THE 39TH CREDIT:

A STUDENT'S NOTEBOOK AND GUIDE TO THE

MASTERS OF SCIENCE IN REAL ESTATE DEVELOPMENT

AND INVESTMENT PROGRAM AT

NEW YORK UNIVERSITY

BY JEREMY LITT

MANAGERIAL ACCOUNTING FOR REAL ESTATEPROFESSOR MICHAEL F.X. WATERS

AUTUMN 1989

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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 BUSINESSA.K.A. COMPLIANCE ACCOUNTINGTO I.R.S., S.E.C., BOARD OF DIRECTORS OF BANKS, LENDERS, CREDITORSPRODUCED FOR EXTERNAL USE

MANAGERIAL ACCOUNTINGA.K.A. CONTROL ACCOUNTINGMANAGING 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 PRINCIPLESFASB FINANCIAL ACCOUNTING STANDARDS BOARD (IN EXISTENCE SINCE 1973)

GAAP AND FASB DETERMINE THE APPROPRIATE STANDARDS FOR THE INDUSTRYFASB IS LIKE THE SUPREME COURT OF ACCOUNTING

WHY DO ACCOUNTANTS DEAL MOSTLY WITH "EXTERNAL" ACCOUNTING?FOR TWO REASONS:ACCOUNTANTS MAKE MORE MONEY DOING ITCERTIFIED AUDITS ARE NECESSARY TO GET LENDING, MANAGEMENT IS NOT

CPA - CERTIFIED PUBLIC ACCOUNTANTCMA - 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 ACCOUNTINGRE: 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

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USE THE COST METHOD.

AS A GENERAL RULE, UNDER THE EQUITY METHOD THE INVESTOR INITIALLY RECORDS ITS INVESTMENT IN THE VENTURE AT COST AND ADJUSTS THE CARRYING AMOUNT OF THE INVESTMENT TO RECOGNIZE THE INVESTOR'S SHARE OF EARNINGS OR LOSSES OF THE VENTURE SUBSEQUENT TO THE DATE OF ACQUISITION. DISTRIBUTIONS RECEIVED FROM THE VENTURE REDUCE THE CARRYING AMOUNT OF THE INVESTMENT (SEE EXAMPLE 9 BONGIORNO 2.53.1).

COST METHOD OF ACCOUNTING

IN SOME INSTANCES A PARTNER'S INTEREST IN THE JOINT VENTURE MAY BE SO MINOR THAT THE VENTURER MAY HAVE VIRTUALLY NO INFLUENCE OVER THE OPERATING AND FINANCIAL POLICIES OF THE REAL ESTATE VENTURE. IN SUCH CASES THE COST METHOD OF ACCOUNTING FOR THE VENTURER'S INVESTMENT MAY BE APPROPRIATE. UNDER THE COST METHOD, INCOME RECOGNIZED BY THE VENTURER IS LIMITED TO DISTRIBUTIONS RECEIVED, EXCEPT THAT DISTRIBUTIONS IN EXCESS OF THE VENTURER'S SHARE OF EARNINGS AFTER THE DATE OF THE INVESTMENT ARE APPLIED TO REDUCE THE CARRYING VALUE OF THE INVESTMENT. (SEE BONGIORNO 2.53.3)

FULL CONSOLIDATION METHOD OF ACCOUNTING

WHERE THE VENTURER HAS AN INTEREST OF MORE THAN 50 PERCENT, IT MAY CONSOLIDATE FOLLOWING NORMAL CONSOLIDATING RULES. IF THESE JOINT VENTURERS ARE NOT CONSOLIDATED, IT MAY BE APPROPRIATE TO INCLUDE SEPARATE COMBINED JOINT VENTURE FINANCIAL STATEMENTS AND FOOTNOTES, ALONG WITH THE CONSOLIDATED FINANCIAL STATEMENTS.

PROPORTIONATE CONSOLIDATION METHOD OF ACCOUNTING

IN SITUATIONS WHERE AN OWNER HAS AN UNDIVIDED INTEREST IN EACH ASSET AND IS PROPORTIONATELY LIABLE FOR ITS SHARE OF EACH LIABILITY, AND WHERE THE JOINT VENTURE AND THE VENTURER ARE IN A RELATED BUSINESS, SOME COMPANIES HAVE PROPORTIONATELY CONSOLIDATED THE JOINT VENTURE - RECOGNIZING THE VENTURER'S PROPORTIONATE SHARE OF THE JOINT VENTURE'S ASSETS, LIABILITIES, REVENUES, AND EXPENSES.

PROPORTIONATE CONSOLIDATION IS RARE BECAUSE IT CAN NOT PRESIDE OVER PROPERTIES THAT REQUIRE JOINT CONTROL (REQUIRING TWO OR MORE OWNERS TO SIGN OFF ON DECISIONS).

ALLOCATION OF INCOME TO PARTNERS

IN ORDER TO DETERMINE THE INVESTOR'S SHARE OF VENTURE NET INCOME AND LOSS, SUCH AGREEMENTS OR ARRANGEMENTS SHOULD BE ANALYZED TO DETERMINE HOW AN INCREASE OR DECREASE IN NET ASSETS OF THE VENTURE, DETERMINED IN ACCORDANCE WITH GAAP, WOULD AFFECT CASH PAYMENTS TO THE INVESTOR OVER THE LIFE OF THE VENTURE AND ON ITS DISSOLUTION. PROJECTED CASH DISTRIBUTIONS, OR THEIR EQUIVALENT, ARE USED AS THE DETERMINING FACTOR

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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 NAMEPARTNERSHIP - 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 CONTRIBUTIONSINVESTMENT 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)

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PROPRIETORSHIP POSITIVES - PAY EXPENSES, GET PROFITS, NO REPORTS NECESSARY TO BE PREPARED FOR ANYBODY, FREE FROM OUTSIDE CONTROL, PASSIVE INCOME (IE. DEPRECIATION) LOSSES MAY BE USEFUL.PROPRIETORSHIP NEGATIVES - PAY EXPENSES, GET LOSSES, MAY HAVE LOSSES WHICH ARE PASSIVE AND NOT OFFSET AGAINST NON-PASSIVE LOSSES.

BONGIORNO - THE SOLE PROPRIETORSHIP HAS THE DISADVANTAGE OF UNLIMITED LIABILITY, ALTHOUGH IT HAS THE ADVANTAGE OF UNLIMITED CONTROL.

THE GENERAL PARTNERSHIP (K-1)

GENERAL PARTNERSHIP POSITIVES - GENERALLY, EASY TO CREATE. NO PERMISSION NEEDED EXCEPT FOR AGREEMENT OF THE OTHER PARTIES IN THE PARTNERSHIP (FOR EXAMPLE, A PARTNERSHIP CAN NOT BE LEGALLY WILLED TO ANOTHER SINCE ALL PARTIES MAY NOT BE IN AGREEMENT), OWNERSHIP INTEREST IN PARTNERSHIP ASSETS (I.E. IF YOU HAVE A 10% INTEREST, YOU OWN 10% OF ALL THE PARTNERSHIP'S ASSETS. COSTS ONLY 1500 TO 2000 DOLLARS TO FORM.GENERAL PARTNERSHIP NEGATIVES - PERSONAL LIABILITY FOR ALL CLAIMS AGAINST ASSETS. YOU ARE 100 PERCENT LIABLE FOR ALL DEBTS EVEN THOUGH YOUR OWNINGS MAY NOT REPRESENT MORE THAN 10 PERCENT OF THE PARTNERSHIP.

BONGIORNO- DOES NOT PAY TAXES AS SUCH. ALL INCOME OR LOSS OF THE PARTNERSHIP IS PASSED THROUGH TO THE INDIVIDUAL PARTNER AND BECOMES PART OF THE INDIVIDUAL PARTNER'S PERSONAL TAXABLE INCOME OR LOSS FOR ANY GIVEN YEAR.

THE LIMITED PARTNERSHIP

LIMITED PARTNERSHIP POSITIVES - SEE OTHER POSITIVES OF GENERAL PARTNERSHIP, THEY ALSO APPLY HERE. COMBINES THE BENEFITS OF PARTNERSHIPS AND CORPORATIONS. A LIMITED PARTNER CAN NOT BE INVOLVED IN THE MANAGEMENT OF A COMPANY, OTHERWISE HIS STATUS CHANGES TO "GENERAL PARTNER".LIMITED PARTNERSHIP NEGATIVES - NEED APPROVAL TO FORM (FROM THE STATE OR COUNTRY), NOT EASY TO FORM, EXPENSIVE TO FORM, FORMATION MUST BE ANNOUNCED IN PAPER SEVEN CONSECUTIVE WEEKS IN A ROW, AND THE ADVERTISEMENT MUST SAY "WHO" AND "HOW MUCH" IS INVOLVED, TAKES 10,000 TO 15,000 DOLLARS TO FORM.

BONGIORNO- ALL INCOME OR LOSS OF THE LIMITED PARTNERSHIP IS PASSED THROUGH TO THE INDIVIDUAL PARTNER AND BECOMES PART OF THE INDIVIDUAL PARTNER'S PERSONAL TAXABLE INCOME OR LOSS FOR ANY GIVEN YEAR. IT IS AN ASSOCIATION IN WHICH ONE OR MORE GENERAL PARTNERS HAVE UNLIMITED LIABILITY AND ONE OR MORE PARTNERS HAVE ONLY SUCH PERSONAL LIABILITY AS THEY SPECIFICALLY UNDERTAKE IN THE PARTNERSHIP AGREEMENT. THIS TYPE OF ENTITY IS ONE OF THE MORE POPULAR FORMS OF OWNERSHIP AS IT COMBINES LIMITED LIABILITY WITH INDIVIDUAL TAX TREATMENT.--------------DISCUSSION CONTINUED

AT LEAST ONE GENERAL PARTNER, ANY NUMBER OF LIMITED PARTNERS.

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THE GENERAL PARTNER HAS UNLIMITED LIABILITYTHE LIMITED PARTNER HAS LIMITED LIABILITY, CORRESPONDING TO HIS CONTRIBUTION TO THE PARTNERSHIP AS MADE, OR AS PROMISED.

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.

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MAXIMUM TAX AT 28 PERCENT, THE PERSONAL RATE.

MUST HAVE A BASIS IN CORPORATION TO TAKE A LOSS, CANNOT TAKE A LOSS GREATER THAN YOUR INVESTMENT UNLESS YOU ARE A GENERAL PARTNER.

END OF CLASS ONE

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.

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EXPENSES IS THE COST OF GOODS, SERVICES, AND FACILITIES USED IN THE PRODUCTION OF CURRENT REVENUE (THAT REVENUE TO BE RECEIVED WITHIN ONE YEAR).

REVENUE - EXPENSES = NET INCOMEFOR EXAMPLE:

INCOME EXPENSES 10,000 2,000 RENT

2,500 SUPPLIES1,000 SALARY 500 OTHER

-------------- --------------10,000 - 6,000 = 4,000

THEREFORE, 4,000 IS THE NET INCOME.

THE MATCHING PRINCIPLE - MATCHING "APPROPRIATE" REVENUE AGAINST "APPROPRIATE" EXPENSES. "APPROPRIATE" REFERS TO THOSE EXPENSES AND REVENUES WITHIN THE SAME PERIOD.

RULE: CAPITAL INCREASES WITH INCOME AND DECREASES WITH LOSS.

THE CASH AND ACCRUAL METHODS OF ACCOUNTING

THE ACCRUAL METHOD: 1. THE INSTALLMENT METHOD2. THE COMPLETED CONTRACT METHOD3. THE PERCENTAGE OF COMPLETION METHOD

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

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INVENTORY CAN NOT HAVE A CAPITAL GAIN ON THAT INVENTORY.

FINANCIAL STATEMENTS:

WHEN YOU GET A FINANCIAL STATEMENT, YOU ASSUME THAT IT WAS PREPARED BY THE ACCRUAL METHOD UNLESS OTHERWISE STATED. THE OPPOSITE IS TRUE WITH INDIVIDUAL RETURNS.

CERTIFIED PUBLIC ACCOUNTANTS - THE "COMPANY" PREPARES THE FINANCIAL STATEMENT, NOT THE C.P.A., BECAUSE IT IS USED FOR EXTERNAL USE. SO, WHAT KIND OF CERTIFICATION OR SERVICE DOES THE CPA PROVIDE?THE CPA USES GAAP TO LEND CREDIBILITY TO THE FINANCIAL STATEMENT, SO THAT THE EXTERNAL PARTY CAN GAIN COMFORT FROM KNOWING THE REPORT WAS PROFESSIONALLY REVIEWED. THE INVOLVEMENT BY THE CPA MAY BE GREAT, OR ALMOST NO INVOLVEMENT AT ALL.

THE CERTIFIED FINANCIAL STATEMENT: A.K.A. THE CLEAN STATEMENT (AAA)

CANNOT BE CERTIFIED IF ANY ENTRY BY THE CPA FIRM IS MADE BY THE STAFF OF THE CPA FIRM RATHER THAN THE COMPANY, SINCE THE COMPANY PREPARES THE REPORT.STATEMENT: PREPARED ACCORDING TO GAAP.

NO OMISSIONS OR BASIS FOR DETERMINING FRAUD IN THE PREPARATION OF STATEMENTS.

ACCOUNTING PRACTICES CONSISTENTLY APPLIED. "CONSISTENT" MEANS "WE LOOKED AT LAST YEAR ALSO".YOU DON'T ALWAYS NEED THIS DEGREE OF REVIEW. IT IS VERY EXPENSIVE BECAUSE EVERYTHING IS REVIEWED IN GREAT DETAIL.

"CLEAN" MEANS, NO EXCEPTIONS, NO RESERVATIONS EXPRESSED.A CERTIFIED FINANCIAL STATEMENT WITH EXCEPTIONS MEANS THAT

THE REVIEW HAS DISCLAIMERS, THAT CERTAIN AREAS MAY NOT HAVE BEEN EXAMINED, AND THAT THEREFORE NO OPINION IS EXPRESSED.

THE REVIEW REPORT

"WE REVIEWED THE FINANCIAL STATEMENT AND HAVE REASON TO BELIEVE THAT THERE NEED BE NO MODIFICATION FOR THE DOCUMENT TO BE IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)".

A REVIEW REPORT IS A LIMITED STATEMENT.

THE COMPILATION REPORT

"WE REVIEWED THE FINANCIAL STATEMENTS, LISTED THEM, AND EXPRESS NO OPINION ON THE ACCURACY, CONFORMANCE, OR FAIRNESS ACCORDING TO GAAP. NOBODY STANDS BEHIND IT.

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DEPRECIATION

DEPRECIATION = COST / ESTIMATED LIFE SPAN

TO BE A DEPRECIABLE ASSET, IT MUST HAVE A USEFUL LIFE THAT EXCEEDS THE ACCOUNTING PERIOD (I.E. ONE YEAR). FOR EXAMPLE A BUILDING EXISTS FOR 40 YEARS. WE CAN NOT, FOR EXAMPLE, MATCH THE INCOME TO THE FULL COST IN A PARTICULAR YEAR. A VIOLATION OF THE MATCHING PRINCIPLE WOULD RESULT.

ESTIMATED USEFUL LIFE - HOW LONG WILL THE ASSET SERVE ITS INTENDED USE? ENGINEERING INPUT AND APPRAISAL BASED ON SOUND TECHNICAL ADVICE. LAND IS NEVER DEPRECIABLE, SO YOU CAN ONLY DEPRECIATE THE BUILDING ASPECT OF A PROPERTY.

THE STRAIGHT LINE METHOD OF DEPRECIATION

COST - RESIDUAL VALUE + SALVAGE VALUE = AMOUNT OF DEPRECIATION IN PERIOD

I.E. 450,000 = DEPRECIABLE COST40 YEARS = ECONOMIC LIFE450,000 / 40 = 8,750

DECLINING BALANCE200% - DOUBLE DECLINING BALANCE - GENERALLY UNACCEPTABLE TO I.R.S.

BUT THERE ARE EXCEPTIONS.150% - DECLINING BALANCE - GENERALLY ACCEPTABLE TO I.R.S.

SEE PAGE 159 OF EISEN

TAKE THE DEPRECIABLE COST, DIVIDE BY ECONOMIC LIFE, DO NOT PROVIDE FOR A SALVAGE OR RESIDUAL VALUE.

COST / ECONOMIC LIFE x 200% = 17,500

DEPRECIATION IS AN EXPENSE WHICH REDUCES INCOME FOR A PERIOD, AND WOULD THEREFORE REDUCE YOUR TAXES PAID IN A PERIOD, BECAUSE OF LOWER INCOME.

SUM OF THE YEARS DIGITS (SYD)SEE PAGE 161 OF EISEN

FOR THE PURPOSES OF ACCOUNTING, YOU HAVE TWO ASSET ACCOUNTS; LAND AND BUILDINGS. THIS IS BECAUSE LAND IS NOT DEPRECIABLE.

THE INCOME STATEMENT:

PROPERTY TAX IS INCLUDED IN OPERATING EXPENSES. ALSO INCLUDED ARE MAINTENANCE, UTILITIES, ETCETERA. THESE ARE EXPENSES NECESSARY TO GENERATE INCOME.

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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 NO NEW BOILER PAINTALL NEW ROOF PATCH ROOF

END OF SECOND CLASS

9/21/89

BONGIORNO - 2.22.4 TABLE

RENT

1ST 24 MONTHS................................120,000═╗NEXT 18 MONTHS................................150,000 ╠═"ANNEXT 18 MONTHS................................180,000 ║ ESCALATINGNEXT 12 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 WHICH IS IMPORTANT, WHICH IS DEFINED AS 5 PERCENT OR GREATER OF INCOME.

ESCALATION CLAUSES.............EXAMPLESBASE LABOR PRICEHEATING COSTSREAL ESTATE TAXES

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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 YEARSRESIDENTIAL 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".

-UNLESS- A 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 COMPLETEAN 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

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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 THE SALE IS CONSUMMATED.

CONSUMMATION OF SALE HAS TAKEN PLACE: WHAT DO YOU DO?CHECK TO SEE IF SALE MEETS THE FOLLOWING CRITERIA:

ADEQUACY OF INITIAL INVESTMENTADEQUACY OF CONTINUING INVESTMENTTRANSFER OF RISKS AND REWARDS OF OWNERSHIP

INITIAL INVESTMENT CRITERIATHE ADEQUACY OF A BUYER'S INITIAL INVESTMENT IS MEASURED BY ITS COMPOSITION AND ITS SIZE COMPARED WITH THE SALE VALUE OF THE PROPERTY.

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BUYER'S INITIAL INVESTMENT IS CASH PAID BY THE BUYER AS A DOWN PAYMENT.IT IS ALSO A BUYER'S NOTE BACKED BY IRREVOCABLE LETTERS OF CREDIT

FROM AN INDEPENDENT LENDING INSTITUTION.

IT IS ALSO PAYMENT MADE BY THE BUYER TO THIRD PARTIES TO REDUCE EXISTING INDEBTEDNESS ON THE PROPERTY.

IT IS ALSO OTHER AMOUNTS PAID BY THE BUYER THAT ARE PART OF THE SALES VALUE.

OTHER CONSIDERATION RECEIVED BY THE SELLER, INCLUDING OTHER NOTES OF THE BUYER NOT BACKED BY IRREVOCABLE LETTERS OF CREDIT, ARE INCLUDED AS PART OF THE BUYER'S INITIAL INVESTMENT ONLY WHEN THEY ARE CONVERTED TO CASH WITHOUT RECOURSE TO THE SELLER. FOR EXAMPLE, A SALE MIGHT BE FINANCED WITH A 60 PERCENT DOWN PAYMENT AND A 40 PERCENT UNSECURED NOTE FROM THE BUYER TO THE SELLER. THE BUYER OBTAINED THE CASH REQUIRED FOR THE 60 PERCENT DOWNPAYMENT WITH A LOAN FROM A THIRD PARTY, USING THE PROPERTY AS COLLATERAL. THE DOWNPAYMENT WOULD NOT QUALIFY FOR INCLUSION IN THE BUYER'S INITIAL INVESTMENT BECAUSE THE LOAN OBTAINED FROM THE THIRD PARTY, HAVING A SUPERIOR LIEN TO THE SELLER'S RECEIVABLE, WOULD IN EFFECT SUBORDINATE THE SELLER'S RECEIVABLE TO THE NEW LOAN, AND, IN SUBSTANCE, THE BUYER HAS NO REAL INVESTMENT IN THE PROPERTY.

THE FOLLOWING ADDITIONAL ITEMS SHOULD BE EXCLUDED FROM THE CALCULATION OF THE BUYER'S INITIAL INVESTMENT.

AMOUNTS PAID BY THE BUYER TO OUTSIDE PARTIES FOR IMPROVEMENTS TO THE PROPERTY. (THESE PAYMENTS BENEFIT THE BUYER, NOT THE SELLER).

ANY FUNDS THAT WILL BE PROVIDED EITHER DIRECTLY OR INDIRECTLY BY THE SELLER. FUNDS INDIRECTLY PROVIDED BY THE SELLER WOULD INCLUDE LOANS MADE BY AFFILIATED FINANCING INSTITUTIONS OF THE SELLER.

LOAN GUARANTEES OR COLLATERAL SUPPORT TO INDUCE THIRD PARTIES TO MAKE LOANS TO THE BUYER.

DETERMINING SALES VALUE

SALES VALUE IS DEFINED AS FOLLOWS:THE STATED SELLING PRICE DECREASED BY THE AMOUNT OF ANY DISCOUNT REQUIRED TO REDUCE A RECEIVABLE TO ITS PRESENT VALUE (RECEIVABLES WITH BELOW-MARKET INTEREST RATES) AND BY THE NET PRESENT VALUE OF ANY SERVICES PROVIDED BY THE SELLER WITHOUT COMPENSATION;THE STATED SELLING PRICE INCREASED BY ALL AMOUNTS THAT ARE ADDITIONAL SALES PROCEEDS (IE. FUNDS PAID TO SELLER FOR THE EXERCISE OF AN OPTION).

INITIAL INVESTMENT (ADEQUACY OF )

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SEE TABLE IN BONGIORNO 2.63.3 FROM FASB 66TABLE OF MINIMUM INVESTMENTS

A BUYER'S INITIAL INVESTMENT IS GENERALLY CONSIDERED ADEQUATE IF THE INVESTMENT IN THE PROPERTY IS LARGE ENOUGH TO GIVE THE BUYER A SUFFICIENT STAKE IN THE PROPERTY SO THAT THE RISK OF LOSS THROUGH DEFAULT MOTIVATES THE BUYER TO HONOR HIS OBLIGATIONS TO THE SELLER.

THE TABLE OF MINIMUM INITIAL INVESTMENTS IS BASED ON USUAL LOAN LIMITS FOR VARIOUS TYPES OF PROPERTIES. HOWEVER, LENDERS' APPRAISALS OF SPECIFIC PROPERTIES MAY DIFFER. THEREFORE, IF A RECENTLY PLACED PERMANENT LOAN OR FIRM PERMANENT LOAN COMMITMENT FOR MAXIMUM FINANCING OF THE PROPERTY EXISTS WITH AN INDEPENDENT ESTABLISHED LENDING INSTITUTION, THE MINIMUM INITIAL INVESTMENT SHOULD BE WHICHEVER OF THE FOLLOWING IS GREATER:

THE MINIMUM PERCENTAGE OF THE SALES VALUE OF THE PROPERTY IN THE BONGIORNO TABLE 2.63.3; ORTHE LESSER OF :

THE AMOUNT OF THE SALES VALUE OF THE PROPERTY IN EXCESS OF 115 PERCENT OF THE AMOUNT OF A NEWLY PLACED PERMANENT LOAN OR FIRM PERMANENT LOAN COMMITMENT FROM A PRIMARY LENDER THAT IS AN

INDEPENDENT ESTABLISHED LENDING INSTITUTION; OR

TWENTY FIVE PERCENT OF THE SALES VALUE.

SEE EXAMPLES OF THESE PRINCIPLES, BONGIORNO 2.63.3

CONTINUING INVESTMENT CRITERIA FOR ACCRUAL METHODACCORDING TO FASB 66, CONTINUING INVESTMENT IS NOT DEMONSTRATED UNLESS BUYER IS CONTRACTUALLY OBLIGATED TO MAKE ANNUAL DEBT SERVICE PAYMENTS ON THE DEBT ASSOCIATED WITH THE PURCHASE. THE PAYMENTS SHOULD BE IN AMOUNTS AT LEAST EQUAL TO THE LEVEL ANNUAL PAYMENT THAT WOULD BE NEEDED TO PAY THE DEBT AND INTEREST ON THE UNPAID BALANCE OVER NO MORE THAN :

20 YEARS FOR LAND;THE CUSTOMARY MORTGAGE TERM OF A FIRST MORTGAGE LOAN BY AN INDEPENDENT ESTABLISHED LENDING INSTITUTION FOR OTHER SIMILAR REAL ESTATE.

THE SELLER'S RECEIVABLES SHOULD NOT BE SUBJECT TO FUTURE SUBORDINATION. THIS CONDITION DOES NOT APPLY IF THE SUBORDINATION IS TO A FIRST MORTGAGE ON THE PROPERTY EXISTING AT THE TIME OF SALE OR IF IT IS A FUTURE LOAN, INCLUDING AN EXISTING PERMANENT LOAN COMMITMENT IF THE TERMS OF THE SALE AND THE PROCEEDS OF THE LOAN WILL BE APPLIED FIRST TO THE PAYMENT OF THE SELLER'S RECEIVABLE.

CONTINUING INVESTMENT CRITERIA METEXAMINE THE TRANSACTION TO ASSURE THAT IT MEETS THE OTHER CRITERIA NECESSARY FOR FULL PROFIT RECOGNITION.

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CONTINUING INVESTMENT CRITERIA NOT MET

USE THE INSTALLMENT METHOD IF OTHER FULL ACCRUAL CONDITIONS ARE MET, AND IF THE RECOVERY OF THE PROPERTY IS REASONABLY ASSURED IN CASE OF DEFAULT.

USE THE COST RECOVERY METHOD IF THE ABOVE IS TRUE, BUT RECOVERY OF THE PROPERTY IN DEFAULT IS NOT REASONABLY ASSURED.

USE THE REDUCED PROFIT METHOD IF PAYMENTS BY THE BUYER EACH YEAR ARE GREATER THAN OR EQUAL TO THE SUM OF THE FOLLOWING:

THE INTEREST AND PRINCIPAL AMORTIZATION ON THE MAXIMUM FIRST MORTGAGE LOAN THAT COULD BE OBTAINED ON THE PROPERTY, AND INTEREST, AT AN APPROPRIATE RATE, ON THE EXCESS OF THE AGGREGATE ACTUAL DEBT ON THE PROPERTY OVER SUCH A MAXIMUM FIRST MORTGAGE LOAN (EFFECTIVE SECOND MORTGAGE).

IF REQUIRED AGGREGATE ANNUAL PAYMENTS ON TOTAL INDEBTEDNESS (AS IN AN ALL INCLUSIVE OR WRAPAROUND MORTGAGE) ARE NOT AT LEAST EQUAL TO ANNUAL PAYMENTS OF PRINCIPAL AND INTEREST ON MAXIMUM FIRST LIEN INDEBTEDNESS, PLUS INTEREST AT THE STATED RATE ON THE EFFECTIVE SECOND MORTGAGE, PROFIT MUST BE RECOGNIZED ON THE INSTALLMENT OR COST RECOVERY METHODS.SEE 2.64.4 BONGIORNO, EXAMPLE 20SEE TEST FOR REDUCED PROFIT RECOGNITION, BONGIORNO, PAGE 2-71

CONTINUING INVOLVEMENT CRITERION FOR THE ACCRUAL METHOD.IF A SELLER CONTINUES TO BE INVOLVED IN THE PROPERTY IN ANY WAY THAT RESULTS IN RETENTION OF SUBSTANTIAL RISKS AND REWARDS OF OWNERSHIP, THEN THE ABSENCE OF THE CONTINUING INVOLVEMENT CRITERION HAS NOT BEEN MET AND FULL PROFIT RECOGNITION IS NOT APPROPRIATE. IN THESE INSTANCES, PROFIT IS RECOGNIZED BY A METHOD DETERMINED BY THE NATURE AND EXTENT OF THE SELLER'S CONTINUING INVOLVEMENT. AS A GENERAL RULE, PROFIT CAN BE RECOGNIZED AT THE TIME OF SALE IF THE AMOUNT OF THE POTENTIAL LOSS OF PROFIT RESULTING FROM THE CONTINUING INVOLVEMENT BY THE SELLER CAN BE DETERMINED. THE PROFIT THEN RECOGNIZED IS REDUCED BY THE MAXIMUM EXPOSURE TO LOSS.

A SELLER'S CONTINUED INVOLVEMENT MAY CONSIST OF A SELLER'S AGREEMENT TO PROVIDE FINANCING; MANAGEMENT, DEVELOPMENT OR CONSTRUCTION OF THE PROPERTY; GUARANTEE OF A RETURN TO THE BUYER; OR A CONTRACTUAL OR IMPLIED OBLIGATION TO INITIATE AND SUPPORT OPERATIONS. A COMMON FORM OF CONTINUING INVOLVEMENT IS THROUGH REAL ESTATE SYNDICATION WHEREBY THE SELLER BECOMES A GENERAL PARTNER IN A LIMITED PARTNERSHIP HOLDING THE PROPERTY. AS A GENERAL PARTNER THE SELLER IS RESPONSIBLE FOR PROFITABLE OPERATIONS OF THE PROJECT AND IS ALSO LIABLE FOR LOSSES OF THE PARTNERSHIP. IN ADDITION, IF THE SALES PRICE IS FINANCED THROUGH A NOTE FROM THE PARTNERSHIP TO THE SELLER, REALIZATION OF THE NOTE IS IN MOST CASES DEPENDENT ON PROFITABLE OPERATIONS OF THE PARTNERSHIP.

NO PROFIT SHOULD BE RECOGNIZED UNTIL PERMANENT FINANCING IS AVAILABLE TO THE BUYER. AN EXCEPTION IS WHERE THE SELLER IS PRIMARILY A FINANCING INSTITUTION. PROFIT MAY SOMETIMES THEN BE RECOGNIZED ON THE PERCENTAGE

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OF COMPLETION METHOD AS THE REMAINDER OF THE EARNINGS PROCESS IS COMPLETED.

GIVEN THE FOLLOWING SITUATION:

OXY REALTY SELLS TO CLOUT REALTY THE JENKINS RANCH FOR 7,600,000.OXY'S COST BASIS FOR FASB PURPOSES IS 4,600,000.7,600,000 - 4,600,000 = 3,000,000 INCOME.

THE TERMS: CLOUT PAYS OXY 760,000AND, 7,000,000 OVER THE NEXT 30 YEARS AT 8 PERCENT INTEREST.

CLOUT SELLS LAND TO OXY FOR 2,600,000OXY PAYS THEM 760,000 WITH BALANCE IN MORTGAGE.

THE REAL ESTATE BROKER HAS A COMMISSION OF 114,000 ON THE TWO TRANSACTIONS.

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 VALUELAND 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 SINGLE-FAMILY HOUSES, A CONDOMINIUM COMPLEX, AND A LOT SUBDIVISION WOULD BE EVALUATED AS THREE SEPARATE PROJECTS.

IN DETERMINING THE COST OF A PARTICULAR PROJECT IN ORDER TO APPLY THE

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LOWER OF COST OR MARKET CRITERIA, ALL PROJECT COSTS MUST BE CONSIDERED. THESE COSTS INCURRED INCLUDE COSTS OF ACQUISITION, CARRYING,DEVELOPMENT, CONSTRUCTION, AND INTEREST WHICH IS CAPITALIZED DURING THE DEVELOPMENT PERIOD AND ANY INTANGIBLE COSTS.

AS COSTS FOR DEVELOPMENT OR CONSTRUCTION ARE INCURRED, CAPITALIZATION SHOULD NOT CEASE WHEN IT BECOMES NECESSARY TO RECOGNIZE A LOWER VALUE FOR AN ASSET THAN THE HISTORICAL COSTS INCURRED FOR THAT ASSET.

WHEN THE CAPITALIZED COSTS OF REAL ESTATE HELD FOR SALE OR FOR DEVELOPMENT AND SALE EXCEED ITS ESTIMATED NET REALIZABLE VALUE, AN ALLOWANCE SHOULD BE PROVIDED TO REDUCE THE CARRYING AMOUNT OF THE ASSET TO NET REALIZABLE VALUE. THE USE OF AN ALLOWANCE ACCOUNT ALLOWS THE ACCUMULATION OF THE TOTAL PROJECT COST WHILE STILL VALUING THE ASSET AT THE LOWER OF COST OR MARKET FOR FINANCIAL STATEMENT PURPOSES. FUTURE INTEREST COSTS SUBSEQUENT TO THE COMPLETION OF THE DEVELOPMENT NEED NOT BE CONSIDERED.

ABANDONMENT AND CHANGES IN USE

CAPITALIZED ASSETS, INCLUDING ALLOCATED COMMON COSTS OF REAL ESTATE ABANDONED, SHOULD BE WRITTEN OFF AS CURRENT EXPENSES OR, IF APPROPRIATE, TO ALLOWANCES ESTABLISHED FOR THAT PURPOSE. THE COSTS OF THESE ABANDONED PROJECTS SHOULD NOT BE ALLOCATED TO OTHER COMPONENTS OF THE PROJECT OR TO OTHER PROJECTS, EVEN IF THESE OTHER PROJECTS ARE CAPABLE OF ABSORBING THE LOSSES. PROPERTY DONATED TO GOVERNMENTAL AGENCIES FOR USES THAT WILL BENEFIT A PROJECT ARE NOT ABANDONMENTS. THE COSTS OF THE PROPERTY DONATED ARE ALLOCATED AS A COMMON COST OF THE PROJECT.

CHANGES IN USECHANGES IN THE USE OF A REAL ESTATE PROJECT OR A PORTION OF THE PROJECT MAY OCCUR AFTER SIGNIFICANT DEVELOPMENT OR CONSTRUCTING COSTS HAVE BEEN INCURRED. IN SUCH CIRCUMSTANCES, DEVELOPMENT AND CONSTRUCTION COSTS INCURRED BEFORE THE CHANGE SHOULD BE WRITTEN OFF, EXCEPT AS FOLLOWS:

IF THE CHANGE IS MADE PURSUANT TO A FORMAL PLAN FOR A PROJECT THAT IS EXPECTED TO PRODUCE A HIGHER ECONOMIC YIELD, THE WRITE-OFF MAY BE LIMITED TO THE AMOUNT BY WHICH THE CAPITALIZED COSTS INCURRED AND TO BE INCURRED EXCEED THE ESTIMATED VALUE OF THE REVISED PROJECT AT THE DATE IT IS SUBSTANTIALLY COMPLETE AND READY FOR ITS INTENDED USE;

IN THE ABSENCE OF A FORMAL PLAN FOR A PROJECT THAT IS EXPECTED TO PRODUCE A HIGHER ECONOMIC YIELD, THE WRITE-OFF MAY BE LIMITED TO THE AMOUNT BY WHICH TOTAL CAPITALIZED COSTS EXCEED THE ESTIMATED NET REALIZABLE VALUE OF THE PROPERTY, DETERMINED ON THE ASSUMPTION THAT IT WILL BE SOLD AT A LATER DATE.

COST BASIS = HISTORICAL COST PURSUANT TO FASB, IMPLYING GAAP.

I.E. I HAVE A CHAIR, WHICH I BOUGHT FOR 50 DOLLARS.

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IT HAS A FIVE YEAR DEPRECIATION PERIOD, OR 10 DOLLARS PER YEAR (SLN)AFTER TWO YEARS, I SELL IT.

50 DOLLARS, MINUS 20 DOLLARS DEPRECIATION, EQUALS THIRTY DOLLARS.LETS SAY THAT I SOLD IT FOR 40 DOLLARS. 30 FROM 40 EQUALS A TEN DOLLAR GAIN.

ANYTIME YOU HAVE A DEPRECIABLE ASSET, YOU WILL HAVE AN ACCUMULATED DEPRECIATION ACCOUNT.

BUILDING.....................................3,000,000LESSACCUMULATED DEPRECIATION..................... 200,000EQUALS --------------BOOK VALUE.................................. 2,800,000LAND........................................ 100,000EQUALS --------------TOTAL VALUE................................. 2,900,000SOLD FOR.................................... 3,000,000FINANCIAL 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 TWOCHAPTER THREE, STARTING 3.01 TO 3.43WILEY, CHAPTER 3 AND 4

END OF THIRD CLASS

9/28/89 REAL ESTATE ESCALATIONS ═══╗LABOR COSTS ╠═ CONTINGENT uncertainty in facts

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C.P.I.═════════════════════╝ may or may not happenCOMPLETED see Bongiorno 2.33.4 supplement

straight line method

UNDERSTAND WHY FASB GOT INVOLVED IN SETTING THE LAW ON REVENUE RECOGNITIONWILEY PG 30 TO 35

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 RENT60,000 LEASEHOLD IMPROVEMENTS 1,000 FOR IMPROVEMENTS MINUS (60,000 / 60 MONTHS) 1,000 DEPRECIATION ON THE 60 MONTH LEASE-------59,00010,000------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? FOR AN ANSWER, SEE SECTION 3.30 AND 3.31 IN BONGIORNO (CAPITAL LEASE).

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BONGIORNO - ACCOUNTING FOR LEASING TRANSACTIONS

THE CONCEPTUAL BASIS FOR LEASING ACCOUNTING:A LEASE THAT TRANSFERS SUBSTANTIALLY ALL OF THE BENEFITS AND RISKS OF OWNERSHIP SHOULD BE ACCOUNTED FOR AS AN ACQUISITION OF AN ASSET AND THE INCURRENCE OF AN OBLIGATION BY THE LESSEE (A CAPITAL LEASE) AND SHOULD BE ACCOUNTED FOR AS A SALE OR FINANCING BY THE LESSOR ( A SALES-TYPE, DIRECT FINANCING, OR LEVERAGED LEASE). OTHER LEASES SHOULD BE ACCOUNTED FOR AS OPERATING LEASES, THAT IS, THE RENTAL OF THE PROPERTY.

THE DUCK TESTIF THE LESSEE APPEARS TO HAVE ASSUMED AN OWNERSHIP POSITION, IN EFFECT HE HAS PURCHASED THE PROPERTY. IF HE DOES NOT BEAR THE RISK AND REWARDS OF OWNERSHIP, HE HAS NOT PURCHASED THE PROPERTY.

