTY WHICH TITLE
COMPANIES EXAMINE.
A PROSPECTUS IS AN OFFERING STATEMENT
VEHICLES FOR FORMING SYNDICATES.
AND
PRIVATE
PLACEMENT
ARE
241
THIS
PRACTICAL VS.THEORETICAL
PRACTICAL.
LAW
THIS
CLASS
WILL
BE
PREDOMINANTLY
A SITUATION:
2 PARCELS, ADJOINING, EACH 5 ACRES IN SIZE.
T
H
E * A
T
L
A
N
T
I
C *
O
C
E
A
**
A "GORE" ( A DISCONTINUITY IN
*
THE SURVEY)
5 ACRES
5 ACRES
THE CLIENT APPROACHES YOU TO PREPARE A CONTRACT (THE GORE WAS AN UNKNOWN
FACTOR AT THIS TIME). HE THOUGHT HE BOUGHT TWO TRACTS WITH A CONTINUOUS
AND UNBROKEN COMMON BORDER. HE DISCOVERS LATER THAT THE SPOT HE WANTS TO
BUILD HIS HOUSE ON IS OWNED BY SOMEONE ELSE. WHAT DID YOU NEED TO AVOID
THIS ERROR?
YOU NEED A CERTIFIED SURVEY, OR A SURVEY UPDATE.
YOU COULD HAVE ALSO GOTTEN AFFIRMATIVE INSURANCE OF CONTIGUITY - WHICH
GUARANTEES THAT ALL POINTS BETWEEN TWO PROPERTIES ARE CONTIGUOUS. BOUGHT
FROM THE TITLE AND GUARANTEE COMPANY.
THIS COULD GUARANTEE THAT IN THE
EVENT IT IS NOT TRUE, THE TITLE COMPANY WILL BUY THE DEAL OR BUY THE GORE
TO MAKE THE PIECE CONTIGUOUS.
*********************
LEGAL ISSUES IN REAL ESTATE
2 TYPES OF LAW:
STATUTORY LAW; A CREATURE OF STATUTE, COMING FROM THE 3 LEVELS OF
GOVERNMENT.
FEDERAL: CONDO & COOP ABUSE ACT
ENVIRONMENTAL LAWS
INTERCOASTAL WATERWAYS
BANKING
STATE:
REAL PROPERTY LAW
REAL PROPERTY ACTIONS AND PROCEEDINGS LAW
MULTIPLE DWELLING LAW
242
LOCAL:
ZONING
BUILDING CODE
NOT
COVERED
EXPLICITLY
BY
PAGE NUMBER
2ND SERIES
(UNOFFICIAL CITE)
VOLUME NUMBER
PAGE NUMBER
2ND SERIES
COURT OF APPEALS
VOLUME NUMBER
AD = APPELLATE DIVISION
NY = COURT OF APPEALS
IN A REFERENCE CALLED McKINNEY'S, CONSOLIDATED LAW EDITION YOU CAN FIND
INFORMATION CLASSIFIED BY LEGAL TOPIC AND HISTORY.
IE.
MDL SEC.701
NEW YORK CITY HAS LAWS THAT ARE BASED ON THE NEW YORK CITY ADMINISTRATIVE
CODE.
243
SELL IT
MORTGAGE IT
AND PLEDGE IT
WITHIN THE CONFINES OF THE LAW.
LEASEHOLD INTEREST - A PARTIAL INTEREST IN THE PROPERTY.
MORTGAGE INTEREST - THE BANK'S INTEREST IN YOUR PROPERTY.
SECURITY OR COLLATERAL INTEREST AS A GUARANTEE FOR THE LOAN.
IT IS A
EASEMENT- THE RIGHT TO USE SOMEONE ELSE'S LAND FOR A SPECIFIC PURPOSE.
EASEMENT OF NECESSITY - A LANDLOCKED PIECE OF LAND FOR EXAMPLE, HAS A
RIGHT TO ACCESS A ROAD OVER SOMEONE ELSE'S LAND.
LICENSE - THE CRITERIA:
AUTHORIZES YOU TO SPEND A TIME ON A PROPERTY AND AFFECT IT WHILE
PERFORMING A SPECIFIED PURPOSE. THEY ARE SHORT-TERM, WHICH DISTINGUISHES
THEM FROM AN EASEMENT.
EASEMENT BY PRESCRIPTION - A COURSE OF CONDUCT DISCLOSED TO ALL WHICH
TURNS INTO AN EASEMENT.
ADVERSE POSSESSION - YOU HAVE TREATED A PROPERTY AS YOUR OWN FOR 10
YEARS, PAID TAXES ON IT, ARE NOT A RELATIVE OF THE OWNER, YOU CAN
ESTABLISH OWNERSHIP OF THE PROPERTY BY BRINGING A QUIET TITLE ACTION.
FIXTURES- PART OF THE PROPERTY, TRAVELS WITH THE PROPERTY AND IS UTILIZED
IN THE USE OF THE PROPERTY. THEY ARE PART OF THE REAL ESTATE IF THEY
WERE INTENDED TO BE PERMANENTLY ATTACHED.
TEST:
244
1. HOW ATTACHED?
A. PERMANENT
B. TEMPORARY
2. CHARACTERISTIC OF THE ITEM (IE. PIPING VS. VENETIAN BLINDS)
3. WHAT IS INTENDED BY THE CONTRACT?
END OF CLASS ONE
CLASS TWO
6/4/90
A DESCRIPTION IN A DEED MUST BE CORRECT.
IN A CONTRACT IT IS NOT
ABSOLUTELY MANDATORY. ASK FOR A COPY OF THE TITLE REPORT AND DEED THE
SELLER RECEIVED WHEN HE BOUGHT IT.
LOOK AT THE TITLE REPORT FOR
EASEMENTS OR ENCUMBRANCES WHICH SHOULD BE REFLECTED IN THE CONTRACT,
BECAUSE THE PROPERTY IS BEING SOLD SUBJECT TO THEM.
SHOULD NOT SAY IN CONVEYANCE OF A DEED, "I AM SELLING TO YOU THE LOWER
SOUTHWEST OF THE PROPERTY" SINCE THIS IS NOT ANYWHERE NEAR SPECIFIC
ENOUGH TO DELINEATE WHICH PROPERTY OR PORTION OF IT IS BEING SOLD.
METE = MEASURE OF DISTANCE
BOUND = BOUNDARY
**********
FIRST PAGE OF A DEED AND A SURVEY PASSED OUT FOR CLASS DISCUSSION.
*********
HOW TO READ A SURVEY
1. FIND A NORTH ARROW
2. COMPARE THE METES AND BOUNDS TO THE SURVEY, COURSE BY COURSE.
RULES OF THUMB:
IF A SURVEY IS LESS THAN 8 YEARS OLD IT CAN BE UPDATED.
IF YOU WANT TO MORTGAGE THE PROPERTY, YOU MAY HAVE TO GET A SURVEY
INSPECTION, WHICH IS COMPRISED OF A SITE INSPECTION AND REPORT COMPARISON
BETWEEN THE TWO. AT A MINIMUM, THE BANK WILL REQUIRE AT LEAST THIS.
THE SECOND WAY TO DESCRIBE A PROPERTY IS WITH REFERENCE TO A FILED MAP OR
PLOT PLAN. TITLE COMPANIES OFTEN PREFER THIS TO METES AND BOUNDS.
A CORRECTION DEED -- IF A MINOR PROBLEM SHOWS
YOU CAN FILE A CORRECTION DEED.
UP IN A DEED AS
AN ERROR,
STREET ADDRESSES IN A CONTRACT MAY BE USEABLE, BUT THEY ARE NOT ADEQUATE
245
THEY
5
4
3
2
PERCENT
PERCENT
PERCENT
PERCENT
OF
OF
OF
OF
YEAR
YEAR
YEAR
YEAR
ONE'S RENT
TWO'S AND THREE'S RENT
FOUR AND FIVE'S RENT
SIX THROUGH TEN'S RENT
IN A RESIDENTIAL DEAL YOU PAY AT THE CLOSING, AND PAYMENTS ARE USUALLY
CUT AND DRY, AND NOT SUBJECT TO NEGOTIATION.
A BROKER MAY SPLIT A COMMISSION WITH A BUYER, AS A FUNCTION OF THE SALE.
HE MAY NOT SPLIT IT WITH A NON-BROKER BECAUSE THE STATE NEEDS TO PROTECT
THE WELFARE OF THE PUBLIC AND NEEDS TO POINT TO A RESPONSIBLE
PROFESSIONAL FOR RECOMPENSE SHOULD SOMETHING GO WRONG.
WHEN A BUYER HIRES A BROKER, THE SELLER IS NOT RESPONSIBLE FOR FEES TO
THE BROKER, UNLESS HE AGREED TO THIS BY CONTRACT.
246
WHEN A BROKER APPROACHES A SELLER WITH A BUYER, AND THE SELLER ACCEPTS
THE BUYER, HE IS OBLIGATED TO PAY THE BROKER EVEN THOUGH HE HAS NO
CONTRACT WITH THE BROKER.
******************
BROKER CONTRACTS
******************
1.
2.
3.
4.
5.
MOST
OPEN
THAN
SELL
EXCLUSIVE AGENCY LISTING - HIRE ONLY ONE BROKER AND YOU MAY TRY TO SELL
IT ON YOUR OWN ALSO. YOU MAY NOT HIRE ANOTHER BROKER, SINCE IF YOU DO
YOU WILL OWE TWO COMMISSIONS; TO THE BROKER YOU HIRED AND THE ONE WHO
SOLD THE PROPERTY.
EXCLUSIVE RIGHT TO SELL - THE ARRANGEMENT MOST BROKERS INSIST ON.
NEITHER YOU OR ANYONE ELSE MAY SELL THE UNIT.
THE BROKER GETS PAID
REGARDLESS OF WHO FINDS THE BUYER.
EXCEPTIONS - I HAVE HAD FOR SALE AND SHOWN TO THESE PEOPLE, X,Y, AND Z.
THEY, IF THEY BUY, WILL NOT BE A REASON TO GIVE A COMMISSION.
MULTIPLE LISTING SERVICES- A GROUP OF LISTINGS PUT TOGETHER BY AN
INDEPENDENT AGENCY FOR A PARTICULAR AREA.
IT IS A POOL WHERE MEMBERS
THROW THEIR LISTINGS INTO THE POOL AND THE INFORMATION IS AVAILABLE TO
ALL WHO ARE MEMBERS.
IN THIS INSTANCE YOU WILL ARRIVE AT THE "SPLIT
COMMISSION"
SITUATION.
THE VARIOUS BROKERS INVOLVED IN A DEAL WILL
SPLIT THE COMMISSION BASED ON TRADITIONAL PRACTICES.
FROM A LEGAL
STANDPOINT, THE PARTY WHO CAN BRING ACTION IS THE LISTING BROKER. THE
SELLING AGENT CAN NOT SUE THE OWNER, BUT MUST SUE THE LISTING BROKER TO
COLLECT HIS COMMISSION IF IT IS NOT PAID.
"READY, WILLING, AND ABLE" - A BUYER WHO WILL PURCHASE ON THE SELLER'S
TERMS. WHEN A BROKER PROCURES THIS BUYER, THE COMMISSION IS EARNED. TO
CHANGE THIS ASSUMPTION, YOU MUST CHANGE THE CONTRACT TO READ "EARNED AT
CLOSING". YOU DO NOT WANT TO PAY A COMMISSION UNLESS THE DEAL CLOSES.
***************
THE BINDER
***************
IF YOU ARE A SELLER, STEER CLEAR OF A BINDER.
247
PROBABLY CAN NOT EXPLAIN IN TERMS OF LAW WHAT YOU HAVE DONE. THE PROBLEM
IS THAT THEY OUGHT TO BE CONTRACTS, YET BY DEFINITION, THEY FALL SHORT OF
THE MARK BECAUSE IT INCORPORATES A "SUBJECT TO" CLAUSE.
YOU DO NOT HAVE A BINDING CONTRACT. THE ONLY PEOPLE WHO LIKE BINDERS ARE
BROKERS, WHO SEE IT AS "THE MEETING OF THE MINDS" AND PROOF OF BRINGING A
BUYER "READY, WILLING AND ABLE".
IF YOU ARE A BUYER, BINDERS SHOULD BE SUBJECT TO TERMS TO BE NEGOTIATED.
IF YOU ARE A SELLER, LIMIT THE TIME OF THE BINDER'S EFFECT.
THE FACT THAT THERE IS A "SUBJECT TO" CLAUSE MEANS THAT THE BINDER IS NOT
A CONTRACT.
"WILLING" - WILLING TO SIGN AN UNCONDITIONAL CONTRACT ENFORCEABLE AGAINST
THE BUYER AND PURSUANT TO WHICH THE BUYER WILL PAY ALL CASH.
"ABLE" - FINANCIALLY ABLE - FUNDS ARE "IN HAND" OR HAVE BEEN ARRANGED.
PURCHASE IS NOT CONDITIONED ON A MORTGAGE. IF THE DEAL IS CONTINGENT ON
THE BUYER SECURING THE MORTGAGE, THEN IF THE CONTINGENCY IS NOT
SATISFIED, THEN THE BROKER IS NOT ENTITLED TO A COMMISSION.
THE CONTINGENCY CLAUSE MUST BE CLEAR AS TO WHAT THE OBLIGATION OF THE
BUYER AND SELLER TO EACH OTHER IS, WITH LIMITATIONS AS TO TIME, THE
AMOUNT OF THE MORTGAGE, AND THE INTEREST RATE THE PURCHASER MUST ACCEPT,
ETC.
AFFIDAVIT OF ENTITLEMENT - A STATUTORY LAW, SECTION 440 OF THE REAL
PROPERTY LAW;294B CREATES A MECHANISM WHEREBY A BROKER CAN ENCUMBER THE
PROPERTY, STAKING A CLAIM TO MONEY FOR A COMMISSION FROM THE SALE OF A
BUILDING. IT IS NOT A LIEN AGAINST THE PROPERTY, BUT AN ENCUMBRANCE.
LEASING BROKERS HAVE AN ADDITIONAL LIEN RIGHT AS OF 1982 UNDER SECTION ??
WHICH REGARDS THE COMMISSION AS AN IMPROVEMENT ON THE PROPERTY.
YOU NEED:
1. WRITTEN BROKERAGE CONTRACT (IN THIS CASE, IT IS NECESSARY)
2. APPLIES ONLY TO A COMMERCIAL PROPERTY.
3. LEASE IN QUESTION MUST BE FOR MORE THAN 3 YEARS.
4. LEASE MUST BE SIGNED AND EXCHANGED.
LIEN - A TYPE OF ENCUMBRANCE
THE DIFFERENCE BETWEEN A LIEN AND A SIMPLE ENCUMBRANCE IS THAT A LIEN IS
ENFORCEABLE. IN A LIEN, SUCH AS A MORTGAGE, FORECLOSURE MAY TAKE PLACE
TO ENFORCE THE AGREEMENT.
BUYER DOES NOT SIGN THE CONTRACT BUT IS INTRODUCED DURING THE LISTING
AGREEMENT WITH THE BROKER.
DOES THE BROKER EARN A COMMISSION?
PUT A
CLAUSE CALLED A SUNSET AGREEMENT IN THE CONTRACT OF BROKERAGE WHICH FOR A
248
PERIOD OF TIME, SAY 30 TO 60 DAYS, COVERS "WHAT HAPPENS" DURING THIS TIME
IN SUCH INSTANCES.
THE BASIC DUTIES OF THE BROKER CAN BE SUMMARIZED AS FOLLOWS:
1. MAKE A GOOD FAITH EFFORT AT SELLING PROPERTY.
2. REPRESENT INFORMATION ACCURATELY AND COMPLETELY.
IF
REPRESENTATION IS FALSE, THE BROKER MAY BE LIABLE FOR DAMAGES TO
THE
BUYER, AND WILL NOT GET A COMMISSION.
NYBTU FORM 8041 HANDED OUT (CONTRACT OF SALE)
MEETING OF THE MINDS ACHIEVED.....WE WANT TO FORMALIZE THE AGREEMENT.
FOR A CONTRACT OF SALE OF PROPERTY TO BE VALID, IT MUST BE IN WRITING.
THE SELLER CALLS THE ATTORNEY AND SAYS " I HAVE A BUYER". ATTORNEY FOR
THE SELLER USUALLY PREPARES THE CONTRACT. HE REQUIRES THE TITLE AND THE
DEED.
MUST BE IN WRITING
MUST HAVE BUYER AND SELLER'S SIGNATURES
DESCRIPTION OF WHAT IS BEING SOLD
CONSIDERATION
249
THIS IS AN IMPORTANT
250
DOING.
PREPARE A CHECKLIST.
DETAILS.
****************
PROPERTY A
PROP'TY
FOR THIS
251
ALL
THE
THE
THE
252
253
254
THE
PARAGRAPH 27 - MEANINGLESS
LAST PAGE
SIGNATURE MUST BE ACKNOWLEDGED IF RECORDED. IF THE DOCUMENT IS NOT TO BE
RECORDED, THIS IS NOT NECESSARY. GENERALLY, RECORDING IS NOT DONE IN
PRACTICE.
255
256
257
258
PREMIUM OF APPROXIMATELY 7,500 TO 8,000 DOLLARS. YOU ARE PAYING FOR THE
PREMIUM FOR INSURANCE IF THE DEAL CLOSES, AND IF NOT, FOR A TITLE REPORT
THAT THE COMPANY WENT THROUGH AND EXAMINED.
THE TITLE REPORT WILL STATE AND CERTIFY THE TITLE IN A PARTICULAR PERSON
OR ENTITY. IF THIS IS NOT THE PERSON YOU SIGNED A CONTRACT WITH, BELLS
AND WHISTLES SHOULD GO OFF. IT ALSO SAYS "WHAT THE STATUS OF THE TITLE
IS" IN SCHEDULE B OF THE REPORT, WHICH LISTS EVERY RECORDED ENCUMBRANCE
SUCH AS MORTGAGES AND LIENS, JUDGEMENTS, TAX LIENS, MECHANICS' LIENS,
TRAFFIC SUMMONSES, COMMON WALL AGREEMENTS, EASEMENTS, RIGHTS OF WAY, ETC.
THE NEXT PAGE IS THE MORTGAGE SCHEDULE. THEY WILL IDENTIFY THE MORTGAGE
BY BANK, THE NAME OF THE BORROWER, AND THE AMOUNT OF THE MORTGAGE AND
POSSIBLE THE TAX PAID. IF WILL SAY IF THE MORTGAGE WAS CONSOLIDATED OR
TAKEN OVER BY ANOTHER BANK.
IT WILL MAKE REFERENCE TO A SURVEY OR SURVEY READING.
A VIOLATIONS
SEARCH MAY BE PART OF THE TITLE SEARCH. A SEPARATE COMPANY WILL DO THIS.
IT TELLS YOU WHO OWNS THE PROPERTY AND WHAT THE STATUS OF THE TITLE IS.
SCHEDULE "B" ISSUES AS TO THE SELLER:
YOU HAVE TO DETERMINE WHICH ELEMENTS NEED TO BE CLEANED UP, IE. THOSE
ELEMENTS NOT IN THE "SUBJECT TO" CATEGORY OF THE CONTRACT. MORTGAGES ARE
PAID OFF AT THE CLOSING (GET PAYOFF LETTERS).
EVERYTHING IN SCHEDULE B IS AN EXCEPTION TO THE TITLE. THE TITLE COMPANY
IS ENSURING THE TITLE UNENCUMBERED EXCEPT FOR THE ITEMS IN SCHEDULE B.
AS SELLER YOU MUST HAVE THE TITLE SEARCH "OMIT" THESE EXCEPTIONS AS THEY
ARE ADDRESSED. THE CLOSER (THE TITLE COMPANY) WRITES "OMIT" OR "EXCEPT"
ON EACH ITEM AS HE IS SATISFIED WITH THE HANDLING OF THE EXCEPTIONS.
MARKET VALUE RIDER AS VALUE OF THE PROPERTY INCREASES, FOR A 10
PERCENT PREMIUM WILL INSURE THE INCREASING VALUE.
NEW YORK IS A TORRENS STATE.
THE RECORDER EXAMINES THE DEED FOR
VALIDITY.. ARTICLE 12 OF THE REAL PROPERTY LAW. REGISTRATION OF TITLE
AS OPPOSED TO RECORDING.
CLOSING DOCUMENTS ON CHECKLIST:
IN ADDITION TO THE:
TITLE REPORT
DEED
THERE ARE THE TRANSFER TAX FORMS:
THE NYCRPT: THE NEW YORK CITY REAL PROPERTY TRANSFER TAX.
THE COMBINED N.Y.S. TRANSFER TAX AFFIDAVIT
259
THAT
EXCEPTIONS
ON
THE
TITLE
260
ARE
NOT
VALID
AND
SHOULD
BE
LEGAL RESEARCH
***************
3 BASIC SOURCES
1. CASE LAW
261
A. UNOFFICIAL REPORTS
B. OFFICIAL REPORTS
2. STATUTES
A. McKINNEY'S
3. TREATISES
A. LAW REVIEW
B. AMERICAN LAW REVIEW
A PRIVATE COMPANY COMPILING ARTICLES ON DIFFERENT TYPES OF
LAW
C. MATTHEW BENDER
REAL ACTION PROPERTY AND PROCEEDINGS LAW
SUBSTANTIVE TEXTS IN REAL ESTATE LAW
THE WARRENS, WEED TREATISE ON REAL PROPERTY LAW
D. CORPUS JURIS SECUNDUM (CJS) ENCYCLOPEDIA OF LAW
STATUTES - THE CODIFICATION OF LAWS PASSED BY THE FEDERAL, STATE, AND
CITY GOVERNMENTS.
ONCE LEGISLATED, THEY ARE CODIFIED BY CATEGORY IN
McKINNEY'S, BUT IN ADDITION THEY HAVE AN AUTHOR TO COMMENT ON IT. ALSO
CASES THAT CITE THE LAW ARE LISTED AFTER THE SECTION COMMENTARY.
THROUGH ANALYSIS OF THE CASE LAW AND THE STATUTE YOU CAN GET A GOOD IDEA
AS TO HOW THE LAW APPLIES.
NEW YORK STATE CODES FOUND IN McKINNEY'S
NEW YORK CITY CODES FOUND IN ADMINISTRATIVE CODE, WHICH INCLUDE THE REAL
ESTATE TAX LAWS AND THE BUILDING CODES.
FEDERAL LAW CODES ARE FOUND IN THE U.S. CODE ANNOTATED
YOU DO CITE SECTIONS, YOU DO NOT CITE ARTICLES.
A CITE MIGHT BE, FOR
EXAMPLE, REAL PROPERTY LAW OF THE STATE OF NEW YORK (STATUTE), ARTICLE 12
(TORRENS LAW), SECTION 12.04 (QUIET TITLE CLAIMS). THE PARENTHETICALLY
MENTIONED PARTS OF THE ABOVE EXAMPLE WOULD BE EXCLUDED FROM THE CITE, AND
ARE SHOWN FOR INSTRUCTIONAL PURPOSES ONLY.
REFER TO QUIET TITLE CLAIMS AS SECTION 12.04 OF THE REAL PROPERTY LAW OF
THE STATE OF NEW YORK, FOR EXAMPLE.
EVERY YEAR A "POCKET PART" INCLUDING AMENDMENTS, IF ANY, ARE PRODUCED AND
PLACED IN A POCKET BOUND INTO THE BINDER OF THE VOLUME OF LAW. IF YOU
KNOW THE SECTION YOU ARE LOOKING FOR, SEEK THE POCKET PART IMMEDIATELY,
SINCE THE OLD LAW IS OF NOW USE. ONCE YOU HAVE REFERRED TO THE POCKET
PART, REFER TO THE TEXT FOR ANNOTATIONS, OR UNMODIFIED LAW IF NOT FOUND
IN THE POCKET PART.
SEE DISCUSSIONS ON SHEPHERDING IN LECTURE ONE NOTES.
CASE LAW
***********
262
FOUR
WORD
INDEX
(IE.
LEASE
263
THE CROWN JEWEL OF CLOSING DOCUMENTS IS THE DEED (OF SALE). IT IS THE
WRITTEN DOCUMENT PURSUANT TO WHICH LAND IS TRANSFERRED.
THERE ARE
BASICALLY THREE TYPES. IN REVERSE ORDER OF QUALITY (LEAST TO MOST
RELIABLE) THEY ARE:
1. THE QUITCLAIM DEED
2. A BARGAIN AND SALE DEED WITH COVENANTS
AND A BARGAIN AND SALE DEED WITHOUT COVENANTS
3. THE WARRANTEE DEED
QUITCLAIM DEEDS CONVEY THE GRANTORS PRESENT INTEREST IN THE LAND, IF ANY.
IT IS USED WHERE THE SELLER EITHER DOES NOT KNOW IF THEY HAVE GOOD TITLE,
OR IF THEY KNOW THEY DO NOT HAVE GOOD TITLE. IN OTHER WORDS, REGARDLESS
OF KNOWLEDGE TO THE FAVOR OR AGAINST, THE OWNER IS CONVEYING WHATEVER
THEY OWN, LOCK, STOCK, AND BARREL. IT PURPORTS TO DEED PROPERTY NOT JUST
AN INTEREST IN PROPERTY.
WARRANTEE DEED - ASSURANCES BY THE GRANTOR THAT HE IS CONVEYING GOOD AND
UNENCUMBERED TITLE.
THE COVENANTS WOULD STIPULATE:
1. THE COVENANT OF SEIZIN IS PRESENTED STATING THAT LAND HAS NOT
BEEN SEIZED.
2. THE COVENANT OF NO ENCUMBRANCES, EXCEPT FOR WHAT IS RECITED IN
THE DEED ITSELF.
3. THE COVENANT OF QUIET ENJOYMENT - THE GRANTEE WILL NOT BE
DISTURBED IN THEIR INTEREST BY ANYBODY.
BARGAIN AND SALE DEED WITHOUT COVENANTS - CONVEYED FREE AND CLEAR.
THERE ARE SEVEN ELEMENTS TO A DEED.
THEY ARE:
1. A COMPETENT GRANTOR
LEGAL AGE
OF SOUND MIND
2. A GRANTEE
MUST BE IDENTIFIED SOMEHOW, GOOD ENOUGH TO PLACE TITLE.
3. CONSIDERATION
HOW MUCH MONEY WAS SPENT. THE PRACTICE, FOR THE SAKE OF PRIVACY,
IS TO SAY "FOR THE SUM OF TEN DOLLARS GOOD AND VALUABLE
CONSIDERATION".
IT IS NOT IMPORTANT FOR THIS TO BE EXACT, EXCEPT WHEN YOU HAVE AN
EXECUTOR TRANSFERRING TO A BENEFICIARY.
4. WORDS OF CONVEYANCE
IE. I HEREBY SELL SO AND SO TO YOU.
5. A DESCRIPTION OF THE PROPERTY.
6. SIGNED BY THE GRANTOR.
7. DELIVERY OF THE DEED FROM THE GRANTOR TO THE GRANTEE.
264
WHEN YOU HAVE "JOHN JONES AND MARY SMITH" WHO ARE MARRIED, THEY MAY TAKE
TENANCY BY THE ENTIRETY. IF THEY ARE MARRIED BUT DO NOT HAVE THE TENANCY
BY THE ENTIRETY STATEMENT IN THE DEED, MOST STATES HOLD THAT THEY ARE
TENANTS IN COMMON. NEW YORK IS DIFFERENT. HERE THEY ASSUME THAT THEY
TAKE POSSESSION AS JOINT TENANTS (WITH THE RIGHT OF SURVIVORSHIP), NOT
TENANTS IN COMMON.
A MORTGAGE IS THE CONVEYANCE OF LAND IN ORDER TO SECURE THE REPAYMENT OF
A DEBT. WHERE THIS IS TRUE, THE LAND IS SOLD SUBJECT TO THE REPAYMENT OF
THE DEBT. IN THESE STATES, FOR THIS REASON, YOU MORE ACCURATELY CONVEY A
DEED OF TRUST. "DEED" BECAUSE AN INTEREST IN THE PROPERTY IS CONVEYED,
AND "TRUST" BECAUSE THAT INTEREST IS HELD IN TRUST.
LIEN THEORY STATES - A STATE THAT HOLDS THAT A MORTGAGE IS A LIEN TO
INSURE REPAYMENT OF A DEBT.
TITLE THEORY STATES - A STATE THAT HOLDS THAT A MORTGAGE IS A TITLE
ACTUALLY CONVEYING A TITLE INTEREST IN THE PROPERTY TO THE MORTGAGEE.
NEW YORK IS A LIEN THEORY STATE.
WITH A MORTGAGE, YOU STOP JUST SHORT OF GIVING THE PROPERTY AWAY TO THE
BANK.
IN A LIEN THEORY STATE, YOU GIVE THEM HUGE RIGHTS TO THE PROPERTY AS
OPPOSED TO THE TITLE.
265
LOAN APPLICATIONS
ON PAGE 284 OF THE TEXT THERE IS A COPY OF A LOAN APPLICATION
THE REASON MOST APPLICATIONS ARE IDENTICAL IS THAT USUALLY THEY ARE
TRANSFERRED TO THE SECONDARY MORTGAGE MARKET.
THE SECONDARY MORTGAGE
MARKET IS A MARKET OF QUASI-GOVERNMENTAL AGENCIES THAT BUY MORTGAGES FROM
BANKS THAT WANT TO "UNLOAD" THEIR MORTGAGE PORTFOLIOS. THEY DO THIS BY
SELLING THE "PAPER" TO THE SECONDARY MARKET, MAKE THEIR MONEY IN POINTS,
ETC, AND GETTING MONEY TO RELEND FOR OTHER LOANS. THE STANDARDIZED FORMS
ARE USED TO EASE THE SALE OF THE MORTGAGES ON THE SECONDARY MARKET.
THE APPLICATION IS THE OFFER.
THE COMMITMENT IS THE ACCEPTANCE.
THIS MEANS THAT THE COMMITMENT IS ENFORCEABLE,A ND THE BANK CAN BE SUED
IF THEY BALK AT THE LOAN AFTER GIVING IT. THE COMMITMENT IS VIRTUALLY AS
IMPORTANT AS ANY OTHER CLOSING DOCUMENTS. THE COMMITMENT WILL COVER THE
BASICS OF THE LOAN, I.E. INTEREST RATE, AND TERM, BUT ALSO SUBSTANTIVE
POINTS SUCH AS WHETHER THE LOAN WILL BE EXCULPATORY, WHICH MEANS THAT THE
MORTGAGEE MAY LOOK ONLY TO THE PROPERTY FOR REPAYMENT IN THE EVENT OF
FORECLOSURE, AND NOT TO THE BORROWER'S OTHER ASSETS. THIS IS ALSO CALL A
NON-RECOURSE LOAN PROVISION.
WHEN THE BORROWER GETS A MORTGAGE HE SIGNS A MORTGAGE AND A NOTE. THE
NOTE IS A SPERATE DOCUMENT CREATING A SEPARATE AND PERSONAL LIABILITY FOR
THE REPAYMENT OF THE LOAN.
THIS MEANS THAT SUBJECT TO AN EXCULPATION
CLAUSE, THE BANK CAN SAY "WE DO NOT WANT THE HASSLE OF SELLING THE
PROPERTY TO REGAIN OUR INTEREST, WE ARE SUING YOU THE MORTGAGEE DIRECTLY
FOR THE MORTGAGE MONEY YOU BORROWED FROM US". IF YOU HAVE AN EXCULPATION
CLAUSE, YOU ARE DISALLOWING THE BANK THIS OPTION. IT IS A COMPLICATED
PROVISION BECAUSE THE QUESTION IS NOT WHETHER THE LOAN IS EXCULPATORY,
BUT WHEN IT IS EXCULPATORY. ONCE YOU GET BEYOND THE THRESHOLD OF WHEN IT
IS EXCULPATORY, YOU MUST DECIDE WHEN IT IS NOT.