THE CAPITAL LEASECAPITALIZATION CRITERIAIF THE LEASE MEETS ANY ONE OF THE FOLLOWING FOUR CAPITALIZATION CRITERIA, IT IS A CAPITAL LEASE.

THE LEASE TRANSFERS OWNERSHIP OF THE LEASED PROPERTY TO THE LESSEE DURING THE TERM OF THE LEASE OR AT ITS END;

THE LEASE HAS A BARGAIN PURCHASE OPTION;

THE LEASE TERM INCLUDING RENEWAL PERIODS EQUALS AT LEAST 75 PERCENT OF THE ESTIMATED ECONOMIC USEFUL LIFE OF THE LEASED PROPERTY; OR,

THE PRESENT VALUE OF THE MINIMUM LEASE PAYMENTS EQUALS AT LEAST 90 PERCENT OF THE FAIR VALUE OF THE LEASED PROPERTY.

THE LAST TWO CRITERIA ARE NOT APPLICABLE WHEN THE BEGINNING OF THE LEASE TERM FALLS WITHIN THE LAST 25 PERCENT OF THE TOTAL ESTIMATED ECONOMIC LIFE OF THE LEASED PROPERTY.

THE RECORDING OF ASSETS AND LIABILITIES WITH A CAPITAL LEASETHE LESSEE RECORDS AN ASSET AND RELATED LIABILITY EQUAL TO THE LOWER OF THE FAIR VALUE OF THE LEASED PROPERTY, OR THE PRESENT VALUE (AT THE INCEPTION OF THE LEASE TERM) OF MINIMUM LEASE PAYMENTS DURING THE LEASE TERM, EXCLUDING EXECUTORY COSTS. THE RECORDED ASSET, EXCEPT FOR LAND, IS THEN DEPRECIATED IN A MANNER CONSISTENT WITH OTHER SIMILAR ASSETS BEING DEPRECIATED BY THE LESSEE. IF THE LEASE DOES NOT TRANSFER TITLE AT THE END OF THE LEASE OR CONTAIN A BARGAIN PURCHASE OPTION, THEN THE AMORTIZATION PERIOD SHOULD BE THE LEASE TERM AND THE ASSET SHOULD BE AMORTIZED TO ITS EXPECTED VALUE AT THE END OF THE LEASE TERM. LAND ASSETS RECORDED UNDER A CAPITAL LEASE ARE NOT DEPRECIATED.IF THE LEASE COVERS LAND ONLY, THEN ONLY THE FIRST CRITERIA APPLY. IF NONE OF THE CRITERIA APPLY, IT IS AN OPERATING LEASE.

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OPERATING LEASESNEITHER 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 ACCOUNTINGTHE 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

22

FINANCING LEASE. UNDER A DIRECT FINANCING LEASE, THE LESSOR RECORDS AS AN ASSET ON THE BALANCE SHEET THE NET INVESTMENT IN THE LEASE CONSISTING OF THE GROSS INVESTMENT LESS UNEARNED INCOME (SEE BONGIORNO 2.33.1).

UNEARNED INCOME IS CALCULATED BY SUBTRACTING THE COST OR CARRYING AMOUNT OF THE LEASED PROPERTY FROM THE GROSS INVESTMENT. UNEARNED INCOME IS AMORTIZED OVER THE LEASE TERM TO PRODUCE A CONSTANT PERIODIC RATE OF RETURN ON THE NET INVESTMENT. IF ON PERIODIC REVIEW, THE ESTIMATED RESIDUAL VALUE OF THE LEASED ASSET HAS DECREASED, AN IMMEDIATE WRITE-DOWN IS REQUIRED FOR OTHER THAN TEMPORARY DECLINES. NO WRITE-UP IS ALLOWED.

LEVERAGED LEASESA LEVERAGED LEASE IS ONE IN WHICH THE LESSOR HAS, IN ESSENCE, PURCHASED THE LEASED PROPERTY SUBJECT TO FINANCING PROVIDED BY A LONG-TERM CREDITOR. A LEVERAGED LEASE IS A DIRECT FINANCING LEASE THAT ADDITIONALLY HAS ALL OF THE FOLLOWING CHARACTERISTICS.

IT INVOLVES AT LEAST THREE PARTIES: A LESSEE, A LONG-TERM CREDITOR, AND A LESSOR.

THE FINANCING PROVIDED BY THE LONG TERM CREDITOR IS SUBSTANTIAL TO THE TRANSACTION (I.E. GREATER THAN 50 PERCENT) AND IS NONRECOURSE TO THE LESSOR.

THE LESSOR'S NET INVESTMENT DECLINES IN THE EARLY YEARS AND INCREASES DURING THE LATER YEARS OF THE LEASE TERM.

ANY INVESTMENT TAX CREDIT RETAINED BY THE LESSOR IS ACCOUNTED FOR AS ONE OF THE CASH FLOW COMPONENTS OF THE LEASE.

THE LESSOR RECORDS HIS INVESTMENT IN A LEVERAGED LEASE NET OF THE NONRECOURSE DEBT. THE INVESTMENT IN THE LEASE IS THE EXCESS OF THE PRESENT VALUE OF THE RENTAL PAYMENTS, PLUS ESTIMATED RESIDUAL VALUE, LESS DEBT SERVICE REQUIREMENTS. INCOME (TOTAL CASH RECEIVED LESS ORIGINAL INVESTMENT) IS RECOGNIZED ONLY IN PERIODS IN WHICH THE INVESTMENT NET OF RELATED DEFERRED TAXES IS POSITIVE. TO DETERMINE THE PERIODIC INCOME, THE RATE OF RETURN ON THE NET INVESTMENT IN YEARS IN WHICH IT IS POSITIVE IS DETERMINED (BY USING PROJECTED CASH FLOW) AND IS APPLIED TO THE NET INVESTMENT.

OPERATING LEASES

IF NONE OF THE FIRST CAPITALIZATION CRITERIA ARE MET, OR IF ONE OR MORE OF THE CAPITALIZATION CRITERIA ARE MET AND BOTH OF THE ADDITIONAL CRITERIA ARE NOT MET, THEN THE LEASE IS TO BE TREATED AS AN OPERATING LEASE

UNDER THE OPERATING LEASE, THE LESSOR CONTINUES TO DEPRECIATE THE LEASED PROPERTY OVER ITS ESTIMATED USEFUL LIFE AND RECORDS RENTAL INCOME WHEN THE RENT PAYMENTS BECOME DUE FROM THE LESSEE. IF RENTAL PAYMENTS ARE NOT

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MADE ON A STRAIGHT LINE BASIS, THEN RENTAL INCOME SHOULD BE RECOGNIZED ON A STRAIGHT LINE BASIS, UNLESS SOME OTHER SYSTEMATIC BASIS IS MORE REPRES-ENTATIVE OF THE TIME PERIODS IN WHICH BENEFITS ARE DERIVED FROM THE LEASED PROPERTY. INITIAL DIRECT AND INDIRECT COSTS ASSOCIATED WITH THE LEASE SHOULD BE DEFERRED AND AMORTIZED INTO EXPENSE OVER THE RELATED LEASE TERMS.

LEASE PROVISIONS INVOLVING REAL ESTATELAND AND BUILDINGS

IF A LEASE INVOLVING BOTH THE LAND AND BUILDINGS MEETS EITHER OF THE FIRST TWO CAPITALIZATION CRITERIA ABOVE (TRANSFER OF OWNERSHIP OR BARGAIN PURCHASE OPTION), THEN THE LAND AND BUILDING ARE SEPARATELY CAPITALIZED BY THE LESSEE. THE PRESENT VALUE OF THE MINIMUM LEASE PAYMENTS LESS EXECUTORY COSTS, INCLUDING ANY PROFIT THEREIN, IS ALLOCATED BETWEEN LAND AND BUILDINGS IN PROPORTION TO THEIR FAIR MARKET VALUES AT THE INCEPTION OF THE LEASE. THE BUILDING IS THEN DEPRECIATED IN ACCORDANCE WITH THE LESSEE'S NORMAL PRACTICE.

IN SITUATIONS WHERE THE LEASE DOES NOT TRANSFER OWNERSHIP AND THERE IS NOT A BARGAIN PURCHASE OPTION, CRITERIA 3 AND 4 MUST BE APPLIED (FROM THE CRITERIA FOR CAPITALIZATION OF LEASES ABOVE). IF THE FAIR VALUE OF THE LAND IS LESS THAN 25 PERCENT OF THE TOTAL FAIR VALUE OF THE LEASED PROPERTY AT THE INCEPTION OF THE LEASE, THEN BOTH THE LESSEE AND LESSOR WILL CONSIDER THE LAND AND THE BUILDING AS A SINGLE UNIT FOR APPLYING CRITERIA 3 AND 4. THE ECONOMIC LIFE OF THE BUILDING IS CONSIDERED THE ECONOMIC LIFE OF THE SINGLE UNIT. IF EITHER CRITERIA IS MET AND THE LEASE IS A CAPITAL LEASE, LESSEE AND LESSOR ACCOUNTING IS SIMILAR TO THAT PREVIOUSLY DESCRIBED. THE LESSEE WILL CAPITALIZE AND DEPRECIATE THE LAND AND THE BUILDING AS A SINGLE UNIT.

IF THE FAIR VALUE OF THE LAND EXCEEDS 25 PERCENT, THE LAND AND THE BUILDING MUST BE TREATED AS TWO SEPARATE LEASES. IF THE BUILDING ELEMENT MEETS CRITERIA 3 OR 4 MENTIONED ABOVE, THE BUILDING ELEMENT WILL BE TREATED AS A CAPITAL LEASE AND ACCOUNTED FOR BY THE LESSEE AND LESSOR AS PREVIOUSLY DESCRIBED. THE LAND ELEMENT IS THEN ACCOUNTED FOR SEPARATELY AS AN OPERATING LEASE.

IF NEITHER CRITERIA (3 OR 4) IS MET BY THE BUILDING ELEMENT, BOTH THE BUILDING ELEMENT AND THE LAND ELEMENT WILL BE TREATED AS A SINGLE OPERATING LEASE.

SEE SECTION 2.34.3 AND 2.34.4 FOR ACCOUNTING FOR LEASES OF BUILDING OR LAND ONLY, FOR LESSOR AND LESSEE.

SUBLEASES AND TERMINATIONSORIGINAL LESSOR

AN ORIGINAL LESSOR WILL NOT CHANGE HIS ACCOUNTING FOR A LEASE IF THE ORIGINAL LESSEE SUBLEASES THE PROPERTY OR SELLS OR TRANSFERS THE ORIGINAL

24

LEASE TO A THIRD PARTY. IF THE LEASE IS TERMINATED AND A NEW LEASE IS ENTERED INTO WITH A NEW LESSEE, THE NET INVESTMENT ON THE BOOKS OF THE LESSOR IS REMOVED, THE LEASED ASSET IS RECORDED AT THE LOWER OF ITS ORIGINAL COST, PRESENT FAIR VALUE, OR PRESENT CARRYING AMOUNT, AND THE NET ADJUSTMENT IS CHARGED TO INCOME IN THE CURRENT PERIOD. THE NEW LEASE IS CLASSIFIED AND ACCOUNTED FOR AS A SEPARATE AND DISTINCT TRANSACTION.

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 ISAN OPERATING LEASE:

IF THE ORIGINAL LEASE IS AN OPERATING LEASE, THE ORIGINAL LESSEE

25

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 500,000AN EXISTING HOUSE ON THE PROPERTY WAS DEMOLISHED, AND NEW CONSTRUCTION BEGINS IN APRIL OF 1989. BY DECEMBER 31, 1989, YOU HAVE THE FOLLOWING:

DEMOLITION 70,000TITLE INSURANCE AND LEGAL FEES 50,000ARCHITECT'S FEES 75,000NEW BUILDING CONSTRUCTION 1,000,000

(BONGIORNO, 6.41 TO 6.45)

WHAT WOULD THE FINANCIAL STATEMENT FOR THE BUILDING AS OF 12/31/89 LOOK LIKE?

ASSETS LIABILITIES

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LAND 500,000 DEMOLITION 70,000*BUILDING 1,000,000 FEES 50,000#

75,000**CAPITALIZED LIABILITY#EXPENSED LIABILITY

THE BATTLE BETWEEN CAPITALIZING AND EXPENSING

CAPITALIZING - AN IMPROVEMENT WHICH MAKES THE PROPERTY MORE USEABLE, EXTENDING ITS LIFE.

EXPENSING - DOES NOT IMPROVE THE PROPERTY. IT IS AN ORDINARY AND NECESSARY EXPENSE NEEDED TO EARN INCOME THIS YEAR.

LAND, CONSTRUCTION OF THE BUILDING, INTEREST EXPENSES, AND REAL ESTATE TAXES ARE ALL CAPITALIZED DURING CONSTRUCTION.

REVIEW READING MATERIAL FOR NEXT WEEK: WILEY (CHAPTERS 3 AND 4)BONGIORNO "THE CAPITAL LEASE" (3.3,3.7,3.9,3.11,3.16,3.17,3.19,3.24,3.25)END OF FOURTH CLASS

10/05/89

SALES TYPE LEASEUNDER ORIGINAL OPERATING LEASE═╦═ BONGIORNO 2.37.2UNDER SUBLET CAPITAL LEASE ═══╝

NET REALIZABLE VALUE ALLOWANCE (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.

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THE CONCEPT OF CAPITALIZATIONCAPITALIZATION HAS THE EFFECT OF CHANGING AN EXPENSE TO AN ASSET, BY CHANGING THE EXPENSE FROM A PERIOD COST TO AN INVENTORY OR FIXED ASSET COST.

THE UNIFORM CAPITALIZATION RULES - DERIVE FROM AN ECONOMIC CONCEPT WHICH FOCUSES ON COST ACCOUNTING, AND WHETHER OR NOT WE WILL HAVE FULL ABSORPTION ACCOUNTING. THIS MEANS THAT THE PRODUCT IS BURDENED WITH ALL OF THE COSTS OF MANUFACTURING THE PRODUCT.A CORPORATION MANAGES HOTELS, LEISURE INTERESTS, AND LAND DEVELOPMENT. IT IS MANAGED BY EXECUTIVES WHO DO ALL KINDS OF WORK OF EACH OF THESE MATTERS. SAY, AN EXECUTIVE MAKING 500,000 PER YEAR SPENDS 20 PERCENT OF HIS TIME ON THE CORPORATIONS HOTEL HOLDINGS. THOSE HOLDINGS WOULD THEN BE CHARGED WITH 500,000 x 20% = 100,000 DOLLARS, WHICH WOULD BECOME AN EXPENSE OF THE HOTELS.

INTEREST COSTS CAPITALIZATION

IF A PERIOD OF TIME IS REQUIRED IN ORDER TO CONSTRUCT OR CARRY OUT OTHER ACTIVITIES NECESSARY TO BRING AN ASSET TO USABLE CONDITION, THE INTEREST COST INCURRED DURING THAT PERIOD SHOULD BE CAPITALIZED AS PART OF THE HISTORICAL COSTS OF THAT ASSET.

CAPITALIZATION OF INTEREST AS A COST OF THE PROPERTY IS APPROPRIATE ONLY WHEN THE PROPERTY IS A QUALIFYING ASSET. A QUALIFYING ASSET IS AN ASSET THAT IS CONSTRUCTED FOR AN ENTERPRISE'S OWN USE OR CONSTRUCTED FOR SALE OR LEASE. PROPERTY THAN IS NOT UNDERGOING SUCH ACTIVITIES NECESSARY TO BRING IT TO THE STAGE OF ITS INTENDED USE IS NOT A QUALIFYING ASSET, AND THEREFORE INTEREST CAPITALIZATION WOULD NOT BE APPROPRIATE. FOR EXAMPLE, IF LAND WERE BEING PREPARED FOR SALE AS DEVELOPED LOTS, INTEREST CAPITALIZATION WOULD BE APPROPRIATE; WHEREAS, IF LAND WERE ACQUIRED AS INVENTORY FOR FUTURE DEVELOPMENT BUT THAT DEVELOPMENT ACTIVITY HAD NOT YET COMMENCED, INTEREST CAPITALIZATION WOULD NOT BE APPROPRIATE.THE AMOUNT OF INTEREST CAPITALIZED DURING AN ACCOUNTING PERIOD CANNOT EXCEED THE TOTAL COST INCURRED BY THE ENTITY DURING THAT PERIOD. IT SHOULD BE DETERMINED BY APPLYING AN APPROPRIATE INTEREST RATE TO THE AVERAGE AMOUNT OF ACCUMULATED EXPENDITURES FOR EACH PROPERTY BEING DEVELOPED. THE INTEREST RATE, OR CAPITALIZATION RATE, IS DETERMINED UPON THE RATE OF THE NEW BORROWING TO ACQUIRE THE LAND. IF THE AVERAGE ACCUMULATED DEVELOPMENT COSTS EXCEED THE SPECIFIC NEW BORROWINGS, THEN THE CAPITALIZATION RATE USED FOR THE EXCESS COSTS SHOULD BE BASED ON THE WEIGHTED AVERAGE INTEREST RATE OF THE OTHER BORROWINGS.THE PERIOD OF INTEREST CAPITALIZATION IS COINCIDENT WITH THE FOLLOWING CONDITIONS:

EXPENDITURES FOR THE PROPERTY HAVE BEEN MADEDEVELOPMENT ACTIVITIES HAVE COMMENCED AND ARE STILL IN PROGRESSINTEREST COSTS HAVE BEEN INCURRED BY THE ENTITY

WHENEVER DEVELOPMENT ACTIVITIES HAVE BEEN SUSPENDED FOR SOME TIME, THE

28

INTEREST CAPITALIZATION SHOULD CEASE UNTIL ACTIVITIES ARE RESUMED. LABOR STRIKES, WEATHER, ETC. ARE INHERENT TO THE DEVELOPMENT PROCESS, AND WOULD NOT BE CAUSE TO STOP INTEREST CAPITALIZATION.

THE INTEREST CAPITALIZATION PERIOD CEASES WHEN, ACCORDING TO FASB 67, THE PROJECT IS SUBSTANTIALLY COMPLETE AND READY FOR ITS INTENDED USE. SEE 2.13.5, BONGIORNO, FOR EXAMPLE OF CAPITALIZATION OF INTEREST

INTEREST INCURRED DURING THE DEVELOPMENT PERIOD RELATED TO LAND FINANCING IS CONSIDERED PART OF THE ACQUISITION COST OF THE STRUCTURE. INTEREST INCOME GENERATED FROM THE INVESTMENT OF UNUSED FUNDS ON SPECIFIC BORROWINGS SHOULD BE RECOGNIZED AS INCOME WHEN EARNED AND SHOULDN'T BE OFFSET AGAINST CAPITALIZED INTEREST COSTS.FULL ABSORPTION ACCOUNTING HAS BEEN REQUIRED UNDER TAX LAW SINCE 1987.

ALL EXPENSES NEEDED TO ACQUIRE A PROPERTY ARE TO BE CAPITALIZED.

ALL EXPENSES REQUIRED TO BRING A BUILDING TO RENT ARE TO BE CAPITALIZED.

THE DEMOLITION OF A BUILDING ON LAND TO MAKE WAY FOR A NEW BUILDING IS EXPENSED, BECAUSE IT DOES NOT BRING THE BUILDING TO RENT; IT ONLY PREPARES THE LAND.

WATCH OUT FOR ASSETS HAVING CONDITIONS. UNLESS IT IS OF A CERTAIN NATURE, IT MIGHT IMPACT THE VALUE OF THE STOCK.

SEE WILEY CHAPTER SEVEN, PG 133HANDOUT PASSED TO CLASS

GOING CONCERN - ACCORDING TO GAAP, ONE OF THE ASSUMPTIONS YOU MAY HAVE THAT A BUSINESS WILL BE WHAT IT IS TOMORROW WHAT IT IS TODAY, AND IS NOT IN DANGER OF NOR POISED FOR LIQUIDATION. A NOTE TO THIS EFFECT MUST BE ENTERED IF STATEMENT IS PREPARED.

PROJECT PASSED OUTJ. MICHAELS REALTY

NOTICE THE "STATEMENT OF LOSS". A DEVELOPMENT STAGE COMPANY IS AN ENTERPRISE WHICH COMMITS TO FINISHING A PROJECT WHICH IS NOT YET FINISHED. IT IS AN ENTITY IN THE "DEVELOPMENT STAGE".

E.P.S. IS THE EARNINGS PER SHARE. IT IS THE MOST COMMON METHOD OF DIVIDING INCOME OR LOSS.

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.

29

ADVANCES TO OFFICERS - THE OFFICER OWES US MONEY. A.K.A. ACCOUNTS RECEIVABLE.

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 - NOT INTENDED FOR CASH WITHIN ONE YEAR - SEE CURRENT 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 - INCLUDES PROPERTY TAX, PAYROLL TAX, ETC.

MORTGAGES PAYABLE, CURRENT - SELF-EXPLANATORY

LONG TERM LIABILITYSHAREHOLDERS' EQUITY - (EQUITY MEANS CAPITAL)

CAPITAL STOCK- COMMON STOCKPREFERRED STOCK

PAID IN SURPLUS IS THE OPPOSITE OF CAPITAL IN EXCESS OF PAR

RETAINED EARNINGS IS THE OPPOSITE OF DEFICIT ACCUMULATED DURING DEVELOPMENT STAGE.

WHEN FORMED, A CORPORATION CAN CHOOSE TO HAVE STOCK. IF A CORPORATION HAS PAR VALUE, ITS VALUE WOULD BE RESERVED ON THE BALANCE SHEET AS CAPITAL AND AS A BUFFER AGAINST DISTRIBUTIONS.

NO-PAR VALUE STOCK - CHEAPER, IT SERVES NO PURPOSE IF WE DO NOT NEED SURPLUS CASH.

THE DECISION EITHER WAY, BE IT PAR VALUE OR NO-PAR VALUE, IS BASED ON COST, INTENTION, NEED FOR SURPLUS CASH, AND WHETHER OR NOT YOU ARE DEALING WITH THE PUBLIC.

CONTINUED DISCUSSION OF PAR VALUE...

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CAPITAL IN EXCESS OF PARTHE STATE SAYS "IF YOU CHOOSE PAR VALUE METHOD, YOU MUST SELL STOCK AT NO LESS THAN THE PAR VALUE". IF STOCK IS SOLD FOR LOWER, CREDITORS MAY COME AFTER THE DIRECTORS OF THE CORPORATION.

FOR EXAMPLE:

PAR IS 10, WHILE 50 IS COST.

BALANCE SHEETCAPITAL IN EXCESS OF PAR = 40PAR VALUE (CAPITAL STOCK, LEGAL CAPITAL) = 10

DIVIDENDS MAY BE PAID OUT OF PRESENT EARNINGS OR SURPLUS. THE SURPLUS IS THE CAPITAL IN EXCESS OF PAR, OR STATED OTHERWISE, PROFIT.

THE LOWER THE PAR VALUE, THE SHAKIER WE FEEL BECAUSE THE CAPITAL BUFFER IS SMALLER WITH LOW PAR VALUES. USUALLY, THE VALUE IS ONE TO SEVEN DOLLARS.

NOTICE THAT STATEMENTS (J. MICHAELS REALTY) ARE "UNAUDITED", WITH NO ACCOUNTANT'S NAME. STATEMENTS ARE PROVIDED TO THE SEC EVERY THREE MONTHS, SO THERE IS NO NEED FOR AN ACCOUNTANT FOR THIS PURPOSE.

END OF CLASS FIVE

10/19/89FINISH FINANCIAL ACCOUNTING, START MANAGERIAL ACCOUNTING

WHAT ARE THE POINTS OF FINANCIAL ACCOUNTING THAT ARE RELEVANT FOR MANAGERIAL ACCOUNTING?

CHAPTER FOUR - WE ARE TAKING THE PRINCIPLES OF FINANCIAL ACCOUNTING AND APPLYING THEM TO REAL ESTATE, WHILE USING TERMS PECULIAR TO REAL ESTATE.

PG 60 EXHIBIT 4-1OPERATING EXPENSES - BONGIORNO - SIGNIFICANT DIRECT RENTAL OPERATING EXPENSES INCLUDE DEPRECIATION, INSURANCE, REPAIRS AND MAINTENANCE, PROPERTY TAXES, CUSTODIAL AND SECURITY EXPENSES, UTILITIES, INTEREST AND PROPERTY MANAGEMENT. SUCH COSTS CAN GENERALLY BE CLASSIFIED AS PERIOD EXPENSES (COSTS ASSOCIATED WITH THE REVENUE OF THE CURRENT PERIOD) OR PREPAID COSTS (COSTS ASSOCIATED WITH FUTURE REVENUE) WHICH ARE ALLOCATED TO FUTURE PERIODS AS EXPENSE IN A SYSTEMATIC AND RATIONAL MANNER.COSTS TO RENT REAL ESTATE PROJECTS THAT DO NOT MEET THE CRITERIA FOR DEFERRAL SHOULD BE ACCOUNTED FOR AS PERIOD COSTS AND CHARGED TO EXPENSE AS INCURRED (I.E. MEDIA ADVERTISING COSTS, RENTAL SALARIES, AND OVERHEAD).

NET OPERATING INCOME / NET OPERATING EXPENSES

31

EXPENSES IN ACCOUNTING WITH THE FOLLOWING MODIFICATIONS:DO NOT INCLUDE DEBT SERVICE (PAYMENT OF INTEREST AND PRINCIPLE)DO NOT INCLUDE DEPRECIATIONDO NOT INCLUDE INCOME TAX ON THE ENTITY THAT OWNS THE PROPERTYDO NOT INCLUDE CAPITAL EXPENDITURES SUCH AS AMORTIZATION OF

LEASEHOLD IMPROVEMENTS.

FINANCIAL ACCOUNTING FOR MANAGERIAL ACCOUNTINGPAST AND CURRENT INCOME, COSTS, AND EXPENSES ARE PROJECTED IN THE FORM OF AN INCOME ANALYSIS - CASH FLOW. WHAT WILL BE THE FUTURE BASED UPON THE PAST PATTERNS? USED TO PROJECT VALUE.

VALUE - THE STREAM OF INCOME OF A PROPERTY, AND WHAT THAT STREAM IS WORTH.

BREAK EVEN ANALYSIS - WHEN DOING THE BREAK EVEN ANALYSIS, WE ARE INTERESTED IN TODAY AND TOMORROW. FINANCIAL STATEMENTS ARE PUT TO BED.

FIXED AND VARIABLE EXPENSES - FIXED; DOES NOT INCREASE AS PER VOLUME OR ACTIVITY.

VARIABLE; COST WHICH VARIES AS PER VOLUME OR ACTIVITY

AT SOME POINT, A FIXED COST MAY BECOME A VARIABLE DUE TO VOLUME. YOU REALLY CAN NOT COUNT ON FIXED COST BECAUSE IT IS A MISNOMER, AN IMPRECISE TOOL TO PREDICT THE FUTURE AND BUDGET THE CASH FLOW.

FIXED EXPENSES (I.E. REAL ESTATE TAX, INTEREST, INSURANCE, SALARIES, DEPRECIATION)VARIABLE EXPENSES (I.E. SALARIES, UTILITIES)

INTEREST FACTOR (CAP RATE)AN INTEREST FACTOR HELPS US TO DECIDE THE VALUE OF A CASH FLOW BY USING THE CAPITALIZATION METHOD.

NET OPERATING INCOME (NOI) IS THE FLOW OF INCOME TO THE OWNER

FLOW OF INCOME TO THE OWNERPROPERTY WORTH = ────────────────────────────

CAPITALIZATION RATESEE CHAPTER 5 AND 6, HOTELS AND MOTELS

A PROPERTY IS WORTH ITS CASH RETURN TO THE INVESTORS

END OF CLASS SIX

10/26/89

32

STOCKHOLDERS' EQUITY = COMMON STOCK

HOW MUCH OF LEGAL CAPITAL HAS BEEN DEDICATED TO THE CORPORATION?

AUTHORIZED STOCK - THE STATE HAS GIVEN PERMISSION TO ISSUE STOCK, NOT THAT IT WAS ACTUALLY ISSUED.

ISSUED AND OUTSTANDING - STOCK THAT WAS AUTHORIZED AND ISSUEDPAR VALUE - MERELY AN ARBITRARY AMOUNT THAT YOU PICK WHEN YOU FORM THE CORPORATION. IT IS A BOOKKEEPING DEVICE TO SPLIT STOCKHOLDERS EQUITY INTO TWO TYPES OF CAPITAL: 1. COMMON STOCK 2. PAID IN CAPITAL IN EXCESS OF PAR ( OR PAID IN SURPLUS )

THESE WILL APPEAR ON FINANCIAL STATEMENTS ONLY IF YOU CHOOSE THE PAR VALUE VEHICLE FOR STATING CAPITAL.PAR VALUE, OPTIONS ARE NO PAR VALUE AND STATED VALUE.

THE PAR VALUE IS MEANINGLESS. THE STOCKHOLDER IS NOT EVEN ENTITLED TO IT AT ALL WHEN STOCK IS SOLD.

RETAINED EARNINGS - A VERY IMPORTANT ACCOUNT; CONTAINS EARNINGS AND PROFITS OF THE CORPORATION FROM "DAY ONE".

+ EARNINGS AND PROFITS (CUMULATIVE ACCOUNT)- LOSSES- DIVIDENDS (REDUCES PROFITS)

LEGAL CAPITAL IS CAPITAL IN EXCESS OF PAR VALUE.

BONGIORNO - SALE/LEASEBACK, BOOK AND SUPPLEMENT2.36, 4.24 SEE HANDOUT FASB JUNE 1989CHAPTER 13 AND 14 WILEY

NOI HAS A DIFFERENT CONCEPT THAN FOUND IN GENERAL FINANCIAL ACCOUNTING THAN FOR MANAGERIAL ACCOUNTING. THE MAJOR DISTINCTION IS THE DEBT SERVICE AND DEPRECIATION AND INCOME TAX ARE NOT INCLUDED IN OPERATING EXPENSES. THE MATCHING OF REVENUE AND EXPENSES WILL NOT INCLUDE THE ELEMENTS INCOME TAX, DEBT SERVICE AND DEPRECIATION.

THE PROBLEM WITH NOI:NOI DOES NOT TAKE INTO ACCOUNT THE TIME VALUE OF MONEY OR INFLATION. THIS IS A MAJOR LIMITATION FOR THIS TYPE OF EVALUATION METHOD.

TIME VALUE OF MONEY - ASSUMES VALUE OF MONEY TODAY IS DIFFERENT FROM ITS VALUE TOMORROW.

END OF CLASS SEVEN

33

11/2/89

INTEREST FREE TRANSACTIONS AND BELOW MARKET LOANS

GIVEN A PROPERTY150,000 IS PRICE30,000 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 INTERESTSEE EXAMPLES OF IMPUTED INTEREST IN EXAMPLE 15, BONGIORNO, 2.63.3NOVEMBER INTEREST RATES HANDED OUT, SEE PACKETTHERE ARE EXCEPTIONS:

DOES NOT APPLY TO LOANS OF 2,000,000 OR LESSDOES NOT APPLY TO PRIMARY RESIDENCEDOES NOT APPLY TO PROPERTY THAT IS FOR PERSONAL USE AS OPPOSED TO BUSINESS USE.PERSONAL LOAN OF 10,000 OR LESS

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. CHURCHESUNIVERSITIESPENSION TRUSTFOUNDATIONS

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

34

(I.E. THE TYPICAL BUSINESS FOR EDUCATION IS BOOK SALES. ATYPICAL WOULD BE MACARONI SALES). STILL, TAX IS ONLY 3 1/2 PERCENT.

DISADVANTAGE: IF SELLER HAD TAKEN A MORTGAGE, HE WOULD HAVE DEPRECIATION AND INTEREST EXPENSES TO DEDUCT AGAINST INCOME WHICH MAY BE SIGNIFICANT ENOUGH TO OFFSET BENEFITS FROM RENTING IN A SALES/LEASEBACK AGREEMENT.

SALE/LEASEBACK IS SUBJECT TO FASB 66 TO SEE IF IT WAS EITHER A SALE AND/OR A LEASE. SO, WHO CARES?

THE IRSFASB

CAP RATE METHOD - HELPS TO GAIN A HYPOTHETICAL VALUE OF A PROPERTY "AT MARKET".

CAP RATE AND OTHER RATIOS ARE REAL ESTATE'S RULES OF THUMB.

DISCOUNTED CASH FLOW AND PRESENT VALUE ARE NOT OFTEN USED BECAUSE THEY ARE TOO COMPLICATED TO MOST PEOPLE.

CAP RATE USED BY MOST SMALL INVESTORS (THOSE WITH LESS THAN 5 MILLION)

END OF CLASS EIGHT

11/9/89

CHAPTER 7, WILEYCHAPTER 10, BONGIORNO

10.1 TO 10.35 + HANDOUTS

BONGIORNO - PREACQUISITION - PREACQUISITION COSTS CONSTITUTE COSTS INCURRED PRIOR TO THE LEGAL ACQUISITION OR FORMAL COMMITMENT TO ACQUIRE THE PROPERTY. ANY COSTS INCURRED THAT ARE RELATED TO THE PROPERTY ACQUISITION AND ARE PREREQUISITES TO DETERMINING WHETHER OR NOT TO ACQUIRE THE PROPERTY ARE CONSIDERED PREACQUISITION COSTS. THESE INCLUDE APPRAISALS, RESEARCH, AND CONSULTING FEES, MARKET AND ENVIRONMENTAL STUDIES, ARCHITECTURAL AND ENGINEERING SERVICES, LEGAL AND OTHER PROFESSIONAL FEES, ZONING APPROVALS, FINDER'S FEES, GOOD FAITH DEPOSITS, AND STANDBY FEES.

PREACQUISITION COSTS, INCLUDING PAYMENTS TO OBTAIN A PURCHASE OPTION, SHOULD BE CAPITALIZED AS INCURRED PROVIDED THAT ALL THE FOLLOWING CONDITIONS ARE MET. * COSTS ARE DIRECTLY IDENTIFIABLE WITH THE SPECIFIC PROPERTY* COSTS WOULD BE PROPERLY CAPITALIZABLE IF THE PROPERTY WERE ALREADY

ACQUIRED.* ACQUISITION OF THE PROPERTY OR ACQUISITION OF AN OPTION TO ACQUIRE

THE PROPERTY IS PROBABLE (LIKELY TO OCCUR).* TOTAL CAPITALIZED COSTS DO NOT EXCEED NET REALIZABLE VALUE.

35

IF THE PROSPECTIVE BUYER CANNOT DEMONSTRATE THAT THESE CONDITIONS ARE MET, COSTS INCURRED PRIOR TO THE ACQUISITION OF THE PROPERTY SHOULD BE EXPENSED AS INCURRED.

WHENEVER PROBABLE THAT THE PROPERTY WILL NOT BE ACQUIRED, THESE COSTS SHOULD BE CHARGED TO EXPENSE TO THE EXTENT THEY ARE NOT RECOVERABLE.

DIRECT ACQUISITION COSTS ARE COSTS DIRECTLY ASSOCIATED WITH THE ACQUISITION OF THE PROPERTY. THEY GENERALLY INCLUDE:

PURCHASE PRICE OF THE PROPERTY.ESCROW, TITLE GUARANTEE, TITLE SEARCH, AND RECORDING FEESBROKER'S FEES AND COMMISSIONS.

DIRECT ACQUISITION COSTS SHOULD BE CAPITALIZED. PROPERTY HELD FOR FUTURE DEVELOPMENT REQUIRES CONTINUAL EVALUATION AS TO RECOVERABILITY OF THE ACCUMULATED CAPITALIZED COSTS.

IN SITUATIONS WHERE THE LAND HAS AN EXISTING STRUCTURE, THE DEVELOPER'S INTENT IS CRITICAL IN DETERMINING THE PROPER ACCOUNTING OF ITS COST. IF THE STRUCTURE IS TO BE RAZED, THE COST OF THE ENTIRE PROPERTY SHOULD BE ALLOCATED TO THE LAND AND REDUCED BY ANY REVENUE RECEIVED FOR TEMPORARY RENTAL OR SALVAGE. IF THE STRUCTURE IS TO BE UTILIZED OR RESOLD, A PORTION OF THE TOTAL PROPERTY COST SHOULD BE ALLOCATED TO THE STRUCTURE. IF THE STRUCTURE IS USED IN OPERATIONS, IT SHOULD BE DEPRECIATED AS ANY OTHER STRUCTURE WOULD BE.

INDIRECT ACQUISITION COSTS ARE COSTS THAT ARE INDIRECTLY ASSOCIATED WITH THE ACQUISITION OF A PARTICULAR PROPERTY, SUCH AS ADMINISTRATIVE AND OVERHEAD EXPENSES. OVERHEAD COSTS SUCH AS THOSE INCURRED BY PLANNING AND DEVELOPMENT DEPARTMENTS, MAY BE CAPITALIZED AS PART OF THE COST OF LAND IMPROVEMENTS. SUCH COSTS MAY BE PROVIDED BY OUTSIDE CONTRACTORS OR MAY BE IDENTIFIABLE INTERNAL COSTS. IF INTERNAL OVERHEAD COSTS ARE CAPITALIZED, SUFFICIENT EVIDENCE SHOULD EXIST SUPPORTING THE METHOD IN WHICH SUCH INTERNAL COSTS ARE ALLOCATED TO SPECIFIC PROPERTIES (I.E. TIME SHEETS DISPLAYING HOW MUCH TIME IS SPENT ON EACH PROPERTY BY AN EMPLOYEE).

GENERALLY, GENERAL AND ADMINISTRATIVE EXPENSES SHOULD BE CHARGED TO EXPENSE AS PERIOD COSTS. HOWEVER, THERE MAY BE SITUATIONS WHERE CAPITALIZATION OF THESE COSTS IS PROPER BECAUSE THEY CAN BE CLOSELY IDENTIFIED WITH A PARTICULAR PROPERTY. IN EFFECT, THESE COSTS ARE THE COST OF PROPERTY CLASSIFIED WITH GENERAL AND ADMINISTRATIVE EXPENSES. EXAMPLES OF SUCH COSTS INCLUDE ATTORNEY AND ACCOUNTANTS' FEES, INTERNAL FEASIBILITY STUDIES, TRAVEL COSTS, AND SO FORTH. ALL GENERAL AND ADMINISTRATIVE EXPENSES, INCLUDING OFFICERS' SALARIES, SHOULD BE EXPENSES AS INCURRED.

THE KEY IS WHETHER OR NOT A PARTICULAR COST CAN BE IDENTIFIED WITH A SPECIFIC PROPERTY.

ACCOUNTING FOR HOLDING COSTS - AS A GENERAL RULE, HOLDING COSTS, SUCH AS

36

PROPERTY TAXES AND INSURANCE, SHOULD BE CAPITALIZED AS PART OF THE COST OF THE PROPERTY DURING THE PERIODS IN WHICH THE PROPERTY IS BEING DEVELOPED. COSTS INCURRED FOR SUCH ITEMS AFTER THE PROPERTY IS SUBSTANTIALLY COMPLETE AND READY FOR ITS INTENDED USE SHOULD BE CHARGED TO EXPENSE AS INCURRED. IF CAPITALIZATION OF COSTS RESULTS IN CARRYING AMOUNTS IN EXCESS OF NET REALIZABLE VALUE, AN APPROPRIATE ALLOWANCE SHOULD BE PROVIDED.

ACCRUAL METHOD OF ACCOUNTING FOR RECORD OF SALENEED A DOWNPAYMENT ON THE LAND THAT CONFORMS TO FASB STATEMENT, OR

TEN PERCENT DOWNPAYMENTDURING CONSTRUCTION, YOU CANNOT EXPENSE ITEMS. YOU CAPITALIZE

THEM, SUCH AS INTEREST AND TAXES, ACCORDING TO GAAP

BUILDINGS CAPITALIZED AT 31.5 YEARS FOR COMMERCIALAND 27.5 YEARS FOR RESIDENTIAL

CHAPTER 7 WILEYHOW DO YOU ALLOCATE OVERHEAD WHEN YOU HAVE SEVERAL PROJECTS UNDER

CONSTRUCTION ?

BONGIORNO - REFER TO FASB 67.BONGIORNO - INDIRECT PROJECT COSTS GENERALLY CONSIST OF THE FOLLOWING:

CONSTRUCTION ADMINISTRATIONLEGAL AND ACCOUNTING FEES

VARIOUS OFFICE COSTS OF PROVIDING SERVICES TO THE PROJECTINDIRECT COSTS MAY RELATE TO SEVERAL PROJECTS AND SHOULD BE ALLOCATED TO EACH PROJECT IN A RATIONAL MANNER BASED ON THE NATURE OF THE ACTIVITY. THIS ALLOCATION PROCESS MAY BE BASED ON DETERMINING THE PERCENTAGES OF TIME SPENT ON THE DEVELOPMENT EFFORT AS COMPARED TO OTHER ACTIVITIES.

FOR EXAMPLE, ASSUME THAT THE ACCOUNTING DEPARTMENT SPENDS APPROXIMATELY 30 PERCENT OF ITS TIME MAINTAINING CONSTRUCTION COST RECORDS AND DEVELOPING ESTIMATES FOR COMPLETION, AND THE REMAINING 70 PERCENT OF ITS TIME MAINTAINING GENERAL ACCOUNTING RECORDS. THE 30 PERCENT SHOULD BE CAPITALIZED AS A DEVELOPMENT COST AND SHOULD BE ALLOCATED TO THE SPECIFIC PROJECTS BASED UPON THE AMOUNT OF CURRENT ACTIVITY. IF THE RECORDS NEEDED TO DO THIS ARE NOT SUFFICIENT TO MAKE AN ESTIMATE, THEN THE RESULT WOULD BE THAT ALL OF THE POTENTIALLY ALLOCABLE ACCOUNTING COSTS WOULD BE EXPENSED.

IF MANAGEMENT INVOLVEMENT IN THE DEVELOPMENT PROCESS IS ACTIVELY TAKING PLACE, IT MAY BE APPROPRIATE TO ALLOCATE A PORTION OF THE PAYROLL EXPENSE TO THE PROJECT AS A CAPITALIZABLE COST.

THE ALLOCATION OF THE COST OF AMENITIES - WHEN AN AMENITY OF A DEVELOPMENT PROJECT IS SOLD, THEN ITS COST IS ALLOCATED PROPORTIONALLY TO THE UNITS USING THE AMENITY ACCORDING TO THE SALES VALUE OF THOSE UNITS AS A PERCENTAGE OF THE AGGREGATE SALES VALUE OF THE PROPERTY. THE WHOLE

37

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 PROJECTIN 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

38

EXPECTED SALES VALUE OF EACH UNIT SOLD TO THE TOTAL EXPECTED SALES VALUE OF THE PROJECT.

THE ALLOCATION OF RENT UP COSTSCOSTS 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).

FINANCING THE DEVELOPMENT

IN THE PROCESS OF COMPLETING A DEVELOPMENT OR PERFORMING CONSTRUCTION OR REHABILITATION, WE HAVE THE APPROACH OF HOW TO FINANCE THE DEVELOPMENT.

39

IF BASED ON MORTGAGE PROCEEDS, WE HAVE TWO INTER-RELATED TYPES THAT PLAY A ROLE:

CONSTRUCTION LOAN (SHORT TERM) PERMANENT LOAN (LONG TERM)───────────────────────────────────────────────────────────────────────NEEDED TO GET TO POINT OF GETTING GENERALLY NOT 100% OF COSTPERMANENT FINANCING

MORTGAGE AFTER COMPLETION,LESS SECURE, THEREFORE HIGHER BUILDING READY TO BE RENTEDINTEREST FACTOR, GENERALLY SPEAKING OR USED

INTEREST ONLY IN MOST CASES UPON COMPLETION, SAY WE NEED12,000,000 FINANCING. THEY

USUALLY ADVANCED AS PART OF THE AGREE GENERALLY THAT THEY CONSTRUCTION COSTS AS THEY PROCEED NEED A PERMANENT LOAN BEFORE

AN INSTITUTION WILL FINANCETHE CONSTRUCTION LOAN.

THE INTEREST ACCRUES USUALLY A LOCAL BANK WILL GIVECONSTRUCTION LOANS. THEY ARE

GENERALLY NOT A GREATER AMOUNT BASED UPON COST AND PROJECTEDTHAN PERMANENT LOAN, BECAUSE VALUECONSTRUCTION LOAN IS SHORT TERM ANDTHEY FINANCIER IS LOOKING TO GET HISMONEY OUT

PERMANENT LOANBONGIORNO- 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 LENDERCOMMITMENT 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

40

THE CONSTRUCTION LOAN HAS QUITE A BIT OF FLUIDITY. IT COULD BE 12 PERCENT PLUS 2 POINTS OVER A GIVEN VARIABLE, SUCH AS ONE YEAR TREASURY BILLS.THE BANK WILL REQUIRE FINANCIAL STATEMENT AND PERHAPS PERSONAL GUARANTEES OF THE INDIVIDUALS INVOLVED IN THE CORPORATION BUILDING THE DEVELOPMENT.

YOU WILL NEED:

DETAILED COST BREAKDOWN, THEN, AS A REQUIREMENT OF THE LOAN, THE BANK MAY APPOINT AN ARCHITECT TO GO OVER A PROJECT, AND MAY APPOINT SOMEONE TO INSPECT IT AS IT IS COMPLETED, BEFORE PERCENTAGE OF COMPLETION PAYMENTS ARE MADE.PAYMENT BONDS AND COMPLETION BONDS AS INSURANCE THAT ONCE STARTED, THE PROJECT WILL BE COMPLETED IF THE DEVELOPER DEFAULTS.

TITLE INSURANCE IS CERTIFICATION THAT THE PERSON ASSERTING TITLE TO LAND HAS TITLE TO THE LAND. FURTHER, IT INSURES THE LENDER THAT IF AN ERROR WAS MADE, THAT HE WILL KNOW ABOUT IT.

THE TITLE SEARCH CONTINUES THROUGHOUT THE CONSTRUCTION, SO THAT THE LENDER IS ASSURED THAT NO OTHER LIENS OR ENCUMBRANCES ARE APPLIED TO THE DEVELOPMENT BY THE BUILDER. IF IT DOES HAPPEN THAT A LIEN IS DISCOVERED, THE BONDS MAY BE TRIGGERED AND THE LENDER MAY BACK OUT OF THE DEAL AFTER RECALLING THEIR INVESTMENT.

GLOBAL DEVELOPMENT CORPORATION HANDOUT , BACKGROUND INFO (SEE PACKET)

END OF CLASS NINE

11/16/89

A DEPOSIT ON PROPERTY IS NOT A CURRENT ASSET ( THAT IS, AN ASSET OF CASH OR OTHER ITEMS TO BE TURNED INTO CASH WITHIN ONE YEAR ). THIS IS BECAUSE IT HAS BOUGHT A CLAIM ON THE PROPERTY. IT IS AN "OTHER ASSET". OTHER ASSETS ARE A NEBULOUS ASSET CHARACTERISTIC BETWEEN FIXED ASSETS AND CURRENT ASSETS.

A FIXED ASSET IS AN ITEM THAT IS USED IN THE COURSE OF BUSINESS, AND THAT HAS VALUE.

ACCOUNTING FOR CONSTRUCTION

WE START WITH THE POSITION THAT WE HAVE CONSTRUCTION FINANCING. CONSTRUCTION RULES ARE BROKEN INTO TWO MAIN TYPES OF ACCOUNTING METHODS.

PERCENTAGE OF COMPLETION METHOD (PREFERRED BY FASB)AND

COMPLETED CONTRACT METHOD (THE METHOD CHOSEN BY MOST BUILDERS)

41

THE RULES:

PERCENTAGE OF COMPLETION METHODRECOGNITION 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 WILEYSEE PG 10.34, BONGIORNO, P.O.C. METHOD

COST INCURRED TO DATETHE 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? ONLY IN TWO INSTANCES.

WHEN THE FINANCIAL POSITION AND RESULTS OF OPERATION WOULD NOT DIFFER SIGNIFICANTLY FROM THOSE USING THE PERCENTAGE OF COMPLETION METHOD.

WHERE THERE ARE INHERENT HAZARDS RELATING TO CONTRACT CONDITIONS OR FACTORS THAT RAISE QUESTIONS ABOUT A COMPANY'S ABILITY TO

ACCURATELY ESTIMATE A CONTRACT.

I.E. WHEN A CONTRACT IS UNDER CHALLENGE BY A COURT ACTION OR BY LEGISLATION.

WHEN THE CONTRACT CAN NOT BE ESTIMATED DUE TO FACTORS WHICH DO NOT EASILY GIVE WAY TO ESTIMATION SUCH AS THE USE OF A NEW CONSTRUCTION TECHNIQUE.

WHY BOTHER? SO THAT WE CAN ACCURATELY REFLECT BUSINESS HEALTH AS PER GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.

TO RECAPITULATE:

% OF COMPLETION DEPENDS ON THE PRECISION IN ESTIMATING THE FULL COSTS.COMPLETED CONTRACT IS USED WHEN ESTIMATE NOT POSSIBLE.ACCRUAL ACCOUNTING IS BAD BECAUSE IT INCREASES THE INCOME RECOGNITION BEYOND REASONABLE LIMITS.

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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. ALSO-ACCOUNTING 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

INTEREST IN NOT MENTIONED BECAUSE IT HAS NOT YET ACCRUED.

PURCHASED LAND FOR 92,000 MAKING A CASH DOWNPAYMENT OF 20,000 AND ISSUING A ONE YEAR NOTE PAYABLE FOR THE BALANCE. THE FACE AMOUNT OF THE NOTE WAS 78,480 DOLLARS. DEBT │ CREDIT

────────────────────────┼───────────────────────LAND 92,000 │CASH │ 20,000NOTE PAYABLE │ 78,480PREPAID INTEREST │INTEREST EXPENSE │ 0

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CURRENT ASSET 6,480 │ ───────────────────────────┴─────────────────────── 98,480 98,480

HOW DOES A CONSTRUCTION MORTGAGE 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. SMALL INVESTORS CAN INVEST AT SMALL SUMS IN REAL ESTATE, AND PURCHASE EXPERTISE.

BENEFITS OF SYNDICATION CONTINUED...

2. THE DEVELOPER HAS A BROADER CAPITAL POOL TO GATHER MONEY. IT IS THE EQUIVALENT OF GOING PUBLIC FOR A CORPORATION WITH STOCK.

3. DECREASED AND DIVERSIFIED RISK

4. EQUITY CAPITAL, NOT DEBT CAPITAL

5. HELPS THOSE WHO ARE NOT EXPERTS TO MAKE MONEY IN REAL ESTATE

6. TAX BENEFITS, PASSIVE INCOMES AGAINST PASSIVE LOSSES.THE INITIAL PHASES OF SYNDICATION MUST BE CAPITALIZED. I.E. MARKETING COSTS, FINANCING, AND DEVELOPMENT (SEE BONGIORNO 14)

SEE HANDOUT BULLETINS IF NEEDED (GUIDE 5) GUIDE FOR REGISTRATION STATEMENT RELATED TO INTEREST IN THE REAL ESTATE PARTNERSHIP.

PRINCIPAL OBJECTION: FAILURE TO CAPITALIZE FORMATION COSTS, RATHER THAN CHOOSING TO EXPENSE.

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PASSIVE INCOME MAY ONLY OFFSET PASSIVE LOSSES

│PORTFOLIO INCOME │ EARNED INCOME

────────────────────────────────────┼─────────────────────────────────── 10,000 │ 90,000 │ 8,000 PASSIVE LOSS │ 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 USEMANAGERIAL IS FOR INTERNAL USE

FINANCIAL: A.K.A. COMPLIANCE ACCOUNTINGMANAGERIAL: A.K.A. CONTROL ACCOUNTING ACCRUAL IS THE METHOD OF ACCOUNTING USED MOST BY BUSINESSES, AND IT IS THE PREFERRED METHOD OF FASB.

CASH METHOD IS NOT AVAILABLE FOR BUSINESSES WITH INVENTORY. FOR TAX PURPOSES, THERE IS AN ADDITIONAL RESTRICTION, THAT IS THAT C CORPORATIONS CAN NOT USE IT IF THEY HAVE GROSS REVENUE GREATER THAN 5,000,000 DOLLARS.

INSTALLMENT METHOD IS USED TO ALLOW THE REPORTING OF INCOME IN ACCORDANCE WITH THE COLLECTION OF SALES PROCEEDS. REPORTED AS A PERCENTAGE OF THE

45

ENTIRE RECEIPT.

PERCENTAGE OF COMPLETION METHOD IS USED ALMOST EXCLUSIVELY BY CONSTRUCTION INDUSTRY, PREFERABLE TO COMPLETED CONTRACT METHOD.

COMPLETED CONTRACT METHOD ALL COMPLETED REVENUE AND EXPENSE ON JOBS IN PROGRESS IS DIFFERED WITH THE RECOGNITION ON THE INCOME STATEMENT ONLY WHEN THE PROJECT IS COMPLETED. YOU WANT TO USE THE METHOD WHICH WILL PUT YOU IN ACCORDANCE WITH GAAP. THESE PRINCIPLES ARE APPLIED SO THAT YOU CAN SAY STATEMENTS ARE IN ACCORDANCE WITH GAAP, WHICH IS THE ACCEPTED STANDARD AS DEFINED BY FASB.

REAL ESTATE MAY BE OWNED BY AN INDIVIDUAL, OR BY A LIMITED PARTNERSHIP CORPORATION (C OR S) JOINT VENTURE (A MIX OF TWO TYPES).

THE ENTITY IS A CONDUIT FOR THE RECOGNITION AND DISTRIBUTION OF INCOME OR LOSS.

PARTNERSHIPSGENERALLIMITED

CORPORATIONC A CORPORATION FOR ALL PURPOSESS A REGULAR CORPORATION FOR ACCOUNTING PURPOSES, A PARTNERSHIP FOR

TAX PURPOSES.

SYNDICATION IS A MEANS BY WHICH INVESTORS POOL AND INVEST MONEY FOR THE ACQUISITION OF REAL ESTATE. ANY OF THE FOUR TYPES OF OWNERSHIP MAY BE USED.

ACCOUNTING ISSUES OF SYNDICATION

MUST CAPITALIZE MANY OF THE COSTS IN THE BEGINNING, THE COST OF RAISING CAPITAL IS ALSO CAPITALIZED.

UNACCEPTABLE ACCOUNTING PRACTICES

MINIMUM DOWNPAYMENTBUDGETS; PROJECTED, REVIEW OF PAST PERFORMANCE

SEE WILEY 116 TO 118

CAPITAL LEASE, THE DEFINITION OF A CAPITAL LEASE

FOR ACCOUNTING PURPOSES, THE LEASING OF REAL ESTATES IS A CAPITAL INVESTMENT RATHER THAN AN OPERATING EXPENSE UNLESS THE TRANSACTION MEETS

46

CERTAIN GUIDELINES, IN ORDER TO BE IN COMPLIANCE WITH GAAP. KNOW THE DIFFERENCE BETWEEN A CAPITAL LEASE AND AN OPERATING LEASE

BOTH ASSETS AND LIABILITIES ARE INCLUDED

EXCLUSIVITY OF USE FOR A PERIOD OF TIME IS AN ATTRIBUTE OF OWNERSHIP

WHEN YOU HAVE EXCLUSIVE USE , YOU GET A DEDUCTION FOR DEPRECIATION. PAYMENT OF LEASE OBLIGATION, AND IMPUTED INTEREST.

YOU PAY ONE AMOUNT WHICH INCLUDES PAYMENT AND INTEREST.

THE PERSON WHO LEASES THE BUILDING TO YOU GETS AN INTEREST INCOME. THE TENANT HAVING EXCLUSIVE USE GETS THE DEPRECIATION, THOUGH THE LESSOR OWNS THE ASSET.

CAPITALIZATION METHOD: USING THE CAP RATE. BASED ON NOI (NET OPERATING INCOME). KNOW HOW TO DEFINE NOI. SOME ADVANTAGES AND DISADVANTAGES.

ADVANTAGES DISADVANTAGES───────────────────────────────────────────────────────────────────────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. THE WAY STATEMENTS ARE PRESENTED AND OPINIONS HAVE SIGNIFICANCE.

BESTCERTIFIED 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.

47

COMPILATION REPORT - "WE TAKE NO POSITION AS TO ACCORDANCE WITH GAAP, WE JUST PRESENT THE REPORT TO YOU".WORST THE COMPUTATION OF DEPRECIATION KNOW METHODS: STRAIGHT LINE, ACCELERATED (I.E. SYD AND DB AND DDB) DECLINING BALANCE (DB) AND DOUBLE DECLINING BALANCE (DDB) HAVE NO SALVAGE VALUE.

STRAIGHT LINE (SLN) HAS A SALVAGE VALUE

ONLY TANGIBLE PROPERTY IS SUBJECT TO DEPRECIATION.

LAND IS NOT SUBJECT TO DEPRECIATION, BECAUSE IT HAS NO LIMITED ECONOMIC LIFE.

BOOK VALUE OF ASSET IS COMPUTED AS ADJUSTED BASIS OR COST, LESS DEPRECIATION, WHICH IS ACCUMULATED.

BALANCE SHEET (EXAMPLE)ASSET LIABILITY

────────────────────────────────────────────────────────────────────────LAND 500,000 500,000BUILDING 2,500,000ACCUMULATED DEPRECIATION 500,000 2,000,000

DEPRECIATION: OVER A PERIOD OF TIME, WE ARE EXPENSING THE ASSET.

THE PROPERTY IS SOLD:

SALES PROCEEDS 5,000,000LESS BASIS OF LAND (500,000) BOOK VALUE (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.

48

IN 1982, THE DEPRECIATION OF REAL ESTATE WAS RAISED FROM 15 TO 18 YEARS. IN 1984, IT BECAME 19 YEARS.IN 1987, IT BECAME 27.5 YEARS FOR RESIDENTIAL, AND 31.5 FOR COMMERCIAL PROPERTIES.

SO, TO RECAPITULATE:

THE PREVIOUS SYSTEM WAS ACRS.

THE PRESENT SYSTEM IS MACRS, OR MODIFIED ACCELERATED COST REDUCTION SYSTEM. THIS HAS BEEN THE METHOD FOR TAX ACCOUNTING SINCE 1987.

FOR TAX ACCOUNTING PURPOSES, YOU CAN DEPRECIATE OVER A LONGER PERIOD OF TIME THAN 31.5 YEARS, BECAUSE OF THE "ALTERNATIVE MINIMUM TAX" CLAUSE, WHICH APPLIES TO ADJUSTMENTS MADE TO PAST TAX PREFERENCE TO THE WEALTHY.BECAUSE THE OWNER HAS TO PAY A MINIMUM TAX ANYWAY, IT MAKES SENSE TO ADVANCE THE DEPRECIATION TO TAKE ADVANTAGE OF THE DEPRECIATION, BECAUSE OTHERWISE THE ALTERNATIVE MINIMUM TAX WOULD WASTE IT AWAY.

THE CONSTRUCTION PROCESS

KNOW HOW THE CONSTRUCTION MORTGAGE, PERMANENT MORTGAGE, AND TAKE-OUT COMMITMENT ARE INTER-RELATED.

WRAP AROUND MORTGAGES ARE A SECOND MORTGAGE, WHICH IS A RESULT OF A CHANGE IN INTEREST RATES FLUCTUATED TO THE DEGREE THAT THE FIRST MORTGAGE HOLDER MAY NOT WANT TO RELEASE IT BECAUSE OF FAVORABLE RATES. SO HE GETS A SECOND MORTGAGE TO MAKE ONE PAYMENT THAT INCLUDES THE FIRST MORTGAGE, AND COVERS THE ADDITIONAL FUNDS THE BORROWER WANTS.

WITH ESCALATING LEASES THE FASB SAYS THAT IT HAS TO BE TAKEN OVER THE ENTIRE TERM OF THE LEASE ON A STRAIGHT LINE BASIS. SEE BONGIORNO.

SALE LEASEBACK - KNOW THAT MUST QUALIFY, AND IF SELLER HAS CONTINUING INVOLVEMENT, YOU HAVE ANOTHER TRANSACTION

THE SALE LEASEBACKTHE SALE LEASEBACK OCCURS WHEN A PROPERTY IS SOLD BY THE OWNER AND THE SELLER THEN LEASES IT BACK FROM THE BUYER.

IF THE LEASEBACK COVERS SUBSTANTIALLY ALL OF THE USE OF THE PROPERTY SOLD AND IF ANY ONE OF THE FOUR CRITERIA FOR TREATMENT AS A CAPITAL LEASE IS MET, THEN THE SELLER WILL ACCOUNT FOR THE LEASE AS A CAPITAL LEASE.

THE DEFERMENT OR AMORTIZEMENT OF PROFIT ON A SALE LEASEBACK.

IF THE LEASE IS A CAPITAL LEASE, IT IS AMORTIZED IN PROPORTION TO THE

49

AMORTIZATION OF THE LEASED ASSET OR OVER THE LEASE TERM IF LAND IS INVOLVED. IF THE LEASE IS AN OPERATING LEASE, IT IS AMORTIZED IN PROPORTION TO THE RELATED GROSS RENTAL CHARGED TO EXPENSE OVER THE LEASE TERM (SEE EXAMPLE 5 2.36.2). IF THE FAIR VALUE OF THE PROPERTY AT THE TIME OF THE TRANSACTION IS LESS THAN ITS UNDEPRECIATED COST, THEN AN IMMEDIATE LOSS IS TO BE RECOGNIZED FOR THE DIFFERENCE.

IF THE SELLER RETAINS ONLY A MINOR PORTION OF THE USE OF THE PROPERTY SOLD, THE SALE AND THE LEASEBACK ARE ACCOUNTED FOR AS SEPARATE TRANSACTIONS ON A STAND-ALONE BASIS. MINOR PORTION IS DEFINED AS A PRESENT VALUE OF A REASONABLE RENTAL FOR THE LEASEBACK WHICH IS LESS THAN 10 PERCENT OF THE FAIR VALUE OF THE ASSET SOLD. UNREASONABLE RENTAL TERMS AS PER MARKET CONDITIONS AT THE INCEPTION OF THE LEASE REQUIRE THAT AN APPROPRIATE AMOUNT BE DEFERRED OR ACCRUED BY ADJUSTING THE PROFIT OR LOSS ON THE SALE AND AMORTIZING THE SAID ADJUSTMENT INTO INCOME SO AS TO ADJUST THOSE RENTALS TO A REASONABLE AMOUNT (SEE EXAMPLE 6 2.36.2).

IF THE SELLER RETAINS MORE THAN A MINOR PART BUT LESS THAN SUBSTANTIALLY ALL OF THE USE OF THE PROPERTY THROUGH THE LEASEBACK AND REALIZES A PROFIT ON THE SALE IN EXCESS OF:

THE PRESENT VALUE OF THE MINIMUM LEASE PAYMENTS (IF THE LEASEBACK IS CLASSIFIED AS AN OPERATING LEASE); OR,

THE RECORDED AMOUNT OF THE LEASED ASSET (IF THE LEASEBACK IS CLASSIFIED AS A CAPITAL LEASE).

THE EXCESS OF THE PROFIT ON THE SALE IN EXCESS OF EITHER OF THE ABOVE, WHICHEVER IS APPROPRIATE, WILL BE RECOGNIZED AT THE DATE OF THE SALE (SEE EXAMPLE 7 2.36.2).

THE SELLER IS CONSIDERED TO HAVE LEASED BACK SUBSTANTIALLY ALL OF THE PROPERTY IF THE LEASE QUALIFIES AS A CAPITAL LEASE UNDER FASB 13, ACCOUNTING FOR LEASES.

ACQUIRING PROPERTY THROUGH THE SALE LEASEBACKA SALE LEASEBACK TRANSACTION CAN BE USED AS A SUBSTITUTE FOR MORTGAGE DEBT FINANCING. TYPICALLY, SELF-CONSTRUCTED PROPERTY IS SOLD BY THE BUILDER, WHO SIMULTANEOUSLY ENTERS INTO A LEASE WITH THE BUYER LESSOR IN ORDER TO SECURE CONTINUED USE OF THE PROPERTY. THE SELLER LESSEE OBTAINS CASH TO PAY OFF THE CONSTRUCTION LOAN AND RELATED COSTS AND RETAINS USE OF THE PROPERTY FOR THE DURATION OF THE LEASE.

THE TAX ADVANTAGE OF A SALE LEASEBACK OVER PERMANENT MORTGAGE FINANCING IS THAT ALL LEASE PAYMENTS ARE DEDUCTIBLE, WHILE ONLY THE INTEREST PORTION OF DEBT SERVICE IS DEDUCTIBLE. MOREOVER, IF PROPERTY IS OWNED, NO DEPRECIATION IS ALLOWED FOR THE COST ALLOCABLE TO LAND, BUT LEASE PAYMENTS ON A SALE LEASEBACK (INCLUDING THE PORTION ATTRIBUTABLE TO LAND) ARE DEDUCTIBLE. CAVEAT: UNDER CERTAIN CIRCUMSTANCES, THE IRS MAY FIND A SALE LEASEBACK TO BE A FINANCING TRANSACTION AND CONTINUE TO TREAT THE SELLER LESSEE AS THE OWNER OF THE PROPERTY.

50

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

FEDERAL TAXATION OF REAL ESTATEPROFESSOR MICHAEL F.X. WATERS

SUMMER 1990

48

CLASS ONE 5/24/90FEDERAL TAX

MICHAEL F.X. WATERS

NEW BOOK AVAILABLE NEXT WEEK AT THE BOOK STORE:

ABRIDGED INTERNAL REVENUE CODE, WEST PUBLISHING

READING ASSIGNMENT:SEC 8.02 ALLSEC 11.02 TO 11.07

INTERNAL REVENUE CODE:SECTIONS 301, 316, 317, 351, 357, 358, 362, 368C, 61, 1001, 118

NEXT WEEK A HANDOUT WILL BE GIVEN TO US WITH THE SEMESTER'S READING ASSIGNMENTS.

*******************

CLASS PROBLEMS ARE PROBLEMS FOR HOMEWORK (3 TO 5 OF THEM)WHICH ARE ADJUNCT TO WHAT IS DONE IN CLASS (25%)

CLASS PROJECT - A RESEARCH PAPER ON TAXATION (25%). IT IS TO BE OF BENEFIT BOTH TO YOUR CAREER, AS WELL AS BEING ACADEMICALLY SOUND. MY REPORT WILL BE ON THE TAX CONSEQUENCES OF DENSITY GRANTS FOR AFFORDABLE HOUSING ON THE DEVELOPER AND BUYER.

THE TERM PAPER SHOULD NOT BE LENGTHY - NO MORE THAN TEN TO ELEVEN DOUBLE SPACED PAGES. CERTAINLY NO MORE THAN 20 TO 25 PAGES.

********************THE COURSE IS ONE IN TAX IDENTIFICATION- WE IDENTIFY THE ISSUES, AND LEARN WHERE TO GO TO SOLVE THEM.

********************TAXATION1. WHAT ARE THE RULES?2. WHAT SHOULD YOU KNOW?*******************

INCOME TAXATION IS ON MANY LEVELS. IN THIS COURSE WE COVER FEDERAL INCOME TAXATION.

THE FIRST INCOME TAX WAS IN 1913, BY CONSTITUTIONAL AMENDMENT. FEDERAL TAXES PREVIOUS TO THEN WERE NOT PERMISSIBLE, AS EXPLICITLY STATED IN THE CONSTITUTION. THE LOBBYING EFFORT BEGAN IN THE 1880'S WHEN ACTIVISTS REALIZED THAT THE EXISTING PREVALENT SYSTEM WAS HELPING THE RICH GET RICHER WHILE THE POOR GOT EVEN MORE POOR. IT WAS DESIGNED TO RAISE MONEY

49

FROM THE RICH AND TO GIVE IT TO THE POOR. PREVIOUS TO THEN THE GOVERNMENT RAISED MONEY THROUGH CUSTOMS ALONE.

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

50

"CODE" WHICH IN A FEW SENTENCES EXPLAINS THE "INTENT" OF THE LEGISLATION. "INTENT" IS THE PURVIEW OF THE TAX ATTORNEY IN THE MIND OF THE TAX ACCOUNTANT.

AFTER CODES AND REGULATIONS, WE LOOK TO "TAX CASES" FOR GUIDANCE IN INTERPRETING THE TAX CODE.

TAX CASE EVOLUTION

TAX CASES FORM AS FOLLOWS:

YOU GO TO FILE YOUR TAXES AND ARE AUDITED. THE AGENT AUDITING YOU SAYS YOU ARE NOT IN COMPLIANCE.

YOU GO TO THE SUPERVISOR. HE AGREES.

YOU GO TO THE APPELLATE COURT, WHICH IS 5 PEOPLE WITH EXPERTISE IN TAX. THEY ARE THE SENIOR TAX OFFICIALS IN THE DISTRICT. THEY AGREE.

YOU GET A 90 DAY LETTER. START COUNTING! UNLESS YOU FILE A PETITION IN TAX COURT, THIS BILL BECOMES FINAL AND YOU HAVE NO FURTHER RECOURSE.

YOU FILE THE PETITION IN TAX COURT, STAYING THE COLLECTION OF THE TAXES.

THE TAX COURT HEARS YOUR CASE AS YOU PROTEST THE IRS DETERMINATION. YOU DO NOT PAY THE TAX UNTIL YOUR CASE IS DECIDED.(SEE CONTINUATION BELOW)

**************

TAX COURT- UNDER 50,000 DOLLARS, AN INDIVIDUAL CAN REPRESENT HIMSELF IN TAX COURT. SINCE YOU WILL BE UP AGAINST PROS, YOU WILL NOT LIKELY WIN IF YOU REPRESENT YOURSELF.

TAX COURT IS A FEDERAL COURT APPOINTED BY THE PRESIDENT. THEY ARE WELL QUALIFIED TAX PRACTITIONERS AND DECIDE TAX LAW FOR THE U.S.

IF YOU GO TO TAX COURT AND WIN, YOU DO NOT PAY THE TAX.

IF YOU GO TO TAX COURT AND YOU LOSE YOU MAY APPEAL TO THE FEDERAL COURT OF APPEALS.

IF YOU LOSE IN THE FEDERAL COURT OF APPEALS YOU MAY APPEAL TO THE SUPREME COURT OF THE UNITED STATES. THEY DO NOT USUALLY TRY TAX ISSUES UNLESS IT IS A NOVEL ISSUE.

***************

51

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.

A REVENUE RULING IS A PRONOUNCEMENT BY THE IRS WHICH IS CITED SUCH AS:

REV RUL 90-151 (151ST RULING OF 1990)CB-1-P.230 (CUMULATIVE BULLETIN, VOLUME ONE PAGE 230)

IT IS SELF GENERATED BY THEIRS, AND IS USED TO KEEP TRACK OF POLICY.

THERE ARE ALSO PRIVATE REVENUE RULINGS. THEY CANNOT BE APPEALED AND MUST BE PAID FOR (300.00). THEY ARE GOTTEN BY STATING THE CASE TO THE IRS, AND GETTING THEM FOR THE RECORD HOW THE IRS FEELS ABOUT A CERTAIN SCENARIO. IT IS A GUIDE, AND IS NOT DEFINITIVE. IF YOU GOT A NEGATIVE REVENUE RULING AND YOU PROCEED ANYWAY, YOU MAY HAVE PROBLEMS SINCE THE IRS MAY LOOK STRONGER IN APPEAL.

THERE ARE TAXES WHICH YOU DEAL WITH WHICH ARE NOT INCOME TAX RULES SUCH AS:

GIFT TAX - FEDERAL LEVELESTATE TAX -FEDERAL LEVELSALES TAX - LOCAL LEVEL

THESE ARE CALLED EXCISE TAXES. THEY ARE IMPOSED ON A HAPPENING OF A CRITICAL AND DEFINITIVE EVENT.

"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

CLASS THREE 6/7/90

CORPORATION; S AND CPARTNERSHIP; LIMITED AND GENERAL

52

CONDUIT - FLOW THROUGH TO INVESTORS. THE REASON WHY A C CORPORATION IS NOT USED.

THERE ARE SOME CAREFULLY CONSTRUCTED EXCEPTIONS.

S CORPORATION STARTS OUT AS A C CORPORATION, THEN THERE IS AN ELECTION TO CHANGE TO AN S CORPORATION AT A LATER POINT IN TIME. 2 1/2 MONTHS AFTER THE TAX YEAR BEGINS IS THE LIMIT, AND ELECTION MUST BE MADE BY ALL OF THE INVESTORS.

THE S CORPORATION IS USED AS OF 1959. NOT REALLY ACTIVE USE IN REAL ESTATE UNTIL 1982. THE 1986 CODE AGAIN MADE IT EVEN MORE VALUABLE FOR USE IN REAL ESTATE. BETWEEN 1959 AND 1982, USED PRIMARILY BY SMALL BUSINESSES. IN 1982, THE TAX RATES CHANGED MAKING THE S CORPORATION ATTRACTIVE DUE TO CHANGE IN PERSONAL TAX RATE.

PARTNERSHIP VS. S CORPORATIONBOTH PASS THROUGH ENTITIES. A LOSS IS PASSED THROUGH FOR BOTH, IN THE LATER CASE TO THE SHAREHOLDERS, AND IN THE PARTNERSHIP TO THE PARTNERS. THERE ARE LIMITS TO THE PASS THROUGH OF LOSS HOWEVER.

AN S CORPORATION WOULD BE PREFERRED WHEN LIABILITY IS A SEVERE ISSUE. THE PARTNERS CAN NOT ACT AS MUCH IN A LIMITED PARTNERSHIP WITHOUT INCREASING THEIR EXPOSURE TO LIABILITY, AND AN S CORPORATION ALLOWS SOME MORE ACTIVITY ON THE PART OF THE PARTNERS, WITH LIABILITY TAKEN ON BY THE CORPORATION.

THE EXCEPTION BETWEEN THE SIMILARITY BETWEEN HE TWO IS THE LIMITATION ON LOSSES. FOR EXAMPLE;

A LOSS IS PASSED THROUGH THE ABC COMPANY, A PARTNERSHIP.

THE ABC COMPANY HAS 300,000 IN LOSSES, AND EACH OF THE THREE PARTNERS, A, B, AND C GET A 100,000 LOSS DEDUCTION ON THEIR PERSONAL TAXES.

BASIS - YOUR BASIS IS WHAT YOU PUT INTO THE BUSINESS. YOU MAY DEDUCT LOSSES UP TO YOUR BASIS. YOU CAN INCREASE BASIS, IN A PARTNERSHIP, BY TAKING ON ADDITIONAL OBLIGATIONS, WHICH WOULD BE SPLIT AMONGST THE PARTNERS.

FOR EXAMPLE;EACH INVESTOR, A, B, AND C PUT IN 250,000 EACH FOR VALUE OF 750,000. THEN THERE IS A LOSS OF 300,000 FOR THREE STRAIGHT YEARS. YOU WOULD RUN OUT OF BASIS IN THE THIRD YEAR, AND THE LOSS BEYOND THE 750,000 INVESTMENT WHICH IS THE BASIS. IF ADDITIONAL MORTGAGE OBLIGATIONS OR LOANS WERE TAKEN ON BY THE PARTNERSHIP, HOWEVER, THIS BASIS COULD HAVE BEEN ADJUSTED TO TAKE THE LOSS. IN AN S CORPORATION, THE BENEFIT IS THAT BEYOND THE 750,000 LOSS, EACH PARTNER ISN'T LIABLE FOR THE ADDITIONAL LOSS IN THE COMPANY.

53

THE PARTNERSHIP IS MORE FLEXIBLE THAN AN S CORPORATION.

IN A LIMITED PARTNERSHIP, YOU ONLY TAKE ONT HE LIABILITY OF YOUR INVESTMENT, PLUS ADDITIONAL SHARE OF OBLIGATION.

A LIMITED PARTNERSHIP IS FINE AS AN INVESTMENT VEHICLE BUT IT IS A DIFFICULT AND EXPENSIVE WAY TO DO BUSINESS.

**********

INVESTMENT ENTITIES

THREE PARTNERS CONTRIBUTE 300,000 EACH. ONE IN CASH, THE SECOND IN PROPERTY AND THE THIRD IN SERVICES.

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. IF THERE IS NO GUARANTEE

54

OF INCOME, THEN SERVICES TO BE RENDERED IN EXCHANGE FOR SHARES IS NOT TAXABLE WHEN THE FUNDS FOR THOSE SERVICES ARE TRANSFERRED TO THE PERSON PERFORMING SERVICES IN THE FORM OF SHARES. THE TAX IS LEVIED WHEN THE SHARES ARE EXCHANGED FOR CASH VALUE. THE FEES MUST BE, IN OTHER WORDS, SUBJECT TO FORFEITURE IN ORDER TO NOT BE TAXABLE.