TYPICAL "SUBJECT TO" PROVISIONS IN AN EXCULPATION CLAUSE ARE :
1. WILLFUL MISREPRESENTATIONS OF THE BORROWER
2. IF THERE IS AN ENVIRONMENTAL PROBLEM
EXCULPATION WILL NOT EXTEND TO COVER THE
LIABILITIES IN
CLEANING UP THE MESS.
266
THE NOTE CREATES THE LIABILITY, AND EVEN WHEN AN EXCULPATION CLAUSE WITH
ADDITIONAL "SUBJECT TO" CLAUSES EXISTS, IS HELPFUL IN PROVING THAT THERE
IS A LIABILITY EVEN THOUGH THE NOTE WOULD NOT HELP TO CREATE PERSONAL
LIABILITY IN THIS CASE.
IN OTHER WORDS, THE MORTGAGE CREATES THE
SECURITY IN THE PROPERTY, AND THE NOTE CREATES THE LIABILITY FOR
REPAYMENT OF THE MORTGAGE.
PREPAYMENT CLAUSE
TWO CLAUSES THAT DOVETAIL : THE PREPAYMENT CLAUSE AND THE DUE ON SALE
CLAUSE.
ASSUME THE FOLLOWING CASE:
1. THAT THERE IS NO ASSIGNABILITY ( THAT THE LOAN IS NOT ASSUMABLE AND
THEREFORE IS DUE ON SALE ).
2. THAT PREPAYMENT IS NOT PERMITTED.
IN THE ABOVE CASE, YOU HAVE BEEN PAINTED INTO A CORNER. THE BANK SAYS YOU
CAN NOT SELL THE PROPERTY BECAUSE YOU CAN NOT PREPAY. YET SELLING THE
PROPERTY WILL BRING THE MORTGAGE DUE, CAUSING YOU TO PREPAY. THIS "BOX"
USUALLY PLAYS OUT BY RENEGOTIATING THE LOAN AND PAYING STIFF PENALTIES BY
PROVIDING STEEP DISCOUNTS TO THE BANK.
OFTENTIMES, THE YIELD MAINTENANCE FORMULA WILL BE PART OF THE COMMITMENT,
ALLOWING PREPAYMENT IF THE YIELD IS REIMBURSED, BASED UPON THE
DIFFERENTIAL BETWEEN PRESALE AND FULL TERM.
267
SATISFACTION - A LETTER FROM THE BANK SAYING THAT THE LOAN HAS BEEN PAID
AND IS "HISTORY". IF YOU ARE A MORTGAGOR, SOMETIMES YOU WILL PREFER AN
"ASSIGNMENT". IN OTHER WORDS, INSTEAD OF TERMINATING THE MORTGAGE, THE
MORTGAGOR PAYS OFF THE MORTGAGE AND ASKS THE MORTGAGEE TO ASSIGN THE
MORTGAGE TO A NEW MORTGAGEE, WHICH COULD EVEN BE ANOTHER SUBSIDIARY OF
THE MORTGAGOR'S COMPANY.
THIS IS DONE TO SAVE THE MORTGAGE RECORDING
TAX. WHEN MORTGAGES EXCEED 500,000 DOLLARS, THE MORTGAGE RECORDING TAX
IS 2.5 PERCENT OF THE MORTGAGE AMOUNT. YOU MAY SAVE THE MORTGAGE TAX ON
THE PORTION OF THE MORTGAGE THAT IS ASSIGNED, ACCORDING TO SECTION 255 OF
THE NEW YORK STATE TAX LAW.
IE. 500,000 1ST MORTGAGE TODAY
268
269
270
ALSO CALLED
271
MORTGAGOR, NOT
THE BANK
(EXCEPT WHEN
A CONSOLIDATION
272
273
274
MORE EXPENSIVE SINCE THERE ARE MORE MIDDLE-MEN TAKING A CUT, THEY HAVE
TO MEET TOUGHER SELLING REQUIREMENTS ON THE SECONDARY MARKET, OR THE
FUNDING COMPANY CAN NOT FIND THE MONEY. IN THE LAST CASE, YOU WILL NOT
BE ABLE TO CLOSE AS SCHEDULED. ALWAYS ASK WHETHER THE FUNDING COMPANY IS
LENDING THEIR OWN MONEY. IF NOT, DO NOT USE THEM.
ADJUSTABLE RATE MORTGAGE - ADJUSTED PERIODICALLY BASED ON A MARGIN ADDED
TO AN INDEX SUCH AS A 1 YEAR T-BILL. ADJUSTMENT LIMITED BY A CAP ON THE
ANNUAL INCREASE, SUCH AS 2%, AND A MAXIMUM CAP, SAY 5%, OVER THE LIFE OF
THE LOAN. ADJUSTABLE RATE LOANS USUALLY HAVE LOW INTRODUCTORY RATES, AND
IS USEFUL FOR SHORT TERM LOANS. DECISIONS TO TAKE AN ARM BASED UPON WHAT
YOU CAN AFFORD TO PAY, WHETHER RATES ARE GOING UPWARD OR DOWNWARD, AND
HOW LONG YOU WILL BE IN THE PROPERTY.
NEGATIVE AMORTIZATION MORTGAGE - THERE IS AN UPWARD TREND IN INTEREST
RATE COUPLED WITH A FIXED MONTHLY PAYMENT.
THE MARGIN IS ADDED TO THE
PRINCIPAL PORTION OF THE LOAN, AND IS PAID AT THE END.
BECAUSE THE
PRINCIPAL PORTION GETS LARGER RATHER THAN SMALLER, THE LOAN IS CONSIDERED
TO NEGATIVELY AMORTIZE.
VARIABLE RATE MORTGAGE - SIMILAR TO ADJUSTABLE RATE MORTGAGE. PRIMARILY
FOR COMMERCIAL LOANS. RATES ARE NOT LINKED TO AN INDEX SUCH AS THE TBILLS, BUT IS LINKED TO THE PRIME RATE. DOES NOT HAVE ANY CAPS. OFTEN
HAS A SLIDING SCALE PREPAYMENT PENALTY.
IE. GIVEN A TEN YEAR LOAN, WITH TYPICAL PREPAYMENT PENALTIES.
YEAR ONE, 4%; YEAR TWO, 3%; YEAR THREE, 2%; YEAR FOUR, 1%; YEAR FIVE, 0%;
YEAR SIX, 4%; YEAR SEVEN, 3%; YEAR EIGHT, 2%; YEAR NINE, 1%; YEAR TEN,
0%.
ROLLOVER MORTGAGE - FOR EXAMPLE, HAS A FAIRLY SHORT MATURITY ON THE SHORT
TERM, SUCH AS FIVE YEARS, WITH AMORTIZATION CALCULATED AT SAY, 30 YEARS.
WILL HAVE A BALLOON PAYMENT AT THE END OF THE TERM.
BALLOON PAYMENT - THE LAST PAYMENT ON A LOAN, SUCH AS IN A ROLLOVER
MORTGAGE, THAT IS THE PORTION OF THE PRINCIPAL REMAINING UNPAID AT THE
END OF THE TERM.
REVERSE MORTGAGE - NEW YORK DOES NOT ALLOW ADJUSTABLE REVERSE MORTGAGES.
THE BANK GIVES THE OWNER PAYMENTS THAT REDUCE THE PRINCIPAL EQUITY.
PARTNERSHIP - AN ENTITY TYPICALLY CONSISTING OF ONE OR MORE GENERAL
PARTNERS WHO MANAGE A PARTNERSHIP, AND SEVERAL LIMITED PARTNERS WHO DO
NOT MANAGE.
A PROSPECTUS IS A DISCLOSURE DOCUMENT FILED WITH THE ATTORNEY GENERAL
THAT DISCLOSES THE MATERIAL FACTS OF AN INVESTMENT THAT YOU WANT PEOPLE
TO MAKE IN A SYNDICATE.
IT IS LIKE AN OFFERING PLAN FOR A COOP.
IT
PERMITS YOU TO OFFER A PARTICIPATORY INTEREST N A PROPERTY TO STRANGERS.
WHERE YOU ARE LOOKING TO PUT PEOPLE TOGETHER TO RAISE MONEY FOR A
275
276
DEAL.
FROM A LAWYER'S STANDPOINT, YOU FIRST DETERMINE WHO THE OTHER
ATTORNEY IS, WHAT THE BASIC DEAL IS, AND IF YOU CAN GET INVOLVED IN THE
TRANSACTION BEFORE THE AGREEMENTS HAVE BEEN SUBSTANTIVELY DECIDED UPON.
SOMETIMES THIS INVOLVES SITE VISITS TO NOTE WHETHER OR NOT SOMETHING IS
OBVIOUSLY AMISS WITH THE LEASING AGREEMENT WHEN COMPARED TO THE FACTS ON
THE GROUND. IN TERMS OF SETTING FEES, IT IS A BIG MISTAKE TO SET A FLAT
FEE FOR THIS SINCE THE ACTION IS NOT PREDICTABLE AND IS RARELY IDENTICAL.
WHO ARE THE LANDLORD AND THE TENANT? WHAT DOES THE LANDLORD OWN? DOES HE
OWN THE FEE OR DOES HE OWN THE LEASEHOLD (IE. A GROUND LEASE)? IT IS
CRITICAL TO KNOW THIS SINCE THE LANDLORD HAVING A GROUND LEASE MAY
INDIRECTLY TERMINATE YOUR LEASE WHEN HIS GROUND LEASE IS TERMINATED. THE
OWNER OF THE GROUND LEASE HAS A SUPERIOR POSITION TO YOUR LEASEHOLD.
VERY OFTEN WHEN YOU THINK YOU ARE DEALING WITH THE LANDLORD, YOU ARE
DEALING WITH A MANAGING AGENT. IT ALSO HELPS TO KNOW WHO THE OWNERS ARE,
AND WHO ARE THE PRINCIPALS IN THE OWNING CORPORATION.
SOME NAMES ARE
"KNOWN" BY REPUTATION TO ATTEMPT TRICKERY IN THEIR LEASING FOR THEIR
TENANTS, AND KNOWING WHO THEY ARE WILL CAUSE YOU TO BE EXTRA CAUTIOUS.
KNOW YOUR TENANT.
"McDONALDS" IS DIFFERENT FROM "McDONALDS OF NEW
JERSEY" FOR EXAMPLE. GET GUARANTEES OF CORPORATE APPROVAL FOR THE DEAL.
KNOW WHETHER IT IS A SUBSIDIARY OR PARENT COMPANY. KNOW IF THE COMPANY
IS PROPERLY INCORPORATED IN YOUR STATE. IF YOU HAVE A CORPORATE TENANT
YOU WANT A CORPORATE RESOLUTION AND A SIGNATURE OF THE CORPORATE HEAD. A
SIGNATURE OF A SUBSIDIARY DOES NOT BIND A PARENT COMPANY.
OFTENTIMES THE TENANT WILL FOR A "SHELL CORPORATION" WHOSE SOLE ASSET IS
THE LEASEHOLD.
THIS WAY, THE TENANT LIMITS HIS LIABILITY TO THE
LEASEHOLD ASSET AND AVOIDS ATTACHING LIABILITY TO HIS OTHER ASSETS.
SIMILAR TO EXCULPATORY PROVISION IN MORTGAGE CONTRACTS.
BANK BRANCHES NEED THE APPROVAL OF THE STATE BANKING AUTHORITY BEFORE A
LEASE CAN BE IN FULL FORCE. RESTAURANTS MUST GET APPROVAL FROM THE STATE
LIQUOR AUTHORITY BEFORE A LEASE CAN BE IN FULL FORCE. BE AWARE OF THE
USES OR PROFESSIONS THAT REQUIRE THESE SPECIAL PERMITS IN ORDER TO
OPERATE, AND KNOW THAT THE LEASE DOES NOT GO INTO FULL FORCE UNTIL THE
PERMITS ARE SECURED.
THE ENTITY TAKING THE LEASE MUST REPRESENT THAT IT KNOWS OF NO REASON WHY
IT WOULDN'T GET APPROVAL FROM THE PERMITTING AUTHORITY IN THE ABOVEMENTIONED CASES.
A CONVICTED FELON WOULD BE MIS-STATING THIS
AFFIRMATION, KNOWING FULL WELL, FOR EXAMPLE, THAT HE COULD NOT SECURE A
LIQUOR LICENSE.
IT IS DIFFICULT TO SECURE LEASES WITH GOVERNMENTS SINCE THEY ARE NOT
SUBJECT TO THE LAWS OF THIS COUNTRY DUE TO DIPLOMATIC IMMUNITY. THEY CAN
NOT BE EVICTED, OR SUED. YOU MUST REQUIRE THEM NOT TO RESORT TO THEIR
SOVEREIGN IMMUNITY. GOVERNMENT AGENCIES ALSO CAN BE PROBLEMATIC.
277
RENT IS OFTEN BASED ON A PER SQUARE FOOT BASIS WHEN CONCERNING OFFICE OR
RETAIL SPACE.
YOU DISTINGUISH BETWEEN RENTABLE SQUARE FOOTAGE AND
USEABLE SQUARE FOOTAGE.
LOSS FACTOR - 22 TO 27 PERCENT; THAT AMOUNT OF SQUARE FOOTAGE THAT IS
REPRESENTED BY WALLS, LOBBIES, ELEVATOR SHAFTS, ETC. THAT SQUARE FOOTAGE
NOT USEABLE FOR THE DAY TO DAY OPERATIONS OF THE TENANT. THE LANDLORD
DOES NOT PLACE SQUARE FOOTAGE AMOUNTS IN THE LEASE EVEN THOUGH HE MARKETS
A GIVEN SQUARE FOOTAGE BECAUSE BY DOING SO HE WOULD LIMIT HIS ABILITY TO
INCREASE THIS PORTION OF THE RENTABLE SQUARE FOOTAGE.
SINCE RENT IS
CHARGED FOR THIS SPACE, INCREASING THE AMOUNT IN TURN INCREASES THE
RETURN TO THE LANDLORD.
THE BASE RENT IS THE:
(USEABLE SQUARE FOOTAGE + THE NON-USEABLE SQUARE FOOTAGE) X THE ANNUAL
RATE PER SQUARE FOOT
THE ANNUAL RATE IS PAID IN MONTHLY INSTALLMENTS TO ALLOW THE LANDLORD TO
SUE FOR THE REST IN CASE OF DEFAULT.
ADDITIONAL RENT IS ALL RENTS IN ADDITION TO THE BASE RENT. IT INCLUDES:
PORTER'S WAGE ESCALATIONS
DIRECT OPERATING EXPENSE ESCALATIONS
REAL ESTATE TAX ESCALATIONS
RENT INCLUSION PROVISION FOR ELECTRICITY
LATE FEES
CONTRIBUTION TOWARD COSTS OF WATER USE
CONTRIBUTION TOWARD COSTS OF SPRINKLER MAINTENANCE CONTRACT
HVAC AFTER BUSINESS HOURS
ALL LANDLORD REMEDIES INCLUDING SUMMARY PROCEEDINGS APPLIES TO BASE RENT
AND ADDITIONAL RENT. THE ADDITIONAL RENT IS CALLED "RENT" TO INCLUDE IT
IN THE SUMMARY PROCEEDINGS, WHICH WOULD NOT BE THE CASE IF NOT CALLED
"RENT".
ALTERATIONS - WORK THAT THE TENANTS MAY WANT TO DO - GOVERNS WHETHER OR
NOT THEY HAVE PERMISSION. IN MOST LEASES, TENANT IMPROVEMENTS BECOME THE
LANDLORD'S PROPERTY. IT IS STATED TO BE REQUIRED THAT IT BE DONE UNDER
LAW. SOMETIMES IT IS REQUIRED THAT UNION LABOR BE USED.
RESTORATION PROVISION - THE LANDLORD WILL OFTEN LOOK TO THE TENANT TO
RESTORE THE PREMISES TO THE ORIGINAL CONDITION AT THE LANDLORD'S OPTION
WITHIN A CERTAIN PERIOD BEFORE THE LEASE ENDS. SOMETIMES THE RESTORATION
PROVISION MAY BE RENEGOTIATED AT THE TIME OF ALTERATION. SOMETIMES THE
RESTORATION WILL BE ALLOWED AFTER THE LEASE IS UP DURING A SPECIFIED
PERIOD.