THE CAMPBELL CASE

WHEN IN PRODUCING A VENTURE THE FUTURE GAIN IS CERTAIN, AND THERE IS NO RISK OF NO RETURN ON THE MONEY, THE TAXES MAY BE PAYABLE IN THE BEGINNING OF THE VENTURE BASED UPON ITS DISCOUNTED CASH FLOW VALUE.

BASIS - USUALLY "WHAT YOU PAY FOR SOMETHING", BUT THERE ARE WAYS TO ADJUST IT. IT IS USED TO DETERMINE GAIN OR LOSS ON DISPOSITION. YOU WILL HAVE A TAXABLE GAIN OR LOSS BASED UPON THE PROCEEDS OF SALE AND YOU TAX BASIS SUBTRACTED FROM EACH OTHER. TAX BASIS PUTS A LIMIT ON YOUR GAIN OR LOSS EACH YEAR. IF YOU HAVE A LOSS YOU CAN TAKE IT AGAINST YOUR OTHER INCOME ONLY UP TO YOUR BASIS. YOUR BASIS WILL SHIFT AND CHANGE, AND MUST BE DETERMINED WHEN YOU ENTER THAT INVESTMENT.

THE BASIC FORMULA FOR BASIS IS THE SAME IN A S CORPORATION AND A PARTNERSHIP BUT THE LATER HAS GREATER FLEXIBILITY ON ADDING BASIS.

INVESTMENT PLUS OR MINUS GAIN OR LOSS PER YEAR, EACH YEAR, EQUALS THE BASIS.

BY GAIN OR LOSS, YOUR INVESTMENT BASIS WILL EITHER INCREASE OR DECREASE. ANY WITHDRAWALS OF CAPITAL REDUCE THE BASIS. ANY CASH ENTRIES OF CAPITAL INCREASE BASIS. DIVIDENDS IN AN S CORPORATION ARE CONSIDERED WITHDRAWALS.END OF CLASS THREE

CLASS FOUR 6/14/90

PROFESSOR WATERS HAD A SUBSTITUTEEXERCISES REVIEWED IN CLASS

UNADJUSTED BASIS = COST - THAT WHICH YOU PAY OR THE AMOUNT OF LIABILITY INCURRED OR BOTH

IE. 1 MILLION DOLLAR PROPERTY; 800K LOAN 200K CASH...BASIS IS 1 MILLION

ADJUSTED BASIS = UNADJUSTED BASIS CONSIDERING DEDUCTIONS AND DEPRECIATION SUBTRACTED FROM IT.

UNADJUSTED BASIS STAYS THE SAMEADJUSTED BASIS IS ALWAYS CHANGING.

SECTION 4-69 AND SECTION 1-68 ESPECIALLY A AND B ARE READING

55

************END OF CLASS FOUR

CLASS FIVE 6/21/90

TEXT 6.14 DEPRECIATION

TO DATE, THE FOLLOWING HAVE BEEN THE REQUIRED READINGSTHE READING LIST HAS NOT YET BEEN DISTRIBUTED TO THE CLASS.

TEXT8.02 11.02 TO 11.076.087.066.14

READINGS (CONT.)

CODE SECTIONS; 301, 316, 317, 351, 358, 362, 368(C), 61, 1001, 118, 469, 465, 704, 705, 721, 722, 723, 731, 732, 752

TOPIC OF TODAY'S LECTURE; BASIS RULES AND PASSIVE LOSS RULES

THESE RULES INTERCONNECT, ALTHOUGH THEY ARE COMPUTED SEPARATELY. THEY SHOULD NOT BE CONSIDERED AS ONE AND THE SAME RULE.

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. DEPRECIATION AND CAPITALIZATION OR CONSTRUCTION PERIOD INTEREST (SUBTRACTIONS AND ADDITIONS) LEAD TO THE "ADJUSTED BASIS".

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:

56

************************************

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)

1. YOU CAN ONLY DEDUCT TRANSACTIONS ENTERED FOR PROFIT. PERSONAL TRANSACTIONS SUCH AS THE SALE OF A RESIDENCE ARE NOT DEDUCTIBLE. WHEN YOU SELL A PERSONAL ASSET AT A LOSS, YOU MAY NOT DEDUCT IT AS A LOSS. A GAIN ON PERSONAL PROPERTY IS TAXABLE AS A CAPITAL GAIN, HOWEVER.

A PERSONAL PROPERTY WHICH IS TURNED TO A BUSINESS PROPERTY CAN TRANSFER THE LOSSES UPON SALE OF THE BUSINESS.

IF YOU SELL TO A CORPORATION THAT YOU OWN AT LEAST 50 PERCENT OF THE SHARES, YOU MAY NOT DEDUCT THE LOSS.

TO PREVENT THE DEDUCTION OF ARTIFICIAL LOSSES THE SECTION DENIES LOSSES AT EXCHANGES BETWEEN RELATED PARTIES (IE. MOM AND DAD OR OTHER BLOOD RELATIVES).

CAPITAL GAIN (LOSS) SECURED IN A TRANSACTION WHEN THERE IS A DISPOSITION OF A CAPITAL ASSET. WE HAVE CAPITAL GAIN IF WE DISPOSE OF AN ASSET WHICH IS CALLED A SECTION 1231 ASSET.

A LOSS UNDER SECTION 1231 IS AN ORDINARY LOSS.SECTION 1231 GIVES YOU THE BEST OF ALL WORLDS. WE HAVE A DISTINCTION BETWEEN ORDINARY AND CAPITAL ASSETS, BUT THE RATE OF TAX FOR THE TWO IS THE SAME AS OF 1/1/87.

A CAPITAL ASSET IS (ON P 1113) ANY PROPERTY HELD BY THE TAXPAYER WHETHER FOR BUSINESS OR NOT EXCEPT:

1. STOCK IN TRADE (INVENTORY). INVENTORY IS NEVER A CAPITAL ASSET.

2. PROPERTY USED IN THE TRADE OF BUSINESS SUBJECT TO DEPRECIATION OR REAL PROPERTY USED IN BUSINESS. HERE SECTION 1231 COMES INTO PLAY.. IT SAYS THAT YOU WILL GET CAPITAL GAIN TREATMENT IF YOU SELL YOUR PROPERTY FOR USE AS A FACTORY. IT APPLIES TO ANY REAL PROPERTY USED IN BUSINESS. THE INTENT OF THE GOVERNMENT IS TO ENCOURAGE THE TRANSACTION OF BUSINESS.

57

LOSSES ARE CONSIDERED ORDINARY LOSSES.

IF YOUR ARE DEALING IN INVENTORY "SAY GOODBYE" TO CAPITAL GAINS TAX RATES. IF YOU ARE CLASSIFIED AS A DEALER IN REAL ESTATE, YOU ARE DEALING IN INVENTORY. IF THE REAL ESTATE IS HELD PRIMARILY FOR THE SALE TO AN INVESTOR, IT IS INVENTORY.

READ THE SECTIONS ON "DEALERS IN REAL ESTATE". CAPITAL GAINS AND LOSSES OF INDIVIDUALS AND CORPORATIONS.

CAPITAL AND ORDINARY GAINS AND LOSSES

I.E. INDIVIDUAL WITH 50,000 SALARY 6,000 INTEREST AND DIVIDENDS

HE BUYS AND SELL REAL ESTATE AS AN INVESTOR, NOT A DEALER. HE BUYS A PROPERTY, PARCEL A, FOR HIS BASIS OF 100K. HE SELLS IT FOR 110K. PARCEL B WAS BOUGHT AT A BASIS OF 200K, AND SOLD FOR 197K.

10000 GAIN ON A3000 GAIN ON B

NOW WE NEED TO DESCRIBE IT AS A SHORT TERM OR LONG TERM LOSS OR GAIN. IF THE PERIOD IS LONGER THAN ONE YEAR, IT IS LONG TERM.

IF BOTH ARE LONG TERM, WE CAN MATCH THEM.

10000 MINUS 3000 EQUALS 7000. THIS IS CALLED MATCHING LIKE ASSETS.

THEREFORE THE TAX STATEMENT WILL REGISTER 50000 SALARY6000 DIVIDENDS7000 GAIN ON SALE OF REAL

ESTATE (LONG TERM CAPITAL GAINS)

THE TAXABLE INCOME WILL THEREFORE BE 63000 DOLLARS.

IN THE NEAR FUTURE, PROFESSOR WATERS PREDICTS LONG TERM CAPITAL GAINS HAVE THE MOST FAVORABLE POSITION. THIS IS WHERE YOU GET MAXIMUM TAX FAVOR. REMEMBER THAT CERTAIN CAPITAL GAINS ARE TREATED BETTER. LONG TERM CAPITAL GAINS ARE ONE OF THESE TYPES. IF YOU HOLD FOR MORE THAN ONE YEAR, YOU ARE NOT A "SPECULATOR". AS OF THIS DATE, HOWEVER, THERE IS NO BENEFIT TO CAPITAL GAINS AS OPPOSED TO ORDINARY GAINS SINCE BOTH ARE TAXED AT THE SAME RATE.

IF IN THE SAME SITUATION AS ABOVE, WITH THE EXCEPTION THAT THEY WERE HELD LESS THAN A YEAR, BOTH ARE SHORT TERM CAPITAL GAINS. SHORT TERM CAPITAL GAINS ARE TREATED AS ORDINARY INCOME.

ANOTHER EXAMPLE;

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PARCEL A 100K BOUGHT80K SOLD20K LOSS (LONG TERM CAPITAL GAIN)

PARCEL B 200K BOUGHT205K SOLD5K GAIN (LONG TERM CAPITAL GAIN)

TOTAL LOSS IS 15KAS AN INDIVIDUAL, IT IS NOT TRANSFERABLE TO THE 50K SALARY AND THE 6K INTEREST AND DIVIDEND IN THE PREVIOUS EXAMPLE. YOU CAN NOT DEDUCT THE 15K LOSS BECAUSE YOU CAN NOT DEDUCT MORE THAN 3K IN CAPITAL LOSS AGAINST ORDINARY INCOME.

56K - 3K = 53K WHICH IS THE TAXABLE INCOME. 12K REMAINS IN CAPITAL LOSS WHICH CAN BE APPLIED BACKWARDS 5 YEARS, AND FORWARD UNLIMITEDLY.

THE 3K LOSS LIMIT ALSO APPLIES TO SHORT TERM LOSSES; THE 3K LOSS IS ONLY ALLOWED TO INDIVIDUALS. NOTHING IS PERMITTED TO THE CORPORATION, SINCE THEY MAY NOT MATCH CAPITAL GAINS WITH ORDINARY GAINS SUCH AS THAT FROM INCOME, INTEREST AND DIVIDENDS.

SAY THE SAME SITUATION AS ABOVE, BUT THE ENTITY IS A SCHEDULE C CORPORATION.

50 K EARNINGS + 6K DIVIDEND AND INTEREST = 56K

THE LOSS CAN BE CARRIED BACK 3 YEARS AND CARRIED FORWARD 5 YEARS. AFTER 5 YEARS, THE LOSS IS LOST. THE LOSS MUST BE "MATCHED" WITH LIKE KIND GAINS. ORDINARY GAINS AND CAPITAL GAINS MAY NOT BE MATCHED, UNLIKE INDIVIDUALS WHO MAY MATCH UP TO 3K ANNUALLY.

THE C CORPORATION CAN NOT USE THE LOSSES UNLESS THEY CAN MATCH AGAINST A CAPITAL GAIN.

THE S CORPORATION UNDER THE SAME CIRCUMSTANCES IS CALCULATED AS SHOWN BELOW:

50 K EARNINGS AND NET INCOME + 6K INTEREST AND DIVIDENDS =56 K56K TAXABLE ORDINARY INCOME - 15K TAXABLE CAPITAL LOSS

THE 3 STOCKHOLDERS WILL SEE THE FOLLOWING

ON THE K-1;50000 / 3 = 16,666 INCOME PER SHAREHOLDER6000 / 3 = 2K DIV. AND INT. PER SHAREHOLDER-15K / 3 = 5K CAPITAL LOSS PER SHAREHOLDER

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EACH INDIVIDUAL WOULD BE ABLE TO DEDUCT UP TO 3K ON THIS YEARS PERSONAL TAX FORM.

PROBLEMS HANDED OUTNEXT WEEK CLASSMATE BY CLASSMATE INTERROGATIONS ON ANSWERS

END OF CLASS FIVE

CLASS SIX 6/29/90

SECTION 267 OF THE IRC HANDED OUTRELATED PARTIES-LOSS

TODAY'S LECTURE ON;DEPRECIATION PASSIVE LOSSESBASIS RULESAT RISK RULES

NON-RECOURSE DEBT - A DEBT FOR WHICH YOU ARE NOT PERSONALLY LIABLE, SINCE THE CREDITOR AGREES TO LOOK TO THE PROCEEDS OF THE PROPERTY TO EXTINGUISH THE DEBT AND NOT THE ASSETS OF THE OWNER.

THE TAX CONSEQUENCE IS THAT YOU DO NOT GENERALLY GET BASIS FOR NON RECOURSE LOANS. IN ORDER TO HAVE BASIS, THERE MUST BE RECOURSE. IN A SINGLE LOAN, THERE MAY BE SOME FOR WHOM THE CREDITOR HAS RECOURSE AND SOME FOR WHOM HE DOES NOT (IE. IN A PARTNERSHIP).

I.E. A NON-RECOURSE MORTGAGE ON A 100K PROPERTY WITH 10K DOWN AMOUNTS IN A 10K BASIS, NOT A 100K BASIS.

WHEN THE NON-RECOURSE DEBT WAS TAKEN PRIOR TO 10/22/86, THE DEBT APPLIES TO BASIS. THIS IS THE GRANDFATHER CLAUSE.

SEE THE BOOK FOR QUALIFICATIONS NEEDED FOR A BANK TO GIVE NON-RECOURSE LOANS.

*****AT RISK RULES*****

INVESTED CASH, PROPERTY, SERVICES, OR DEBT FOR WHICH ONE IS PUT AT RISK OF LOSING IT. THE AT RISK BASIS IS COMPRISED OF PRECISELY THESE ELEMENTS.THE ADJUSTED BASIS:

MINUS: DISTRIBUTIONS, DIVIDENDS (IN AN S CORP.), REPAYMENT OF DEBT PRINCIPAL.

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PLUS: NET INCOME, ADDITIONAL INVESTMENT, ADDITIONAL QUALIFIED DEBT.

PASSIVE LOSS RULES:THREE TYPES OF INCOME

PASSIVE INCOME- MOST REAL ESTATE DERIVED INCOME. ANY ACTIVITY WHERE YOU DO NOT TAKE AN ACTIVE ROLE.

ACTIVE INCOME - SALARY, COMMISSIONS, FEES...WHAT YOU EARN FROM THE SWEAT OF YOUR BROW (ALSO CALLED EARNED INCOME).

PORTFOLIO INCOME - INTEREST, DIVIDENDS, T-BILLS, STOCKS, ETC. THE DISTINCTION WITH PASSIVE INCOME IS THAT PORTFOLIO INCOME IS PRIMARILY FROM INVESTMENTS. ALSO CALLED UNEARNED INCOME.

ADDITIONALLY, THERE IS IMPUTED, OR PHANTOM INCOME. IT IS INCOME THAT IS NOT EARNED PER SAY, BUT EXISTS BY DEFINITION DUE TO A SPECIFICALLY CONSTRUCTED TRANSACTION. FOR EXAMPLE, IN A LOAN TO A FROM B AT 6 PERCENT WHEN LOANS MARKET AT 10 PERCENT, THE 4 PERCENT DIFFERENCE IS IMPUTED INCOME.

P.I.G. = PASSIVE INCOME GENERATORA.G.I. = ACTIVE GROSS INCOME

ACTIVE EARNED INCOME PASSIVE PORTFOLIO AGI********************************************************************100K (50K) 20K 7OK YEAR ONE100K SOLD FOR 20K 80K YEAR TWO

10K --LOSS OF 40K

40 K OF LOSSES IS GENERATED AT SALE IN YEAR TWO. AFTER THE LOSSES ARE OFFSET AGAINST ANY PASSIVE INCOME, THE REMAINING AND OUTSTANDING LOSSES MAY BE APPLIED AGAINST THE OTHER TYPES OF INCOME.

PASSIVE LOSSES OTHERWISE STAY ONLY WITH PASSIVE GAINS, AND SINCE 10/22/86 CAN NOT BE APPLIED AGAINST ANY OTHER TYPE OF INCOME.

IN THE YEAR OF DISPOSITION THE PASSIVE LOSS IS MATCHED AGAINST ANY OTHER INCOME IN THE PASSIVE CATEGORY, THEN IT IS FREE TO BE MATCHED AGAINST OTHER INCOME. THE ENTIRE PROPERTY, NOT SHARES OF IT, MUST BE SOLD HOWEVER, AND THE PASSIVE LOSS MAY BE MATCHED FOR ALL INCOME BACKWARD AND FORWARD AS PER THE RESTRICTIONS IN THE INTERNAL REVENUE CODE.

**********PHASE IN RULES

PASSIVE LOSSES CAN BE USED ONLY AGAINST GENERATED PASSIVE INCOME, EXCEPT

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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 DEPRECIATION1982 - 84 18 YEARS OF DEPRECIATION1985 - 86 19 YEARS OF DEPRECIATIONPRIOR 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 SEVEN7/5/90

FINAL EXAM IS ON THURSDAY, AUGUST 9TH, 1990TERM PAPER IS DUE THURSDAY, AUGUST 2ND, 1990

TERM PAPER10 PAGES DOUBLE SPACED

GIVE CITATIONS, IE. SECTION XXX, IRC. 1986MENTION THE CODE AND REGULATIONS IN A CITE AT LEAST ONCE.

COURT CASES SHOULD BE MENTIONED AS APPLICABLE.

RESEARCH

62

THREE JOURNALS IN LIBRARY:

1. THE JOURNAL OF REAL ESTATE TAXATION QUARTERLY2. REAL ESTATE ACCOUNTING AND TAXATION3. REAL ESTATE LAW JOURNAL (HAS A DEPARTMENT OF TAXATION IN EVERY ISSUE)SOURCES MAY BE FOUND AT:

THE N.Y.U LAW LIBRARYTHE STERN MBA LIBRARY

THE JOURNAL OF TAXATION (MONTHLY, HAS A REAL ESTATE CORNER)"THE BEST TAX JOURNAL PUBLISHED" ACC. TO PROF. WATERS

THE TAX ADVISOR (AMERICAN INST. OF CPA'S)MONTHLY, 50-70 PERCENT OF ISSUES HAVE ARTICLES ON REAL ESTATE.

TAXES (PUT OUT BY CCH)

THE JOURNAL OF ACCOUNTANCY THE CPA JOURNAL(BOTH PUT OUT ARTICLES ON ACCOUNTANCY)

THE AMERICAN BAR ASSOCIATION JOURNALTHE AMERICAN BAR ASSOCIATION TAX BULLETIN(BOTH DEAL WITH TAX LAW)

TRY TO KEEP ARTICLES AS RECENT AS POSSIBLE IN ORDER THAT THE ITEMS BE CURRENT.

TYPICAL TOPICS:

THE SALE LEASEBACK TRANSACTION AND THE LAW OF TAX DEDUCTIBILITY OF REAL ESTATE TAXES FOR THE COOP APARTMENT OWNER

DEFINING ACTIVITY UNDER THE NEW PASSIVE ACTIVITY LOSS RULES

TYPICAL TOPICS (CONT)_

CAPITAL GAINS IN REAL ESTATE

AT RISK RULES APPLICATION

COOP HOUSING AND SECTION 216 OF THE CODE

THE LOW INCOME HOUSING CREDIT AND ITS IMPACT ON THE PROVISION OF AFFORDABLE HOUSING

SECTION 263 AND CONSTRUCTION COST CAPITALIZATION

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PASSIVE LOSS AND AT RISK RULES

UNTIL 1986, REAL ESTATE WAS EXEMPTED FROM AT-RISK RULES. NON-RECOURSE LOANS WERE PERMISSIBLE FOR PURPOSES OF DETERMINING BASIS FOR OFFSETTING LOSS BEFORE 10/22/86.

FOR PROPERTY PURCHASED BEFORE 10/22/86, INVESTMENT IN REAL ESTATE MUST BE

RECOURSE DEBT, OR 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 ACTIVITIES2. 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. DISPOSITION FREES UP YOUR LOSS.

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 YEAR20K 8730K 8840K 89

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50K 90 YEAR OF DISPOSITION, 200K GAIN

HISTORY OF PROPERTY:PAID 3.2M FOR PROPERTY. BASIS IS 2M. SOLD FOR 2.2M GAIN IS 200K

THE LOSS COMES FROM INCOME MATCHED AGAINST EXPENSES. IN THIS CASE, THE LOSS EXCEEDED THE GAIN.

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 COMPLEXTHE 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 INDIVIDUALS2. 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 CORPORATIONTHOSE 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 EIGHT7/12/90

FORM 1065 (K-1) PASSED OUTK-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?

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ITEM C: TRUST? ESTATE? CORPORATION?

ITEM D: FOREIGN PARTNER?

ITEM E: PROFIT SHARING...........PERCENT OF TOTAL LOSS SHARING............. " " " OWNERSHIP OF CAPITAL..... " " "

ITEM G: 50.00 DOLLAR FINE FOR NOT INCLUDING THE REGISTRATION NUMBER.

ITEM I: PTP? PUBLICLY TRADED PARTNERSHIPIF SO, LOSSES MUST BE SEGREGATED FROM OTHER PASSIVE LOSSES. PTP'S ARE A DIFFERENT BREED OF PASSIVE LOSSES THAN TYPICAL PASSIVE

LOSSES.

DURING 1987, PTP'S BENEFITTED FROM A LOOPHOLE THAT ALLOWED A PARTNERSHIP WITHOUT THE APPLICATION OF PASSIVE LOSS RULES. IT RESEMBLED A CORPORATION. AS OF 1/1/88, PTP'S, "A PARTNERSHIP TRADED OVER THE COUNTER ON AN EXCHANGE", LOSSES FOR THE ENTITY WERE SEGREGATED FROM OTHER PASSIVE LOSSES.

ITEM K: CAN THE PERSON TAKE ADVANTAGE OF ANY LOSS APPEARING FURTHER ON IN THE FORM? DO THEY HAVE ADDITIONAL BASIS?

RENTAL REAL ESTATE ACTIVITIES ARE PASSIVE LOSSES.

QUESTION: DO YOU HAVE POSITIVE BASIS DOES THE FINANCING THAT YOU HAVE QUALIFY FOR BASIS?

DURING THE ACTIVITY OF REAL ESTATE INVESTMENT, MONEY COMING IN IS INVESTED, EARNS INCOME, AND IS NOT OFFSET BY PASSIVE LOSSES UNDER THE PASSIVE LOSS RULES.

ADVANTAGE OF SECTION 1231 GAIN IS THAT IT IS TREATED AS A CAPITAL GAIN -SEE ITEM K(6) OF K-1 FORM. THIS IS IMPORTANT IF CAPITAL GAINS TAX IS EVENTUALLY REDUCED.

K-1 DEDUCTIONS - CHARITABLE DEDUCTIONS FLOW THROUGH TO THE PARTNERS AS A PER SHARE OF PARTNERSHIP, AS DO THE OTHER DEDUCTIONS.

THE "S" CORPORATION K-1 (FORM 1120 S)

ITEM A - SHAREHOLDER'S PERCENTAGE OF STOCK.

OTHER ITEMS PRETTY MUCH THE SAME AS OTHER PARTNERSHIP'S K-1 FORM.

DEPRECIATION - SECTION 179

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SECTION 6.06 OF THE TEXT

PERTAINS TO PERSONAL PROPERTY, NOT REAL PROPERTY. PERTAINS TO THE REPORTING ON THE K-1 FORM. PUT IN TEN YEARS AGO, AND UPGRADED IN THE 1986 ACT. AN INDIVIDUAL ENTITY IN OPERATING A BUSINESS, MAY CHOOSE TO CAPITALIZE THE ITEM THAT BENEFITS THE BUSINESS FOR A PERIOD OF OVER ONE YEAR WHEREAS BEFORE IT HAD TO BE DEPRECIATED. APPLIES UP TO 10,000 DOLLARS. NOT FOR PERSONAL USE (SECTION 38) ITEMS SUCH AS CARS. IF YOUR COMPANY SPENDS MORE THAN 200,000 DOLLARS FOR EQUIPMENT IN A TAX YEAR, IT LOSES THE SECTION 179 DEDUCTION.

K-1 FOR PARTNERSHIPS, ITEM 9

SECTION 179 - IF THE PARTNERSHIP TAKES THE 10,000 DOLLAR CAPITALIZATION OF THE ITEM, AND YOU HAVE PARTNERS, EACH PARTNER HAS 2,500 DOLLARS PASSED THROUGH TO THEM AS A DEDUCTION AGAINST INCOME. THIS AMOUNT IS LISTED AT ITEM 9.

THE SECTION 179 LOSS IS ALLOWABLE ONLY TO THE EXTENT THAT YOU HAVE INCOME FROM YOUR ACTIVITIES. SEE SECTION 6.06 OF THE TEXT.

IF YOU DON'T USE IT, YOU LOSE IT.KNOW THE FOLLOWING; IT WILL APPEAR ON THE EXAM.

YOU CAN GET THE DEDUCTION IF YOU HAVE A LOSS IN YOUR REAL ESTATE PARTNERSHIP AS LONG AS YOU CAN OFFSET IT WITH INCOME FROM ANOTHER ACTIVITY, EVEN EARNED SALARY INCOME.

IF YOU OWN SHARES IN TEN PARTNERSHIPS, FOR EXAMPLE, EACH WITH 2,500 DOLLARS IN SECTION 179 DEDUCTIONS (25,000 TOTAL), YOU CAN TAKE 10,000 THIS YEAR AND CARRY OVER THE REST TO FUTURE TAX YEARS.

DEDUCTIONS (CONT)ITEM 11 (OTHER DEDUCTIONS)

MEDICAL INSURANCE PREMIUMS - A PARTNER MAY NOT FULLY DEDUCT HIS MEDICAL INSURANCE PREMIUMS, AS HE DOES FOR HIS EMPLOYEES. UNDER THE 1986 CODE, PARTNERS HAVE A DEDUCTION OF UP TO 25% OF INSURANCE PREMIUMS. IE. 3000 DOLLARS IN PREMIUMS YIELDS A 750 DOLLAR DEDUCTION.

THIS IS NOT TRUE IN C CORPORATIONS.

IF YOU OWN MORE THAN 2 PERCENT OF AN S CORPORATION, YOU ARE NOT ENTITLED TO MEDICAL INSURANCE PREMIUM DEDUCTIONS. AS OF 1990, ITEM 10 OF THE 1120S FORM WOULD ALLOW A 25 PERCENT DEDUCTION OF PREMIUMS, THE SAME AS IN THE PARTNERSHIP.

67

QUALIFIED NON-RECOURSE DEBTSECTION 7.06[2] OF THE TEXT4 TESTS:

ONCE INDEBTED IN OBLIGATION, TO GET BASIS THE NON-RECOURSE LOAN MUST;

1. BE BORROWED BY THE TAXPAYER WITH RESPECT TO THE ACTIVITY OF OWNING REAL PROPERTY ( INCLUDES HOTELS, MOTELS, INCOME

PRODUCING RESIDENTIAL USES, DOES NOT INCLUDE MINERAL RIGHTS ).

2. MUST BE BORROWED FROM A QUALIFIED PERSON AS DEFINED IN THE AT-RISK RULES. IT SHOULD NOT BE ANY RELATED PERSON OR CORPORATION IN WHICH YOU OWN SHARES. A BANK WOULD BE GOOD AS LONG AS YOU DO NOT OWN 20 PERCENT OR MORE OF THE BANK. PURCHASE MONEY MORTGAGE IS NOT QUALIFIED BECAUSE THE LAND SALE IS RELATED TO THE LENDER, WHO IS AT ONCE THE PAST OWNER OF THE TITLE AND THE MORTGAGEE.

THE LENDER MUST NOT RECEIVE A FEE OR EQUITY PARTICIPATION ON THE INVESTMENT FOR WHICH THE LOAN IS MADE.

AN AGENCY OF GOVERNMENT GUARANTEEING THE OBLIGATION IS QUALIFIED NON-RECOURSE DEBT.

3. NO OTHER PERSON MAY BE RESPONSIBLE FOR REPAYMENT OF THE FINANCING.

4. CAN NOT BE CONVERTIBLE DEBT.KNOW THAT IT IS RELATIVELY EASY TO QUALIFY FOR QUALIFIED NON-RECOURSE DEBT.

KNOW WHERE TO FIND THE TESTS IN THE CODE (SECTION 465).

EXAMPLE: GEN A 20M PROPERTY WITH A MORTGAGE OF 5M. ABC PARTNERSHIP WANTS TO BORROW 5M MORE; THEIR BASIS IS 5M, AND THEY BOUGHT FOR 5M. THEY WANT TO GET A NEW 10M QUALIFIED NON-RECOURSE LOAN AND PAY OFF THE OLD 5M UNQUALIFIED NON-RECOURSE DEBT.

THE 1986 CODE EXPLANATIONS BY THE JOINT WAYS AND MEANS COMMITTEE, CALLED THE "BLUE BOOK" (2 VOLS. PAPERBACK) IS THE "CONFERENCE COMMITTEE EXPLANATIONS".

READ SECTION 11.06, CAPITAL GAINS 11.30 TAX CREDITS (LOW INCOME HOUSING CREDIT) 7.06, 7.10 TO 7.12 TAX DEDUCTIONS FOR INTEREST 6.02 CONSTRUCTION PERIOD INTEREST AND TAXES

6.05 REAL ESTATE EXPENSES (START UP COSTS) 11.01 TO 11.02 DISPOSITION OF REAL ESTATE 11.11

KNOW HOW TO IDENTIFY HOW YOU CAN COMPUTE A GAIN OR LOSS UPON THE

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DISPOSITION OF A PROPERTY.

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. HE DEPRECIATES IT TO 2 MILLION. HE GIFTS IT TO B, HIS SON.

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 TEN7/19/90

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

69

HE TAKES OUT A 2ND MORTGAGE FOR 200K. THE BASIS IS STILL EQUIVALENT TO THE ORIGINAL BASIS.

CHAPTER 11 NOTES:

DATE OF SALE - WHEN DOES THE PROPERTY BECOME "OWNED"? GENERAL RULE: WHEN THE TITLE PASSES; A DEED SHOULD BE DELIVERED.

ALTERNATIVE MINIMUM TAX - KNOW WHAT IT IS AND HOW IT IMPACTS REAL ESTATE. IT APPLIES TO ALL ENTITIES. ITS PURPOSE IS TO CAPTURE TAXPAYERS (AN ENTITY REQUIRED TO FILL OUT A RETURN) WHO DO NOT PAY ANY TAX. THEY HAVE RECEIVED DIVIDENDS, INTEREST, ROYALTIES, AND COMPENSATION, YET STILL REALIZE A TAX LOSS DUE TO LOSSES USED TO OFFSET GAINS. WHEN THE REGULAR TAX DOES NOT RESULT IN A TAX, THE ALTERNATIVE MINIMUM TAX (A.M.T.) KICKS IN.

11-27, 11-28

4 STEPS TO THE A.M.T.

1. TAKE TAXABLE INCOME2. ADJUST PREFERENCES, ADD BACK PERSONAL EXEMPTIONS, THE TYPE OF INCOME

AND LOSS IS DIFFERENT FOR A.M.T. PURPOSES.3. TAKE A SPECIFIC A.M.T. EXEMPTION.4. ARRIVE AT THE A.M.T. INCOME TAX, CALCULATED AT 21%.

COMPARE THE REGULAR TAX AND THE A.M.T.; WHICHEVER IS HIGHER, YOU PAY.

THE EXEMPTION AMOUNT:40,000 WHEN MARRIED FILING JOINTLY; 115,000 IS THE PHASE OUT AMOUNT.30,000 WHEN SINGLE; 112,500 IS THE PHASE OUT AMOUNT.20,000 WHEN MARRIED FILING SEPARATELY; 75,000 IS THE PHASE OUT AMOUNT.11-29 PASSIVE LOSSES ALLOWED FOR A.M.T. PURPOSES, YET THERE ARE RESTRICTIONS ON THEM THAT MAKE THEM LESS VALUABLE.

ACCELERATED DEPRECIATION IS A TAX PREFERENCE THAT IS ADDED BACK INTO THE TAX INCOME.

DEPRECIATION PERIOD IS EXTENDED TO 40 YEARS SPECIFICALLY FOR A.M.T. PURPOSES. NO ACCELERATED DEPRECIATION TAKES PLACE, IT IS STRAIGHT-LINE.

TAX EXEMPT INTEREST - I.E. MUNICIPAL BONDS. NON-TAXABLE FOR REGULAR TAX PURPOSES, BUT IS TAXABLE FOR A.M.T. PURPOSES. SOME BONDS ARE FOR GOVERNMENTAL PURPOSES, SUCH AS SCHOOLS, ROADS, ETC. SOME BONDS ARE FOR NON-GOVERNMENTAL PURPOSES, SUCH AS A BASEBALL STADIUM OR CONFERENCE CENTER. THESE ARE CALLED PRIVATE ACTIVITY BONDS.

CHARITABLE CONTRIBUTIONS - IF YOU GIVE PROPERTY TO A CHARITABLE GROUP,

70

YOU DEDUCTION IS FOR THE FMV OF THE PROPERTY UNLESS THE PROPERTY IS INVENTORY. IN THE CASE OF INVENTORY, THE DEDUCTION IS AT COST.

THE FMV CREDIT IS THEN AN "ADD BACK" SUBJECT TO THE ALT. MIN TAX. SEE 11.13 AND PAGE 11-37. APPRAISALS ARE REQUIRED WHEN THE VALUE EXCEEDS 5000 DOLLARS. EXAMINE THE CONTENTS OF 11.13. PENALTY OF 30% OF THE TAX IF APPRAISALS ARE WITHOUT MERIT. THE PENALTY IS UPON THE APPRAISER.

REHABILITATION -THE INVESTMENT CREDIT WAS DONE AWAY WITH AS OF 1/1/86.

REHAB EXPENDITURES SAVED BY THE '86 ACT:A TEN PERCENT CREDIT FOR NON-RESIDENTIAL BUILDINGS PLACED IN

SERVICE BEFORE 1936.A TWENTY PERCENT CREDIT FOR CERTIFIED HISTORIC STRUCTURES.

CERTIFICATION MUST BE FROM AN INDEPENDENT RECOGNIZED LOCAL HISTORICAL SOCIETY.

SEE PAGE 11-33; READ PARAGRAPH CAREFULLY AND UNDERSTAND!

11.14

FOREIGN INVESTORS REPORTING TAX ACT (FIRPTA)

* A FOREIGN CITIZEN RESIDING IN THE U.S. IS TAXED AS IF A U.S. CITIZEN (RESIDENT ALIEN).

* A FOREIGN BUSINESS IS TAXED IN THE U.S. IF IT HAS U.S. CONNECTED INCOME. NOTHING IS MORE "CONNECTED" THAN U.S. REAL ESTATE. (NON-RESIDENT ALIEN)

IF YOU BUY PROPERTY FROM A NON-RESIDENT ALIEN, AND YOU ARE BUYING U.S. PROPERTY, YOU MUST DETERMINE IF HE IS LIABLE FOR TAX, SINCE IF HE DOES NOT PAY THE TAX YOU ARE LIABLE FOR IT. YOU MUST HAVE AN AFFIDAVIT FROM THE SELLER THAT HE HAS COMPLIED WITH FIRPTA - YOU CAN GET CLEARANCE FROM THE INTERNATIONAL TAX DIVISION IN PHILADELPHIA. THIS APPLIES EVEN WHEN A MEMBER OF THE PARTNERSHIP YOU PURCHASED FROM IS A NON-RESIDENT ALIEN.A U.S. ENTITY OWNING THE BUILDING AND PASSING INCOME TO THE FOREIGN ENTITY IS TAXED ON THE GAIN AT SALE AND AGAIN AT THE LIQUIDATION OF THE COMPANY. IF A U.S ENTITY IS NOT INTERCEDING, THEN THE TAX IS PAID ON THE GAIN, AND NOT ON THE LIQUIDATION ALSO.

END OF CLASS TEN

CLASS ELEVEN 7/26/90

NEXT WEEK CLASS PROJECT DUEFOLLOWING WEEK IS THE FINAL

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C CORPORATIONS ARE NOT UNDER PASSIVE LOSS RULES UNLESS IT IS A CLOSELY HELD C CORPORATION SUBJECT TO PASSIVE LOSS RULES.

FINAL EXAMINATION

2 TO 3 ESSAY TYPE QUESTIONS OF THE SORT IN CLASS ASSIGNMENT DUE 7/19/905 PROBLEMS OF THE TYPE HANDED OUT 7/26

TOPICS: INSTALLMENT SALESLIKE-KIND EXCHANGESBASISPASSIVE LOSS RULESCHOICE 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 SALES2. LIKE-KIND EXCHANGES3. 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

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THE GAIN IS AN INSTALLMENT SALE.

IF YOU SELL A PROPERTY IN ONE YEAR, TO QUALIFY FOR INSTALLMENT ELECTION, YOU HAVE TO RECEIVE AT LEAST ONE PAYMENT IN ANOTHER YEAR.

IE. SALE 1990, PROCEEDS TO BE PAID WITH INTEREST OVER 5 YEARS WITH 10 PERCENT INTEREST FOR 1 MILLION DOLLARS AND WITH A BASIS OF 500K. WE HAVE A 500K GAIN. IN THE YEAR OF SALE WE RECEIVED 100K CASH AS ONE OF THE PAYMENT INSTALLMENTS.

TAX GAIN = 500K. IF WE DO NOT ELECT THE INSTALLMENT METHOD, IN THE CASE OF AN INDIVIDUAL, IF WE DO NOTHING ABOUT THIS, WE WILL BE TAXED ON THE ENTIRE GAIN AT 28 PERCENT, AND WILL BE PAYING MORE THAN WE RECEIVE. IF WE MEET CERTAIN CONDITIONS (DISPOSITION OF REAL PROPERTY, NO INVENTORY, INVESTMENT PROPERTY) WE MAY ELECT THE INSTALLMENT METHOD.

NOTE: TEST FOR WHETHER PROPERTY IS INVENTORY... YOU DO NOT HOLD THE LAND FOR INVENTORY, YOU HOLD IT FOR INCOME GAIN.

READ SECTION 12.02 OF THE TEXT

12-5, 12-13

THE GAIN ON THE SALE IS PAID RATABLY. THE AMOUNT OF INCOME IS FIGURED BY MULTIPLYING THE PAYMENT RECEIVED BY THE GROSS PROFIT RATIO TO EQUAL THE ANNUAL GAIN. GROSS PROFIT RECEIVED

__________________________GROSS PROFIT RATIO =

CONTRACT PRICE

500,000 (THE REALIZED GAIN) / 1,000,000 (THE CONTRACT PRICE) = 50%

100,000 (THE INSTALLMENT PAYMENT) X 50% (THE GPR) = 50,000 (THE RECOGNIZED GAIN)

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

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PROPERTY SUBJECT TO A NOTE, MORTGAGE, OR DIFFERED PAYMENT, INTEREST IS EXPECTED TO BE CHARGED AT MARKET RATE.

YOUR IMPUTED INTEREST EXPENSE WILL BE BASED ON THE MARGIN BETWEEN 3 AND 10 PERCENT. THEREFORE, YOU WILL BE PAYING INTEREST INCOME GAINS TAX ON 7%.

12-19 INSTALLMENT SALES

AT ANY TIME, YOU CAN ELECT TO CANCEL FURTHER MEANS OF DEFERRAL AND PAY THE TAXES ON THE REMAINING GAINS.

POSTPONE TAX - GOOD? NOT ALWAYS TRUE.

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:

1. PROPERTY MUST BE HELD FOR PRODUCTIVE USE IN A BUSINESS OR INVESTMENT. RULES OUT PERSONAL USE PROPERTY, SUCH AS A HOME. ALSO, INVENTORY ELIMINATED, AS ARE PARTNERSHIP INTEREST SALES.

2. MUST BE AN ACTUAL EXCHANGE. THERE MUST BE CONVEYANCE OF TITLE. RISK OF OWNERSHIP MUST BE TRANSFERRED.

PROPERTY MUST BE IDENTIFIED WITHIN 45 DAYS BETWEEN THE TIME OF THE TRANSACTION AND THE LOCATION OF THE PROPERTY TO BE SWAPPED. THEY MUST BE CONVEYED WITHIN 180 DAYS.

SEE PAGE 12-36 "BOOT"; 12-42 "3 PARTY EXCHANGES"; 12-46 NON-SIMULTANEOUS EXCHANGES.

BOOT - PROPERTY OTHER THAN THE PROPERTY BEING EXCHANGED AS PART OF THE DEAL. ANY BOOT MUST BE RECOGNIZED TO THE POINT THAT THERE IS GAIN.

3. PROPERTIES THAT ARE EXCHANGED MUST BE OF LIKE-KIND.

END OF CLASS ELEVEN

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CLASS TWELVE 8/2/90

FINAL EXAMINATION INFORMATION

EXPECT QUESTIONS ON:

FORECLOSURERESIDENTIAL SALECOOPS AND CONDOSSECTION 1031 EXCHANGES OF LIKE KIND PROPERTIESCONDEMNATIONSTAX 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 CONVERSION - INCLUDES CONDEMNATION (SECTION 1033 TRANSACTION)

***************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 SALESBASISPASSIVE LOSS RULESDEPRECIATION

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.

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IF YOU HAVE FORGIVENESS OF DEBT, THAT AMOUNTS TO AN EARNING OF INCOME. ALTHOUGH YOU HAVE NOT ACQUIRED AN ASSET, YOU HAVE DECREASED YOU LIABILITIES. IF YOU HAVE NON-RECOURSE DEBT THAT IS FORGIVEN, IF IT IDENTIFIES AS QUALIFIED NON-RECOURSE DEBT AND LATER THE MORTGAGE IS FORECLOSED AND THE PROPERTY IS PUT UNDER BID AND THE MORTGAGE IS CANCELED, YOU HAVE FORGIVENESS OF DEBT INCOME AMOUNTING TO THE DIFFERENCE OF THE SALES PRICE AND THE MORTGAGE AMOUNT.

EXCEPTIONS:

1. IF THIS OCCURS OUTSIDE BANKRUPTCY WHEN THE PERSON IS INSOLVENT, SECTION 108 APPLIES AND YOU DO NOT HAVE TAXABLE INCOME IN THE FORGIVENESS OF DEBT.

2. BANKRUPTCY.

THE QUALIFICATIONS FOR INSOLVENCY: IN ORDER TO QUALIFY UNDER THE FIRST EXCEPTION, YOU MUST BE INSOLVENT BEFORE AND AFTER THE APPLICATION OF THE TAX. IF WHEN THE TAX BECOMES FORGIVEN YOU BECOME SOLVENT, THE TAX WILL BE REINSTITUTED TO THE DEGREE NECESSARY TO TAKE BACK WHAT WAS GIVEN TO YOU IN THE WAIVER OF TAXES. UNDER THE CODE, YOU MUST BE INSOLVENT BEFORE AND AFTER THE TAXABLE EVENT IN ORDER TO BE CONSIDERED TRULY INSOLVENT.

END OF THE COURSE

MARKET ANALYSIS IN REAL ESTATEPROFESSOR ROBERT BJORKLUND

AUTUMN 1989

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MARKET ANALYSIS

PROFESSOR ROBERT BJORKLUNDINVESTOR, REALTOR609-737-1717,1695

MARKET ANALYSIS AND SITE SELECTIONNOT 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: BROKERS ARE INCOMPETENT

TYPES OF DATA, HOW THE INFORMATION IS USED, AND WHO ARE THE INFORMATION USERS; THIS IS THE QUESTION YOU MUST ANSWER.

DATA:

SIMILAR INVENTORIES GENERAL TRANSPORTATIONPOPULATION SALES PER SQUARE FOOTINCOME TENANT NEEDSHOUSEHOLDS POLITICS AND POLITICAL CLIMATEAGE COMPETITIVE LAND RENTSEX COMPARATIVE LAND ACRE SALESGROWTH OF POPULATION DEVELOPING INDUSTRIESPUBLIC TRANSPORTATION ENVIRONMENTAL RESTRICTIONSVACANCY RATE SITE IMPROVEMENT COSTSRENTAL RATES TRAFFIC STUDIESABSORPTION RATE HAZARDOUS WASTESFUTURE DEVELOPMENT WETLANDEXISTING ANCHORS ENVIRONMENTAL ISSUESNEED FOR SPECIFIC STORES PARKINGLEASE TERMS IN AREA STREAMSLARGE USERS NEARBY BUILDABLE AREASQUARE FOOTAGE MARKET USE CATEGORIESCAPTURE RATE

CLIENT: HOW USED:

DEVELOPERS IDENTIFYTENANTS COLLECTBANKS (FINANCIERS, CREDITORS) INTERPRETMUNICIPALITY EVALUATEADJACENT OWNERSCITIZENSCOMPETITORS

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INVESTORS

HOW TO COMPARE STUDIES

FOCUSSPECIFIC TO SITESPECIFIC TO USE

LOCALREGIONALLARGER REGIONS

TYPES OF STUDIESURBAN ANALYSIS - COULD BE AS LARGE AS A STATE

REGIONALECONOMIC TRENDSPOPULATION TRENDSEMPLOYMENT TRENDS

COMMUNITY ANALYSIS - SUB REGIONALECONOMIC BASE ANALYSIS

MARKET ANALYSIS - LIMITED LOCALESUPPLY OF EXISTING REAL ESTATE WITHIN A DEFINED MARKET AREADEMAND OF EXISTING REAL ESTATE WITHIN A DEFINED MARKET AREA

MARKETABILITYSITE 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 SALESHOUSEHOLDS RENTALSEMPLOYMENT OCCUPANCY/VACANCY RATESUSER'S PSYCHOGRAPHIC CHARACTERISTICS FORTHCOMING SUPPLY

ATTITUDESTASTES

77

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 ║PAST TRENDS AND FORECASTS FOR A GIVEN GEOGRAPHICAL AREA

FEASIBILITY ANALYSIS (INDIVIDUAL DECISIONS FOCUS)

IS PROJECT BUILDABLE UNDER GIVEN PROGRAM GIVEN THE FINANCIAL OR SITE-RELATED CONSTRAINTS?

INVESTMENT ANALYSIS

EVALUATE MOST APPROPRIATE FINANCINGEVALUATE VALUE AS AN INVESTMENTEVALUATE TAX CONSIDERATIONSRISK/REWARD ANALYSIS

MOST MARKET STUDIES ARE LOCAL BECAUSE THAT IS WHERE THE COMPETITION GENERALLY IS.

DISAGGREGATION AND SEGMENTATION ARE PROCESSES WHICH HELP US TO FOCUS ON SPECIFIC USES AND THEREBY AVOID EXTRANEOUS DATA.

DISAGGREGATION IS USE DEFINED INTO CATEGORIES OR CATEGORY.SEGMENTATION IS USER DEFINED INTO CATEGORIES OR CATEGORY.

EXTERNALITIES ARE THOSE MATTERS WHICH ARE EXTERNAL TO THE SUBJECT PROPERTY YET IMPACTED BY THE SUBJECT PROPERTY. I.E. TRAFFIC, POLLUTION, INFRASTRUCTURE, SOCIAL PATTERNS, LAND USES, ETC. ALL OF THESE CAN IMPACT THE PROFITABILITY OF A DEVELOPMENT.

BE AWARE OF THEM

THEY MAY IMPACT THE SUPPLY AND DEMAND DETERMINANTS.

OTHER DETERMINANTS OF ECONOMIC PRODUCTIVITYFINANCINGSUBSIDIES AND GRANTS (I.E. UDAG)TAXES AND TAX INCENTIVES

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PRIMARY DATA IS THAT GATHERED BY THE ANALYSTSECONDARY DATA IS THAT GATHERED BY OTHERS.

PRIMARY DATA IS IMPORTANT SINCE THE USE OF SECONDARY DATA MAY NOT BE SEGMENTED ENOUGH, AND THEREFORE IT IS AN ARMCHAIR APPROACH.

PRIMARY DATA OFFERS SPECIFICS WHICH ARE NOT AVAILABLE IN GENERALIZED SECONDARY DATA COLLECTIONS.

THE HIGHEST AND BEST USE

TO THE APPRAISERS: REASONABLE AND PROBABLE USE SUPPORTING THE HIGHEST PRESENT VALUE, OR THE USE FROM AMONG REASONABLE, PROBABLE, AND LEGAL ALTERNATIVES, APPROPRIATELY FINANCED AND SUPPORTED, THAT RESULTS IN THE HIGHEST VALUE.

TO THE INVESTOR: NOT ONLY PROVIDING A "SATISFACTORY PROFIT", BUT THE MAXIMUM PROFIT.

INVESTMENT ANALYSIS IS BASED ON AFTER TAX INCOME GENERATION

INVESTMENT ANALYSIS EVALUATES A SPECIFIC PROPERTY AS A POTENTIAL

INVESTMENT BASED ON:RISK/REWARD RATIOAFTERTAX CASH FLOWAFTERTAX CASH REVERSION

THIS INFORMATION IS USED TO GAIN A MEASURE OF THE RETURN ON THE INVESTMENT

INTERNAL RATE OF RETURNNET PRESENT VALUEPROFITABILITY INDEXFINANCIAL MANAGEMENT RATE OF RETURNOTHERS

RISK ASSESSED BY :PARTITIONING THE RATE OF RETURNSENSITIVITY ANALYSISCOMPUTER-BASED SIMULATION ANALYZING THE BEST MIX OF FINANCING AND TAX CONSIDERATIONSCASH FLOW DUE TO RENT RECEIVABLES ANALYZED IN MARKETABILITY ANALYSIS.

MARKET ANALYSIS FOIBLES

A MARKET ANALYSIS CAN BE PROBLEMATIC DUE TO MATTERS OF:

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DATASTATISTICAL ANALYSISANALYST/CLIENT RELATIONSHIP

LACK OF EXPERIENCEUSING 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 CREDITEDDATA PROBLEMS (CONT)

DATA OUT OF DATEDATA NOT GATHERED BY SAME METHODMARKET 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 TECHNIQUESUNWARRANTED OR UNSPECIFIED ASSUMPTIONSMANAGEMENT CAPABILITIES NOT TAKEN INTO ACCOUNTUNNECESSARY LIMITING ASSUMPTIONSUNWARRANTED 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 REGULATIONSLIFE STYLESNET MIGRATIONEMPLOYMENT, INCOME, S.F. RENTALS5 YEAR PLAN, WHAT ARE DETAILSABSORPTION RATE OF OFFICE SPACEPOLITICAL 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 OVERVIEWQUESTIONS TO AN AREA BROKER

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WHAT IS THE SITUATION IN FIVE YEARSDEMAND VS. SUPPLY, ABSORPTION, INVENTORYRENTAL GRADIENTSBUILDING AMENITIESRENTAL TERMS, CONDITIONS, AND TRENDSWHAT IS BROKER'S CLIENT BASE, WHEN WILL LEASES EXPIREQUALITY OF EXISTING SPACE

PRODUCT OVERVIEWQUESTIONS TO AN AREA DEVELOPER

DEVELOPMENT COSTS/COMPLICATIONS IN AREAPOLITICAL CLIMATELEASE UP ISSUESDESIGN FACTORS, AMENITIES, AREAS AND SHAPE OF FLOOR SPACECONTRACTORSPROFESSIONAL CONSULTANTS IN AREA WITH A TRACK RECORDINFRASTRUCTUREBUILDING SPECIFICATIONS

WHAT ARE SOME OF THE PROJECTS THAT YOU ADMIRE AND WHYMEGATRENDS

REAL ESTATE CYCLES ARE LONG BECAUSE OF LIFE OF BUILDINGS.

ELEMENTS OF MARKET:

GROSS NATIONAL PRODUCTWHAT DRIVES THE G.N.P.?

CONSUMPTION PRODUCTION TAXESINVESTMENT DEFICIT SPENDINGGOVERNMENT EXPENDITURES INFLATIONFOREIGN IMPORTS AND EXPORTS INTEREST RATESSAVINGS (AS SAVINGS GO UP, INTEREST COMES DOWN, AND INVESTMENT GOES UP)

ORGANIZATIONAL BEHAVIOR:

DECENTRALIZATION AND CENTRALIZATIONINVESTMENT PATTERNSLONG TERM VS. SHORT TERM DECISIONS

SOCIAL BEHAVIOR:

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COMMUTING PERSONAL COMPUTERSWORKING MOTHERS EDUCATIONDAY CARE POST INDUSTRIALISMENVIRONMENTAL AWARENESS RECREATIONHOMELESSNESS SHORTER WORK WEEKSCHANGES IN THE DISTRIBUTION OF DEMOGRAPHICS

LIVE LONGERLESS BABIES ┌───────X──────────┐

│ X═╗ ║ ╔X │--------------------- │ ╚_╫_╝ │ │X════╩SSS╩─════X │ WHY DOES A CITY GROW WHERE IT IS? │ ╔_╫_╗ │WHY DID IT GROW AFTER BEING FOUNDED? │ ╔╝ ║ ╚╗ │WHERE IS THE CITY IN ITS HISTORIC CYCLE? WHY? │ X╝ X ╚X │WHAT IS THE FUTURE? WHAT TRENDS AFFECT THIS? │ MULTIPLE NUCLEI │ └──────────────────┘WHY? BECAUSE OF : ┌────────────────────────┐

HISTORIC REASONS │ │MILITARY REASONS │ ──_═_───_═══_───_═_─── │GOVERNMENT REASONS │ AXIAL GROWTH │MANUFACTURING AND TRADE │ │TRANSPORTATION └────────────────────────┘SERVICEGEOPHYSICAL CHARACTERISTICS ┌─────_════════_─────────┐

┌───────────────────────────┐ │ ╔═══╬═╦═*══╗ ║ ││ ╔════════════════╗ CONCENTRIC │ ║ ╔═*═╣ X ║ ║ ││ ║ ╔════════════╗ ║ GROWTH │ ║ ║ X ╠═╬══╝ ║ ││ ║ ║╔═XX══════╗ ║ ║ │ │ ║ ╚═╩═╩═╬════╝ ││ ║ ║╚═XX══════╝ ║ ║ │ └─_═══════_──────────────┘│ ║ ╚════════════╝ ║ │ SECTOR GROWTH└──_════════════════_───────┘EXAMPLES OF DIFFERENT CITIES:

CONCENTRIC GROWTH.......WASHINGTON, D.C.SECTOR GROWTH...........MILWAUKEEMULTIPLE NUCLEI.........LOS ANGELESAXIAL GROWTH............LONG ISLAND

AXIAL GROWTH IS DRIVEN BY TRANSPORTATION, AND MULTIPLE NUCLEI GROWTH IS DRIVEN BY COMMUTING DISTANCE.

IN THE DEVELOPMENT OF CITIES EXAMINE:

FUNCTIONSHISTORIC TRENDSPHYSICAL CHARACTERISTICSSHAPES (PATHS OF PROGRESS)

ECONOMIC BASE ANALYSIS TO SHOW THE RELATIONSHIP BETWEEN COMMERCIAL

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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 CLASSIFICATION012301 = MAJOR CATEGORY2 = SUB CATEGORY3 = SUB-SUB CATEGORY

FIRST TOW DIGITS ENOUGH FOR NON-COMPLICATED PROJECTSLAST TWO DIGITS ARE USED AS PROJECTS BECOME MORE COMPLEX.

PRELIMINARY FINANCIAL FEASIBILITYHANDOUT 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: TENANT PAYS ALL EXPENSES.

C.A.M. IS A COMMON AREA MAINTENANCE CHARGE WHICH EQUALS THE TENANT'S SHARE OF COMMON AREA EXPENSES.

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VERY COMMON FOR TENANT TO PAY CAM, RENT, AND EXPENSES.

NOI - ADS = BOTTOM LINENOI = NET OPERATING INCOMEADS = ANNUAL DEBT SERVICE

DCR = DEBT COVERAGE RATIO - LESS THAN 1.0 IS A PROBLEM. CASH SHORTFALL WONT FINANCE DEBT. THIS IS OK IF IT FITS YOUR INVESTMENT STRATEGY. AN EXAMPLE IS BUYING RAW LAND AND SEEKING APPROVALS, WHILE PAYING TAXES AND UPKEEP.

THE MAJOR FACTOR IS FINANCING. A TYPICAL FACTOR FOR BANK APPROVAL IS 1.1 TO 1.3.

DCR = NOI / ADS

THE BASIC FINANCIAL FEASIBILITY MODEL: SEE PAGE 184, 187

IT IS POSSIBLE FOR GROSS INCOME TO BE SMALLER THAN NET RENT DUE TO ADDITIONAL FEES, SAY FOR BASEMENT OR ROOF RENT.

WHEN YOU CREATE NEW SPACE, YOU DO SO FOR THOSE WHO CAN AFFORD IT. YOU DO NOT SEE A USED BOOK STORE, FOR EXAMPLE, IN NEW RETAIL SPACE.

QUALITY IS DETERMINED BY 1. TYPE OF CENTER AND 2. TYPE OF OUTLET.

TYPES OF CENTERS:

COMMUNITYCLUSTEREDNEIGHBORHOODREGIONALFREESTANDING

NEIGHBORHOOD CENTERS, TYPICALLY 30 TO 100,000 S.F., WITHIN SHORT DRIVING TIME OF CONSUMER.

INCLUDES CONVENIENCE STORE, DRUG STORE, SUNDRIES, IMMEDIATE STAPLES, NEEDS RESIDENTS

KEY TENANT IS A SUPERMARKET, KEY CONSIDERATION IS ACCESSIBILITY.

COMMUNITY CENTERS; TYPICALLY 10 TO 30 ACRES, 100 TO 250,000 S.F., 40 TO 150,000 CONSUMERS IN PRIMARY MARKET, MIGHT HAVE A SUPERMARKET, MAY HAVE MINOR DEPARTMENT STORE, CONVENIENCE IS STILL IMPORTANT, BUT NOT AS MUCH AS IT IS IN THE NEIGHBORHOOD CENTER. HAS MORE VARIETY THAN A

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NEIGHBORHOOD CENTER.

SUPER REGIONAL CENTERS; SHOPPING GOODS (PRIMARY AND SECONDARY)PRIMARY INCLUDES APPAREL, SHOES, AND CLOTHINGSECONDARY 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 WEEKSECONDARY - ONCE A MONTHTERTIARY - 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

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SCRIBNER USES THIS, BUT HE IS CAUTIOUS WITH IT.

REILLY'S LAW ║ ┌─────┐ ║ │ │┌────┐ ║ LARGE CENTER │ ││ │ SMALL CENTER ║ ┌┘ ││ │ ║ │ │└────┘ MAIN HIGHWAY ║ └──────┘═══════════════════════════════╬════════════════════════════ ║ ║ ║

WHERE IS THE TRADE AREA BOUNDARY FROM THE SMALL CENTER?

THE TRADE AREA BOUNDARY FOR THE SMALL CENTER = X

DISTANCE BETWEEN CENTERSX = ────────────────────────────────────────

╔══ ══╗ 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: NUMBER OF HOUSEHOLDS OF EACH CTTIMES AVG. HOUSEHOLD INCOME

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EQUALS AGGREGATE HOUSEHOLD INCOMETIMES PERCENT CAPTUREEQUALS 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 LISTSTHE NUMBER OF DEPARTMENT STORESDOLLARS IN SALESS.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 RESIDENTIALOFFICE RETAIL │ │ └────────────────_═════HOTEL ═══_─────────────────┘

87

RUEBEN ROKA OF ROUSE COMPANY HAS A BOOK ON MARKETING METHODS, WORTH LOOKING INTO.

USERS IN SEARCH OF LOCATIONS

BUILDING RELATED:COST AND EFFICIENCY FACTORS

FOR SOME COST NOT AN ISSUE, I.E. THEY WILL TOP DOLLAR FOR A PRIME LOCATION.EFFICIENCY IS MOST IMPORTANT FOR WAREHOUSING.

SIZEWHAT ARE THE BUYER'S REQUIREMENTS?DOES HE NEED EXPANDABLE SPACE?

WHAT IS THE DIFFICULTY WITH EXPANDABILITY?

AS A TENANT, HE MAY NOT BE ABLE TO GET SMALL 10,000 S.F. BUILDING WITH 20,000 EXPANSION WHEN DEVELOPER CAN MAXIMIZE HIS PROFIT MOST LIKELY BY NOT GUARANTEEING FUTURE SPACE WHEN THE

LOT IS PRIME.

INDUSTRIAL PARKFREE STANDINGLARGE SUBDIVIDED BUILDING

EXPANDABILITY

SHAPE OF THE BUILDINGELECTRICITY AVAILABLETRAIN TRACK ACCESSIBLECLEAR SPAN SPACEWAREHOUSING, LONG AND RECTANGULARMANUFACTURING, SQUARE

LOCATION CONSIDERATIONS

CLOSE TO VENDORSSOME COMPANIES WANT TO BE CLOSE TO VENDORS

CUSTOMERSSOME COMPANIES WANT TO BE A CONVENIENT DISTANCE FROM

CUSTOMERS

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ACCESSIBILITY VS. FRICTION

LINKAGESBEYOND ROAD ACCESSIBILITY, INCLUDES BUSINESSES OF A SIMILAR TYPE. (I.E) DO YOU NEED TO BE IN AN AREA WHERE THERE ARE A

LOT OF BUSINESSES AROUND TO CREATE BUSINESS FOR YOU.SHIPPING CHARGESLABOR MARKETSEXISTENCE OF TRANSPORTATION SERVICES

I.E. RAILROAD ACCESSIBILITY

COMPETITORSSUPERMARKETS DO NOT WANT COMPETITION

THEY HAVE LOW MARK UPSTHEY HAVE HIGH EXPENSESTHEY RENT A LOT OF SPACE

EXECUTIVE RESIDENCESHOUSING COSTS, SCHOOLS, SERVICESDEMOGRAPHIC CONSIDERATIONS

POPULATION STATISTICSTRAFFIC PATTERNSINCOME STATISTICSHOUSING PATTERNS

EXAMPLE:A BREWERY

NEEDS:WATER PRIORITY TWOLABOR FORCE PRIORITY FOURSHIPPING AND TRANSPORTATION PRIORITY THREECONSUMERS 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 PRIORITY ONEVENDORS PRIORITY THREEBUILDING COST EFFICIENCY PRIORITY TWO

HOUSING:

DEMOGRAPHICSGROWTH TRENDSUTILITIESPRICEWHAT KIND OF PRODUCT CAN BE SOLD? 25% OF THE COST OF THE HOME IS IN THE

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LAND DEVELOPMENT.

STRIP CENTERS:

CAR TRAFFICVISIBILITY

APARTMENT HOUSE INVESTOR:

DEMOGRAPHICS

RETAIL LAUNDROMAT: FAST FOODS AND GAS STATIONS:

PROXIMITY TO RENTERS TRAFFIC2500 TO 3000 APARTMENTS VISIBILITY

CORNER LOCATION PREFERABLEMOTEL: SOME LIKE TO BE ON THE WAY TO

WORK, SOME LIKE TO BE ON THE WAY BACK.

LOW LAND COST1-4 ACRES OF LANDNEAR TRANSPORTATION

END OF COURSE

REGULATION OF REAL ESTATEPROFESSOR SHELDON LOBEL

AUTUMN 1990NEW YORK UNIVERSITY

89

REGULATION OF REAL ESTATE

CLASS ONE9/10/90

SHELDON LOBEL (pronounced "low-bell")687-1133RM. 427

THE TEXT IS A COLLECTION OF ESSAYS AND NOTES WHICH ARE AVAILABLE FOR ROUGHLY 25 DOLLARS FROM UNIQUE COPY CENTER, 252 GREEN STREET (212) 777-9690. THE SYLLABUS WILL BE GIVEN OUT NEXT WEEK.

ON TUESDAY, NOVEMBER 20TH, SYLVIA DEUTCH AND THE DIRECTOR OF PLANNING FOR PHILADELPHIA WILL BE AT NYU FOR A CONFERENCE BETWEEN 3 AND 6 PM. PLAN TO BE THERE.

READ ALL READINGS. WHEN YOU GET THE BOOK READ THE FIRST FOUR READINGS (UP TO JEROME ROSE).

THE FIRST 3 SECTIONS DEAL WITH GOVERNMENT POLICY ON REGULATION. "HOW FAR CAN GOVERNMENT GO TO STOP OR IMPEDE YOU FROM USING YOUR PROPERTY?

THE 14TH AMENDMENT STATES THAT A PERSON CANNOT BE DENIED THE USE OF HIS PROPERTY. WHY CAN GOVERNMENT IMPEDE YOUR USE OF YOUR OWN PROPERTY? IN 1916 THE EUCLID V. AMBLER DECISION WAS HANDED DOWN BY THE U.S. SUPREME COURT. IT HELD THAT THE GOVERNMENT CAN IMPEDE USE WHEN IN DOING SO SOCIETAL HEALTH, SAFETY, MORALS AND WELFARE IS ADVANCED. SESSIONS 4-6 PERTAIN TO ZONING; HOW DIFFERENT AGENCIES CONTROL DEVELOPMENT.

SESSION 7 PERTAINS TO THE BOARD OF STANDARDS AND APPEALS

SESSION 8 & 9 PERTAIN TO ENVIRONMENTAL LAW AND THE ENVIRONMENTAL PROCESS.

SESSION 10 PERTAINS TO LANDMARK DESIGNATION

SESSION 11 PERTAINS TO RESIDENTIAL RENT REGULATIONS. THE MAJOR PROJECT IS DUE AT THIS SESSION.

THE MAJOR PROJECT IS TO EVALUATE A PROJECT, SHOWING THE REGULATORY PROCESS THE DEVELOPMENT WENT THROUGH IN ARRIVING AT A BUILDING PERMIT.

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TYPICAL TABLE OF CONTENTS FOR THE MAJOR PROJECT:

I. NATURE OF ASSIGNMENTII. EXECUTIVE SUMMARYIII. PROJECT HISTORYIV. PROJECT DESCRIPTIONV. PROJECT GOALS AND OBJECTIVESVI. PROJECT FINANCING AND ECONOMIC INCENTIVESVII. ENVIRONMENTAL IMPACT / MITIGATIONVIII. ARCHEOLOGICAL AND HISTORICAL ISSUESIX. REGULATORY ISSUESX. AS-OF-RIGHT ALTERNATIVESXI. CONCLUSIONXII. BIBLIOGRAPHYXIII. APPENDIXXIV. EXHIBITS

"KNOW WHAT HAPPENS WITH THE REGULATION OF PROPERTY WHEN YOU ARE A 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) GRANTS VARIANCES. IT IS LOCATED AT 161 6TH AVENUE.

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

91

CLASS TWO9/17/90

╔══════════════════════╗ ╔════════════════════════╗║ ║ ║ ║║ ║ ║ ║║ 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

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HANDOUTS - RENT STABILIZATION CODE (PROPOSED) WITH EXPANDED FAMILIAL RIGHTS, AND 520 E 81ST. STREET (THE LENOX HOSPITAL CASE).

THE FIFTH AMENDMENT - PRIVATE PROPERTY SHALL NOT BE TAKEN FOR PUBLIC USE WITHOUT JUST COMPENSATION.

TAKINGS COULD BE EFFECTUATED BY:

1. PHYSICAL INVASION CAUSED BY GOVERNMENT ACTION (IE. AIRPORT NOISE, FLOODING FROM DAM).

2. REGULATORY INVASION.

REGULATORY INVASION'S FIRST TEST CASE WAS IN THE 1920'S WITH PENNSYLVANIA COAL V. MAHAN. A LAW WAS PASSED PROHIBITING MINING UNDER HOMES, CEMETERIES, ETC., IN ORDER TO PREVENT COLLAPSE OF FOUNDATIONS ETC. JUSTICE HOLMES WROTE FOR THE MAJORITY WHEN HE SAID THAT SUCH A RULE GOES TOO FAR IN REDUCING MINING RIGHTS, WITHOUT JUST COMPENSATION.

IN 1978, PENN CENTRAL V. NEW YORK CITY, THE OWNERS OF GRAND CENTRAL STATION WANTED TO BUILD A 55 STORY TOWER. THE LANDMARK COMMISSION REFUSED TO ALLOW IT. THE OWNERS CLAIMED THIS WAS A REGULATORY TAKING, AND THE COURT RULED AGAINST IT SAYING THE ECONOMIC IMPACT OF THE LANDMARKS COMMISSION RULING WAS NOT SEVERE AND THAT IT DID NOT INTERFERE WITH EXPECTATIONS FOR PROFIT. THEREFORE IT WAS A REASONABLE REGULATION IN THE COURT'S MIND.

IN 1987, 2 DECISIONS. NOLLAN V. STATE OF CALIFORNIA COASTAL COMMISSION: PROPERTY OWNERS WANTED TO BUILD A HOUSE ON A BEACH. THE COASTAL COMMISSION GRANTED APPROVAL ON THE CONDITION THAT AN ACCESS EASEMENT BE GRANTED TO THE PUBLIC. NOLLAN SUED SAYING THAT IT WAS AN UNJUSTIFIED TAKING AND THE COURT AGREED. JUSTICE SCALIA SAID THAT LAND REGULATIONS MUST "SUBSTANTIALLY ADVANCE" AS OPPOSED TO "RATIONALLY SUPPORT" THE PUBLIC INTEREST.

SEAWALL V. N.Y.C. SRO MORATORIUM LAW OVER RULED BY THE SUPREME COURT OF NEW YORK. BASED ON PRECEDENTS, THE COURT FOUND THE LAW TO BE A PHYSICAL AND REGULATORY TAKING, DID NOT SUBSTANTIALLY ADVANCE PUBLIC INTEREST AND DEPRIVED THE OWNERS OF THEIR EXPECTATIONS FOR PROFIT.

IN 520 E. 81ST STREET, LENOX HILL HOSPITAL IS A TENANT OF STABILIZED APARTMENTS. THE LEASE STATES THAT EMPLOYEES OF LENOX HILL COULD OCCUPY THE APARTMENT. WHEN BUILDING WAS CONVERTED TO A COOPERATIVE, SOME WANTED TO BUY, SOME WANTED RENEWAL LEASES. LANDLORD SAYS THAT LENOX HILL, BEING A PERPETUAL CORPORATION, HAD PERPETUAL OCCUPATION AND THEREFORE DENIED THE LANDLORD OF THE RIGHT TO EVER GET HIS PROPERTY BACK. THEREFORE, UNDER SEAWALL, THE LANDLORD CLAIMED THAT IT WAS A REGULATORY TAKING TO FORCE HIM TO MAINTAIN THE CORPORATION AS A TENANT.

93

END OF CLASS TWO

CLASS THREE9/24/90

TRANSFER OF DEVELOPMENT RIGHTS - THE TRANSFERENCE OF DENSITY FROM ONE LOCATION TO ANOTHER THROUGH THE SALE OF THE RIGHTS, OR THROUGH THE TRANSFERENCE TO OTHER PROPERTIES OF THE DEVELOPER.

DEPARTMENT OF CITY PLANNING - 22 REED STREET

GREEN BOOK - THE "BIBLE" FOR PEOPLE WORKING WITH CITY AGENCIES. GIVES THE TELEPHONE NUMBERS, LOCATION, AND PEOPLE INVOLVED WITH CITY AGENCIES, COMMUNITY BOARDS, ETC. PUBLISHED ANNUALLY.

UNIFORM LAND USE REVIEW PROCEDURE (ULURP) - THE APPARATUS SET UP BY THE CITY TO REVIEW ZONE CHANGES, ETC., AND WORK THEM THROUGH THE PLANNING PROCESS. THE CITY RECEIVES A SUBMISSION AND MAKES CERTAIN IT IS IN PROPER FORM (CERTIFICATION) BEFORE BEING SENT THROUGH ULURP. ZECKENDORF MET WITH THE COMMUNITY PRIOR TO SUBMISSIONS TO SPEED THE PROCESS. IT IS A PROCESS OF GIVE AND TAKE.

THE OLD METHOD OF ULURP, PRIOR TO THE ABOLITION OF THE BOARD OF ESTIMATE, CALLED FOR A TWO MONTH REVIEW FOR EACH OF THE FOLLOWING BOARDS, TOTALLING SIX MONTHS:1. COMMUNITY BOARD2. CITY PLANNING BOARD3. BOARD OF ESTIMATE

OLD ULURP PROCESS FOUND UNCONSTITUTIONAL BY THE U.S. SUPREME COURT DUE TO THE BOARD OF ESTIMATE'S VIOLATION OF THE PRINCIPLE OF ONE MAN, ONE VOTE. BEFORE THE SIX MONTH REVIEW, PROJECTS WENT THROUGH PRE-CERTIFICATION. IN MOST CASES THIS TOOK TWO YEARS AND REQUIRED AN ENVIRONMENTAL IMPACT STATEMENT.

THE PROCESS:FILE APPLICATION > PRECERTIFICATION > CERTIFICATION > ULURP > APPROVAL OR DISAPPROVAL.

THE COMMUNITY BOARDS WERE IN OPERATION SINCE THE 1970'S. A BODY OF APPROXIMATELY 50 TO 60 PEOPLE, THEY ARE APPOINTED BY THE MAYOR, BOROUGH PRESIDENT, AND LOCAL COUNCIL MEMBERS. THERE ARE APPROXIMATELY 50 COMMUNITY BOARDS. THEY ARE NOT PAID POSTS, AND HAVE COMMITTEES RANGING FROM ZONING TO TRANSPORTATION AND POLICE PROTECTION.

THEY ARE ONLY ADVISORY. THEY VOTE AFTER THE FIRST TWO MONTHS FOR OR AGAINST A CHANGE. THE VOTE IS NOT BINDING ON THE PLANNING COMMISSION.

MARTY GALLENT, GUEST SPEAKER

94

"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 = CHAIRMAN OF CITY PLANNING COMMISSION.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 BOARDS REPORT TO COMMISSION OF PLANNING AND BOROUGH PRESIDENT.

IN 1989, THE CHARTER REVISION COMMISSION INJECTED CONFLICTS INTO THE REVIEW PROCESS, IN THE ATTEMPT TO INSURE MORE INVOLVEMENT OF CITIZENS AND TO ASSURE A BETTER PLAN.

"1989"13 COMMISSIONERS (BOARD OF ESTIMATE ELIMINATED)

5 APPOINTED BY THE BOROUGH PRESIDENT. THEY OWE ALLEGIANCE TO BOROUGH PRESIDENT AND CAN ONLY BE REMOVED BY HIM.6 APPOINTED BY THE MAYOR1 APPOINTED BY THE PRESIDENT OF THE CITY COUNCILTHE ABOVE HAVE 5 YEAR TENURES

1 CHAIRMAN APPOINTED BY THE MAYOR

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THE CITY COUNCIL IS SUBSTITUTED FOR THE BOARD OF ESTIMATE.

ZONING, REAL ESTATE MATTERS (IE. TAKINGS), URBAN RENEWAL - THESE DECISIONS ARE MADE DIRECTLY BY THE CITY COUNCIL.

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 FOUR10/1/90

EUCLID V. AMBLERCHALLENGED ZONING RESOLUTION - WENT TO THE SUPREME COURT. ZONING RESOLUTION WAS CONFIRMED.

OCT. 29TH IS THE MIDTERM.TESTED THROUGH 7 SESSIONS (LAST IS BOARD OF STANDARDS AND APPEALS).**************************************************************************

TERMS:

96

ULURP : UNIFORM LAND USE REVIEW PROCESS

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 : ENVIRONMENTAL IMPACT STATEMENT

STATE REQUIREMENTIF AN APPLICATION, REQUEST DISCRETIONARY RELIEF.

NON-DISCRETIONARY APPROVAL IS AS-OF-RIGHT.

PDS : PROJECT DATA STATEMENTFILED WITH THE LEAD AGENCIES - EPA & CPCDONE 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.

97

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.┌──────────────┬─────────────┬─────────┐ │ │ │ ││ │ │ ││ 1 │ 2 │ 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. AMBLERTHE FIRST SUPREME COURT DECISION DELINEATING CONSTITUTIONAL LEGITIMACY OF

98

PUBLIC POLICY THAT LIMITS AN INDIVIDUAL'S PROPERTY RIGHTS IN PROTECTING 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 - ARCHITECTEXAMPLE 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 SIX10/15/90

TODAY, WE REVIEWED THE PROPOSED CLASS PROJECTS.A SAMPLING INCLUDED:

WORLDWIDE PLAZACITY SPIREMT. LAUREL DECISIONCARNEGIE CENTERTIMES SQUARE REDEVELOPMENTCOLISEUM CENTERENVIRONMENTAL 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 EMISSIONSTRANSPORTATION

99

SUBWAYSCHOOLSWATER SUPPLYSEWERTAXESPOLICE AND FIRE PROTECTIONLANDMARKS

END OF CLASS SIX

CLASS SEVEN10/22/90

SECTION 72-21THIS IS THE SECTION OF THE ZONING RESOLUTION PERTAINING TO THE JURISDICTION OF THE BOARD OF STANDARDS AND APPEALS.