UNDER THE COMMON LAW, THE LANDLORD WAS NOT REQUIRED TO MAKE REPAIRS
EITHER TO THE BUILDING OR THE DEMISED PREMISES. IT IS THE OBLIGATION OF
278
APARTMENT LEASES
LOFT LEASES
279
FOR EXAMPLE, LOCAL LAW 10 STATES THAT BUILDINGS SIX STORIES AND TALLER
REQUIRE INSPECTIONS EVERY YEAR WITH THOROUGH INVESTIGATIONS EVERY 5
YEARS.
THE LANDLORD WOULD BE WITHIN HIS RIGHTS TO AT LEAST PASS A
PORTION OF THIS COST ON TO THE TENANT.
THE CLAUSE COVERS SUCH MATTERS AS ZONING
CERTIFICATES OF OCCUPANCY REQUIREMENTS, ETC.
REQUIREMENTS,
EPA,
OSHA,
280
A NON-DISTURBANCE AGREEMENT
UNDERMINING THE TENANT'S USE
OUT THE LEASEHOLD. THIS IS
THE LEASEHOLD SUBSERVIENT TO
THE ATTORNMENT PROVISION: THE LANDLORD SAYS THAT HE WILL GIVE THE NONDISTURBANCE PROVISION IF THE TENANT AGREES TO "ATTORN" TO THE GROUND
LESSOR. ATTORN MEANS THAT THE TENANT RECOGNIZES THE GROUND LESSOR AS THE
NEW LANDLORD IN THE EVENT THE GROUND LEASE WIPES OUT THE BASE LEASEHOLD.
FOR SMALL TENANTS IN A BIG BUILDING, NON-DISTURBANCE PROVISIONS ARE NOT
USUALLY GRANTED, AND YOU EMBARRASS YOURSELF BY INSISTING ON IT.
THE TENANT AGREES THAT HE WILL NOT MODIFY THE LEASE WITHOUT NOTIFYING THE
MORTGAGEE. THIS PREVENTS THE TENANT FROM PREPAYING RENT, SO THAT IF THE
BANK FORECLOSES, THEY ARE ASSURED OF A FULL SUPPLY OF CASH FOR RENT.
WHETHER OR NOT TO GRANT NON-DISTURBANCE
DECISION, BASED ON FOUR CRITERION:
1.
2.
3.
4.
IS
ULTIMATELY
THE
BANK'S
281
THIS, AS HE WILL NOT WANT TO RISK THE POSSIBILITY OF THE OLD TENANT
LEAVING BY THE PROPER TIME. IF THE TENANT DOES NOT GAIN POSSESSION, HE
WOULDN'T HAVE TO PAY RENT YET.
THE COURTS WILL ALWAYS ALLOW A TENANT TO HOLD OVER FOR THREE MONTHS.
OFTEN THE LANDLORD WILL BUILD INTO THE LEASE THAT THE RENT WILL BE TWICE
THE TOTAL RENT WHEN HOLD OVERS OCCUR.
KEEP IN MIND THAT THE LANDLORD WILL COMMIT TO PROVIDING THE SPACE TO THE
TENANT. THIS HAS TO BE KEPT IN MIND IN DETERMINING WHEN POSSESSION TAKES
PLACE; SINCE THE SPACE IS BEING AMENDED FOR THE TENANTS BENEFIT,
POSSESSION MAY TAKE PLACE WHEN CONSTRUCTION BEGINS RATHER THAN WHEN THE
TENANT MOVES IN.
END OF CLASS EIGHT
CLASS NINE
7/23/90
PAPER DUE NEXT WEEK, MIDTERM RETURNED TODAY
SECTION 255
MORTGAGES.
DEALS
WITH
THE
ASSIGNMENT
OF
MORTGAGES
AND
DORMANT
SECTION 275 - DEALS WITH THE MORTGAGE TAX WHEN THE INDEBTEDNESS ALREADY
EXISTS.
TENANCY BY THE ENTIRETIES
COMMUNITY PROPERTY IS ANY
THE MARRIAGE.
IN N.Y.,
STATUS OF TENANCY WITH
SPECIFIED.
RENT
A CONTRACT CAUSE OF ACTION IS THE RECOURSE THROUGH THE COURTS WHEN
ADDITIONAL RENT IS CALLED "ADDITIONAL RENT". IF NOT, THEN THE RECOURSE
IS IN THE TORT COURT, WHERE THE SETTLEMENT MAY BE AFTER A LONG LITIGATION
PERIOD.
ESCALATIONS
FOUR TYPES OF ESCALATIONS:
282
1.
2.
3.
4.
PORTER'S WAGE
CONSUMER PRICE INDEX
DIRECT OPERATING EXPENSE
REAL ESTATE TAXES
OPERATING EXPENSES
283
A COMMON CLAUSE IS, "IF A LABOR SAVINGS OR COST SAVINGS DEVICE SHALL BE
IMPLEMENTED BY THE LANDLORD, THAT CORRESPONDING ITEM ALSO GETS TAKEN OUT
OF THE BASE SO THAT IT IS RECOGNIZED AND REFLECTS THE TRUE COST OF
OPERATING THE BUILDING".
(IE. A SELF-OPERATING ELEVATOR, WHICH WAS
PREVIOUSLY OPERATED BY AN ELEVATOR OPERATOR). TYPICALLY THE STATEMENT OF
OPERATING EXPENSE WILL BE PREPARED BY AN ACCOUNTANT, AND IS NOT USUALLY
CERTIFIED. THE TENANT MUST RESERVE THE RIGHT TO CHALLENGE THIS, BUT THE
LANDLORD WILL INSIST ON A "PAY NOW FIGHT LATER" PAYMENT CLAUSE, AND THE
TENANT MUST PAY HIS OWN ACCOUNTANT. THE CLAUSE WILL ALSO STATE THAT THE
PAYMENT WILL BE DUE IN 10 TO 30 DAYS, AND THE TENANT WILL TRY TO EXPAND
THIS TO A LONGER PERIOD OF TIME.
BECAUSE ESCALATIONS ARE SUBJECT TO MANIPULATION BY THE LANDLORD, THE
TENANT SHOULD INSIST ON A CAP ON THE ESCALATION INCREASES.
284
285
12 POINTS.
2. TAKE THE CHANGE IN POINTS, IE. 12, AND DIVIDE IT BY THE PREVIOUS YEAR;
IE. 12/303 = .04; .04 X 100 = 4 (A 4 PERCENT CHANGE).
CPI IS CALCULATED MONTHLY. YOU WILL EITHER USE AN ANNUALIZED AVERAGE, OR
COMPARE IT TO THE CPI IN THE SAME MONTH OF EVERY YEAR. THE BASE RENT
WILL THEN BE MULTIPLIED BY THE PERCENT OF CPI.
THIS IS THE FIRST
ESCALATION WE SEE BASED ON A PERCENTAGE OF THE BASE RENT. 4% X THE BASE
RENT, IN THE PAST EXAMPLE, WOULD BE THE INCREASE IN THE CPI ESCALATION.
THE INCREASE MAY BE NEGOTIATED AS 80%, 120%, OR ANOTHER PERCENTAGE OF THE
CHANGE IN THE INCREASE, OR MAY BE BASED ON 4% OF THE LAST YEAR'S RENT.
IE. 10,000 = LEASED AREA RENT
BASE YEAR = CPI OF 102
IN A GIVEN YEAR THE CPI BECOMES 105, A CHANGE OF THREE POINTS.
THE BASE CPI = 2.941 PERCENT.
3/102 =
2.941 PERCENT X 10,000 = 2,941 DOLLAR INCREASE = CPI ESCALATION FOR THE
GIVEN YEAR.
THE LANDLORD WILL ISSUE THE STATEMENT, USUALLY ANNUALLY, WITH THE ABOVE
EXAMPLE DISPLAYED ON IT. TYPICALLY A STATEMENT IS MADE THAT IF THE CPI
IS NO LONGER PUBLISHED BY THE BLS, ANOTHER METHOD WILL BE USED THAT IS
THE EQUIVALENT.
THE CPI ESCALATION CLAUSE IS DIFFICULT TO WRITE, AND USUALLY CONTAINS AN
EXAMPLE FOR CLARITY.
REAL ESTATE TAX ESCALATION
YOU
ONE
TAX
THE
THE
START WITH A BASE YEAR. IN NEW YORK CITY, THE FISCAL YEAR IS JULY
TO JUNE 30. WE ARE CURRENTLY IN THE 1990 TO 1991 TAX YEAR. IF NOT A
YEAR, IT IS LEASED ON A CALENDAR YEAR; YO AVERAGE THE SECOND PART OF
FIRST YEAR WITH THE FIRST PART OF THE SECOND YEAR IN THIS CASE, SINCE
TAX YEAR DOES NOT COINCIDE WITH THE CALENDAR YEAR.
THE OPERATING EXPENSE AND THE REAL ESTATE TAX ESCALATION WILL BE BASED ON
THE SAME PERCENTAGE OF THE SHARE OF THE BUILDING, BECAUSE THIS IS USUALLY
THE NEGOTIATED AGREEMENT.
INCLUDED:
REAL ESTATE TAXES
SPECIAL ASSESSMENTS
OTHER TAXES, FEES, OR IMPOSITIONS ASSESSED BY THE LANDLORD.
REVIEW CAREFULLY TO EXCLUDE THE INCOME TAX FROM THIS TAX PROVISION.
THE LEASE STATE SPECIFICALLY THAT THEY ARE NOT INCLUDED.
286
HAVE
10,000
12,000
2,000
2,000 X 10% = 200.00
287
288
289
THE SUBTENANT WILL WANT TO AGREE AS TO HOW ESCALATIONS ARE SHARED WITH
THE PRIME TENANT.
ASSIGNMENTS
ELEMENTS:
1. NEED EFFECTIVE DATE OF THE ASSIGNMENT.
2. A STATEMENT THAT THERE ARE NO DEFAULTS UNDER THE LEASE.
3. IF YOU CAN GET IT, AN ESTOPPEL CERTIFICATE FROM THE LANDLORD - AT
LEAST GET A CONSENT TO THE ASSIGNMENT. YOU DO NOT WANT TO GIVE MONEY TO
THE ASSIGNOR AND LATER FIND YOURSELF IN LITIGATION WITH THE LANDLORD
BECAUSE OF LACK OF CONSENT.
4. THE SECURITY DEPOSIT. THE TENANT WILL WISH TO BE REIMBURSED FOR HIS
SECURITY DEPOSIT BY THE ASSIGNEE.
THE ASSIGNEE WILL WANT A
REPRESENTATION THAT THE SECURITY HAS NOT BEEN UTILIZED OR DIMINISHED BY
THE LANDLORD.
IF THE ASSIGNEE DOES NOT SPECIFICALLY ASSUME THE TENANT'S OBLIGATIONS AND
THERE IS A BREECH, THE ASSIGNEE IS NOT LIABLE FOR DAMAGE.
SECURITY DEPOSIT
SECTION 5-107 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK
COVERS SECURITY DEPOSITS.
THIS SECTION REQUIRES THE LANDLORD TO
SEGREGATE THE SECURITY DEPOSIT FROM GENERAL OR OPERATING FUNDS. IT NEED
NOT BE IN AN INTEREST BEARING ACCOUNT OR IN A BANK UNLESS THE RENTAL UNIT
HAS SIX RESIDENCES OR MORE. ONE PERCENT OF THE INTEREST IS RETRIEVED BY
THE LANDLORD AS AN ADMINISTRATIVE FEE.
THE SECURITY IS USED TO COVER A "BREECH". A WELL DRAFTED CLAUSE STATES
THAT IF THE LANDLORD HAS TO USE A PORTION OF THE SECURITY, THE TENANT
MUST REPLENISH IT. IN LARGE DEALS, A LETTER OF SECURITY OR A CERTIFICATE
OF DEPOSIT CAN BE USED.
END OF CLASS NINE
CLASS TEN
7/30/90
290
291
292
EVEN THE
293
*******************************
PROPERTY VALUES AND ASSESSMENTS
*******************************
THERE IS A DIFFERENCE
ARE ASSESSED BASED ON
IS THE ASSESSMENT OF
NEW CONSTRUCTION AS A
REAL PROPERTY TAX LAW REQUIRES THAT PROPERTY BE ASSESSED AND VALUED ON AN
OBJECTIVE AND FAIR STANDARD.
N.Y.C.
TAX ASSESSMENTS
0........100K
1........170K
2........240K
3........310K
4........380K
5........450K
294
295
296
YEAR'S LEASES.
EMERGENCY
POSSIBLE.
TENANT
PROTECTION
ACT
(ETPA)
MAKES
RENT
STABILIZATION
RENT STABILIZATION HAS A VACANCY INCREASE + RENT INCREASE FOR ONE OR TWO
YEAR LEASES.
RENT CONTROL STATUTORY INCREASE IS 7.5 PERCENT FOR A ONCE YEAR LEASE UPON
VACANCY.
THE RENT GOES TO MARKET RATE AND THEN THE APARTMENT BECOMES
STABILIZED.
APARTMENTS BUILT AFTER 1974 ARE NOT RENT STABILIZED UNLESS THEY ARE BUILT
UNDER J-51 OR 421a.
END OF CLASS TEN
CLASS ELEVEN
8/6/90
RULAND AND DUMBPHORS CASE
THE LANDLORD LEASED A PIECE OF LAND TO AN INDIVIDUAL, WHO IN TURN
ASSIGNED THE LEASE TO A THIRD PARTY, WHO IN TURN ASSIGNED TO A FOURTH.
IN CONSENTING TO THE THIRD PARTY, THE LANDLORD WAIVES HIS RIGHT TO
PREVENT FURTHER ASSIGNMENTS, UNLESS OTHERWISE PROHIBITED IN THE CONTRACT.
A LEASE WILL HAVE A CLAUSE THAT WILL STATE THAT CONSENT IN THE CASE OF
THE THIRD PARTY DOES NOT IMPLY CONSENT TO FURTHER ASSIGNMENTS BY WAIVER
OF LANDLORD'S RIGHTS.
297
OF
REQUIREMENTS
**************
6 TO 8 PM, BREAK, 1/2 HOUR WRAP-UP
25 SHORT ANSWERS, WITH 3 ESSAY QUESTIONS.
SECTION 223 F - DEALS WITH THE SPACE NOT BEING DELIVERED ON TIME, AND THE
TENANTS ABILITY TO TERMINATE THE LEASE.
SECTION 227 - RIGHT FOR TENANT TO TERMINATE AFTER CASUALTY
THE ABOVE SECTIONS 223 F AND 227 ARE USUALLY WAIVED ON THE PRINTED FORM
OF THE LEASE, THOUGH THE TERMS THESE SECTIONS SOUGHT TO PROTECT ARE
GENERALLY RENEGOTIATED BY THE TENANT AND THE LANDLORD.
*****************************
CONDOMINIUMS AND COOPERATIVES
*****************************
CONDOS AND COOPS ARE FORMED UNDER THE ENABLING ACT OF ARTICLE 23 A OF THE
GENERAL BUSINESS LAW, WHICH IS ALSO CALLED THE MARTIN ACT. IN NEW YORK
CITY, THE SECTION OF THE ARTICLE GOVERNING THEM IS SECTION 352 eeee
("QUAD-E"), AND IS SECTION 352 eee ELSEWHERE IN THE STATE.
CONDOS
COOPS
************************************************************************
ARTICLE 9-B OF REAL PROPERTY LAW
ARTICLE 23A, GBL, MARTIN ACT
13 NYCRR PT20 (DEVELOPMENT)
13 NYCRR PT 18 (OCCUPIED)
13 NYCRR PT23 (OCCUPIED)
13 NYCRR PT 21 (DEVELOPMENT)
PART
298
*********
CONDOS
*********
THE UNITS ARE OWNED IN FEE, ARE INSURABLE, ARE MORTGAGEABLE, AND IN
ADDITION TO THE UNITS THERE ARE ELEMENTS OF THE PROPERTY OWNED IN COMMON,
CALLED COMMON ELEMENTS.
COMMON ELEMENTS CONSIST OF THE ENTIRE PROPERTY LESS THE UNITS.
THE
PERCENTAGE OF COMMON ELEMENTS OWNED BY A UNIT OWNER IS EQUAL TO THE
PERCENTAGE OF OWNERSHIP THAT THE OWNER HAS IN THE ENTIRE PROPERTY.
IN A CONDO, THE PERCENTAGE OF COMMON INTEREST IS DETERMINED BY ONE OF
FOUR WAYS, ACCORDING TO SECTION 339-i.
299
300
LOLLIPOP CONDO
AIR RIGHTS AIR RIGHTS
BUILDING
BUILDING
TERRA FIRMA
THE UNIFORM CONDOMINIUM ACT SEEKS TO DO WHAT ARTICLE 9B DOES, BY CREATING
A UNIFORM CONSTRUCTION FOR THE DEFINITION OF CONDOS. UNDER THIS ACT, NOT
USED IN NEW YORK, A LEASEHOLD CONDO WOULD BE PERMISSIBLE. THE UNIFORM
CONDOMINIUM ACT IS FEDERAL LEGISLATION.
SECTION 39E - COMMON ELEMENTS
THE MOST COMMON OF COMMON ELEMENTS IS THE LAND UNDERNEATH THE BUILDING.
ALSO INCLUDED ARE GARAGES, BASEMENTS, MACHINE ROOMS, FOUNDATIONS,
SUPERINTENDENTS APARTMENTS, GARDENS, ETC.
THERE ARE ALSO LIMITED COMMON ELEMENTS. THEY ARE OWNED
BASIS BY THE OWNERS, YET NOT ALL THE OWNERS HAVE RIGHTS
THE ELEMENTS.
FOR EXAMPLE, ROOF RIGHTS CARVED OUT
APARTMENTS ON THE TOP FLOOR; PATIOS; PARKING SPACES
PARTICULAR APARTMENT.
ON A PERCENTAGE
TO USE OR OCCUPY
FOR THE USE OF
EARMARKED FOR A
IT IS A
COOPS AND CONDOS ARE SIMILAR BECAUSE OF THEIR STATUTORY BEGINNINGS IN THE
MARTIN ACT. IN ARTICLE 9B, CONDOS ARE DEFINED AS "COOPERATIVE INTERESTS
IN REAL PROPERTY". CONDOS, EXCEPT TO THE EXTENT THAT THEY SPECIFICALLY
DIFFER FROM COOPS, ARE GOVERNED BY THE MARTIN ACT, ARTICLE 23A OF THE
GENERAL BUSINESS LAW.
TO CREATE THE CONDOMINIUM, IN OTHER WORDS, REFER TO THE COOP ENABLING ACT
(THE MARTIN ACT). THE MARTIN ACT IS AN UMBRELLA STATUTE FOR BOTH COOPS
AND CONDOS.
FORMING A CONDO OR COOP
THE INITIAL STAGE OF PUTTING TOGETHER A CONDO OR COOP IS TO PUT TOGETHER
AN OFFERING PLAN. THIS DISCLOSES EVERYTHING THAT THE REGULATIONS REQUIRE
BE DISCLOSED ABOUT THE PROPERTY. WITH CONDOS, YOU START WITH AN OFFERING
PLAN. AT THE POINT IN TIME WHEN YOU HAVE AN OPERATING CONDO, YOU FILE A
CONDO DECLARATION (SECTION 339n), WITH WHICH IS FILED THE BY-LAWS
(SECTION 339u) AND THE AS-BUILD CONSTRUCTION PLANS (SECTION 339p).
301
THE FOLLOWING ELEMENTS ARE NOT NECESSARY IN A COOP, THOUGH THEY ARE
REQUIRED IN A CONDO:
THE BYLAWS, GOVERNING THE OPERATION OF THE CONDO, CAN ONLY BE AMENDED
WITH A 2/3 VOTE OF THE UNIT OWNERS. YOU MUST SIMULTANEOUSLY AMEND THE
DECLARATION.
1. DECLARATION (SUBMITTED TO THE ATTORNEY GENERAL AS PART OF THE
OFFERING PLAN.
2. BY-LAWS
3. PLANS
UNDER SECTION 339v THE BYLAWS ARE TO INCLUDE A SET OF "HOUSE RULES",
WHICH ARE THE DAY TO DAY REGULATIONS OF THOSE ACTIVITIES THAT ARE
RESTRICTED BY THE CONDOMINIUM.
THE PROCESS:
OFFERING
PLAN....DECLARE
PLAN
EFFECTIVE
(YOU
HAVE
SOLD
ENOUGH
APARTMENTS)....AFTER DECLARING THE PLAN EFFECTIVE, YOU APPLY FOR A TAX
LOT
CERTIFICATION
FOR
EACH
APARTMENT....YOU
FILE
CONDO
DECLARATION....ONCE FILED, YOU CAN START CLOSINGS.
THE KEYSTONE TO THE PROCEDURE OF SELLING COOPS AND CONDOS IS
DISCLOSURE!
OFFERING PLAN
PROSPECTUS
302
IN A NON-EVICTION
303
304
305
ASSET MANAGEMENT
PROFESSOR JOHN FRANK
CLASS ONE
1/22/91
THREE BOOKS:
1. CORPORATE REAL ESTATE HANDBOOK
2. MANAGERIAL REAL ESTATE
3. PRINCIPLES OF REAL ESTATE MANAGEMENT
COURSE WORK SUPPLEMENTED WITH ADDITIONAL READINGS IN THE LIBRARY, AS WELL
AS FROM BRUEGGEMAN'S REAL ESTATE FINANCE AND PYHRR & COOPER'S REAL ESTATE
INVESTMENT: STRATEGY, ANALYSIS, DECISIONS.
ABOUT THE PROFESSOR:
HARVARD BUSINESS SCHOOL, GRAD 1965.
MOVED TO ARTHUR D. LITTLE (A
CAMBRIDGE BASED MANAGEMENT CONSULTING FIRM), THEN TO A SAN FRANCISCO
FIRM, AND FINALLY TO COOPERS AND LYBRAND'S REAL ESTATE ADVISORY SERVICES
DIVISION.
ASSET MANAGEMENT IS NOT AN ESTABLISHED FIELD OF STUDY, AND WAS NOT EVEN A
COINED PHRASE UNTIL THE MID 1970'S. REAL ESTATE ASSET MANAGEMENT IS THE
MANAGEMENT OF RIGHTS, LAND AND APPURTENANCES (INCLUDING PARTIAL
INTERESTS) OF ALL PROPERTY IN A PORTFOLIO. THE PLAN OF MANAGING PLANNING
AND CONTROLLING THE USE OF A PROPERTY FROM CONCEPTION TO ACQUISITION, TO
STEWARDSHIP AND TO DISPOSITION.
IT IS THE MANAGEMENT OF LOANS AND
INVESTMENTS TO ACHIEVE THE HIGHEST POSSIBLE RETURN.
REAL ESTATE EARNINGS ARE CREATED THREE WAYS:
1. BUY WELL
2. OPERATE WELL
3. SELL WELL
"YOU CAN MOST EASILY REDUCE CORPORATE COSTS BY REDUCING FIXED CORPORATE
FACILITIES".
THE FIXED CORPORATE FACILITY IS ASSET CONSUMING BECAUSE IT CONSISTS OF
THE FOLLOWING THREE ELEMENTS:
1. MATERIALS
2. LABOR
3. OCCUPANCY COSTS
NATIONWIDE, 25 PERCENT OF CORPORATE ASSETS ARE IN REAL ESTATE.
47
IN MANAGING ASSETS, YOU MUST FORM THREE TYPES OF PLANS. THEY ARE:
1. A LONG RANGE STRATEGY THAT PUTS ASSETS INTO SERVICE AND EFFECTUATING A
BENEFIT.
2. A THREE TO FIVE YEAR PLAN, COVERING ENHANCEMENTS AND REPOSITIONING.
REPOSITIONING IS THE REASSESSMENT OF ASSETS AND EVENTUAL REWORKING OF IT
TO "BREATH NEW LIFE" INTO FACILITIES THAT MAY BE PHYSICALLY DATED, OR
THAT MAY NOT FULFILL THE NEEDS OF NEW MARKET DEMANDS TO REMAIN
COMPETITIVE.
3. AN OPERATING PLAN THAT COVERS DAY TO DAY OPERATIONS, FROM INSPECTIONS
TO FLOOR SWEEPING.
AN ASSET MANAGER HAS CHARACTERISTICS THAT ARE A BLEND OF THOSE COMMON IN
A PROPERTY MANAGER AND IN A DEVELOPER.
PROPERTY MANAGER
*
*
*
*
*
*
*
*
DEVELOPER
*
*
*
*
*
*
CREATIVITY
MONEY
SALESMAN / PROMOTER
RISK ASSESSOR
OPTIMIST
ABILITY TO PLEASE A VARIETY OF CONSTITUENCIES
MAXIMS
"DON'T DO WORK WITH SOMEONE THAT HASN'T FAILED AT LEAST THREE
48
TIMES".
SOURCE UNKNOWN.
DEVELOPMENT OF STRATEGY
MANAGEMENT CONTROL
OPERATIONS
TRANSACTION
PORTFOLIO MANAGEMENT
(NATIONAL)
ASSET MANAGER
FACILITIES MANAGEMENT
ASSET MANAGEMENT
(REGIONAL)
SUBPORTFOLIOS (4 TO 6)
BETWEEN 10 TO SEVERAL
HUNDRED PROPERTIES
PROPERTY MANAGERS
49
STRATEGIC MANAGEMENT
PORTFOLIO
CORPORATE STRATEGY
structure of business
sensing market
positioning
promoting
MANAGEMENT CONTROL
ASSET MANAGEMENT
managing the asset
OPERATIONAL
carrying out the
strategy
PROPERTY MANAGEMENT
FACILITIES MGT.
50
APARTMENT BUILDING
CONSTRUCTION IN THIS PERIOD.
AS THE DESIRE TO
EXPERIENCE THE "GOOD LIFE" INCREASED AMONGST RESIDENT LANDLORDS, THEY
MOVED OUT TO THE COUNTRY AND LEFT THEIR HOLDINGS IN THE HANDS OF THE
FIRST ASSET MANAGERS. AFTER THE STOCK MARKET CRASH AND UNTIL AFTER THE
SECOND WORLD WAR, THERE WAS LITTLE BUILDING.
THE BUILDING STOCK
EXISTING AT THE TIME WAS ABSORBED BY THE MIDDLE OF THE SECOND WORLD WAR.
AFTER THE SECOND WORLD WAR AND UNTIL 1956, A BUILDING BOOM OCCURRED.
1957 SAW A BUST.
51
3. MANAGEMENT
4. REDEPLOYMENT
5. FINANCIAL ALTERNATIVES -"MINING THE GOLD IN THE CONCRETE CANYONS"
6. NEGOTIATION
A JEWEL OF MARKETING WISDOM: "THE KEY TO RUNNING A BUSINESS IS TO FIND A
PLACE (GEOGRAPHY, DEMOGRAPHY) AND A PRODUCT".
POLICYPROCEDURE
O
X
X
O
EXECUTION
MONITOR
XO
X
X = CENTRALIZED MANAGEMENT
O = DECENTRALIZED MANAGEMENT
/
POLICY\
\/
PROCEDURES
MONITOR
/\
/ EXECUTION
POLICY, PROCEDURES, EXECUTION AND MONITORING ALL FEED OFF OF EACH OTHER
IN A CYCLICAL FASHION.
CORPORATIONS HAVE PLANNING CYCLES THAT THE ASSET MANAGER HAS TO BE AWARE
OF BECAUSE THEY HAVE A DIRECT IMPACT ON HIS ASSESSMENT OF FUTURE
FACILITIES NEEDS.
THERE IS THE STRATEGIC PLANNING CYCLE, WHICH TAKES PLACE EVERY 5 TO 10
YR.
THERE IS THE DEVELOPMENT PLANNING CYCLE , " " "
" 2 TO 4 YEARS
THERE IS THE OPERATIONS PLANNING AND BUDGETING CYCLE, " " " EVERY YEAR.
THE OPERATIONS PLANNING AND BUDGETING CYCLE HAS TWO COMPONENTS:
52
THEY ARE THE CAPITAL BUDGET AND THE INCOME AND EXPENSE BUDGET.
THE CORPORATE REAL ESTATE STRUCTURE MUST BE MINDFUL OF HOW CORPORATIONS
OPERATE.
THE REAL ESTATE PLANNING MUST BE INTEGRAL WITH THE ABOVE
CYCLES.
THERE IS A SIMILARITY BETWEEN CORPORATE REAL ESTATE AND CORPORATE ASSET
MANAGEMENT BECAUSE, IN ESSENCE, THE MANAGER RELATES TO THE REAL ESTATE AS
AN ASSET.
E X T E R N A L
M A R K E T
* * * * * * * * * * * * * * * *
\/ INDEPENDENT MARKET /\
\//\
MANAGEMENT CONTROL
COST / BENEFIT
USERS
\/
/\
\/ DEPENDENT MARKET
/\ SERVICES
\/
/\
\/
/\
ASSET MANAGEMENT
FACILITIES MANAGER
IF THE MANAGEMENT CONTROL FUNCTION DOES NOT HAVE A PLAN FOR THE UPCOMING
CYCLE AS TO THE QUANTITY OF ASSETS IT WILL NEED AT ITS DISPOSAL, YOU AS
THE ASSET MANAGER WILL HAVE TO LOOK UP AND THROUGH THE MANAGEMENT CONTROL
FUNCTION TO THE EXTERNAL MARKET AND DETERMINE AN ESTIMATE OF THOSE NEEDS
BASED UPON THE DEMAND FOR THE SERVICES OFFERED BY THE USER'S COMPANY.
THE CORPORATE REAL ESTATE OPERATING PLAN AND BUDGET MUST BE CONSTRUCTED
IN LINE WITH THE DEVELOPMENT PLANNING AND OPERATIONAL PLANNING PHASES OF
THE BUSINESS CYCLE.
53
AT
THE
DEMOGRAPHICS,
BUSINESS
OF
ALTERNATIVE
STRATEGIES:
PORTFOLIO
AND
SEE
STRATEGY,
DEVELOP A MANAGEMENT PLAN FOR A PROPERTY OF YOUR CHOICE IN THE NEW YORK
AREA.
CAN BE RESIDENTIAL PROJECT OF SOME SIZE, OR AT LEAST A 250,000
S.F. OFFICE BUILDING. IN A ONE TO FOUR YEAR TIME PERIOD, CREATE VALUE
FOR THE CLIENT.
END OF CLASS TWO
CLASS THREE
2/5/91
REAL ESTATE HAS TWO HALVES:
1. WHAT YOU WANT TO DO
2. WHAT YOU CAN DO
ASSET MANAGEMENT IS ABOUT FOLDING THE FIRST INTO THE SECOND.
THE AGREEMENT BETWEEN THE ASSET MANAGER AND THE CLIENT IS A REGURGITATION
OF THE AGREED UPON AUTHORITY FOR THE MANAGER TO ACT ON BEHALF OF THE
CLIENT.
THE MANAGEMENT PLAN, WHERE THE MANAGER DETAILS HOW HE WILL ATTEMPT TO
ACCOMPLISH THE GOALS OF THE CLIENT, LIMITS THE EXTENT OF RESPONSIBILITY
FOR THE ASSET MANAGER.
BANK,
INVESTMENT,
STRATEGY
STRATEGY
(4%)
54
R.E.
PORTFOLIO
LINK
POLICY (GOALS,
MANAGEMENT CONTROL (16%)
OBJECTIVES, &
LINK
OPERATIONS
(80%)
PROCEDURES (PLANNED
ACTION)
55
SEE CHAPTER FOUR OF DOWNS, PAGE 78, FOR MANAGEMENT PLAN ISSUES.