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 THE VARIANCE IS GRANTED, IT WILL NOT ADVERSELY AFFECT THE NEIGHBORHOOD SURROUNDING THE PARCEL.

THE CHOICE OF SEEKING A VARIANCE OR A CHANGE OF ZONE OFTEN DEPENDS ON THE INTENSITY OF THE CHANGE, AND ITS CONSPICUOUS RESEMBLANCE TO A USE PERMISSIBLE IN ANOTHER ZONE.

SPECIAL PERMIT - GRANTED UNDER SECTION 73-00, SPECIAL PERMITS ARE ISSUED BY THE BOARD OF STANDARDS AND APPEALS. THEY ALLOW USES SPECIFIED IN THE RESOLUTION TO BE PLACED IN CERTAIN ZONES BY PERMIT FOR A SPECIFIC PERIOD

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OF TIME.

BULK VARIANCE - PERTAINS TO VARIANCES FOR YARD SETBACKS, HEIGHT, ETC.

USE VARIANCE - PERTAINS TO VARIANCES FOR USES NOT OTHERWISE PERMITTED AS-OF-RIGHT, SUCH AS PUTTING A DENTAL OFFICE ON A SECOND FLOOR OF A RESIDENCE WHEN THIS WOULD NORMALLY BE PERMITTED ON THE FIRST FLOOR ONLY ACCORDING TO THE RESOLUTION.

WHEN YOU GO FOR A BULK VARIANCE, YOU GENERALLY DO NOT CHANGE THE CHARACTER OF THE NEIGHBORHOOD. YOU MAY BE LOOKING TO INCREASE DENSITY WITHOUT CHANGING THE ZONING. WITH A USE VARIANCE YOU CHANGE THE NATURE OF THE NEIGHBORHOOD AS PLANNED IN THE ZONING MAPS.

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 ZONE: YOU WANT TO BUILD A BUILDING WITH 4 TO 5 APARTMENTS.

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 EIGHT10/30/90

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

101

ITS OWN LEAD AGENCY THROUGH WHICH STATE AGENCIES ARE DIRECTED, AND 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 NINE11/5/90

GUEST SPEAKER, KEVIN CARRIGANTHE 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:

1. MONITOR THE DELIVERY OF CITY SERVICES TO THE DISTRICT.2. ENABLES THE DISTRICT TO GET ITEMS FUNDED FROM THE CAPITAL AND

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EXPENSE BUDGETS OF THE CITY.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 TEN11/12/90

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. NATIONAL REGISTRATION, UNLIKE NEW YORK'S, CANNOT BE FORCED UPON YOU.

NATIONAL HISTORIC DISTRICTS CANNOT BE FORCED ON AN AREA WITHOUT THE CONSENT OF AT LEAST 50 PERCENT OF THE AREA'S MEMBERS.

NATIONAL REGISTRATION, STATE OR CITY REGISTRATION DOES NOT AUTOMATICALLY QUALIFY YOU FOR REGISTRATION IN THE REMAINING REGISTRIES. EACH REGISTRY IS COMPLETELY AUTONOMOUS.

NATIONAL REGISTRATION DOES NOT LIMIT DEVELOPMENT ACTIVITY. THERE ARE FEW LIABILITIES TO BEING AN NATIONALLY REGISTERED LANDMARK.

THERE ARE THREE CRITERIA TO BEING LISTED IN THE CITY'S LANDMARK REGISTRY:

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1. ARCHITECTURAL UNIQUENESS2. SOCIAL UNIQUENESS3. 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 ELEVEN11/19/90

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.

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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.

-UNLESS-

IF 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:

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1. THE PROJECT CAN BE FINANCED2. THE TENANT CAN BE RELOCATED3. THE PLAN FOR IMPROVEMENTS ARE APPROVABLE BY THE BUILDING DEPT.

THE PROCESS:

DHRC > APPEAL > ETC. (LOOPS AGAIN AND AGAIN)TAKES 7 TO 8 YEARS, POTENTIALLY.

DEMOLITION FOR A RENT STABILIZED BUILDING IS EASIER TO SECURE THAN FOR A RENT CONTROLLED BUILDING IN A RENT CONTROLLED BUILDING, A FOURTH ITEM IS REQUIRED.

4. THAT A 8.5 PERCENT RETURN IS NOT POSSIBLE AGAINST THE ASSESSED VALUATION OF THE PROPERTY.

THE ASSESSED VALUATION IS OFTEN FAR LESS THAN THE ACTUAL VALUE. EXPENSES MAY NOT INCLUDE INTEREST.

END OF CLASS ELEVEN

CLASS TWELVE11/26/90

ADMINISTRATIVE APPEAL - AN APPEAL OF THE DECISION OF THE BUILDING DEPARTMENT TO REVOKE A PERMIT. THE BUILDING DEPARTMENT UNDER THE OLD CITY CHARTER (WHICH PROVIDED THAT WORK COULD PROCEED AT YOUR OWN RISK WHEN THE PERMIT WAS REVOKED) COULD HAVE ITS DECISIONS TO REVOKE A PERMIT APPEALED TO THE BOARD OF STANDARDS AND APPEALS.

ADMINISTRATIVE APPEALS ARE OFFERED IN THE MORNING SESSION OF THE BSA MEETING WHEREAS VARIANCE APPEALS ARE HEARD IN THE AFTERNOON SESSION.

ADMINISTRATIVE APPEALS ARE DIFFERENT THAN VARIANCE APPEALS IN THAT THE "FIVE FINDINGS" DO NOT APPLY.

TAXATION ISSUES

ASSESSMENTSVINCENT 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.

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THE ICIB CAME UNDER FIRE BECAUSE OF ITS DISCRETIONARY NATURE. 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 THIRTEENDECEMBER 3, 1990

ASSIGNMENTS TURNED IN.END OF CLASS THIRTEEN AND COURSE

ANALYTICAL TECHNIQUESPROFESSOR ED MADSEN

SPRING 1990

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NOTES FROM ANALYTICAL TECHNIQUES

1/22/90

WHEN ALLOCATING VALUE TO A PROPERTY, IT MUST BE DONE BY RELATING IT TO SOME UNIT OF MEASUREMENT:

DOLLARS PER ROOMDOLLARS PER SQUARE FOOTDOLLARS PER ......

CONSUMPTION DRIVES THE SUCCESS OF MALLS

HOTELS ARE MEASURED FOR VALUE BY A PER ROOM BASISCONRAD HILTON SAID, "FOR EVERY 1000 DOLLARS INVESTED, I NEED 1 DOLLAR IN ROOM RATE."

FOR EXAMPLE, A 100 ROOM HOTEL WITH 95 DOLLAR PER NIGHT RATES COULD HAVE HAD AS MUCH AS 95,000,000 DOLLARS INVESTED IN IT. ANY AMOUNT LESS IN INVESTMENT WOULD RESULT IN A GREATER RETURN ON THE INVESTMENT. HOTELS COULD COST AS MUCH AS 140,000 TO 150,000 PER ROOM TO BUILD AND EQUIP, INCLUDING FACILITIES IN COMMON.

TWO RULES OF LENDING:

1. DO NOT LEND MORE MONEY THAN THE PROPERTY IS WORTH.2. DO NOT LEND MONEY TO A DEAD-BEAT

ALSO:

THERE ARE TWO TYPES OF PEOPLE INVOLVED IN REAL ESTATE:1. DREAMERS, AND2. 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 "NON-RECOURSE" 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

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DEBT SERVICE........................ 950,000CASH FLOW........................... 490,000VALUE IS DEDUCED FROM NET INCOME BY USING A CAP RATE, SAY 10%.

1,440,000 / 10% = 14,400,000

LAND AND LAND IMPROVEMENTS = 2.2M ..CONSTRUCTION = 9.5M ..EQUALS 11.7M

14.4 - 11.7 = 2.4M IS THIS THE EQUITY? LET US SEE.

DID BANKER GIVE 9.5M CONSTRUCTION LOAN AT 80% RATE?9,500,000 / 80% = 11.88 M THIS IS AN ESTIMATE OF VALUE OF DEBT

14.4 - 11.88 = 2.5M ; ANOTHER ESTIMATE OF VALUE OF EQUITY.

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 APARTMENT1000 DOLLARS PER APARTMENT PER MONTH12 MONTHS PER YEAR12,000 DOLLARS PER YEAR PER APARTMENT

EACH BEDROOM IS 12 X 1612 X 16 BEDROOM X 2 = 192 X 2= 3848 X 8 KITCHEN = 64100 SQUARE FOOT LIVING ROOM = 1006 X 8 BATHROOM = 48TOTAL APPROX. 600 S.F.

12,000 PER YEAR / 600 S.F. = 20.00 PER S.F. PER YEARCOMPARE TO 23.23 PER YEAR FROM DEVELOPER'S FIGURES1.44M / 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

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VALUE. THIS IS $23.23 / 10% = 232.30 X 75% = 174.23 X 62,000 = 10,801,950 LOAN FROM THE BANK.

IF THE SUBJECT PROPERTY IS WORTH 232.30 PER SQUARE FOOT WHEN COMPLETE, AND COST OF CONSTRUCTION, PROFIT, AND OTHER COSTS IS 132 DOLLARS PER SQUARE FOOT, ISN'T THE LAND WORTH 100 DOLLARS PER SQUARE FOOT OF BUILDING AREA? THIS IS CALLED THE FAR METHOD OR FLOOR/AREA RATIO METHOD FOR DETERMINING THE RESIDUAL LAND VALUE. THE VALUE OF THE PROPERTY WOULD THEREFORE BE;

100 DOLLARS/FAR62,000 X 100 = 6,200,000 = LAND VALUE AS DEDUCED FROM THE DEVELOPER'S NUMBERS. IF THE VALUE IS 6.2M, MULTIPLY BY 75% AND THE BANK LOAN WOULD AMOUNT TO 4.65M DOLLARS.

IN TERMS OF DOLLARS PER ACRE, TAKE 6,200,000 / 14.28 ACRES = 434,000 PER ACRE IS THE VALUE OF THE PROPERTY.SUBTRACT MONEY FOR GETTING VARIANCES, FLOOD PLAINS, WETLANDS, ETC.

END OF CLASS ONE

CLASS TWO 1/29/90

TODAY'S CLASS:1. HISTORY OF REAL ESTATE MARKET; WHAT HAS A BEARING ON REAL

ESTATE VALUES.2. WHAT IS THE PROCESS FOR APPRAISAL

PARENTHETICALLY SPEAKING

CONSIDER: LAST WEEK'S CLASS NOTES:A PROPERTY WITH A NOI OF 1.44 MILLIONVALUE METHOD WAS TO CAPITALIZE NOI AT 10% OVERALL.

1,440,000 = 14.4 MILLION 10%

THIS PROCESS IS KNOWN AS "DIRECT CAPITALIZATION". ALSO KNOWN AS "CAPITALIZATION AT AN OVERALL RATE".

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: "IN THE EVENT THAT, IN WHOLE OR IN PART, THE MUNICIPALITY

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CONDEMNS THE PROPERTY, THE TENANT SHARES IN THE AWARD".

HOW DO YOU EVALUATE THE LEASEHOLD POSITION OF THE TENANT AND THE VALUE OF THE AGREEMENT, IN TERMS OF A TEN YEAR LEASE.

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. 3600002. ENTER3. CHS4. PMT5. 36. N7. 10.58. I9. PVANSWER 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.

EXAM QUESTION *************

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*******************************************************************

THE RULE OF 72'S

72 / RATE OF INTEREST = YEARS TO DOUBLE THE VALUE OF THE INVESTMENT.see also the rule of 70's for monthly compounding, below*******************************************************************

I.E. AT 6% PER ANNUM, IT WOULD TAKE 12 YEARS TO DOUBLE MONEY. AT 8% PER ANNUM, IT WOULD TAKE 9 YEARS TO DOUBLE MONEY.

A VARIANT ON THE ABOVE RULE:DIVIDE TIME INTO 72 TO GET THE RATE OF INTEREST REQUIRED TO DOUBLE YOUR MONEY. FOR EXAMPLE, TO DOUBLE YOUR MONEY IN TEN YEARS, YOU WOULD REQUIRE A 7.2% PERCENT INTEREST COMPOUNDED ANNUALLY.

THE RULE OF 70'S IS THE SAME CONCEPT, BUT YIELDS MONTHLY COMPOUNDING.

EXAMPLE CASE;A BUILDING BUILD IN 198464,390 S.F.14.5 PERCENT VACANCYMETROPARK, N.J.

RENTS HAVE BEEN LEVEL AT BETWEEN 21 AND 22.5 SINCE 1984, WHICH COMPARES UNFAVORABLY WITH THE INCREASE IN INFLATION.

ACCORDING TO HUGH KELLY, WE CAN EXPECT THE INCREASE IN OFFICE RENTS TO OCCUR AT ABOUT THE SAME RATE AS THE CONSUMER PRICE INDEX (CPI); HOWEVER, IN THE REAL ESTATE MARKET WE PERIODICALLY RUN INTO PERIODS OF OVER-SUPPLY, WHERE THE MARKET TENDS TO MOVE SIDEWAYS OR DOWNWARD, AND PRESSURE INCREASES ON INFLATING RENTS, CAUSING IN TURN AN INCREASE IN NEW CONSTRUCTION. ^ ^ ^ ^ ^DO NOT │2000 ^ BUILD *1999 │ ^ *1998 │ 5 % INCREASE * 1997 │ *1996 │24.00 DOLLARS * 1995 39.00 DOLLARS│ * 1994 ^│ * 1993 │ * 1992 ^─┴────────────DEMAND INCREASES AS EXCESS

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BUILD SUPPLY DIMINISHES. DEVELOPERS NOTICE QUICK *1991^ ^ ^ ^ ^ INCREASE IN RENTS AND BUILD BUILDINGS TO *1990 THE LEVEL OF OVERSUPPLY, RETURNING THE CYCLEDIAGRAM 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. THE PROPERTY RIGHTS APPRAISED MUST BE DESCRIBEDTHE VALUE OF A LEASED FEETHE VALUE OF A LEASEHOLDTHE VALUE OF A FEE SIMPLE INTERESTETC.

WHAT ARE THE BUNDLE OF RIGHTS INVOLVED IN FEE-SIMPLE OWNERSHIP? USE THE ACRONYM; D. O. S. L. U. G.

DO NOTHING─┐OCCUPY │ 1. POLICE POWER; ZONING, SELL │ BUILDING CODES, SPECIALLEASE ├ AS LIMITED BY ─ DISTRICTS USE │ 2. TAXATION

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GIVE AWAY │ 3. ESCHEAT (INHERITANCE BY ─┘ STATE WHEN NO HEIRS CLAIM 4. EMINENT DOMAIN (CONDEMNATION)

5. ZONING; USES AND BULK REQUIREMENTS6. HIGHEST AND BEST USE7. LAND8. IMPROVEMENTS9. LOCATION**************************************************************************

"VALUE IS A THREE-LEGGED STOOL"

1. THE COST APPROACHCOMPUTE THE VALUE BY COMPARISON

PARCEL ONE. PARCEL TWO64,398 FAR (TIMES) 3 ACRE SITE35 DOLLARS PER FAR 180,000 FAREQUALS TIMES 35/FAR 2.253 MILLION EQUALSDIVIDED BY 2.2 ACRES 6.3 MILLION, DIVIDED BY 3 = 1.024 MILLION PER ACRE 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 AND COST APPROACH IS OFTEN MADE UP BY THE "DEPRECIATION FIGURE".

IF MARKET VALUE IS 32 DOLLARS PER SQUARE FOOT AND REPLACEMENT IS 100 DOLLARS, THEN THE PROPERTY WOULD BE DEPRECIATED BY 68 DOLLARS PER SQUARE FOOT.

THE INCOME APPROACH

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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 MILLIONMARKET APPROACH VALUE................10 MILLIONINCOME 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 APPROACHAVERAGING 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 2/5/90HOWARD 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: THE CENTRAL MANUFACTURING DISTRICT FORMULA (CMD)

THIS FORMULA REFLECTS THE CMD THEORY. WE WANT TO EARN A REASONABLE RETURN ON OUR LAND IN RENT. A RATE WAS CONCOCTED WHICH DID THIS; 6

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PERCENT. AT THE SAME TIME, THEY WISHED TO GET REIMBURSED FOR THE LOSS OF VALUE (DEPRECIATION) OF THE BUILDING WHILE BEING OCCUPIED BY THE TENANT OVER TIME. CONSIDER THE PERIOD 50 YEARS AS A LIFESPAN, DEPRECIATING 2 PERCENT PER YEAR UNTIL THE 50TH YEAR WHEN 100 PERCENT IS REACHED. USING A 6 PERCENT RETURN IN RENT ON THE BUILDING, ADD ON THE 2 PERCENT DEPRECIATION FACTOR TO GET 8 PERCENT. THEREFORE THE ANNUAL RETURN ON THE BUILDING CONSTRUCTION EXPENSE NEEDS TO BE 8 PERCENT.

EXAMPLE:LAND VALUE= 100,000 X 6% = 6,000 (not 8% because land does not depreciate)BUILDING COST = 400,000 X 8% = 32,000TOTAL RENT = 6,000 + 32,000 = 38,000 NET ANNUALLY

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 OVERALL CAPITALIZATION RATE (OCR)

THE PROCESS OF USING THE OVERALL CAPITALIZATION RATE IS DIRECT CAPITALIZATION.

DIRECT CAPITALIZATION WAS THE METHOD OF PREFERENCE IN THE 1960'S. YOU ESTIMATE GROSS INCOME, DEDUCT VACANCY ALLOWANCE (VA) AND COLLECTION LOSS ALLOWANCE (CLA) TO ARRIVE AT EFFECTIVE GROSS INCOME (EGI).

GROSS INCOME - (VA + CLA) = EGI

(VA + CLA) = THE NET OPERATING EXPENSE (NOE)

EGI IS THE FORECASTED GROSS INCOME AFTER ALLOWING FOR VACANCY AND COLLECTION LOSS.

EXAMPLE:

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100,000 =EGI -5,000 =NOE--------

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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.

NOI / 8.5% = VALUE

47,500 / 8.5% = 560,000THE VALUE OF THE ABOVE PROPERTY IS $560,000 ACCORDING TO THIS METHOD.

IN THE 1960'S, APPRAISERS STABILIZED EXPENSES, AND DID NOT CONSIDER INFLATION OR COST INCREASES INTO THE FORMULAS DETERMINING VALUE. SINCE IT WAS RECOGNIZED THAT THIS WAS INADEQUATE, TECHNIQUE THREE, THE GROSS INCOME MULTIPLIER WAS UTILIZED.

TECHNIQUE THREE: THE GROSS INCOME MULTIPLIER (GIM)

FORMULA: 5.6 X GROSS INCOME = VALUE

EXAMPLE: 100,000 X 5.6 = 560,000 DOLLARS.

WHERE DID GROSS INCOME MULTIPLIERS COME FROM? FROM OBSERVATION. SINCE NET IS NOT CONSIDERED, SOME SAID IT WAS NOT PREFERRED. SO WHY WAS IT USED?

ANSWER: WHEN YOU HOLD THE ASSUMPTIONS PREVALENT AT THE TIME, THAT THERE IS AN ASSUMED 5 PERCENT VACANCY, AND A 50 PERCENT OPERATING EXPENSE, AND AN 8.5% CAPITALIZATION RATE, YOU MUST BY NECESSITY AND BY MATHEMATICS GET A 5.6 GROSS RENT MULTIPLIER. SO, IN ACTUALITY, THIS METHOD IS AS GOOD AS DIRECT CAPITALIZATION, IS SIMPLER AND REFLECTS THE ASSUMPTIONS HELD IN COMMON UNDER THE DIRECT CAPITALIZATION METHOD. TECHNIQUE FOUR: THE ELLWOOD FORMULA

PETE ELLWOOD OF EQUITABLE LIFE INSURANCE COMPLAINED THAT WE NEED TO TAKE MORE INTO ACCOUNT IN VALUE THAN THE FIRST YEAR OF INCOME. HE SAID THAT IF, GIVEN A PROPERTY WITH:

NOI = 10,000LOAN = 75,000INTEREST = 10 PERCENT CONSTANT, INTEREST ONLYDEBT SERVICE = 7,500CASH FLOW = 2,500 (ALSO CALLED THE EQUITY DIVIDEND BY ELLWOOD)COST = 100,000

SUPPOSE YOU INVEST EQUITY OF 25,000, WHAT DO YOU GET IN EXCHANGE. IN THIS EXAMPLE YOU GET EQUITY DIVIDEND FOR 2,500 PER YEAR, OR 10 PERCENT. IF OVER A TEN YEAR TIME FRAME THERE IS NO INCREASE OR DECREASE IN THE

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PROPERTY VALUE ( WHAT YOU PAID ), WHAT IS THE EQUITY YIELD ON THE INVESTMENT? A TEN PERCENT EQUITY YIELD IS THE ANSWER.

HP CALCULATION25000, chs, g, Cfo 2500, g, Cfj9, g, Nj 27500 (which is the last year income added to the sale price), g, Cfjf, 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.

│ #14.11% (20% INCREASE)│10% # │ # *12.25% (10% INCREASE) │ * │5% # * │ # * │ # * * SALE DATE│0.#*----------------------------------------------*-- 10% EQUITY LINE│ = \ =\│ =│-5% \ =│ =│ \ = │ = 7.12% (10% DECREASE)

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│-10% │ \ 3.03% (20% DECREASE)│*INFLATION IN VALUE└────*YEARS───────────────────────────────────────────*───────────────────O YEARS 10 YEARS

THE ELLWOOD FORMULA (FAN GRAPH)

THE ELLWOOD FORMULA WAS AN ATTEMPT TO LOOK AT A PROPERTY FROM AN INVESTOR'S POINT OF VIEW. THIS LEADS US TO THE FIFTH TECHNIQUE, DISCOUNTED CASH FLOW.

TECHNIQUE FIVE: THE DISCOUNTED CASH FLOW (DCF)

THE LACK OF DEBT COVERAGE CONSIDERATION GIVES RISE TO THIS TECHNIQUE.

GIVEN:PROPERTY VALUE 10,000,000 DOLLARS BASED ON 10% OVERALL CAP RATE.LOAN OF 7,500,000 BASED ON 75% LOAN RATIONOI OF 1,000,000 DOLLARS PER YEAR

ANNUAL INTEREST AND PRINCIPAL PAYMENT STATED AS A PERCENT ON TOTAL LOAN IS CALLED A CONSTANT WHICH IS 10 PERCENT IN THIS CASE. 750,000 DEBT SERVICE RESULTS IN A 250,000 DOLLAR CASH FLOW.COVERAGE = NOI / DEBT SERVICECOVERAGE SHOULD BE APPROXIMATELY 1.3 TO BE ACCEPTABLE.1,000,000 / 750,000 = 1.3

WHERE DID THE 1.3 FIGURE DERIVE FROM?

WHEN THE CONSTANT IS PRECISELY THE SAME AS THE OVERALL RATE, AND YOU HAVE A 75% LOAN RATIO, THE COVERAGE WILL ALWAYS BE 1.3. THE GLUE THAT MAKES THIS ALL STICK TOGETHER IS THE RELATIONSHIP BETWEEN THE OVERALL RATE (OAR) AND THE CONSTANT.

MADSEN'S RULE: FOR EVERY BASIS POINT AT WHICH THE OVERALL RATE SLIPS BELOW THE CONSTANT, THE CASH ON CASH RATIO SLIPS 4 POINTS. WHEN OAR AND THE CONSTANT ARE THE SAME RATE, THEN IT WILL BE IDENTICAL TO THE CASH-ON-CASH RATIO.

COC = CASH FLOW / CASH EQUITYCOC = 250,000 / 2,500,000 = 10%

TO APPLY MADSEN'S RULE, A 9.99 OAR WITH A 10 PERCENT CONSTANT WOULD RESULT IN A 9.96 COC. IF YOU HAVE A 9 PERCENT OAR WITH A 10 PERCENT CONSTANT, THEN YOU HAVE A 6.00 COC.

100,000 PROPERTY

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10% CONSTANT7,500 DEBT SERVICE ANNUALLY10% OAR2,500 CASH FLOW = NOILOAN = 75,000EQUITY = 25,000COC = 2500IF OAR SLIPS TO 9.99 PERCENT, THEN THE NOI IS 9990.009990 - 7500 = 24902490/25000 = 0.0996

EXAMPLE OF DISCOUNTED CASH FLOW:

PROPERTY IS 21,000CASH IN (INVESTMENT) IS 4,800PERIOD IS 3 YEARSCASH OUT (WHAT YOU WALK AWAY FROM CLOSING WITH) IS 9,600CASH FLOW IS NIL.

THE RATE OF RETURN IS 26 PERCENT.

EXAMPLE:CASH IN IS 25,000CASH 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

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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

CLASS FOUR 2/12/90NO CLASS NEXT WEEK

ETHICS IN REAL ESTATE

3 TYPES OF PEOPLE... WHAT IS MINE IS MINE SO I'LL KEEP IT WHAT IS MINE IS MINE SO I'LL SHARE IT WHAT IS MINE IS YOURS SO I'LL TAKE IT

HOW DO YOU AVOID GETTING YOURSELF INTO AN ETHICAL MORASS?THE CONCEPT OF TRUSTEESHIP - A TRUST; A THIRD PARTY ACTOR WHO MAKES AN EFFORT TO BE A CARETAKER OF SOMEONE ELSE'S PROPERTY, AND TO ACT IN THEIR INTEREST. A TRUST IS AN ARRANGEMENT MADE BY A "CREATOR" WHO HAS THE WEALTH. HE CREATES A "TRUST" WHICH IS THE REPOSITORY OF THE WEALTH. THE TRUST HAS SEVERAL PARTIES: THE TRUSTEE AND THE BENEFICIARY.

THE TRUSTEE TAKES CARE OF THE WEALTH IN THE TRUST FOR THE BENEFIT OF THE BENEFICIARY, ACCORDING TO THE OBJECTIVES OF THE CREATOR.

SEE YOURSELF AS A TRUSTEE AND YOU WONT GO WRONG.

IN INVESTMENTS THE INVESTOR CONCERNS HIMSELF WITH YIELD TO RISK RATIOS. YOU INVEST SAFELY AT THE HIGHEST RETURN POSSIBLE WITH THE LEAST RISK; THE TRUSTEE HAS THE RESPONSIBILITY FOR DETERMINING THE LIMITS OF BOTH.

AUTHORITY - TO WHOM IS THE AUTHORITY TO INVEST DELEGATED TO, AND UNDER WHAT CONDITIONS? AUTHORITY IS A DELEGATED RESPONSIBILITY.

PRESENT WORTH VS. FUTURE WORTHGIVEN;LOAN AT 6.25 DOLLARSAT 8%FOR 9 YEARSPAYMENT IS 1.00 PER YEAR ANNUITY(SEE MADSEN HANDOUT FROM WEEK 3, IN THE 5 X 8 FORMAT)

CASH FLOW EXERCISE

PV=?CASH FLOW = 100,000 ANNUALLYINTEREST = 10%TERM = 5 YEARSANSWER IS 379,078.68

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HOW DO YOU KNOW WHEN COMPUTING IRR ON A CALCULATOR THAT YOU GOT THE CORRECT ANSWER?

BY DOING THE FOLLOWING;PV=400,000 ────────────────────────────────────────┐INTEREST=? │TERM=5 │PAYMENT = 100,000 │ANSWER = 7.93 =INTEREST & IRR │ │CALCULATE THE FV OF THE 100,000 PAYMENT │YEAR ONE = 92,653 │TWO = 85,845 │THREE= 79,538 │FOUR= 73,693 │FIVE= 68,279 │ │TOTAL = 400,000 ────────────────────────────────────┘THEREFORE THE 7.93 FIGURE IS CONFIRMEDSOLVING THE SAME PROBLEM WITH THE "BLUE KEY" REGISTERS;

100,000 PER YEAR PAYMENT5 YEARSPV=400,000

400,000, CHS, G, Cfo100,000, G, Cfj5, G, NjF, IRR, READ REGISTER 7.93

ANOTHER EXAMPLE100,000 PAID IN THE FIRST YEAR200,000 IN YR. TWO400,000 IN YR. THREE800,000 IN YR. FOUR1,600,000 IN YR. FIVE

INTEREST = 10%

SOLVE FOR PV

0, G, Cfo100,000, G, Cfj ┌──── F, NPV, READ REGISTER 2,096,609.15200,000, G, Cfj │

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400,000, G, Cfj │800,000, G, Cfj │1,600,000, G, CfJ──┘ANOTHER EXAMPLEYEAR ONE TO THREE 200,000YEAR FOUR TO SIX 400,000YEAR SEVEN 500,00010% INTEREST

0, G, Cfo200,000, G, Cfo3, G, Nj400,000, G, Cfj3, G, Nj500,000, G, NjF, NPV, = 1,501,312.94

ANOTHER EXAMPLE10% INTEREST 0% INTERESTNPV = 481,593 NPV = 600,000

CASH FLOW YEAR100,000 1200,000 2300,000 3--------600,000END OF CLASS FOUR

CLASS FIVE 2/26/90

A SINKING FUND IS A REGULAR PERIODIC PAYMENT REQUIRED TO ACCUMULATE 1.00 DOLLAR AT THE END OF A GIVEN TERM, INCLUDING PAYMENT AND COMPOUNDED INTEREST.

EXAMPLE:OBJECTIVE; TO HAVE 10,000 DOLLARS AT THE END OF 4 YEARS AT 8% PER ANNUM, THE ANNUAL SINKING FUND PAYMENT WOULD BE 2,200 DOLLARS.

10,000 X .22 (FROM TABLE) = 2,200.00 CALCULATED ON HP12C = 2219.21

POP QUIZ GIVEN. EXPECT CONTENT TO REAPPEAR ON THE MIDTERM AND FINAL

THE INFORMATION BELOW IS BASED UPON THE POP QUIZ HANDOUT

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PORTION OF ANNUAL CLAIM ON RATE INVESTMENT INCOME STREAM COMPONENT

DEBTSERVICE 75% (LOAN X 11.76% (MORT. = 8.82%(DEBT) RATIO) CONSTANT)

EQUITYYIELD 25% (DOWN 15% (IRR) = 3.75%(DEBT) PAYMENT) X

AMORTIZATION75% (OF THE(CREDIT) INVESTMENT)*X 9.7%** X 6.53*** = -0.48%

VALUEAPPRECIATION100% X 32.07%****X6.53% = -2.10%(CREDIT)

OVERALL RATE............................................ + 10.00%

THE OVERALL RATE IS A COMPOSITE OF INCOME REQUIRED FOR DEBT SERVICE AND EQUITY YIELD WHILE FOLDING IN AMORTIZATION AND VALUE APPRECIATION.

* = PAYMENT AGAINST THE LOAN WHICH IS 75%** = PERCENTAGE OF THE TOTAL INVESTMENT PAID OFF AT 8 YEARS, PAID OFF ON THE AMORTIZED PORTION OF THE INVESTMENT*** = THE SINKING FUND FACTOR. HOW DO YOU GET THIS FIGURE? .005445 FROM COLUMN 3, PAGE 934, 15%, YEAR 8 . .005445 X 12 = 0.06534****= INCREASE OF INVESTMENT AGAINST THE BUYING PRICE AT 8 YEARS (SEE QUESTION NINE IN HANDOUT)

***CALCULATION METHOD8,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;

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BETTER TO BUY OR RENT?NOICASH ON CASH RATES

END OF CLASS FIVE

CLASS SIX 3/5/90

CLASSES FOR NEXT SEMESTERLEGAL ISSUES; SMITH, 5:45 TO 9:15 ON MONDAYFEDERAL TAX; WATERS, 5:45 TO 7:30 ON THURSDAY

FORMULA FOR FUTURE VALUE

(1+i)n = FUTURE VALUE

EXAMPLE; 8 PERCENT INTERESTYEAR ONE; (1+.08)1 = 1.08YEAR TWO; (1+.08)2 = 1.166YEAR NINE; (1+.08)9 = 1.999

FORMULA FOR PRESENT VALUE

1 = PRESENT VALUE (1+i)n

EXAMPLE; 8 PERCENT INTEREST 1 = 0.926YEAR ONE; (1+.08)1

1 = 0.858 YEAR TWO; (1+.08)2

1 = 0.5YEAR NINE; (1+.08)9

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╔═══════════════════════════╗║ ║║ NET OPERATING INCOME ║╠════════════╦══════════════╣║ OVERALL ║ ║║ RATE ║ VALUE ║╚════════════╩══════════════╝STATED DIFFERENTLY, VALUE = I/R, OR, VALUE = NET OPERATING INCOME / OVERALL RATEFOR EXAMPLE:GROSS OPERATING INCOME = 19000LESS EXPENSES = 11000 8000THEN 8,000 / 10% = VALUE = 80,000

EXAMPLE108,000 LOAN AT 12.5% PER ANNUM

TERM MONTHLY P&I TOTAL PAYMENTS TOTAL INTEREST

20 YEARS 1227.03 294,487.00 186,487.6330 YEARS 1152.64 414,949.19 306,949.82 74.39 120,462.19 120,462.19REFINANCING

104,000 REMAINING IN BALANCE ON A LOAN12.5% INTEREST, 17 YEARS LEFT VS.108,000 AT 9 3/8%, 15 YEAR TERM

TERM MONTHLY P&I TOTAL PAYMENTS 17 YEARS 12.5% (1227.03/MO.) 250,31415 YEARS 9 3/8% (1119.64/MO.) 201,535

THERE IS AN INTEREST DEDUCTION OVER THE LIFE OF THE LOAN

REDUCTION IN INTEREST EXPENSE OVER THE LIFE OF THE LOANWITH A 100 DOLLAR PRE-PAYOUT (accelerated payment)

REMAINING TERM FIXED INTEREST RATES 12.5% 14% 15% 16%

28 YEARS 2K 3K 4K 5K30 YEARS 4K 6K 8K 10K

END OF CLASS SIX

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CLASS SEVEN ; 3/19/90

EXAM:50 QUESTIONS2:30 TO 4PM IS EXAM4:15 TO 5:30 IS DEBRIEFING

OPEN BOOKOPEN NOTESBRING CALCULATOR

*********************EXAM CONTENT*********************25% OAR/IRR/CASH-ON-CASH20% DCF/FUTURE VALUE/PRESENT WORTH20% LEVEL RENT ANNUITY15% COMPOUND INTEREST/ RULE OF 72'S10% MORTGAGE FINANCING5% LEVERAGE5% 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 PERCENT5 YEARS AT 125,000 PER YEAR AT 10 PERCENTPROVIDES SIX MONTHS FREE RENT UP FRONTEXPENSES PAID BY TENANT

YEAR ONE = 50,000YEAR TWO THROUGH FIVE = 100,000 EACHYEAR 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

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10, i10, nPMTREAD ANSWER, 102,179.15

IF THE BUILDING IS 100,000 S.F., THEN THE AVERAGE LEVEL RENT PER SQUARE FOOT PER ANNUM IS 1.022 DOLLARS.MORTGAGES AND MORTGAGE LOANSWHAT IS A MORTGAGE?

500 YEARS AGO, YOU BORROWED MONEY IN PLEDGE FOR COLLATERAL. VIFGAGE WAS GIVEN TO THE LENDER AS A FEE. VIFGAGE MEANS "LIVE PLEDGE" AND WOULD GENERALLY RESULT IN MOVING OUT OF A PROPERTY WHILE THE LENDER MOVES IN. MORTGAGE MEANS "DEAD PLEDGE". THE OWNER'S RIGHT TO OCCUPY YOUR PROPERTY REMAINED "DEAD" AND PASSIVE AS LONG AS PAYMENTS WERE KEPT UP-TO-DATE.

FORECLOSURE, GENERALLY RESULTING IN SALE OF PROPERTY, TAKES PLACE TO SETTLE THE DEBT TO THE LENDER.

A SALE BELOW THE DEBT REMAINING CAUSES YOU TO BE PERSONALLY LIABLE FOR THE REMAINDER OF THE AMOUNT. SOME STATES (GENERALLY RURAL STATES) PROVIDE FOR "REDEMPTION", WHICH ALLOWS A PERSON TO "BUY BACK" HIS PROPERTY. IT IS A LIMITED PERIOD (GENERALLY SIX WEEKS) WHERE YOU CAN PAY OFF THE ENTIRE DEBT, PLUS COURT COSTS AND OTHER COSTS.

THE LENDER HAS FIRST PRIORITY AND LEANING ON THE PROPERTY, AND IS IN A MORE SECURE POSITION THAN THE BORROWER.

FOR EXAMPLE: 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. TISHMAN OBTAINED A 45 MILLION CONSTRUCTION LOAN

(LEASEHOLD FIRST MORTGAGE LOAN) IN ADDITION TO INVESTING 25 MILLION DOLLARS IN THE LEASEHOLD EQUITY. FOR YOUR ANSWERS TO

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 4. FIRST MORTGAGE ON THE

LEASEHOLD. 5.LEASEHOLD EQUITY. WHERE DO THE MORTGAGE PAYMENTS COME FROM?

WHAT IS THE LOAN BALANCE AT THE END OF TEN YEARS ON A LOAN WHICH HAD:AN INITIAL LOAN AMOUNT OF 100,000INTEREST RATE OF 10 PERCENTMONTHLY PAYMENT PERIOD OVER 25 YEARSPAYMENT PER MONTH OF 908.70.100,000, PV10,g,i25,g,nPMT, READ REGISTER120,nFV, READ REGISTERANSWER IS 84,561.36.

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WHAT IS THE FUTURE VALUE OF 100,000 IF AT 10 PERCENT AND 10 YEARS?FV = 270,704.15 (COMPOUNDED MONTHLY)FV OF PAYMENT OF 908.70 FOR TEN YEARS AT 10% PER ANNUM COMPOUNDED MONTHLY = 186,142.63.

270,704.15-186,142.63------------- 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 EIGHTEXAMINATION GIVEN WITH DEBRIEFING3/26/90

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%.

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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:

LEVITT AT GARFIELD PARK ANNOUNCES 3 NEW HOME DESIGNS RANGING IN PRICE FROM 13,500 TO 16,990.

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:

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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 PRESENT WORTH AND FUTURE WORTH IN THE NOTES TO CLASS SIX.