ASSET MANAGEMENT IS BEST SUITED TO MANAGING INCOME STREAMS FROM
PROPERTIES, SUCH AS RENTALS AND LEASES. THE MANAGEMENT OF PROPERTIES FOR
PURCHASE, SUCH AS A SINGLE FAMILY SUBDIVISION, IS MORE DIFFICULT BECAUSE
CASH FLOWS ARE NOT PREDICTABLE AND ARE SUBJECT TO "LUMPINESS" IN DEMAND.
THEREFORE, ATTEMPT TO CREATE A MATRIX OF BEST, PROBABLE AND LEAST
PROBABLE RETURNS PER TIME PER TIME PERIOD IN ORDER TO GET A HOLD ON THE
LIKELY RETURNS.
END OF CLASS THREE
CLASS FOUR
2/19/91
WAYS OF IDENTIFYING LOANS IN DANGER OF BECOMING DELINQUENT
1. NON PAYMENT OF INTEREST AND/OR PRINCIPAL
2. DOLLAR EXPOSURE
3. CONDITION OF COLLATERAL (IE. A PERFORMING NON-PERFORMING LOAN)
A PERFORMING NON-PERFORMING LOAN IS, FOR EXAMPLE, A LOAN THAT IS MAKING
SCHEDULED PAYMENTS OF INTEREST AND PRINCIPAL, YET MAY HAVE BECOME
UNDERCAPITALIZED AS THE VALUE OF THE PROPERTY DROPS DUE TO MARKET FORCES.
STANDARDS FOR CONDITION OF COLLATERAL VARY WITH THE SOURCE OF THE FUNDS.
FOR EXAMPLE, AN INSURANCE COMPANY WOULD REQUIRE A STABILIZED RETURN, 75%
LTV, GOOD GEOGRAPHICAL DIVERSIFICATION, WOULD ACCEPT NON-RECOURSE LOANS,
AND WOULD NOT MAKE CONSTRUCTION LOANS.
ELEMENTS OF A TYPICAL MANAGEMENT AGREEMENT (SEE DOWNS, PAGE 333)
*
*
*
*
*
56
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
TERMINATE TENANCY
SIGN AND SERVE NOTICES
REIMBURSEMENT OF EXPENSES
SUE FOR AND RECOVER RENT
HIRE PROFESSIONALS AND WORKERS TO OPERATE BUSINESS
HANDLE SECURITY DEPOSITS ON AN OWNER'S BEHALF
X% PAYMENT ON LEASES OR RENT
POWERS SPECIFICALLY WITHHELD FROM MANAGER.
TERMINATION AND CANCELLATION OF AGREEMENT
ARBITRATION.
TENANT
ONE
TWO
THREE
ONE
TWO
THREE
MONIES COLLECTED
X
Y
Z
PROPERTY B
X
Y
Z
TOTAL RENT COLLECTED
ABC
THE BALANCE SHEET CONTAINS CASH (LISTED FIRST) AND NON-CASH ITEMS, AND IS
BALANCED BY THE ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE/ DISTRIBUTION
SHEETS.
THE ACCOUNTS RECEIVABLE SHEET WILL CONTAIN AN AGED TRIAL BALANCE IN DAYS
SUCH AS THE FOLLOWING:
MARCH-APRIL
ACCOUNTS RECEIVABLE - AGED TRIAL BALANCE
DAYS
0-5
A,1
5-10
10-30
B,2
30<
A IS PROPERTY
# IS TENANT
THERE ARE THREE PARTS TO A MANAGEMENT AGREEMENT:
1. CONTRACT
57
2. MANAGEMENT PLAN
3. MONTHLY REPORT
THE MANAGER MUST PROJECT VARIABILITY IN BUDGETING YOUR VARIOUS ELEMENTS.
FUEL, FOR EXAMPLE, IS MORE EXPENSIVE IN THE DEPTH OF THE WINTER AND IN
THE MIDST OF SUMMER, AND CAN NOT BE BUDGETED IN EQUAL AMOUNTS THROUGHOUT
THE 12 MONTHS OF THE YEAR OR IN STRAIGHT LINE INCREMENTS. THE MONTHLY
BUDGET IS ALSO A GUIDE FOR DETERMINING PERFORMANCE OF THE BUDGET AND
POINTING OUT PROBLEMS IN THE EXPENSE SIDE.
THE MONTHLY MANAGEMENT DISCUSSION OF OPERATIONS HAS THREE PARTS:
1. OVERVIEW
2. REVENUES
3. PROPOSED ACTION (PHYSICAL AND FINANCIAL)
ANALOGY:
IN A FACTORY YOU HAVE:
MANAGEMENT > FOREMEN > WORKERS
IN A PROPERTY YOU HAVE:
OWNER (ASSET MANAGER) > PROPERTY MANAGER > TENANT
THE DIFFERENCE BETWEEN A QUALITY AND A SEEDY BUILDING IS IN THE ATTENTION
TO SERVICES AND TO MAINTENANCE.
END OF CLASS FOUR
CLASS FIVE
2/26/91
10 MINUTE PRESENTATION NEXT WEEK ON PROJECT, DUE AT THE BEGINNING OF
CLASS.
GUEST SPEAKER: STEVE COWAN, COOPERS AND LYBRAND
TOPIC: HOW A DEAL IS CONSTRUCTED
*************
ADVERTISING FOR PROPERTIES:
5 METHODS:
BANNERS
DIRECT MAIL
RADIO ADS
NEWSPAPER ADS
T.V. ADS
TOUT THE COMPARATIVE ADVANTAGE OF AMENITIES TO THE TENANT'S NEEDS.
**********
IN A CORPORATION YOU ARE PLEASING A COMMITTEE, NOT A BUYER OR OWNER.
58
C.R.E
H.R.
C.I.O.C.F.O
C.R.E. = CHIEF OF REAL ESTATE
H.R.
= HUMAN RELATIONS
C.I.O. = CHIEF INFORMATION OFFICER
C.F.O. = CHIEF FINANCIAL OFFICER
SEE DOWNS CHAPTER 8, TENANT RELATIONS
MARKETING AND
SIGNING OF
ARRAY OF TENANT
CREDIT &
LEASING
LEASE
SERVICES
COLLECTION
>
REVENUE
COST OF PRODUCT
GROSS MARGIN 40
SALARIES
OVERHEAD
TAXES
NET INCOME
100
60*
10
20#
10
5
5
59
LEGAL
CHIEF OPERATIONS OFFICERACCOUNTING AND FINANCE
FUNCTIONAL ORGANIZATION
HUMAN RESOURCES
FUNCTIONAL ORGANIZATIONS
ARE USED FOR SMALLER BUSINESS.
ESTATE DEVELOPERS HAVE FUNCTIONAL ORGANIZATIONS.
CHIEF EXECUTIVE OFFICER
MOST REAL
LEGAL
CHIEF OPERATIONS OFFICER
ACCOUNTING AND FINANCE
MULTI DIVISIONAL ORGANIZATION HUMAN RESOURCES
MATRIX
BUSINESSUNIT MANG'R
APPROVES
REGION
CHIEF OF REAL ESTATE---ACTIONS>-|
REGION STORE STORE STORE
|
60
REGION
oTOTAL COST
C + o
o
O
+
ooFIXED COST
S
+
T
+
+
+ FREIGHT COST
61
# OF WAREHOUSES
(NEXT YEAR)
ACTION YEAR
AS A REAL ESTATE EXECUTIVE, YOU NEED TO KNOW THE PROCESS SO YOU CAN BRING
UP THE FOLLOWING ISSUES IN THE BUDGET PLANNING STAGE:
1. LIBERATE EXCESS APPRECIATION?
2. OCCUPANCY COSTS CORRECT?
3. CONSIDERATION OF LOCATIONAL ISSUES, MARKETS, LEASES, ETC.?
IT DOES NO GOOD TO TALK ABOUT REAL ESTATE MARKETS TO A C.E.O. IF YOU
CAN'T RELATE IT BACK TO THE CORPORATIONS STRATEGIC PLAN.
END OF CLASS SEVEN
62
CLASS EIGHT
3/26/91
PAGE 29 -NOURSE TEXT:
EXPECT TO SEE QUESTION ON THIS CHART ON THE EXAMINATION
ROLE OF CORPORATE REAL ESTATE EXECUTIVES IN THE NETWORK OF ROLES.
"YOU ONLY INVEST IN CAPACITY IF YOU CREATE WEALTH FOR YOUR SHAREHOLDERS".
MEANING, YOU ONLY INVEST CORPORATE CASH ASSETS IN A FACILITY IF THAT
FACILITY WILL GIVE YOU AT LEAST THE SAME PERFORMANCE, MEASURED IN NPV OR
IRR, AS AN EQUIVALENT CASH INVESTMENT IN THE COMPANY'S PRODUCTION
CAPACITY.
SEE PAGE 30, EXAMPLE TABLES 3.1 AND 3.2
MAKE DECISION BASED ON:
/ DO NOTHING (NPV=0)
/
/
---------------------/--------NPV = ?
INT. RATE = ?
\
\
\NPV = ?
INTEREST RATE TO BE DETERMINED BY THE CAPITAL ASSET PRICING MODEL.
ANECDOTE:
DEPARTMENT OF HEALTH, EDUCATION AND WELFARE HAS A STANDARD THAT
INSTITUTIONS THAT IT HELPS FINANCE (SUBSIDIZE), SUCH AS BLUE CROSS / BLUE
SHIELD, CANNOT HAVE A LEVEL OF CORPORATE STANDARD OF LIVING THAT IS
HIGHER THAN 135 SQUARE FEET PER EMPLOYEE. THIS STANDARD WAS SET BY THE
GENERAL ACCOUNTING OFFICE.
HOWEVER, THE PRESIDENT OF BLUE CROSS WANTS MORE SQUARE FEET.
BREAKDOWN MIGHT BE AS FOLLOWS:
A TYPICAL
63
-800000
64
< RENTABLE/USEABLE S.F.
!
#
-700000
!
*
#
-600000
!
*
!
#
*
-500000
*
!
#
0
-400000 X
X = STANDARD
0 = ACTUAL
* = LOW EXPECTATION
# = EXPECTATION ! =HIGH
EXPECTATION
/91/92/93/94
65
X
X
PHASE ONE
PHASE TWO
PHASE THREE
PHASE FOUR
=
=
+
=
=
=
=
=
=
0=
=
=
=
=
=
CASH FLOW DIAGRAM - SHOWS NEGATIVE AND POSITIVE CASH FLOWS BY PHASE
66
X
0}--1-2X-3-4-5-6-7
}_X
} _X
_
}
_ -X
_
}
X_
_
X
_
]
_
_
]
_
]
X
}
_
]
=
=
=
=
=
_
_
_
-8
_
67
AND
OWN
SITES
THAT
WILL
BE
LEASED
TO
195 BROADWAY
LIMOUSINES
68
ART KARLIN
HOW TO MAKE MONEY ON LOUSY PROPERTY
STARTED WITH HOWARD HOFFMAN IN 1963, THE FIRST CORPORATE ASSET MANAGERS
IN INDUSTRIAL SPACE, THERE ARE 1000 SMALL USERS (100,000 S.F.) FOR EVERY
LARGE USER (250,000 S.F.). DIVIDE LARGE USES SINCE LARGE USERS USUALLY
BUILD THEIR OWN BUILDINGS. MARKET TO SMALLER USERS.
TYPICAL DEAL
RECUPERATED
STRUCTURE:
75:25
IN
FAVOR
OF
THE
OWNER
UNTIL
COST
GIVE BROKERS SOMETHING TO WORK WITH OR THEY WILL GIVE YOU TOO MANY CHAFF
POTENTIAL TENANTS AND NOT ENOUGH WHEAT POTENTIAL TENANTS.
STAY AWAY FROM THE REAL ESTATE GUY WHEN COURTING A CORPORATION AS A
CLIENT. YOU ARE COMPETITION FOR HIM. GO THE CHIEF FINANCIAL OFFICER, YOU
HAVE HIS INTERESTS AT HEART.
L.B.O. = LEVERAGED BUY OUT
END OF CLASS TEN
CLASS ELEVEN
APRIL 23, 1991
WORKOUTS AND NEGOTIATIONS; CHAPTER 13, NOURSE
GAME THEORY PRISONER'S DILEMMA; TWO PRISONERS CAUGHT PERFORMING A CRIME.
THEY ARE
CAPTURED AND SEPARATED AT THE POLICE STATION. THE POLICE OFFICER OFFERS
EACH A DEAL, WHICH IS, COOPERATE AND RAT ON YOUR BUDDY.
YOU HAVE X
PERCENT OF SEEING TIME. IF YOU DO NOT COOPERATE AND YOU HAVE A 3X CHANCE
OF SEEING TIME. IF NEITHER COOPERATES, THEIR CHANCES ARE BEST. IF BOTH
COOPERATE, THEIR CHANCES ARE WORSE. EVALUATE CHOICES NOT ONLY BASED ON
OUR OWN PRIORITIES, BUT ON YOUR ENEMIES PRIORITIES.
ZERO-SUM GAME IS WHERE WHAT ONE PARTY GETS, THE OTHER LOSES. THEIR IS A
LIMITED SUPPLY OF "STUFF" UNDER NEGOTIATION, AND WHAT ONE GETS, THE OTHER
LOSES.
IN NEGOTIATIONS BETWEEN A FINANCIER AND A FAILED DEVELOPER, WHAT EACH HAS
TO OFFER THE OTHER, AND WHAT YOU CAN DO IF THE PROBLEM IS NOT THE DEBTOR
69
BUT THE PROPERTY, IS CENTRAL TO HOW THE WORKOUT WILL FIND ITS WAY TO
REALITY.
BANKER
SILENT PARTNER*
DEBTOR
HARD $
HIRE PROPERTY MGR ($) AVOID
A
TRANSACTION
THAT
CAPITAL
TRIGGERS A TAX
GAIN
(DIFFERED)
THREATEN
BANKRUPTCY
SOFT$
FORBEARANCE
PROP.
MGMT.
PLAN
SWEAT
EQUITY
IN
PROPERTY
* GOVERNMENT TAX AUTHORITY
WHAT YOU WOULD LIKE TO KNOW ABOUT YOUR BANK:
STRATEGIC - YOU WOULD LIKE TO KNOW THE BANK'S STRATEGIC FINANCIAL
OBJECTIVES. ARE THEY WELL CAPITALIZED? CAN IT TAKE THE HIT OF A WRITE
DOWN ON A PROPERTY? DOES IT HAVE THE RESOURCES TO BE HARD NOSED?
MANAGERIAL- (LENDING OFFICER) WHAT IS HIS AUTHORITY? WHAT LIMITS HAS HE
GOT?
DOCUMENTATION...GIVE HIM WHAT HE NEEDS TO HELP HIGHER LEVEL
MANAGEMENT TO MAKE A DECISION YOU CAN LIVE WITH. WHAT RECOURSE DOES HE
HAVE TO HIGHER UPS?
OPERATIONAL - DO THEY HAVE AN IN HOUSE PROPERTY MANAGER OR A SWEETHEART
70
READ CHAPTER 13 FOR TUESDAY. LOOK FOR THREE PART DIAGRAM, "ASSET MANAGER
FRAMEWORK FOR UNDERSTANDING REAL ESTATE MANAGEMENT"
CEILING PRICE FOR BUYER IS BASED ON SHAREHOLDER VALUE, INTERNAL RATE OF
RETURN AND NET PRESENT VALUE.
CEILING PRICE = PRICE + TERM = NPV OF 0 OR IRR THAT IS ACCEPTABLE,
MEANING JUST OVER CORPORATE HURDLE RATE.
OR, USING A STUDY OF ALTERNATIVE SITES THAT GIVES YO A NET PRESENT VALUE
OF ONE MILLION, THEN YOU WOULD NOT ACCEPT THE OTHER PROJECTS UNLESS THEY
ALSO GIVE YOU A NPV OF AT LEAST ONE MILLION.