DEMONSTRATE THE CORRECTNESS OF YOUR ANSWER TO THE ABOVE QUESTION BY SHOWING YOUR SOLUTION OF THE EQUATION (1+i)n. (1+0.08006)9 = 2.00.

WHAT IS THE COEFFICIENT FOR AN ANNUITY OF 1 DOLLAR PER ANNUM FOR THE SAME RATE AND TERM? 12.491

WHAT IS THE MORTGAGE LOAN CONSTANT FOR THE SAME RATE AND TERM? 12.491.

WHAT IS THE RELATIONSHIP BETWEEN THE TWO ABOVE NUMBERS? THEY ARE THE SAME.

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 125,000OAR OF 10 PERCENTLOAN RATIO OF 75 PERCENTINTEREST RATE OF 10 PERCENTLOAN TERM OF 8 YEARSAMORTIZATION IS BY INTEREST ONLY PAYMENTS ANNUALLYSELLING EXPENSES ARE 5% AT THE END OF 8 YEARS.

THE PRESENT PROPERTY VALUE BASED ON OAR IS 1,250,000THE PRESENT VALUE OF THE EQUITY IS 312,500THE LOAN AMOUNT IS 937,500THE ANNUAL CONSTANT IS 10 PERCENTTHE ANNUAL DEBT SERVICE IS 93,750, SINCE ONLY INTEREST IS PAID (INT. ONLY)ANNUAL CASH FLOW IS 31,250.00FUTURE LOAN BALANCE AT THE END OF 8 YEARS IS 937,500SALE 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

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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 CAUSE THE CASH ON CASH RATIO TO BE (125,000-103,125) / 312,500 =7 PERCENT.THE CONSTANT IS THE ANNUAL INTEREST AND PRINCIPAL PAYMENTS AS A PERCENTAGE OF THE TOTAL LOAN.

WHAT DOES THE 100 BASIS POINT CHANGE IN THE CONSTANT (SPECIFIED IN THE PREVIOUS QUESTION) DO TO THE COVERAGE (COMPUTE TO TWO DECIMAL PLACES)?THE COVERAGE WOULD BE ADJUSTED TO 1.212 WHICH IS 125,000 / 103,125.

IN FEBRUARY, 1989 A 119,349 SQUARE FOOT OFFICE BUILDING IN NEW JERSEY'S ROUTE 1 CORRIDOR NEAR PRINCETON SOLD FOR 17,600,000 SUBJECT TO A 10 YEAR LEASE FOR THE ENTIRE BUILDING AT A RENTAL OF 16.35 S.F. NET WITH FREE RENT (EXCEPT EXPENSES) FOR THE FIRST 8 MONTHS.

WHAT IS THE PRICE PER SQUARE FOOT? 147.47.

WHAT WILL THE NOI BE IN THE FIRST YEAR? 650,452.05

WHAT IS THE OVERALL RATE BASED ON THE FIRST YEAR NOI? 3.7%

WHAT WILL THE NOI BE IN THE SECOND YEAR? 1,951,356.15

WHAT IS THE OVERALL RATE BASED ON THE SECOND YEAR NOI? 11.1%

USING ANNUAL DISCOUNTING AT 10% PER ANNUM, WHAT IS THE NET PRESENT VALUE OF THE LEASE CONTRACT? 10,807,598.72

USING ANNUAL DISCOUNTING AT 10% PER ANNUM AND YOUR ANSWER TO THE PREVIOUS QUESTION, WHAT IS THE EQUIVALENT LEVEL ANNUAL NET RENTAL? 1,758,886.92

BASED ON THE EQUIVALENT LEVEL ANNUAL NET RENTAL WHICH YOU COMPUTED IN THE PREVIOUS QUESTION, WHAT IS THE INDICATED OVERALL RATE? 10 PERCENT WHICH IS 1,758,886.92 / 17,600,000.

WHAT ARE THREE GUIDELINES TO FOLLOW DURING COURT TESTIMONY?

1. ADVOCATE THE TRUTH2. TREAT THE COURT WITH RESPECT3. TREAT EACH QUESTION WITH RESPECT

END OF CLASS EIGHT

CLASS NINE4/2/90

132

HOWARD GELBTUCH PRESENTS...THE WORLD ACCORDING TO A REAL ESTATE MAVENBROUGHT TO YOU BY....MADSEN PRODUCTIONS

THE FRANK RUSSEL REPORT

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 VIRGINIAJC PENNEY TO DALLASMITSUBISHI FROM TOKYO TO N.Y.SEARS FROM DOWNTOWN TO SUBURBAN CHICAGONASA FROM WASHINGTON D.C. TO HOUSTONMIDTOWN LONDON TO CANARY WHARF

ECONOMY HAS GLOBALIZED

SHERATON IS BUILDING A 450 ROOM HOTEL IN MOSCOWLAND IN TOKYO COSTS 10 TO 12,000 DOLLARS PER S.F.LONG SHOT CITIES ARE BEIJING, SHANGHAI, WARSAW, BUDAPEST, ISTANBUL, MOSCOW, AND LENINGRAD

VULTURE FUNDS ARE BUYING DISTRESSED PROPERTIES WITH POTENTIAL AND TURNING THEM AROUND.

133

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)HIGH CAP RATES LEAVE NO ROOM FOR ERROR ON DEBT SERVICE

TOYS R US, CIRCUIT CITY, HOME DEPOT, & FAR MORE DRUGS ARE ALL IN STRIP CENTERS AND NOT MALLS. THEY ARE CATEGORY KILLERS IN THAT THEY ARE DEPARTMENT STORES THAT ARE SUCCESSFUL WHILE BEING PRIMARILY IN STRIP CENTERS.

MEMBERSHIP/WAREHOUSE CLUBS ARE ALSO GOOD PERFORMERS. THEY REQUIRE:100,000 S.F. INDUSTRIAL BUILDINGS

BUSINESS IS A MAJOR CUSTOMER, OFTEN WITH SPECIAL SHOPPING HOURS.MEMBERSHIP IS PAID FOR THE PRIVILEGE OF DOING SHOPPING AT THE CLUB.MANY OF THE CLUBS ARE THE OWNERS OF THE REAL ESTATE BELOW THEIR BUILDINGS, BUT OPPORTUNITIES ARE AVAILABLE TO LEASE LAND TO THEM. SOME ARE REALIZING THAT THEY ARE GREAT DRAWS, SO THEY ARE BUYING LAND AROUND THEMSELVES AND BUILDING FURTHER RETAIL AROUND THEM. IN N.Y. IT IS ONE STORE PER 3.6 MILLION PEOPLE. COSCO IS LOOKING FOR 35 SITES. SEATTLE HAS 1 PER 1.3 MILLION PEOPLE. SHOPPING CLUBS SIGN 20 YEAR LEASES, AND ARE VERY SENSITIVE TO THE COSTS OF OCCUPANCY. RENTS ARE PAID AT 3 TO 6 DOLLARS PER S.F., AND ARE USUALLY FLAT LEASES, AND SOME HAVE PERCENT OF RENT CLAUSES. THEY NEED 10 ACRES. NO LESS THAN 18 FEET OF CEILING HEIGHT. THEY DO NOT LIKE TO COMPETE WITH OTHER WAREHOUSE CLUBS SO DON'T PUT THEM TOGETHER. THEIR MARKET AREA SIZE IS 100 MILES IN DIAMETER.*********

THE ADVENT OF HIGHER PROPERTY TAXES:

CHICAGO, CLASS B OFFICE = 9.00 PER S.F. PER YEARMINNEAPOLIS IS 18.6% OF RENTNEW YORK IS 18.1% OF RENTCLEVELAND IS 7.3% OF RENTCINCINNATI IS 3.6% OF RENT

A SHIFTING FROM RESIDENTIAL TO NON-RESIDENTIAL USES OF TAXES IS TAKING PLACE.

*********INFORMATION

WALL STREET RESEARCH IS THE SOURCE OF MUCH OF INFORMATION

TOTAL COST/SALES = COST OF OCCUPANCY RATIO

15 TO 20 PERCENT MAXIMUM FOR RETAILER. ANYTHING ABOVE 20 PERCENT WILL

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BUST THE RETAILER IN A MALL.

TO ESTIMATE SUPER-MARKET SALES, COUNT THE CHECKOUT COUNTERS AND MULTIPLY BY 1.5 TO 2 MILLION DOLLARS, AND YOU WILL BE VERY CLOSE.

WHEN YOU ARE FOLLOWING A TOP GUN, YOU DO NOT KNOW IF YOU ARE BEHIND A WINNER OR IF YOU ARE BEHIND A KAMIKAZE PILOT....LES WEXNER, THE LIMITED

HYPERMARKETS' DRAW IS SO POWERFUL THAT BUYERS DO NOT GO TO MOM & POP STORES WHEN A HYPERMARKET ANCHORS THEIR STRIP MALL.

INVEST-TEXT - CALL BY INDUSTRY OR RETAILER (I.E. HOTELS IN NEW ORLEANS, OR CASINOS) AND THEY WILL GIVE YOU ALL THE REPORTS FOR THESE ITEMS.

SUPERMARKETS, WAREHOUSE SHOPPING CLUBS, DISCOUNT STORES, AND DEPARTMENT STORES ARE SOLID.

CLASSIC GOLF COURSES ARE POPULAR, BUT THERE ARE GOLF COURSES, AND THEN THERE ARE GOLF COURSES.

BAA BOND YIELDS AND IRR ARE COMPARABLY SIMILAR. RETAIL HAS TRADED PLACES WITH INDUSTRIAL AS A FAVORED PROPERTY TYPE. SALES PER S.F. AND THE COST OF OCCUPANCY ARE FACTORS OF RETAIL PROFIT, AND ARE KEY MEASURES OF DETERMINING IT.

THE NEW DRAW TO MALLS ARE THE SMALLER RETAIL CHAINS SUCH AS : GAP, THE LIMITED, AND BANANA REPUBLIC. 13,000 S.F. STORES REALIZING THAT THEY ARE PART OF THE DRAW TO MALLS AND NOT JUST THE MAJOR. THEY ARE THEREFORE DEMANDING THAT RENTS BE ADJUSTED TO REFLECT THIS, AND THE RESULT WILL BE THAT THE MALLS WILL NOT BE AS PROFITABLE. THE LIMITED SEES THEIR STORES AS "DOMINATING THE INTERIOR REAL ESTATE" WHEREAS A TRADITIONAL DEPARTMENT STORE MAY DOMINATE THE EXTERIOR. THEY ARE CHALLENGING THE VIEW THAT SPECIALTY STORES DRAW THEIR TRAFFIC FROM ANCHORS. WHEREAS THE PRESENT INCOME PER S.F. OF MALL MAY BE 600 PER ANNUM, THIS MAY DECREASE WITH RENT CONCESSIONS.

THE TRICK TO RETAIL IS TO GET A GOOD MIX OF STORES THAT ARE NOT PRICE SENSITIVE, AND HAVE GOODS THAT ARE ALWAYS IN DEMAND, SUCH AS LECTOR'S, A HOUSEWARES AND KITCHEN GADGET STORE, WHICH HAS SALES GENERATED AT 200 DOLLARS PER SQUARE FOOT.

CLASS TEN4/16/90CLASS NOT ATTENDED. NOTES REFLECTED IN FOLLOWING LECTURE

END OF CLASS TEN

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CLASS ELEVEN

4/23/90 ADD CHAPTER 19 TO READING, SUBTRACT CHAPTERS AFTER 19 FROM LIST.

CONDOSTOWNHOMESSINGLE 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 BUDGETINGCREDIT CONTROL: AVOID CREDITAUTOMOBILES: MAINTAIN IT AND CHANGE THE OILBUYING 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?

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13.92-5.00 = 8.92 THE ANSWER IS 8.92 PER SQUARE FOOT.

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).

8.92 / .09 = 99.11 THE ANSWER IS 99.11 PER SQUARE FOOT.

5. IF THE CURRENT COST OF CONSTRUCTION AND DEVELOPING THE BUILDING IS 100 DOLLARS PER SQUARE FOOT, WHAT DOES YOUR ANSWER TO QUESTION 4 IMPLY ABOUT THE LAND VALUE OF THE UNDERLYING SITE?

99.11 - 100.00 = - 0.89 THE VALUE IS NEGATIVE 89 CENTS PER SQUARE FOOT.

+++++++++++++++++++++++YOU ARE PRESENTED WITH THE FOLLOWING FORECAST FROM THE APPRAISAL OF A 32,000 S.F. OFFICE BUILDING VALUED AT 3,300,000.

YR.ONEYR. TWO YR.THREE YR.FOUR YR.FIVE YR.SIX___________________________________________________________________

NOI 265,458 337,132 245,455 339,871 368,443382,886

LEASECOM, -31,490 0 -62,541 32,455-26,486 -23,825&TI

____________________________________________________________________CASH 233,968 337,132 182,914 307,416 341,957

359,061FLOW

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,Cfj;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 = OVERALL RATESALES PRICE

265,458 / 3,300,000 = 8.0442

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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.

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;341,957THE NPV OF THE NOI OF 382,886 (NOT THE CASH FLOW OF 341,957) CAPPED AT 9.5% IS 4,030,378.95WHEN 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% = 1,000,360.81THE NPV OF THE REVERSION AT 11.88% = 2,299,231THE 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 TWELVE4/30/90

REVIEW:

LEASE YEAR DEAL A DEAL B

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1 10 142 11 133 12 124 13 115 14 10

10 PERCENT DISCOUNT RATE USED

EFFECTIVE RENT PER S.F. 12 12EQUIVALENT LEVEL RENT 11.81 12.19NPV 44.77 46.21

*ASSUMES THE COST OF CAPITAL IS 10 PERCENT

FROM AN OWNER'S POINT OF VIEW, YOU THINK OF VALUE, THE RENTER FROM THE POINT OF VIEW OF THE RENT PAID.

AT 11 PERCENT ON A LOAN, WHAT ARE THE MONTHLY AND TOTAL PAYMENTS FOR A 30, 40, AND 99 YEAR LOAN?

30 40 99MONTHLY PAYMENT 952.32928.29916.69 (10%)TOTAL PAYMENTS (k) 342.8 445.6 1,089

MONTHLY PAYMENT 536.82482.2 419.7 (5%)TOTAL PAYMENTS (k) 193.2 231.5 498.6

THE DIFFERENCE BETWEEN A 30 AND 99 YEAR LOAN AT 10 PERCENT HAS AN AMOUNT OF 4% DIFFERENCE IN PAYMENTS, AND 3.17 TIMES THE AMOUNT PAID.THE DIFFERENCE BETWEEN A 30 AND 99 YEAR LOAN AT 5 PERCENT HAS AN AMOUNT OF 22% DIFFERENCE IN PAYMENTS, AND 2.58 TIMES IN AMOUNT PAID.

LEASE ANALYSIS:

YEAR 1 2 3 4 5 6mkt rent per s.f. 10 11 12 13 14 15contractrent per s.f. 7 7 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.

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TENANT IMPROVEMENTS (T.I.) = 10.00 PER S.F.CASH FLOWASSUMING NODEBT SERVICE7 7 9.50 13 13 13

PROBABILITY IN LEASE BY LEASE ANALYSIS : TWO FACTORS

1. VACANCY2. 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 EXPIRATION2. 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 1 2 3 4 5 6MKT. RENT 12LEASE EXPIRES 12/31 10

│ │ └─SUBTRACTED TWO MONTHS FROM THE ABOVE

PROBABILITY CALCULATION

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.

POINTSBUYING 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 100,00025 YEAR LOAN

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11 PERCENT PER ANNUM

WHAT ARE THE PAYMENT PER MONTH? 980.11

100,000 AT 10% FOR 25 YEARS = 908.70EFFECTIVE RATE = .93NOMINAL ANNUAL YIELD 11.11 % (BECAUSE EFFECTIVELY THE BANK HAS LOANED 92,000 BECAUSE OF $8000 IN POINTS TO BUY DOWN THE LOAN 1 PERCENT.

END OF CLASS TWELVE

CLASS THIRTEEN 5/7/90FINAL CLASS

NEXT WEEK IS THE FINAL

EXERCISE ONEASSUMPTIONS:

1. CAP RATE APPLIED TO 6TH YEAR NOI IS 10%2. 12% DISCOUNT RATE3. 5 PERCENT SELLING COSTS

YEAR CASH FLOW NOI---------------------------------------------------------------1 20,000 NA2 22,000 NA3 26,000 NA4 28,000 NA5 30,000 NA6 NA 100,000

COMPUTE THE NPV0,g,Cfo;20k,g,Cfj;22k,g,Cfj;26k,g,Cfj;28k,g,Cfj;*980k,g,Cfj;12,i;f,NPV;READ ANSWER, 627,775 * 100,000/10% = 1,000,000LESS 5% SELLING COSTS = 950,000950,000 = 5TH YEAR REVERSION, ADD 30,000 CASH FLOW TO ARRIVE AT 980,000

SUPPOSE YOU HAVE SOLVED THE ABOVE PROBLEM, WITH 627,774 AS NPV, HOW DO YOU KNOW THAT YOU HAVE DONE IT PROPERLY? ANOTHER WAY TO SOLVE THE PROBLEM AS A CHECK IS: FV = 20Ki = 12 percent

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n = 1 yearsolve for PV, = 17,857.14

FV = 22kn = 2solve for PV = 17,538.27FV = 26kn = 3

solve for PV = 18,506.29

FV = 28k n = 4

solve for PV = 17,794.51

FV = 30kn = 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 INVESTMENT88,719 = NPV OF CASH FLOWS

88,719, CHS, CfoPUT 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.

ECONOMICS AND REAL ESTATEPROFESSOR HUGH KELLY

SPRING 1990

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ECONOMICS NOTES

1/22/90 HUGH KELLY

REGIONAL ECONOMICS = SUBSET OF ECONOMIC GEOGRAPHY

CLASS 1/22/90 STRUCTURE

1. INTRODUCTION2. SYLLABUS3. DREAMER'S SCALE4. URBANOLOGY BREAK5. REGIONAL ISSUES

ECONOMIC CONCEPT > FILTERED THROUGH> LOCATION OR CITY> SEGMENTED BY PROPERTY TYPE. THIS IS THE CLASS STRUCTURE.

A 15 TO 20 PAGE PAPER WITH TOPIC OF CHOICE RELATING TO REAL ESTATE AND ECONOMICS WILL BE REQUIRED. FOR EXAMPLE: ISLAND IN CRISIS?: THE EFFECTS OF DEFENSE INDUSTRY LAYOFFS ON THE LONG ISLAND ECONOMY AND REAL ESTATE MARKET.

SOURCES: LONG ISLAND ASSOCIATION LONG ISLAND NEWSDAY DEFENSE DEPARTMENT REPORTS GRUMMAN STATISTICS

WHAT SECTORS OF DEFENSE WILL BE HARDEST HIT BY CUTS? WHAT SECTORS OF DEFENSE ARE PRODUCED ON LONG ISLAND? WHAT PLACE DO THESE PLAY IN THE LONG ISLAND ECONOMY? WHAT ELSE IS SIGNIFICANT IN THE LONG ISLAND ECONOMY?

REGIONAL ISSUES:"THE MOST IMPORTANT SENTENCE OF THE SEMESTER", ACC. TO PROF. KELLY.REAL ESTATE IS A RESIDUAL ECONOMIC PRODUCT. REAL ESTATE SHELTERS ECONOMIC ACTIVITY. REAL PROPERTY AS A PRODUCTIVE ASSET RECEIVES ITS VALUE FROM ECONOMIC ACTIVITY. THEREFORE WITHOUT ECONOMIC ACTIVITY REAL ESTATE CAN NOT GROW IN VALUE.

THE COURSE IS AN ELABORATION OF THIS CONCEPT. ALSO:

ALL ECONOMIC FUNCTIONS ARE "SPACE EATERS", THEREFORE THEY ALL HAVE A SPATIAL DIMENSION, BECAUSE ALL ECONOMIC ACTIVITIES ARE SPACE USERS.

ALSO:

IT IS THE NATURE OF CITIES TO BE CENTRAL PLACES OF REGIONS, AND ACT TO FORM ITSELF INTO A HIERARCHY OF SYSTEMS WHICH ACT TO DISTRIBUTE GOODS AND SERVICES.

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END OF CLASS ONE.

CLASS TWO

1/29/90

1. NAME GAME2. PRESENTATION DETAILS3. THEORIES OF URBANIZATION4. GARREAU ON NEW ENGLAND5. HOUSING IN BOSTON

THE PRESENTATION: 15 POINTS5 POINTS EACH FOR COMMUNICATION, ANALYSIS, AND RESEARCHSHOULD ANSWER; "WHAT DOES IT MEAN" AND "HOW DOES IT LAND ON A CITY AND HOW DOES IT DESCRIBE A PROPERTY TYPE".

SUGGESTIONS:1. KNOW THE TOPIC2. STATE THE TOPIC UP FRONT3. STICK TO THE TOPIC

REMEMBER S I M P L I C I T Y 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 - DO NOT RECITE FROM THEM, AND DO NOT USE THEM IN THE VISUALS.

IF YOU USE A HANDOUT, 1. KNOW WHEN TO USE IT. 2. KNOW WHEN NOT TO USE IT. 3. AND KNOW WHEN TO STOP USING IT.

USE THEM BRIEFLY AND MANAGE THEM IN CLASS, OR USE THEM FOR ADDITIONAL INFORMATION.

AND LASTLY,

BE YOURSELF

THEORY OF URBANIZATION

141

THE GATHERING OF PEOPLE INTO CITIES IS IN ITSELF A SIGN OF ECONOMIC DEVELOPMENT. IT IS THE FIRST PROVABLE INSTANCE OF A DIVISION OF LABOR.

CITIES IMPLY: DIVISION OF LABOR (SPECIALIZATION)

MEDIUM OF EXCHANGE- HOW DO YOU KNOW THE VALUE OF WHAT YOU ARE

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 - CONCENTRATION CONTINUED, BUT URBAN POPULATION DECENTRALIZES.

1980 AND BEYOND - SMALLER PROPORTION OF POPULATION LIVING IN URBANIZED AREAS.

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HOW DO DIFFERENT CITIES RESPOND TO THE CONDITION OF CONCENTRATION VERSUS CENTRALIZATION?

FIVE FORCES THAT EFFECT CONCENTRATION AND CENTRALIZATION.

1. OVERFLOW EFFECT - "FILL UP NASSAU COUNTY?, MOVE TO SUFFOLK"

2. TECHNOLOGICAL -AIRPLANES, FAXES, TELEPHONES, AUTOS, HIGHWAYS, AND AIR CONDITIONING.

3. RISE IN LIVING STANDARDS -EFFORT SPENT TO GAIN LIVEABLE INCOME.

4. LIFESTYLE PREFERENCES - CHOICES FOR DISPOSING OF INCOME.

5. PUBLIC POLICY - GOVERNMENTAL DECISIONS WHICH REFORM THE PREVIOUS FOUR FORCES.

GIVE LECTURE ON FEBRUARY 26 ON NEW YORK. SPECIFICS GIVEN NEXT WEEK.

THEORY OF SECTORAL SUCCESSION

"ONCE UPON A TIME USA WAS AN AGRICULTURAL COUNTRY; BUT AS CONCENTRATION OCCURRED, THE NATION BECAME A MANUFACTURING INDUSTRIAL NATION. IN THE 1980'S WE MOVED INTO A POST-INDUSTRIAL ERA WHERE SERVICE ECONOMIES PREDOMINATED. THESE CHANGES ARE CALLED SECTORAL SUCCESSION, AS LABOR IS RETRACKED INTO THE NEXT LEVEL OF ECONOMIC DEVELOPMENT.

AGGLOMERATION

THE TENDENCY OF ECONOMIES AND BUSINESSES OF A SIMILAR CHARACTER TO CLUSTER IN A SMALL AREA AND SUPPORT INDUSTRIES TO CLUSTER AROUND THE CORE INDUSTRIES. AN EXAMPLE IS THE TRADERS, WHICH BRING SHIPPERS, WHICH CAUSES HAZARDS, WHICH INVITE INSURANCE AGENCIES.

FIRMS AS A PACKET OF FUNCTIONS

THINK OF A BUSINESS AS A PACKET OF FUNCTIONS WHICH TIE INTO THE CONCEPTS OF SECTORAL SUCCESSION AND AGGLOMERATION.

EXCESS AND OBSOLESCENCE

FACTORS INCLUDE:o COMPARATIVE ADVANTAGEo ECONOMIC STRUCTUREo CYCLES; "EXCESS PROFIT BREEDS RUINOUS COMPETITION"

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SOURCES FOR COLLECTION OF DATA ON ECONOMIES

1. LOCAL BUSINESS TRADE MAGAZINE OR NEWSPAPER SUCH AS ECONOMIC TIMES OF LONG ISLAND.

2. LOCAL PAPER- SOURCE OF INFORMATION ON WHAT MAKES A COMMUNITY TICK. LOOK AT THE HEADLINES FOR THE PAST TWO YEARS.

3. DATA RESOURCES VERSUS MARKETS REVIEW (MAJOR METRO AREAS) LISTS EMPLOYMENT, DEMOGRAPHICS, PRICE STRUCTURE.4. GOVERNMENT REPORTS5. BEIGE BOOK- FEDERAL RESERVE SYSTEM- EVERY SIX WEEKS MONETARY POLICY GETS COMPILED INFO FROM THE TWELVE FEDERAL RESERVE DISTRICTS ON THE LOCAL ECONOMY.6. TRADE ORGANIZATIONS NATIONAL ASSOCIATION OF REALTORS "HOME SALES" STATES AND METROPOLITAN AREAS AFFORDABILITY INDEXES NATIONAL ASSOCIATION OF HOME BUILDERS "HOUSING ECONOMICS" ECONOMY'S EFFECT ON NEW HOUSING CONSTRUCTION, PACE OF HOUSING CHANGE VS. PACE OF JOB CHANGE.7. SUMMARY DISCUSSION OF MARKETS IE. LANDAUER SALOMON BROTHERS THE EQUITABLE - "EMERGING TRENDS IN REAL ESTATE"8. ACADEMIC RESEARCH - HOUSING FINANCE REVIEW

MEASUREMENT FOR HOUSING AFFORDABILITY

MEDIAN SINGLE FAMILY HOUSE AT 183,300MORTGAGE INTEREST RATE AT 9.5 PERCENTPRINCIPAL AND INTEREST IS THEREFORE 1,236

QUALIFYING INCOME IS (1/.25)X 12 = 59,325MEDIAN INCOME IS 39,000AFFORDABILITY INDEX IS 39 / 59.325 = 65.7 PERCENT

ORDER OF HOUSING AFFORDABILITY FACTORSINCOME AFFECTS HOUSING COST, AVAILABILITY OF HOUSING AFFECTS JOBS, AVAILABILITY OF JOBS AFFECTS MORTGAGE INTEREST

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BOSTON, MASSACHUSETTS, USA

GARREAU DOES NOT FULLY EXAMINE THE FACTORS OF EXCESS AND OBSOLESCENCE IN LOOKING AT NEW ENGLAND.

BOSTON HOUSING TRENDS HAVE BEEN VOLATILE. WHEREAS, FOR EXAMPLE, 1985 HAD A 185,000 GAIN IN EMPLOYMENT 1987 GAINED ONLY 50,000.

THERE HAVE BEEN HUGE SURGES AND VALLEYS IN THE JOB GROWTH OF THE AREA WHILE HOUSING STARTS HAVE BEEN RELATIVELY EVEN.

RELATIVE AFFORDABILITY IS A PROBLEM. THE MAPS SHOW DECENTRALIZATION DUE TO THE LACK OF AVAILABILITY OF LAND. ALSO, THE CITY IS AGING AND REDEVELOPMENT IS STRINGENTLY REVIEWED, CAUSING DELAYS IN CONSTRUCTION.

END OF CLASS TWO

CLASS THREE 2/5/90

1. HOUSE KEEPING2. TERM PAPERS3. BOSTON CATCH-UP4. INTO TO PITTSBURGH AND INDUSTRIAL PROPERTIES5. SOURCES FOR INDUSTRIAL PROPERTIES STUDIES6. TAXONOMY OF INDUSTRIAL PROPERTY

TERM PAPER IS DUE THE 11TH WEEK OF THE COURSE. NEXT MONDAY, HAVE A PARAGRAPH TO EXPLAIN THE TOPIC. LATE PAPERS ARE ACCEPTABLE WITHOUT PENALTY. PROF. KELLY ONLY ASKS FOR FAIR WARNING THAT PAPER WILL BE LATE, AND HE CAN NOT GUARANTEE THAT THE PAPER WILL BE REVIEWED AND GRADED PRIOR TO THE FINAL EXAM.

AS FOR THE TOPIC OF THE PAPER, IT SHOULD PERTAIN THE COURSE BY CONCERNING ITSELF WITH AN ECONOMIC BASE AND A REAL ESTATE APPLICATION IN A FINITE LOCATION, SUCH AS A METROPOLITAN AREA.

PAST TOPICS:AFFORDABLE HOUSING AND RENTAL OPPORTUNITIES IN STAMFORD.JAPANESE DOMINANCE IN THE U.S. REAL ESTATE MARKET.LONG ISLAND CITY - THE REGENERATION OF AN INDUSTRIAL TOWN.MACROECONOMIC INFLUENCES ON SHOPPING DEVELOPMENT.IMPACT OF ZONING ON THE GARMENT DISTRICT.AFFECT OF REAL ESTATE FAILURES ON THE SAVINGS AND LOAN INSTITUTIONS.

INTRODUCTION TO PITTSBURGH

STEEL MANUFACTURING IS IN PITTSBURGH BECAUSE ACCESS TO COAL IS GOOD, WHICH REDUCED TRANSPORT COSTS IN PRODUCING STEEL.

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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 LIVINGTRENDS IN JOBSLOCAL CRIMETHE AMOUNT AND QUALITY OF HEALTH CARETRANSPORTATIONEDUCATIONENVIRONMENTARTS 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.

146

THE SOCIETY OF INDUSTRIAL AND OFFICE REALTORS HAS A GUIDE TO INDUSTRIAL AND OFFICE REAL ESTATE WHICH SUPPLIES RELIABLE DATA.

AREA DEVELOPMENT MAGAZINE IS AVAILABLE FOR CORPORATE REAL ESTATE EXECUTIVES.

BUSINESS FACILITIES MAGAZINE TARGETS THOSE INDUSTRIAL USES ON THE HIGH END OF THE TAXONOMY SCALE.

DEVELOPMENT MAGAZINE

PLANTS, SITES, AND PARKS MAGAZINE SPECIALIZES IN HEAVY DUTY INDUSTRIAL PARKS.

GOVERNMENT SOURCES ARE NOT RELIABLE SO DO NOT DEPEND HEAVILY ON THEM.

LOCAL ECONOMIC DEVELOPMENT GROUPS ARE VERY HELPFUL, HOWEVER.

LOCAL UTILITIES ARE GOOD SOURCES OF INFORMATION, PARTICULARLY LILCO, AND PSE&G.

LOCAL CHAMBER OF COMMERCE

*****************************************

HANDOUT GIVEN ON INDUSTRIAL USES

*****************************************THE TAXONOMY OF INDUSTRIAL PROPERTY

ANALYZE THE:o CHAIN OF PRODUCTIONo SPECIFIC FACILITY REQUIREMENTSo DIVERSE GEOGRAPHIC PROFILES

THERE ARE 5 KINDS OF INDUSTRIAL PROPERTY

LABOR 1. RESEARCH AND DEVELOPMENT - WHAT DO I NEED TO MAKE, AND HOW DO I DRIVEN MAKE IT.

2. FABRICATION - HOW; I GET THE MATERIALS TO CREATE A SEMI- FINISHED PRODUCT OR ITS PARTS.

3. ASSEMBLY - ASSEMBLE PARTS INTO A USEABLE PRODUCT .

************************************************************************MARKET DRIVEN

4. DISTRIBUTION - WAREHOUSING; I HAVE GO TO GET IT TO THE MARKET FROM WHERE I HAD IT ASSEMBLED.5. DISPLAY - DISPLAY THE PRODUCT AND SELL IT ON THE WHOLESALE

LEVEL; HOW DO I GET MY PRODUCT TO THE STORES IS THE QUESTION THAT

147

THE DISPLAY LEVEL OF INDUSTRIAL BUILDING TAXONOMY ANSWERS.

RESEARCH AND DEVELOPMENT FACILITIES REQUIRE A RESEARCH ENVIRONMENT SUCH AS THOSE PROVIDED IN RESEARCH INSTITUTIONS OF HIGHER LEARNING WHERE LARGE GOVERNMENT GRANTS ARE SPENT IN RESEARCH. THEY REQUIRE THE HIGHLY SKILLED WORKERS THAT THESE INSTITUTIONS USUALLY PRODUCE, AND NEED TO BE LOCATED NEAR SOURCES OF VENTURE CAPITAL OR MONEY CENTERS. RESEARCH AND DEVELOPMENT FACILITIES HAVE BEEN OVERBUILT PRECISELY BECAUSE THEY ARE SO GLAMOROUS, WHILE CONCURRENTLY HAVING BEEN BUILT IN AREAS WHICH DO NOT HARBOR THE ABOVE QUALITIES. A MARKET MAY BE OPENING FOR REHABILITATION OF THESE BUILDINGS INTO OFFICE USES OR OTHER TYPES OF INDUSTRIAL USES.

FABRICATION FACILITIES REQUIRE SKILLED BLUE COLLAR LABOR, GOOD ACCESS TO TRANSPORTATION, GOOD SCHOOL EDUCATION, ACCESS TO MATERIALS, PROXIMITY TO THE POPULATION CENTROID OF ITS MARKET. THE FURTHER YOU GET DOWN THE CHAIN OF PRODUCTION, THE CLOSER YOU NEED TO BE NEAR A POPULATION CENTROID. THE HISTORY OF LABOR RELATIONS IS A FACTOR.

ASSEMBLY - LOW LABOR COSTS ARE IMPORTANT, SKILLED LABOR IS NOT AS IMPORTANT. HIGH SCHOOL GRADUATES AND BELOW. ONE OF THE MOST VULNERABLE SECTORS OF INDUSTRIAL U.S.A. DUE TO WAGE STRUCTURE AND COMPETITION FOR ASSEMBLY FROM OVERSEAS.

DISTRIBUTION - WAREHOUSING; DO NOT NEED MANY WORKERS. NEED EFFICIENT AND CHEAP SPACE IN GOOD LOCATIONS. NEED EFFICIENCY IN REACHING THE END MARKET. YOU WANT THE DISTRIBUTION CENTER TO BE NEAR THE SOURCE OF DEMAND, NOT THE SUPPLY.

DISPLAY - CLOSENESS TO THE MARKET IS IMPORTANT. CONSISTS OF SHOWROOMS, TRADE SHOWS, AND MERCHANDISE MARTS. PROXIMITY TO MARKET MAKERS (BUYERS) OF AN INDUSTRY IS IMPORTANT. CONVENIENT TRANSPORTATION, LOTS OF GOOD HOTELS, AND LOTS OF AVAILABLE ENTERTAINMENT IS IMPORTANT.

END OF CLASS THREE

CLASS FOUR2/12/90

AGENDA1. QUIZ2. MORE ON INDUSTRIALS BREAK3. PRESENTATION4. THE TWO SOUTHS5. ATLANTA; THEIR CAPITAL

QUESTIONS YOU ASK WHEN RESEARCHING FEASIBILITY FOR INDUSTRIAL LOCATIONS

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INCLUDE;

WHY ARE THE INDUSTRIES WHERE THEY ARE? HOW DO THEY FIT INTO THEIR LOCATION? WHAT MAKES FOR A GOOD MARKET FOR INDUSTRIAL PROPERTIES?

REVIEW;TWO TYPES OF INDUSTRY, LABOR DRIVEN AND MARKET DRIVEN.

5 CATEGORIES OF INDUSTRY;RESEARCH AND DEVELOPMENT*FABRICATIONASSEMBLY*DISTRIBUTION*DISPLAY

* WE STUDY THESE CATEGORIES TONIGHT FOR SPECIFIC COMPARATIVE FACTORS FOR ANALYSIS.

SOME ELEMENTS THAT SHOULD BE REVIEWED IN DETERMINING R&D LOCATIONS.

ABSORPTION QUALITY OF LIFEVACANCY RATE HIGH TECH IND. LOCALLYJOB GROWTH R&D "BALANCE" SCHOOLS FEASIBILITY OCCUPATIONAL RATIO YIELDS

RESEARCH AND DEVELOPMENT PROPERTIES:

FLEXIBILITYNICE ENVIRONMENTSTATE-OF-THE-ART EQUIPMENT

ALL OF THESE CAUSE LARGE AMOUNTS OF CAPITAL TO BE AT RISK WHEN CONSTRUCTION R&D SPACE. IT COSTS 2 1/2 TO 3 TIMES THE AMOUNT OF PLAIN VANILLA WAREHOUSING.

SYNONYMS FOR R&D SPACE; FLEX SPACE, HI-TECH SPACE.

MANY THINGS IMPACT THESE FACILITIES BECAUSE THEY ARE ASKED TO DO SO MUCH. THEREFORE, THEY ARE SUBJECT TO GREATER AMOUNTS OF VARIABLES THAN EVEN THAT FOUND IN A SKYSCRAPER MARKET, WHICH IN NEW YORK IS HOMOGENOUS AND RELATIVELY PREDICTABLE.

FACTORS FOR R&D REAL ESTATE:

1. ABSORPTION- CRITICAL MASS- NEED A LOT OF INTERACTION WITH PEERS. NEED

149

TO BE NEAR ALL OF THE OTHER R&D MARKETS. THE GREATER THE ABSORPTION OF R&D REAL ESTATE IN A GIVEN MARKET RELATIVE TO OTHER TYPES OF INDUSTRIAL REAL ESTATE, THE BETTER IT IS AS A LOCATION FOR R&D.

2. VACANCY RATES: DIFFICULT TO GET INFORMATION ON THIS SPECIFIC TO RESEARCH AND DEVELOPMENT MARKET. BUT THIS IS IMPORTANT.

3. R&D BALANCE: IS THE MARKET OVER-SUPPLIED, UNDER SUPPLIED, OR ABOUT RIGHT. IF YOU TAKE FIGURES ON THE BALANCE, YOU CAN COMBINE IT WITH ABSORPTION RATES TO DETERMINE PRETTY GOOD ESTIMATES FOR THE VACANCY RATES FOR RESEARCH AND DEVELOPMENT INDUSTRIAL REAL ESTATE.