CORPORATION
\/
CEO
OFFICE OF GENERAL COUNSEL
CHIEF FINANCIAL OFFICER
CONTROLLER
TREASURY
GROUP
PARTNER IN CHARGE
NEGOTIATION
VP. REAL ESTATE BACK AND FORTH
FACILITIES MANAGER
STAFF
CORPORATE/DEVELOPE
R
71
ASSET MANAGER
PROPERTY MANAGER
STAFF
NEGOTIATION BORDER
DEVELOPER /\
UNDERSTAND THAT THE STRUCTURE OF REAL ESTATE WORKS BOTH WAYS, FROM THE
DEVELOPER INTO THE CORPORATE REAL ESTATE DIVISION, AND FROM THE
CORPORATION INTO THE REAL ESTATE DIVISION. YOU THE CORPORATE REAL ESTATE
EXECUTIVE ARE THE CONDUIT FOR THE CORPORATE STRUCTURE AND THE DEVELOPER
TO GET THE FACILITIES LEASED.
|----------------PROPERTY MANAGEMENT--------|
\/
\/
ASSET MANAGER
WORKOUTS AND NEGOTIATIONS
/\
/\
|
CORPORATE REAL ESTATE------|
|---------------- MANAGEMENT, REPRESENT CLIENT
S T R A T E G Y
__
M A N A G E M E N T
T__T
OPERA
OPERA-
TIONAL
TIONAL
72
O P E R A T I O N A L
73
OR
72
73
R= RESIDENTIAL
C= COMMERCIAL
"USUALLY"
M= MANUFACTURING
THE GRAY TONES ARE SPECIAL DISTRICTS.
IN A RESIDENTIAL ZONE, YOU CAN ALSO HAVE COMMUNITY FACILITY USES FOR NOTFOR-PROFIT USES.
IN A COMMERCIAL ZONE, YOU CAN ALSO USUALLY HAVE RESIDENTIAL AND COMMUNITY
FACILITIES.
IN A MANUFACTURING ZONE, YOU CAN HAVE ALL OF THE ABOVE, USUALLY.
IF YOU HAVE, SAY, R3A, THE "A" IS A CONTEXTUAL ZONE WHICH REPRESENTS A
CERTAIN BUILDING TYPE.
IF YOU HAVE A C5-3, THE
"DIRTINESS" OF THE ZONE.
TWO
NUMBERS
REPRESENT
THE
INTENSITY
AND
74
LOOK FOR STREET WALL REQUIREMENTS. PLAZA MUST BE ON THE SOUTH SIDE OF A
BLOCK, BUT THE FLOOR SIZE MIGHT BE HURT BY THE NEED FOR THE PLAZA TO BE
OPEN TO THE SKY. PLAZA BONUSES ARE FOR 1 FAR.
WHAT IF THE FIRST 150 FEET OF THE LOT IS C5-3 (15 FAR) AND THE LAST 50
FEET IS A C5-2.5 (12 FAR). THERE IS A WAY TO TRANSFER SOME OF THE FAR
OVER THE ZONING DISTRICT LINES.
THEY ARE: IF THE LOT EXISTED BEFORE THE ZONE CHANGE. SEE ALSO LANDMARK
SPECIAL PERMITS. A ZONING LOT MERGER IS NOT A TRANSFER. IT IS LIKE TWO
PEOPLE GETTING MARRIED BUT NOT PERMITTED TO DIVORCE, ACCORDING TO THE
GUEST LECTURER.
YOU CAN'T TRANSFER DEVELOPMENT RIGHTS OVER ZONING DISTRICT LINES.
MINIMUM PLAZA WIDTH IS 40 FEET.
END OF TALK FOR FIRST GUEST LECTURER.
NEXT GUEST LECTURER:
PREVIOUSLY,
YOU OFTEN NEED TO CHOP THROUGH A WALL TO SEE IF THE STRUCTURE IS CONCRETE
AS OPPOSED TO STEEL, SINCE THIS FACT IS A FACTOR IN THE COST OF THE
RENOVATION.
RENOVATIONS COST BETWEEN 130 AND 180 DOLLARS PER SQUARE FOOT, 200 DOLLARS
FOR A SLIVER BUILDING. UPTOWN FOUNDATIONS ARE IN ROCK, DOWNTOWN IN MUCK.
DETERMINE WHETHER THE CONCRETE OR STEEL CAN TAKE THE ADDITIONAL LOADING
THE RENOVATIONS REQUIRE.
75
GRANITE AND GLASS CURTAIN WALLS COST 80 DOLLARS PER S.F., WHILE PRECAST
CONCRETE PANELS ARE 50 DOLLARS PER S.F.
DO YOU HAVE TO REPLACE MECHANICAL SYSTEMS?
DO REINFORCED FOUNDATIONS OR STRUCTURES NEED TO BE INSTALLED?
END OF CLASS TWO
CLASS THREE
2/25/91
GUEST SPEAKER: ARCHITECT, EGGERS GROUP, RICK MORRIS
GUEST SPEAKER: ARCHITECT, EGGERS GROUP, HANNY HASSAN
MENTOR
MARKETING AND
LEASING MENTOR
**
**
***
**
**
**
**
**
**
**
**
**
76
- =THE BUILDING
- = THE BUILDING
77
BLOCKFRONT W/ 2
LOCATIONS FOR CORE
CORNERBLOCK
MIDBLOCK
78
AMENITIES (CONTINUED)
*
*
*
*
BONUSES ARE AVAILABLE FOR INCLUSIONARY HOUSING, AND PLAZAS. PLAZAS ARE
AN ENDANGERED BONUS.
FORCES ARE FORMING ALLIANCES TO BAR BONUSES FOR
THIS AMENITY.
RESIDENTIAL TOWER DESIGN
* MAP VIEW OPPORTUNITIES BY COLOR-CODING ADJACENT BUILDING HEIGHTS AROUND
THE SITE.
10 PERCENT OF YOUR LOT LINE FACADE CAN BE COVERED IN WINDOWS. ADJACENT
BUILDINGS, HOWEVER, HAVE THE RIGHT TO CLOSE THESE WINDOWS OFF.
THESE
WINDOWS ARE CALLED LOT LINE WINDOWS.
SQUARE FOOTAGE THAT GOES INTO A HEALTH CLUB AMENITY IS NOT HELD AGAINST
THE MAXIMUM FAR. THE CONDITIONS FOR THE DESIGN OF THE HEALTH CLUB ARE
SPECIFIED IN THE CODE.
OUTSIDE MEMBERSHIP IS NOT PERMITTED, SO COSTS
CANNOT BE OFFSET BY OUTSIDE MEMBERSHIP FEES.
PUTTING THE CLUB ON THE
FIRST OR SECOND FLOOR IS A GOOD IDEA SINCE THE LOWER FLOORS ARE NOT
DESIRABLE FOR RESIDENTIAL USES.
MOST PEOPLE PREFER RECTANGULAR ROOMS UNLESS THE PROPORTIONS OF THE ROOM
PERMIT OTHERWISE.
MEET NEXT WEEK AT THE "LIPSTICK BUILDING", 885 THIRD AVE. (GERALD HINES
79
80
81
82
TABLE OF CONTENTS
"ABLE"
248
"RATIONALLY SUPPORT"..................................................
"READY, WILLING, AND ABLE"...........................................
"SUBSTANTIALLY ADVANCE"...............................................
"TIME IS OF THE ESSENCE".............................................
"WILLING"
247
14TH AMENDMENT........................................................
80/20 FINANCING......................................................
ABANDONMENT 16
ABSORPTION 25, 26, 75, 76, 79, 148-150, 159, 173, 208, 212, 216,
309, 311
ABSTRACTS
185
ACCELERATED COST REDUCTION SYSTEM.................................
ACCELERATED DEPRECIATION.....................................60, 68, 213
ACCELERATED PAYMENT..................................................
ACCELERATION 186, 216, 271
ACCOUNTING FOR CONSTRUCTION...........................................
ACCOUNTING FOR HOLDING COSTS..........................................
ACCOUNTING FOR LEASING TRANSACTIONS...................................
ACCOUNTING ISSUES OF SYNDICATION......................................
ACCOUNTS RECEIVABLE..........................6, 9, 23, 27, 221, 224, 313
ACCRUAL
6, 7, 11, 13-15, 18, 24, 25, 34, 39, 42
ACCRUAL ACCOUNTING............................................15, 18, 39
ACCRUAL METHOD.................................7, 11, 13, 14, 24, 25, 34
ACCRUED EXPENSES......................................................
ACCUMULATED DEPRECIATION ACCOUNT......................................
ACQUIRING PROPERTY THROUGH THE SALE LEASEBACK.........................
ACQUISITION COST......................................................
ACRS
45, 60
ACTIVE INCOME.........................................................
ACTUAL ASSESSMENT....................................................
ACTUARIAL MORTGAGE SECURITY..........................................
ADDITIONAL RENT...................................37, 276, 277, 280, 281
ADJUSTABLE RATE MORTGAGE........................................207, 273
ADJUSTED BASIS.......44, 52, 54, 55, 59, 62, 67, 128, 132, 213, 216, 231,
252, 273
ADJUSTMENT (APPORTIONMENT) SCHEDULE..................................
ADMINISTRATIVE APPEAL................................................
ADMINISTRATIVE CODE TITLE 20.........................................
ADMINISTRATIVE DETERMINATION.........................................
ADVANCES TO OFFICERS..................................................
ADVERSE POSSESSION...................................................
AESTHETIC UNIQUENESS.................................................
AFFIDAVIT OF ENTITLEMENT.............................................
AFFIRMATIVE COVENANTS................................................
AFFIRMATIVE INSURANCE OF CONTIGUITY..................................
AGGLOMERATION........................................................
AGRIBUSINESS 163, 165
83
84
85
165-167, 169, 170, 181, 207, 213, 216, 221, 232, 236, 252,
253, 258, 276, 289, 290, 295, 298, 303, 305-307, 309, 311,
312, 315-317, 320, 323, 328-330
BUY AND SELL AGREEMENT...............................................
BUYER'S INITIAL INVESTMENT.........................................
C CORPORATION...................................3, 5, 51, 57, 58, 63, 69
CAM
82, 130
CAMPBELL CASE.....................................................
CAP
30, 32, 44, 107, 111, 114, 116, 118, 129, 130, 137,
163, 195, 198,
204, 214, 218-220, 231, 232, 273, 281, 282, 285, 337
CAP CONTRACT 218
CAP RATE
30, 32, 44, 107, 114, 116, 118, 129, 137, 163, 195,
198, 204,
214, 218, 232, 337
CAP RATES
130, 198
CAPITAL
3, 6, 7, 18-20, 22-25, 28-31, 41, 43, 45-47, 53-58,
62, 64, 66,
81, 101, 103, 104, 129, 135, 146-148, 151, 168, 171-173,
180, 193, 194, 205, 213, 214, 219, 222, 223, 233, 236, 257,
302, 306, 308, 309, 317, 318, 325
CAPITAL ASSET....................................................56, 318
CAPITAL ASSET PRICING MODEL..........................................
CAPITAL BUDGET.............................................194, 308, 317
CAPITAL GAINS OR LOSS.................................................
CAPITAL IN EXCESS OF PAR..........................................
CAPITAL LEASE................................6, 18-20, 22-25, 43, 46, 47
CAPITAL MARKET.......................................................
CAPITAL STOCK.........................................................
CAPITALIZATION CRITERIA........................................19, 21
CAPITALIZATION METHOD........................................30, 44, 115
CAPITALIZATION OF INTEREST............................................
CAPITALIZATION RATE.....................................26, 30, 114, 203
CAPITALIZE 22, 25, 34, 41, 43, 65, 108, 118
CAPITALIZED STATEMENT..................................................
CAPITALIZING 24
CAPTURE RATE 75, 76, 85
CARRYING LOAN-UP COSTS............2, 3, 16, 20-22, 34, 49, 196, 212, 306
CASH FLOW
6, 21, 24, 29, 30, 32, 53, 78, 99, 106, 115-120, 128,
134,
136-138, 158, 191, 192-194, 197, 198, 202-205, 208, 209,
212, 214, 215, 218, 219, 223, 225, 226-228, 232, 234,
237-239, 312, 321, 322, 325, 329, 336
CASH FLOW MODEL......................................................
CASH FLOW MORTGAGE...................................................
CASH METHOD 7, 42
CASH ON CASH ........................................................
CASUALTY INSURANCE.........................................289, 290, 295
CEILING PRICE........................................................
CENSUS TRACT 85
86
87
88
CORPORATION POSITIVES..................................................
CORRECTION DEED.................................................245, 269
COST APPROACH........................................................
COST BASIS 3, 15, 17, 195
COST METHOD 1, 2, 217
COST OF OCCUPANCY RATIO..............................................
COST PLUS
157, 331
COST RECOVERY METHOD..................................................
COURT TESTIMONY......................................................
COVENANT OF SEIZIN.........................................252, 263, 270
COVERAGE
82, 116, 128, 188, 228, 289
CPA
1, 7, 8, 61
CRC
293
CREATOR
118
CREDIT ANALYSIS.................................................224, 226
CREDIT ENHANCEMENT...................................................
CREDIT LINE MORTGAGE CERTIFICATE.....................................
CUMULATIVE PREFERENTIAL RETURN.......................................
CUOMO TAX
253, 257
CURRENT ASSETS....................................................
CURRENT COUPON.......................................................
CURRENT LIABILITIES...................................................
DALLAS
130, 160, 161, 168-170, 174-176
DATE OF SALE 68
DCF
116, 124, 329
DEALERS IN REAL ESTATE................................................
DEBENTURE
203
DEBT CAPACITY........................................................
DEBT CAPITAL 6, 41
DEBT COVERAGE RATIO...................................................
DEBT SERVICE COVERAGE...........................................116, 228
DEBT SERVICE RATIO...................................................
DECISION TREE OF PROFIT RECOGNITION.......11, 28, 89, 94, 95, 97-99, 102,
104, 162, 183, 226, 279, 317, 318, 322, 325
DECLINING BALANCE..................................................
DEDUCTION OF INTEREST.................................................
DEDUCTIONS 47, 54, 60, 63-66, 301
DEED
3, 68, 185, 187, 241, 245, 248, 249, 252, 256,
258-260, 262-264,
267, 269, 296
DEFAULT
13, 14, 106, 186, 187, 204, 205, 237, 254, 266, 270,
276, 336
DEFAULT PROVISION....................................................
DEFEASANCE 187
DEFERMENT OR AMORTIZEMENT OF PROFIT ON A SALE LEASEBACK...............
DEFERRED DEVELOPMENT AND MORTGAGE COST...............21, 27, 36, 46, 127
DEFICIENCY JUDGMENT..................................................
DEFICIT ACCUMULATED DURING DEVELOPMENT STAGE..........................
DELIVERY OF POSSESSION OF THE SPACE.........101, 197, 255, 263, 279, 285,
317
89
90
ELECTRICITY PROVISION................................................
ELLWOOD FORMULA.................................................115, 116
ELLWOOD FORMULA (FAN GRAPH)..........................................
EMERGENCY REPAIR LIEN................................................
EMERGENCY TENANT PROTECTION ACT (ETPA)...............................
ENCUMBRANCE 248, 254, 258
ENGINEER'S REPORT....................................................
ENTITY
3-6, 10, 26, 27, 29, 43, 53, 57, 64, 65, 68-70, 106,
185, 258,
274, 276, 335
ENVIRONMENTAL ASSESSMENT FORM........................................
ENVIRONMENTAL REVIEW........................................98, 100, 101
ENVIRONMENTAL REVIEW PROCESS..........................................
EQUAL PERCENTAGE METHOD..............................................
EQUITY
1-3, 6, 28, 30, 40, 41, 66, 90, 107, 115-117, 121,
125-128, 138,
183, 184, 187, 188, 191-193, 197-199, 203, 205, 219-226,
232, 237-239, 250, 257, 271, 273, 274, 307, 325
EQUITY DIVIDEND......................................................
EQUITY INTEREST........................................................
EQUITY KICKER LOAN...................................................
EQUITY METHOD.......................................................
EQUITY METHOD OF ACCOUNTING............................................
EQUITY OF REDEMPTION.................................................
ERTA
45
ESCALATIONS 18, 194, 276, 281, 282, 285, 287
ESCROW PROVISION RIDER...............................................
ESTIMATED LIFE SPAN....................................................
ESTIMATED USEFUL LIFE..........................................8, 10, 21
ESTOPPEL CERTIFICATE..................................250, 269, 270, 288
ETHICS IN REAL ESTATE................................................
EUCLID V. AMBLER..............................................89, 95, 97
EVALUATION 31, 33, 156, 197, 203, 204, 216, 217, 226, 237
EVICTION PLAN..........................................185, 241, 299
EXCEPTIONS 3, 8, 9, 31, 44, 51, 73, 90, 247, 252, 258, 260, 302
EXCHANGE OF LIKE-KIND PROPERTY .........3, 11, 53, 64, 72, 73, 115, 126,
141,
160, 211, 219
EXCLUSIVE AGENCY LISTING.............................................
EXCLUSIVE RIGHT TO SELL..............................................
EXCULPATION CLAUSE.........................................265, 271, 272
EXCULPATORY 37, 241, 265, 271, 272, 275
EXCULPATORY PROVISIONS...............................................
EXISTING STRUCTURE......12, 14, 24, 33, 48, 75, 76, 79, 96, 97, 163, 183,
241, 249, 250, 278, 306, 311, 319
EXPENSE STOPS...................................................194, 208
EXPENSED AS INCURRED ......................................24, 27, 33
EXPENSES
2, 3, 6, 7, 9, 10, 16, 18, 25, 26, 28, 29, 31-34, 37,
63, 66,
82, 87, 103, 104, 114, 123, 124, 128, 133, 192, 196, 198,
91
200-203, 205, 206, 208, 209, 213, 214, 215, 218, 227-229,
235, 251, 252, 277, 278, 281, 282, 290, 312, 337
EXPENSING
24, 45
EXTERNALITIES.........................................................
FABRICATION 81, 146-148
FACILITIES MANAGEMENT...........................................305, 319
FAIR MARKET VALUE.....................................15, 20, 35, 36, 53
FAIR MARKET VALUE METHOD..............................................
FAIR PRACTICES ACT...................................................
FAIR VALUE 19, 22, 35, 46, 297
FAIR VALUE METHOD....................................................
FANNIE MAE 205, 233
FAR
89, 92, 104, 108, 112, 130, 151, 172, 194, 202, 266,
270, 330, 334, 335
FASB
1, 3, 11, 13, 15, 17, 18, 20, 26, 30, 32, 34, 38, 42,
46, 47, 51
FASB 66
3, 11, 13, 20, 32
FEDERAL FUNDS RATE...................................................
FEDERAL HOME LOAN BANK BOND INDEX....................................
FEDERAL RESERVE REGULATION Q.........................................
FEDERAL RESERVE REGULATION THREE.....................................
FEE SIMPLE INTEREST .................................................
FEE-SIMPLE 111, 185
FEE-SIMPLE ABSOLUTE ESTATE...........................................
FHLMC
205
FIFTH AMENDMENT.......................................................
FINANCIAL ACCOUNTING ..............................1, 17, 18, 24, 29, 30
FINANCIAL ANALYSIS....................................183, 184, 204, 226
FINANCIAL INTERMEDIARIES........................................221, 222
FINANCIAL PROJECTIONS................................................
FINANCIAL REPORTING...............................................
FINANCIAL STATEMENT.........................7, 8, 10, 16, 24, 38, 40, 44
FINANCIAL STATEMENTS.....................1, 2, 7, 8, 10, 29, 30, 44, 186
FINANCING EXPENDITURES................................................
FINANCING REVENUE.....................................................
FINANCING STATEMENT.............................................266, 268
FINANCING THE DEVELOPMENT.............................................
FIRPTA
69, 259
FIVE P'S OF CREDIT ANALYSIS..........................................
FIXED
25, 29, 38, 123, 200-202, 205, 211, 212, 218, 219,
224, 225, 230,
231, 251, 273, 303, 317, 331
FIXED AND VARIABLE EXPENSES...........................................
FIXED ASSET 25, 38
FIXED CORPORATE FACILITY.............................................
FIXED OPERATING EXPENSES.............................................
FIXED PRICE CONTRACT.................................................
FIXED RATE MORTGAGE.............................................230, 273
FIXTURES
195, 244, 254, 268, 270
FLEX SPACE 148, 207
92
93
94
174,
207,
234,
270,
179,
212,
235,
271,
95
275,
278, 279, 297, 298
LEASEHOLD ESTATE................................................109, 185
LEASEHOLD INTEREST..............................................244, 274
LEASING
19, 40, 43, 118, 135, 136, 198, 208, 210, 212, 214,
228, 246,
248, 274, 275, 281, 285, 288, 314, 323, 328, 332, 335
LEASING BROKER.......................................................
LESSOR ACCOUNTING.............................................20, 22, 23
LETTER OF COMMITMENT............................................240, 267
LEVERAGE
124, 126, 127, 199-201
LEVERAGED BUY OUT....................................................
LEVERAGED LEASE....................................................
LIABILITY
2-6, 19, 24, 27, 28, 37, 40, 45, 47, 52-54, 188, 265,
267,
269, 272, 275, 286, 289, 291
LIBOR
218, 219, 222, 225, 228, 230, 231
LIBOR OPTION 222
LICENSE
185, 244, 275, 276
LIEN
12, 14, 38, 186, 232, 233, 237, 248, 250, 251, 253,
254, 264, 266,
273, 274, 275, 279, 284
LIEN PRIORITY........................................................
LIEN THEORY STATE....................................................
LIEN THEORY STATES..............................................264, 275
LIEN WAIVERS 186
LIKE-KIND EXCHANGE....................................................
LIMITED COMMON ELEMENTS..............................................
LIMITED PARTNER.....................................................
LIMITED PARTNERSHIP NEGATIVES..........................................
LIMITED PARTNERSHIP POSITIVES .........................................
LIMITING CONDITIONS OF AN APPRAISAL...............79, 113, 179, 219, 286
LINE OF BUSINESS................................................305, 323
LIQUID
27, 233, 325
LIQUIDATION VALUE....................................................
LOAN APPLICATIONS....................................................
LOAN BALANCE 125-128
LOAN RATIO 116, 128
LOAN REVIEW PACKAGE..................................................
LOAN TO VALUE (LTV)..................................................
LOAN TO VALUE RATIO...................................225, 227, 228, 235
LOCATION QUOTIENT.........72, 79, 81, 86-88, 92, 93, 105, 109, 111, 129,
139,
141, 144, 147-150, 156, 157, 158, 271, 327, 333, 334
LOCUS SIGILLI........................................................
LOFT LAW
293, 295
LOLLIPOP CONDOMINIUMS................................................
LONDON INTERBANK OFFERING RATE ......................................
96
97
98
OPERATING EXPENDITURES................................................
OPERATING EXPENSES......9, 29, 31, 82, 192, 198, 200, 202, 205, 208, 209,
215, 218, 228, 229, 281, 282, 290, 337
OPERATING LEASE........................................18-23, 36, 43, 46
OPERATING LEVERAGE...................................................
OPERATING PLAN.............................................304, 309, 317
OPERATING REVENUE.....................................................
OPERATIONS PLANNING AND BUDGETING CYCLE..............................
OPPORTUNITY COST.....................................................
ORDINARY GAINS OR LOSS.........................................24, 55
ORIGINAL BASIS..........................21-23, 25, 55, 67, 213, 257, 277
OTHER ASSETS 27, 38, 45, 221, 265, 275
OVERAGE
157, 208
OVERALL CAPITALIZATION RATE (OCR)....................................
OVERALL RATE (OAR)...................................................
OVERFLOW EFFECT......................................................
OVERHEAD
29, 33, 34, 140, 197, 282, 315
OWNERSHIP
3, 4, 6, 11, 12, 14, 19, 22, 43, 55, 64, 72, 111, 185,
188,
244, 264, 297, 298, 307
PACIFIC RIM 171-173
PAID IN SURPLUS...................................................
PAR VALUE
28, 30
PARTICIPATIONS..................................................225, 237
PARTNERSHIP 3-6, 10, 15, 41-43, 51-54, 58, 64-66, 69, 72, 188,
226,
253, 274, 335
PARTNERSHIP VS. S CORPORATION.........................................
PASS THROUGH SECURITIES.........................................233, 234
PASSIVE INCOME.............................................3, 42, 59, 60
PASSIVE LOSS AND AT RISK RULES........................................
PASSIVE LOSS RULES.................................55, 59, 62-64, 69, 73
PASSIVE LOSSES.................................3, 41, 42, 58, 60, 64, 68
PASSIVE PARTNER........................................................
PAYMENT BONDS.........................................................
PAYMENT TO INCOME RATIO..............................................
PAYOFF LETTER...................................................240, 256
PENN CENTRAL V. NEW YORK CITY.........................................
PENNSYLVANIA COAL V. MAHAN............................................
PENNY FOR PENNY......................................................
PERCENTAGE OF COMPLETION METHOD........................7, 15, 38, 39, 42
PERCENTAGE RENT.................................................194, 208
PERFORMING NON-PERFORMING LOAN.......................................
PERIOD OF INTEREST CAPITALIZATION.....................................
PERMANENT LOAN...........................................13, 14, 37, 230
PERSONAL PROPERTY.......4, 5, 31, 37, 38, 52, 55, 56, 58, 65, 68, 70, 72,
80,
132, 188, 213, 216, 254, 265, 270
PHASE IN RULES........................................................
PHASE ONE REPORT.....................................................
99
100
PURCHASE MONEY MORTGAGE......13, 19, 22, 32, 33, 41, 64, 66, 67, 84, 103,
111, 127, 138, 171, 183, 187, 205, 210, 213, 214, 218, 229,
238, 246-250, 253, 254, 256, 257, 300, 301, 311
PUT / CALL 229
QUALIFICATIONS FOR INSOLVENCY.........................................
QUALIFIED NON-RECOURSE DEBT.......................................
QUALIFYING ASSET......................................................
QUIET TITLE ACTION...................................................
QUIT-CLAIM DEED......................................................
QUITCLAIM DEED.............................................185, 252, 263
QUIZ
121, 133, 147
R&D BALANCE 148
RANKING SYSTEM.......................................................
RATIFY
287
REAL ESTATE ESCALATIONS..........................................18, 281
REAL ESTATE INVESTMENT TRUSTS..............................202, 221, 226
REAL ESTATE SETTLEMENT AND PROCEDURES ACT (RESPA)....................
REAL ESTATE TAX ESCALATION...........................................
REAL ESTATE TAXATION ................................................
REAL PROPERTY.......17, 56, 62, 65, 66, 71, 105, 139, 183, 186, 216, 242,
248, 253, 258, 259, 261, 274, 291, 292, 295-298
REALIZED GAIN .......................................48, 70-73, 174, 257
REASSESSMENT 292, 304
REBNY FORM 275
RECAPTURE
286
RECOGNITION OF GAIN OR LOSS...........................................
RECOGNIZED GAIN...................................................
RECONCILIATION APPROACH..............................................
RECORD OF SALE........................................................
RECORDING CHARGE.....................................................
RECORDING OF ASSETS AND LIABILITIES WITH A CAPITAL LEASE..............
RECREATIONAL 207
RED HERRING 300
REDEMPTION 187
REDLINING
206
REDUCED PROFIT METHOD.................................................
REFINANCING 123, 195, 208, 228, 237, 307
REGIONAL ECONOMICS.........36, 76, 83, 130, 139, 152, 160, 168, 174, 175,
205,
207, 305
REGULAR TAX 68
REGULATORY ACCOUNTING.................................................
REHABILITATION...............................................36, 69, 146
REILLY'S LAW 84
REIT
202, 203
RELATIVE FAIR MARKET VALUE..........35, 36, 117, 129, 132, 144, 148, 150,
170,
178, 198, 236, 244, 278, 301, 317
RENT CONTROL 103, 183, 294
101
102
SALE/LEASEBACK.....................................................
SALES TYPE LEASE..............................................20, 23, 25
SALES VALUE 12, 13, 35, 36
SALES-TYPE LEASE......................................................
SALVAGE VALUE......................................................
SATISFACTION 267, 268
SCHEDULE B 57, 258, 259, 283, 301, 302
SEAWALL V. N.Y.C......................................................
SECOND MORTGAGE....................................14, 46, 125, 237, 273
SECONDARY DATA...................................................77, 184
SECONDARY MORTGAGE MARKET.......................................205, 265
SECTION 1031 72, 73
SECTION 1033 73
SECTION 108 73
SECTION 1231 56, 64
SECTION 1231 ASSET....................................................
SECTION 179 17, 65
SECTION 216 62, 301
SECTION 216 OF THE I.R.C.............................................
SECTION 223 F........................................................
SECTION 227 291, 295
SECTION 255 267, 280
SECTION 263 62
SECTION 267 58
SECTION 275 280
SECTION 339-i........................................................
SECTION 339-r........................................................
SECTION 339n 299
SECTION 339p 299
SECTION 339u 299
SECTION 339v 299
SECTION 351 53
SECTION 352 eee......................................................
SECTION 352 eeee.....................................................
SECTION 38 65
SECTION 39E - COMMON ELEMENTS........................................
SECTION 421a 97, 105, 292, 293
SECTION 421a OF THE REAL PROPERTY TAX LAW............................
SECTION 421b 105
SECTION 465 66
SECTION 469 63
SECTION 5-321 OF THE GENERAL OBLIGATIONS STATUTE.....................
SECTION 72-21.........................................................
SECTION 721 53
SECTION 73-00.........................................................
SECTOR GROWTH....................................................81, 148
SECURITY AGREEMENT..........10, 15, 18, 29, 161, 179, 186, 202, 227, 228,
233-236, 244, 265, 266, 268, 288, 312
SEGMENTATION 77, 159
103
SELLING BROKER.......................................................
SERIAL ZERO COUPON BOND..............................................
SERVICES
3, 6, 13, 32, 34, 36, 53, 59, 87, 101, 102, 139, 149,
160,
161, 169, 170, 173, 196, 213, 247, 250, 277, 283, 285, 303,
305, 309, 311, 313, 314, 323
SETBACK EXPOSURE LINE................................................
SETUP
197, 198
SHARE ALLOCATION.....................................................
SHAREHOLDERS' EQUITY..................................................
SHELL CORPORATION....................................................
SHEPHERDING 243, 261
SHORT INTEREST.......................................................
SIC CODES
79, 82, 164
SIGMOID CURVE....................................................166
SINKING FUND 120, 121, 128
SKY EXPOSURE CURVE..............................................332, 333
SMART BUILDING.......................................................
SMOKE DETECTOR AFFIDAVIT.............................................
SOCIAL UNIQUENESS....................................................
SOFT COSTS 196, 329
SPECIAL DISTRICTS................................................96, 329
SPECIAL PERMIT....................................................
SPECIAL RISK 301
SPECIAL WARRANTEE DEED...............................................
SPECIFIC IDENTIFICATION13, 26, 33-36, 68, 75-78, 84, 99, 113,
146-148,
156-158, 174, 205, 235, 241, 244, 245, 283, 286, 287, 297,
327, 336
SPECULATOR 57, 167
SPREADS
197, 224
SQUARE FOOTAGE.........35, 75, 132, 276, 281-283, 286, 297, 319, 333, 335
SQUARE FOOTAGE METHOD............................................35, 297
STAND-BY COMMITMENT..................................................
STANDARD OCCUPATION CLASSIFICATION.......42, 82, 149, 195, 225, 228, 230,
235, 266, 278, 291, 318, 320
STATE SALE TAX.......................................................
STATE TRANSFER TAX..............................................253, 257
STATED VALUE 30
STATEMENT OF CASH FLOWS...............................................
STATUTE
49, 185, 186, 240, 242, 261, 268, 291, 292, 296-298
STATUTE OF FRAUDS..........................................185, 186, 240
STATUTORY LAW.........................................242, 243, 248, 295
STRAIGHT LINE METHOD........8, 18, 20, 21, 44, 46, 52, 68, 109, 170, 281,
313
STRATEGIC BUSINESS UNIT..............................................
STRATEGIC MANAGEMENT............................................306, 308
STRATEGIC PLANNING CYCLE.............................................
SUBLEASES AND TERMINATIONS........................................
SUBLET CAPITAL LEASE..................................................
104
105
106
107