4. JOB GROWTH IN THE MANUFACTURING SECTOR. IF YOU SEE GROWTH IN MANUFACTURING SECTOR, THEN THERE IS PROBABLY GROWTH IN THE R&D SEGMENT OF THE MANUFACTURING SECTOR. R&D WORKERS ARE COUNTED UNDER THE MANUFACTURING SECTOR IN THE CENSUS. R&D LIKES TO BEAR SOME RELATIONSHIP TO THE ASSEMBLY AND FABRICATION FUNCTIONS. WHERE THE WIDGETS ARE MADE AND GROWING, THE FIELD IS RIPE FOR R&D DEVELOPMENT.

5. OCCUPATIONAL RATIO: WHITE COLLAR WORKERS/BLUE COLLAR WORKERSGROWTH IN MANUFACTURING AND A GREATER THAN NORMAL DISTRIBUTION OF WHITE COLLAR WORKERS IS A GOOD MARKET FOR R&D. WHEN TAKEN TOGETHER WITH MANUFACTURING SECTOR GROWTH, THIS IS A GOOD INDICATION OF R&D POTENTIAL.************************

S.O.C. = STANDARD OCCUPATION CLASSIFICATION; DESCRIBES BLUE COLLAR AND WHITE COLLAR WORKERS BREAKDOWN.

WHITE COLLAR BLUE COLLAR MANAGERS AND ADMINISTRATION SERVICESPROFESSIONAL/TECHNICAL WORKERS LABORERSSALES OPERATIVESCLERICAL 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.

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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 FUNCTIONAREAS 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; RELATIVE TO OTHER INDUSTRIAL USES.

WAGES; STORING GOODS DOES NOT REQUIRE MANY EMPLOYEES, THEREFORE WAGES

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ARE NOT AN IMPORTANT ELEMENT FOR WAREHOUSING TYPES OF INDUSTRIAL REAL 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; FOR HIGHWAY INTERSECTIONS, RAIL LINES, AIRLINES.

FEASIBILITY / YIELDS; COST VS. PRICE AND RENT VS. PRICE SHOULD BE 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

152

ONLY IN FLORIDA (101%) AND VIRGINIAN (107%); THE OTHERS WERE BELOW, AS LOW AS 66% IN ALABAMA.

UNEMPLOYMENT RATE IN U.S. IS AVERAGE OF 5.4%. VIRGINIA AND NORTH CAROLINA ARE BELOW AT 3.7% AND 3.2%.

***********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. MARKET NEED2. TECHNICAL FEASIBILITY3. CAPITAL4. POLITICAL WILL

END OF CLASS 4

CLASS FIVE 2/26/90

1. PRESENTATIONS2. SYNOPSIS OF REGIONAL CYCLES OF ECONOMY3. BREAK4. NUMBERS (HOW TO ESTIMATE, WITH STATISTICS, OFFICE EMPLOYMENT)

FOR NOTES ON PRESENTATIONS SEE NOTEBOOKMONTREALLONG ISLANDN.Y.C. OFFICE MARKET

MONTREAL1.1 MILLION PEOPLEMONTREAL URBAN COMMUNITY (MUC) 1.7 MILLION PEOPLE3.8 MILLION IN CANADIAN CENSUS DISTRICT

153

MONTREAL IS AN ISLAND WITH 28 DISTRICTS AND 28 MAYORS UNITED UNDER THE MUC.

BREAK.*********

THE DEVELOPMENT OF MANHATTAN'S R.E. ECONOMY

1. THE ERA OF URBAN OPTIMISM (1960 - 1967)2. THE TIME OF STRESS AND STRAIN (1967 - 1973)3. CRITICAL ERA (1974 - 1979)4. RECOVERY PERIOD (1977 - 1987)5. ADJUSTMENT TO EXCESS PERIOD (1987 - PRESENT - ?)

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 PROGRAMLET'S SOLVE PROBLEMS ATTITUDE (I.E. MOON LAUNCH, CITY BEAUTIFUL MOVEMENT)LOW UNEMPLOYMENTNO RECESSION1969- PEAK EMPLOYMENT LEVELS IN N.Y.C.

STRESS AND STRAIN

OCCUPANCY RATES LOW, RENTS RISE1968- KENNEDY AND KING SHOT ; LONG HOT SUMMER1969- DOW JONES FALLS SHARPLY37% DECLINE IN STOCK MARKET-BAD NEWS FOR THE CITY1971-100,000 JOB RATE IN FIRE INDUSTRIESRESIGNATION OF PRESIDENT, INDICTMENT AND RESIGNATION OF V.P.EMBARRASSING WITHDRAWAL FROM VIET NAMINFLATION 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

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100,000 WALL STREET JOBS DROP TO 69,000. CORPORATIONS LEAVE THE CITY. 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 TO U.S. GOVERNMENT: "WE NEED HELP" TO N.Y.C. : FORD TO CITY; DROP DEAD

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

1. NEW YORK CITY NUMBERS*2. BREAK3. MIAMI PRESENTATION4. HOTELS*EXPECT TO SEE THOUGHT PROCESS OF "NEW YORK CITY NUMBERS" ON TEST

LATIN AMERICA/MIAMI CONNECTIONS1962-1980 CUBANS (27K ARRIVED PER YEAR)1970 300,000 CUBANS1985 780,000 CUBANS1990 1,000,000 CUBANS

85% OF LATIN POPULATION OF MIAMI IS CUBAN30% OF 3.25 MILLION PEOPLE IN MIAMI ARE LATINO

BUSINESS ATTRACTED TO MIAMI BECAUSE OF ITS CONNECTIONS TO LATIN AMERICA120 MULTI-NATION CORPORATIONS IN SOUTH FLORIDAAIRLINE CONNECTIONS AT AIRPORT HELP GROWTH

155

1987 REAGAN CARIBBEAN BASIN INITIATIVERESTRUCTURING OF LATIN DEBT THROUGH DEBTOR COMPANIES

FLORIDA EXPORTS FELL WHILE LATIN IMPORTS INCREASEDMIAMI IS BANKING CENTER OF LATIN AMERICA LARGELY BECAUSE SPANISH IS SPOKEN AS A SECOND LANGUAGE IN MIAMI.

OLYMPIA AND YORK HAS A FINANCIAL CENTER IN MIAMI

BY 1985, MIAMI HAD CHANGED FROM A TOURISM CENTERED CITY TO A BUSINESS LINK TO SOUTH AMERICA

****************************************************NEW YORK CITY NUMBERS**************************************************************************

THE LANDAUER MOMENTUM INDEX

N= MOMENTUM FIGURE THE DEMAND SIDE THE SUPPLY SIDE

N= FORECAST OF OFFICE EMPLOYMENT X MARKET INVENTORY CURRENT OFFICE WORKFORCE (VACANCY + RECENT CONSTRUCTION

WHICH IS TRUE IF THE INVENTORY IS GROWING FASTER THAN THE WORKFORCE. IF THE WORKFORCE IS GROWING LARGE THAN THE INVENTORY, THE OPPOSITE IS TRUE.

ESTIMATED MANHATTAN OFFICE EMPLOYMENT*************************************IF FOR INDUSTRY A

W/T > M/T AND W = WHITE COLLAR JOBST = TOTAL NEW YORK CITY JOBSM = MANHATTAN JOBS IN THE INDUSTRY

THEN; MANHATTAN OFFICE JOBS = {M*(W/T)} + [{M*(1-(W/T))}*{M/T}]

156

= MANHATTAN + ┌OCCUPATIONAL * CONCENTRATION─┐ BASIC SHARE │RESIDUAL FACTOR │

└─ ─┘W/T = RATIO OF WHITE COLLAR JOBSMANHATTAN BASIC SHARE IS THE 'FLOOR' OF YOUR ESTIMATE. IT IS THE MINIMUM AMOUNT OF EMPLOYMENT IN INDUSTRY IN MANHATTAN

OCCUPATIONAL RESIDUAL IS A BUNCH OF PEOPLE WHO WORK IN AN INDUSTRY IN MANHATTAN WHOSE OCCUPATION YOU DO NOT KNOW YET. HOW MANY OF THEM WILL BE MANHATTAN OFFICE WORKERS IS THE QUESTION THIS FORMULA TRIES TO ANSWER.

CONCENTRATION FACTOR IS THE DEGREE TO WHICH THE INDUSTRY IS PRESENT IN MANHATTAN.

THE HYPOTHESIS IS THAT MANHATTAN HAS AT LEAST AS GREAT A SHARE OF AN INDUSTRY AS ANOTHER AREA IN NEW YORK CITY. THE UPPER LIMIT IS THAT THERE ARE NEVER MORE THAN THE TOTAL WHITE COLLAR EMPLOYMENT IN MANHATTAN, AND THAT THERE ARE NEVER LESS THAN THE TOTAL WHITE COLLAR JOBS IN A PARTICULAR INDUSTRY.

EXAMPLE;GIVEN THE MEMBERSHIP ORGANIZATION INDUSTRY, WHICH ARE GROUPS LIKE TRADE ASSOCIATIONS AND LOBBYISTS.

W= 148,800T= 172,000M= 74,300

W/T= 86.1%M/T= 43.0%(74,300 X 0.861) + ((74,300 X (1-0.861))) X (0.43)= 63,972 + (10,328 X 0.43)= 63,972 + 4,441= 68,413 = ANSWER; THERE ARE 68,413 IN MEMBERSHIP INDUSTRY MANHATTAN OFFICE EMPLOYMENT

NOTE THAT 68413>63,972

IF FOR INDUSTRY B; APPARELW/T < M/T

THEN;

MANHATTAN OFFICE JOBS = {M*(W/T)} + {(W-(M*(W/T)))*{M/T}} ─┐

157

= MANHATTAN │LOCATIONAL * CONCENTRATION│ BASIC SHARE + │RESIDUAL FACTOR │ └─ ─┘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=34,800M=71,600T=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 = 31,705ANSWER; THERE ARE 31,705 APPAREL WORKERS IN MANHATTAN OFFICES

END OF CLASS SIX

CLASS SEVEN ; 3/19/90

CLASS HOSTED BY JACQUES GORDONSUBSTITUTING FOR HUGH KELLY

MICRO ANALYSIS OF REAL ESTATE MARKETSI. MARKET AREA CHARACTERISTICS

A. DEMOGRAPHICSB. ECONOMIC BASE ANALYSISC. LOCAL GOVERNMENT/REGULATORY ENVIRONMENTD. QUALITY OF LIFE ISSUESE. INFRASTRUCTURE ISSUESF. DETAILED ANALYSIS OF MICRO ENVIRONMENT

MICRO ANALYSIS DEALS WITH A SPECIFIC GEOGRAPHY

II. DEMAND ANALYSISIII. SUPPLY ANALYSISIV. EVALUATION OF MICRO-MARKET RESEARCHPART 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

158

AREA UNDER CONSIDERATION IN THE MICRO ECONOMIC STUDY.

MACRO TRENDS

A NATION OF CONSUMERSSAVINGS RATE VS. CONSUMPTION RATES; INTERNATIONAL COMPARISONSRETAIL...A GOOD INVESTMENT?THE DEPARTMENT STORE...FOR SALERETAILER LOYALTY VS. BRAND LOYALTY VS. NO LOYALTY

UNDERSTANDING THE CONSUMER

CYCLICAL DEMAND VS. RECESSION-RESISTANT DEMANDLANCASTRIAN DEMAND FOR HETEROGENOUS DURABLE GOODSREAL 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 8 8.5

5 15 11 9 12

DEPARTMENT STORE FOR SALE

159

ANCHORS CONTRIBUTE LESS THAN 5 TO 10 PERCENT OF CASH FLOW IN A MALL. 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 OUTLETSHOPPING VS. ENTERTAINMENT?TRAFFIC: THE SINE QUA NON OF RETAILING

YOU HAVE GOT TO HAVE TRAFFIC TO GET YOUR LOCATION NOTICED. YOU CAN:1. START WITH THE RIGHT LOCATION2. MAKE PROMOTIONS3. PROVIDE SHOPPING AS ENTERTAINMENT

160

TRADE AREA ANALYSIS

MEASURING DEMAND: DETERMINE TRADE AREAS, EFFECTIVE BUYING INCOME, DISPOSABLE INCOME, DEMOGRAPHICS.

PSYCHOGRAPHICS, SEGMENTATION MODELS, MARKET SHARE, ZERO-SUM OR EXPANSION, SHOPPER DEMAND VS. TENANT DEMAND VS. INVESTOR DEMAND.

MEASURING SUPPLY: IDENTIFYING CURRENT COMPOSITION. IDENTIFYING FUTURE COMPETITION. PERCENTAGE RENTS, BREAK POINTS, VACANCY RATES AND ABSORPTION.

CHICAGO:

SUCCEEDED BECAUSE OF RAILROADS.

TWO MAJOR SHOPPING DISTRICTS:NEW ONE IS NORTH MICHIGAN AVENUE

CHICAGO KNOWN FOR ITS LAW FIRMS AND ADVERTISEMENT AGENCIES AND FOR ITS MERCHANDISING MARTS FOR THE MIDWEST.

4 MAJOR OFFICE MARKETS:EAST-WEST TOLLWAY HIGH TECH CORRIDORSCHAUMBERG (CENTERED AROUND 2.5 M S.F. MALL)O'HARE (AIRPORT CENTERED)EDENS CORRIDOR (AROUND EXPRESSWAY)

RIVERVIEW SPACE HAS PREMIUM. THEIR ARE NO LAKE VIEWS DUE TO PLANNING DECISIONS BY DANIEL BURNHAM IN THE 1920'S.

3/26/90CLASS EIGHT

1. MINNEAPOLIS2. PRESENTATIONS3. TECHNOLOGY BREAK4. RETAIL MATRIX5. VARIABLES

THE SMART BUILDING: LIGHTING, HEATING, AIR CONDITIONING, VOICE AND DATA COMMUNICATION ARE COORDINATED IN A SMART BUILDING TO MAXIMIZE OCCUPANT PERFORMANCE.

161

MINNEAPOLIS CHARACTERISTICS

1. HEADQUARTERS CITY2. REGIONAL CENTER3. TECHNOLOGY EMPHASIS4. EXCELLENT SCHOOLS5. GOOD NATIONAL ACCESS6. ANCILLARY SYSTEMS AND QUALITY OF LIFE

HI-TECHNOLOGY

PRODUCERS AND USERS....WHO ARE THEY?

PRODUCERS ELECTRIC MACHINERYINSTRUMENTSTRANSPORTATION EQUIPMENTCOMMUNICATIONSCOMPUTER SERVICES

USERS VIRTUALLY ANYONEMANUFACTURING, ROBOTICSTRADE, INVENTORY TRADINGF.I.R.E., E.F.T. (ELECTRONIC FUNDS TRANSFER) AND ALL OPERATIONSBIO-MEDICINELEXIS/NEXISETC.

SMART BUILDINGS

TECHNOLOGY ENHANCED:1. TENANT SERVICES2. BUILDING SYSTEMS

TENANT SERVICES:1. VIDEOCONFERENCING2. PBX (PRIVATE BRANCHING EXCHANGE)3. LEAST-COST LONG DISTANCE CALLING4. DATA AND WORD PROCESSING5. SYSTEMS CONSULTING6. SERVICES AND MAINTENANCE7. WIRING SCHEME8. EXTERNAL COMMUNICATIONS

OLYMPIA & YORK IS KNOWN FOR ITS PROVISION OF CLASS A SMART BUILDINGS.

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THEY OFFER, FOR EXAMPLE, TELECONFERENCING BETWEEN ITS LEASEHOLDS IN THE FOLLOWING CITIES.

BOSTON, SPRINGFIELD, HARTFORD, N.Y.C., DALLAS, PORTLAND, LOS ANGELES, AND SAN FRANCISCO.

TECHNOLOGICALLY ENHANCED PROJECTS SEEM TO CENTER IN LARGER CITIES. NOTE THE FOLLOWING TABLE:

NUMBER OF TECHNOLOGICALLY ENHANCED PROJECTS (N=118)

NYC =19DALLAS =18WASH. D.C.=14CHICAGO =12S.FRANC = 6 L.A. = 5

__________________________SUBTOTAL = 74OTHERS = 44

% │ ┌────┐40│ │ │30│ │ │ ┌────┐ NUMBERS OF HIGH TECH PROJECTS20│ │ │ │ │ MOST CONCENTRATED IN OFFICE TYPES. 10│ │ │ │ │ ┌────┐0 │ │ │ │ │ │ │──┴───┴────┴───────┴────┴────────┴────┴────────── CBD SUBURBS N.C.BUILDING SYSTEMS

1. HVAC2. ENERGY MANAGEMENT3. LIFE SAFETY / FIRE4. SECURITY

ALL OF THESE SYSTEMS ARE BECOMING STANDARDS INDUSTRY-WIDE.

SERVICES COME FROM STREET AND EXTEND THROUGH THE BUILDING. DUMB BUILDING BRING IT UP THROUGH THE ELEVATOR CORE. THEY HAVE:

SINGLE TELEPHONE SYSTEMSRISERS IN THE CORE ONLYLONG CABLE RUNSMINIMAL CLOSET CAPACITY

SMART BUILDINGS ARE DIFFERENT. THEY:PUT RISERS AT THE PERIMETER, AWAY FROM ELEVATOR CORE VIBRATIONSHAVE MULTIPLE SYSTEMS FOR REDUNDANCY

163

HAVE DISPERSED RISERSHAVE SHORT CABLE LENGTHSHAVE LARGE CAPACITY CLOSETS

**************RETAIL MATRIX************** median 100─────────────────┬────────────────────┐ │ │ │ │ │ │ │ │ │ │ │ BEST (SEEK OUT) │ │ │ │ │ │ │ │ │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?

164

INFORMATION IS FOUND IN CACI, CENSUS, ETC.

33% WEIGHT TO AMOUNT OF INCOME THAT IS CAPTURED. (SALES & MARKETING MANAGEMENT MAGAZINE)

33% WEIGHT GIVEN TO INVENTORY OF STORE AREA IN MARKET (DODGE, SHOPPING CENTER DIRECTORY)

OFTEN, PER CAPITA INCOME AND RETAIL SALES MAY NOT CORRELATE.

(GROWTH)30% WEIGHT GIVEN TO 5 YEAR GROWTH IN RETAIL SALES

30% WEIGHT GIVEN TO 5 YEAR GROWTH IN GENERAL APPAREL, FURNITURE SALES / S.F. OF AREA.

20% OF WEIGHT GIVEN TO PROJECTED GROWTH IN INCOME (JOB GROWTH AND INCOME MEASURE BASE BETTER THAN DEMOGRAPHIC)

20% GIVEN TO SCALE OF RATIO OF NEW STORES CONSTRUCTION AGAINST EXISTING INVENTORY. LESS IS BETTER BECAUSE THERE IS MORE BUSINESS TO SHARE. (DODGE DATA)

MAKE THE SYSTEM BETTER BY TESTING PERFORMANCE OF ARRAY AGAINST THE ACTUAL MARKET CONDITIONS.

THIS IS MEASURED BY "HOW GOOD IS THE INVESTMENT" AS MEASURED BY CAP RATE, SALES PER S.F., AND IRR.

THE DIFFERENCE BETWEEN REVENUE AND INCOME IS:

MEASURE OF PRODUCTIVITY = REVENUEMEASURE OF OPERATIONS = INCOME

END OF CLASS EIGHT

CLASS NINE4/2/90

1. PRESENTATIONS2. ECONOMIC BASE3. BACK TO EDEN ARTICLE4. AGRIBUSINESS5. DEVELOPMENT PRESSURES

***********************************BREAK BULK WAREHOUSING VS. BULK WAREHOUSING

165

BREAK BULK WAREHOUSING IS USED WHEN GOODS ARE BROKEN DOWN AND DISTRIBUTED 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 HONEYWELLHALLMARK CONTROL DATAFORD MOTORS UNISYSARMCO STEEL 3MOLIN PILLSBURY

INDUSTRY+++++++++++++++++++++++++++++++MANUFACTURING

UNITED TELECOM CONTROL DATAFARMLAND INDUSTRIES UNIVERSITY OF MINNESOTAST. LUKES HOSPITAL NORWEST BANKTWA MAINTENANCE NORTHWEST AIRUTILITIES DAYTON HUDSON

KANSAS CITY HAS A BROAD ORIENTATION WHILE MINNEAPOLIS HAS A HIGHLY TECHNOLOGICAL ORIENTATION.

::::::::::::::::::::::::::::::::::::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 FOR BREADTH, EXAMINE THE LINKAGES OF THE ECONOMY.

166

AGRONOMISTS, VETERINARIANS, CROP DUSTERS, EQUIPMENT MANUFACTURERS, EXTENSION AGENTS AND LAND BROKERS, AS WELL AS HARVESTERS, TRUCKERS, PROCESSORS, WHOLESALERS, AND COMMODITY BROKERS MAY APPEAR IN WIDELY VARIANT SIC CODES, BUT ALL DEPEND ON AND ARE LINKED WITH THE WELL-BEING OF FARMING, AND ARE AFFECTED BY IT.

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 DISCUSSEDSEE OUTLINED PARAGRAPH ON PAGE 57

********************************

"FARM STRUCTURE" FROM FEDERAL RESERVE BANK BULLETIN OF KANSAS CITY. A GREAT SOURCE OF LOCAL INFO FOR EACH FEDERAL RESERVE DISTRICT. 100 ┌──M───┐ ┌──M───┐ ┌───────┐ │ ├──L───┤ ├──────┤ │ │ │ ├──────┤ │ │ │ M │ │ │ MED │ │ │ │ │ │ ├──────┤ │ │ │ │ 75 │ │ │ L │ │ │ │ │ │ │ │ │ │ │ │ │ │ │ ├───────┤ │ │ S │ ├──────┤ │ │ │ │ │ │ MED │ │ L │ 50 │ │ │ │ │ │ % │ │ │ ├──────┤ │ │ │ │ │ │ │ │ │ 25 │ │ │ S │ ├───────┤ │ │ │ │ │ │ MED │ │ │ │ │ │ ├───────┤ └──────┴──────┴────────────┴──────┴───────────────┴──S────┴─

167

NO. OF FARMS DEBT NET INCOME

M = MEGA; L = LARGE; MED = MEDIUM; S = SMALL

# OF FARMS SIZE % OF OVERALL FARM DEBT SALES GROSS

75% SMALL 20 UP TO 40,00012% MEDIUM CARRY 18% OF DEBT/10% OF INCOME 40 TO 100,00012% LARGE HAVE 40% OF DEBT/40% OF INCOME 100 TO 500,0001% MEGA HAVE 22% OF DEBT/40% OF INCOME OVER 500,000

LARGE FARMS BENEFIT FROM ECONOMIES OF SCALE.

HOW DO SMALL FARMS STAY IN BUSINESS?

IN REAL ESTATE, THERE ARE TWO COMPONENTS OF RETURN:

1. APPRECIATION2. INCOME

│ 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.

168

SEE FIGURE 2.15, THE SIGMOID CURVE OF POPULATION ECOLOGY

* * * * P │ * O │ * P │ * U │ * L │ * A │ * T │* * * I └───────────────TIME──────────────────────── O NAS 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

169

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 POSSIBLE2. LEGALLY PERMISSIBLE3. FINANCIALLY FEASIBLE4. MAXIMUM PRODUCTIONEND OF CLASS NINE

CLASS TEN WAS NOT ATTENDED DUE TO PASSOVER HOLIDAY4/16/90

THIS CLASS WAS ON DALLAS.

DALLAS - DIVERSIFICATION

DALLAS/ATLANTA COMPARISON

170

REGIONAL TRANSPORTATION CENTERSRAIL TRAFFIC JUNCTIONCENTER OF SUPPLY/RESOURCES FOR THE REGIONSCONVERGENCE OF REGIONS

DALLAS - MEXAMERICA - LABOR RESOURCEBREAD BASKET INFLUENCE (COTTON)EMPTY QUARTER (WEST AND NORTH)OIL RESOURCES

BASIS FOR DIVERSIFICATIONALL ABOVE LINKAGES ARE RESOURCE LINKAGES

RESOURCE BASE ECONOMIES NEED TO BECOME IMPORT BASE ECONOMIES AND GENERATORS OF GREATER NUMBER OF GOODS

RESOURCE BASED ECONOMIES ARE BOOM AND BUST ECONOMIES

DEPENDENT ON AVAILABILITY AND DEMAND FOR RESOURCES

DALLAS - IMPORTANT DEFENSE COMPONENT IN AEROSPACE

GROWS THROUGH OTHER ECONOMIC RECESSIONSGOVERNMENT SUPPLIES FUNDS SHIELDED FROM MANUFACTURING DOWN TURNS BECAUSE GOVERNMENT IS BUYER OF ITS GOODS.

74-75 RECESSION CAUSED BY OIL AND GAS PRICES81-82 RECESSION OIL EMBARGO GOOD FOR TEXASTEXAS BELIEVES THAT IT IS RECESSION PROOF

LOW ENERGY COST OF 84-86 BAD FOR TEXAS AND GOOD FOR THE NATIONAL ECONOMYDIVERSE ECONOMIES HAVE A NUMBER OF ECONOMIC PROCESS WITH ITS OWN SET OF LINKAGES WHICH ACT AUTONOMOUSLY.

DALLAS EXPORT INDUSTRIES------------------------OIL AND GASFABRICATED METALSMACHINERYPIPELINESFINANCELEGALBUSINESS SERVICES

ALL ARE RELATED TO OIL: IT IS AN INVERTED PYRAMID ECONOMY

COMPLEX AND DIVERSIFIED ECONOMIESMIX OF COMPONENTS AND ECONOMIC PROCESSES

171

1. TRADING ECONOMY2. GOODS PROCESSING BASED ON LOCAL ECONOMY3. IMPORT REPLACEMENT- DO NOT BE DEPENDENT ON GETTING FINISHED GOOD FROM OUTSIDE, NEED TO EXPORT SOME FINISHED GOODS

LESS DIVERSIFIED ECONOMYBOSTON- SHOE MAKING MILL ECONOMYNON-DIVERSIFIED70'S DIVERSIFY-DEFENSE, ELECTRONICS AND COMPUTERS

DIVERSIFIED ECONOMIC BASE MEANS DIFFERENT PROCESSES AND COMPONENTS

REFER TO SIGMOID CURVE:IT ALSO APPLIES TO ECONOMIC DIVERSIFICATION

IN THE BEGINNING THERE IS A LOW LEVEL OF POPULATION WITH LITTLE INTERACTION. IT GROWS OVER TIME TO A POINT WHERE IT CAN SUSTAIN A POPULATION. EVENTUALLY IT GETS TO A POINT WHERE IT CAN NOT SUSTAIN A LARGER POPULATION.

WHAT WERE THE DALLAS DANGER SIGNALS?

1. UNSUSTAINABLE GROWTH (NYC, 3%; DALLAS,10%)2. DETACHMENT OF VALUES FROM COSTS3. CIRCULAR LINKAGES IN ECONOMIC BASE

OIL AND GAS......MANUFACTURING.....REFINING....BUILDING...OIL & GAS4. COMPARATIVE ECONOMIC DISADVANTAGE (IE. DETROIT, HIGH LABOR COST)5. EXHAUSTION OF RESOURCES (ARE THERE POINTS WHERE THE RESOURCE IS NOT ECONOMICAL TO EXPLOIT)6. LINK TO OBSOLETE TECHNOLOGY (IE. BOSTON)

WHAT TO LOOK FOR:

WHERE ARE CITIES GOING IN TERMS OF DIVERSIFICATION, UP OR DOWN ON THE SCALE.

BOSTON GETTING MORE DIVERSE, NYC GETTING LESS DIVERSE, LA IS MOST DIVERSECOMPONENTS OF RESOURCE BASED ECONOMY (DIVERSIFIED)

1. RESOURCE2. IMPORT REPLACEMENT GENERATED LOCALLY TO MEET THE NEEDS OF THE

172

LOCAL ECONOMY3. CONNECTIONS TO NATIONAL MARKETS4. CONNECTIONS TO WORLD MARKETS

TRADE, HOTELS, LOCAL SERVICES, CONSTRUCTION BUILT UPON BASE

LOOK FOR LINKAGE CLUSTERS

END OF CLASS TEN

CLASS ELEVEN

4/23/90

1. HOUSEKEEPING2. PRESENTATIONS3. L.A. / OFFICE - INDUSTRIAL SUBMARKETS4. REVIEW: PART I

LOS ANGELES PRESENTATIONS:

FORBES MAGAZINE: "60 DIVERSE INDUSTRIES IN L.A. = 50% OF CALIFORNIA EMPLOYMENT.

STRAIGHT UPWARD TREND IN L.A. TOTAL EMPLOYMENT EVEN AS HOUSTON AND NEW YORK, FOR EXAMPLE, HAD UPS AND DOWNS.

DIVERSITY OF L.A. IS KEY TO STRENGTH, KEEPING IT HEALTHY IN DIFFICULT TIMES. MOST FIRMS ARE SMALL WITH LESS THAN 50 WORKERS, KEEPING FLUIDITY OF RESPONSE TO ECONOMIC CONDITIONS, GOOD RELATIVE TO EAST COAST BUSINESS.

MANUFACTURING RISING AS "GOESINTO" ITEMS PRODUCED. THEY ARE INCREASING EVEN AS N.Y. AND HOUSTON TREND DOWNWARD. McDONNEL DOUGLAS AND NORTHROP AND OTHER AEROSPACE INDUSTRY ACCOUNT FOR 37% OF MANUFACTURING.

CITY OF INDUSTRY IS 60% MANUFACTURING, WITH 60,000 EMPLOYEES PRODUCING VERY DIVERSE PRODUCTS.

AIR, RAIL, WATER, HIGHWAY GIVES GOOD CAPACITY FOR TRADE WITH THE WORLD. UNIVERSITIES (150) GIVE GOOD RESEARCH FUTURE.

HOME BANKS TIED TO LA MANUFACTURING AND ASIAN TRADE.

LA SURPASSED N.Y. METRO AREA IN SERVICE EMPLOYMENT RECENTLY, AND IS THE FINANCIAL CENTER OF THE WEST.

IT IS THE U.S. CAPITAL OF THE PACIFIC RIM'S TRADE AND FINANCE INDUSTRIES, BELIEVED THAT DOWNTOWN LA WILL BY 21ST CENTURY BE PREMIER FINANCE CENTER, ABOVE N.Y.

173

IMMIGRANT POPULATION, CHANGED THE RACIAL MIX OF LA IN FAVOR OF ORIENTALS 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 BANKS WITH INTERNATIONAL OPERATIONS ALL HAVE PROXIMITY TO CUSTOMERS.

INTERNATIONAL TRADE CARRIED LA TO BE SECOND BEHIND N.Y. IN CUSTOMS RECEIVING.

LA OCCUPIES PRIMARY FREIGHT GATEWAY TO THE PACIFIC RIM.

LA MAJOR OPERATIONS AND HEADQUARTERS CENTER FOR THE COUNTRY.

254,000 INVOLVED DIRECTLY IN INTERNATIONAL TRADE.

LATE 80'S BOOM IN OFFICE MARKET EXPECTED TO CONTINUE.

LA MAY LOSE MARKET SHARE IN CUSTOMS AS PACIFIC RIM TRADE SHIFTS TO ATLANTIC AND EASTERN BLOCK.

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 WITH JAPAN, AND LA'S RELATIONSHIP INCLUDES MANY OTHER PLAYERS.

TRADE PRODUCTION AND FINANCIAL SUPPORT RELATIONSHIPS FOR LOS ANGELES.

174

LA TRADING PARTNERS:

EAST ASIA: JAPANCHINASOUTH KOREATAIWANHONG KONGSINGAPORE

THESE COUNTRIES ARE AT DIFFERENT LEVELS OF MATURITY, AND MAY COOPERATE AMONGST THEM BY SUBCONTRACT TO PRODUCE GOODS AS THEIR OWN ECONOMY EVOLVES AND THEIR OWN LABOR COSTS INCREASE.

THEY ARE THE INDUSTRIAL CENTERS OF THE PACIFIC RIM.

ASEAN (S.E. ASIA)PHILIPPEANSTHAILANDINDONESIAMALAYSIA

THEY ARE LESS INDUSTRIALIZED, MORE RESOURCE BASED THAN EAST ASIA. THEY ARE LDC'S (LESS DEVELOPED COUNTRIES).

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 ZEALANDAUSTRALIA

MANY RESOURCES, FEW PEOPLE, EXCESS OF ENERGY, RESOURCES AND THEREFORE EXCESS OF CAPITAL LOOKING FOR INVESTMENT. THEY NEED MARKETS TO PUT ITS EXCESS CAPITAL TO WORK. IE. L.J. HOOKER, WESTPAC BANKING CORP. THEY INVEST IN LOS ANGELES AS A SOURCE FOR CAPITAL INVESTMENT

THEY ARE THE CAPITAL SOURCE OF THE PACIFIC RIM.

STILL A WAY TO RUN ON THE GROWTH CURB DUE TO FALLOW RESOURCES IN THE PACIFIC RIM AWAITING MANUFACTURERS.

INDUSTRIAL MARKETS

LOS ANGELES = 9 DES MOINES LAID END TO END.

175

INDUSTRIAL SPACE

WHAT IS THE TRANSFERABILITY OF TECHNOLOGY?

HOW QUICKLY CAN THEY TRANSFER THEIR TECHNOLOGY TO AVOID ECONOMIC PITFALLS?

THE INDUSTRIAL AND MANUFACTURING REGIONS OF LOS ANGELES

LOS ANGELES EAST: ON CHEAPER LAND NEAR CHEAP HOUSING LOWER WAGE AND LOWER SKILLED LABOR, THEREFORE NEAR L.A. EAST INDUSTRIAL ZONE.

DOWNTOWN LA INDUSTRIAL ZONE:15 MINUTES WALK FROM DOWNTOWN EASTWARD....600,000,000 S.F. OF INDUSTRIAL SPACE IN CENTRAL LOS ANGELES.

ORANGE COUNTY: R&D RELATED WAREHOUSING. AS R&D AROUND THE COUNTRY GOES DOWN HILL, R&D ABSORPTION IS REDUCED.

CITY OF INDUSTRY: MIX OF INDUSTRIAL USES. NON-DEFENSE ORIENTED.

SOUTH BAY AREA/LONG BEACH: DRIVEN BY THE TRADE OF IMPORTS AND EXPORTS.

OFFICES: FUNCTION AS SPECIALIZED MULTI-NODAL MARKET; ALL WITH THEIR OWN SERVICE ECONOMIES.

CENTRAL L.A. - PETROLEUM BASED INDUSTRY.

BEVERLY HILLS - CENTURY CITY: ENTERTAINMENT HAS ITS OWN SET OF FINANCIERS, ACCOUNTANTS, AND OTHER SERVICES.

WESTWOOD/SANTA MONICA: A NODAL MARKET, CROSS PURPOSE.

THE AIRPORT: HIGH TECHNOLOGY, AEROSPACE, SERVICE FIRMS, MANUFACTURING, FINANCIAL SERVICES.

****************REVIEW****************

KEY IDEA:

REAL ESTATE IS A RESIDUAL ECONOMIC PRODUCT WHICH TRANSLATES ECONOMIC ACTIVITY INTO LOCATIONAL SPECIFIC ECONOMIC TERMS, AND IT RECEIVES ITS VALUE FROM ECONOMIC ACTIVITY.

176

REAL ESTATE IS A SPATIALLY DEFINED ASSET CLASS, AND IS BY ITS NATURE SUBJECT TO ECONOMIC GEOGRAPHY. R.E. DIFFERS FROM FUNGIBLE ASSETS OF STOCKS AND BONDS BECAUSE IT IS SPATIALLY DEFINED. IN COMMON THEY HOLD THE QUALITY OF BEING RESIDUAL ECONOMIC PRODUCTS.

INSTITUTIONS THOUGHT THEY WERE BUYING INFLATION HEDGES IN REAL ESTATE, THOUGH TIME HAS NOT BORN THIS OUT ALWAYS. IT HAS, HOWEVER, ALLOWED GOOD INVESTMENT TO CAPTURE THE LOCALE'S BENEFIT.

NATIONAL ECONOMY HAS A PROFOUND EFFECT ON REAL ESTATE; TRADE DEFICIT, INTEREST RATE, MONEY SUPPLY POLICY, FEDERAL TAXES, MORTGAGE RATES.REGIONAL VARIATIONS MAKE A DIFFERENCE. I.E. DALLAS WHICH SUFFERED WHILE THE ECONOMY GREW NATIONWIDE. THE TRANSLATION OF NATIONAL TRENDS MUST FILTER THROUGH THE LOCAL ECONOMY'S SCREEN BEFORE LANDING ON REAL ESTATE.

IF IT IS SPATIALLY DEFINED, IT IS ALSO TRUE ON A LOCAL LEVEL, AND THIS IS DISCERNED BY ANALYSIS OF LOCAL LINKAGES.

CYCLES DOMINATE THE REAL ESTATE MARKET. THE BIGGEST DANGER IS A MARKET THAT THINKS IT WILL GO UP FOREVER BECAUSE THIS BREEDS EXCESS.

PROPERTY TYPES INTER-RELATE IN COMPLEX WAYS, WHICH MAKES IT IMPOSSIBLE TO CONSIDER ONE PROPERTY MARKET WITHOUT THE OTHERS. IT PAYS TO GAUGE THE HEALTH OF OTHER PROPERTY TYPES LIKED TO THE ONE YOU ARE STUDYING.

THE BAD NEWS. THERE IS AN ENORMOUS AMOUNT OF ECONOMIC DATA WHICH IS AVAILABLE THOUGH NOT MUCH IS DIRECTLY USEABLE IN REAL ESTATE ANALYSIS.MEANS MUST BE DERIVED TO ACT AS TOOLS TO TRANSLATE COMMONLY AVAILABLE DATA. AS A MINIMUM WE NEED TO BE GOOD TOOL USERS. AT BEST WE SHOULD BE TOOL MAKERS.

SOURCES FOR INFORMATION ARE MORE ABUNDANT THAN GENERALLY REALIZED.

CRAFT OF ANALYSIS IS IN ITS INFANCY. TECHNICAL AND FUNDAMENTAL ANALYSIS HAS IMPROVED. MOST OF OUR WORK IN CLASS HAS BEEN FUNDAMENTAL. TECHNICAL ANALYSIS USES INTERNAL INDICATORS TO PREDICT PERFORMANCE.

END OF CLASS ELEVEN

CLASS TWELVE

4/30/90

SAN FRANCISCO

1. PRESENTATIONS

177

2. COMPARATIVE COMMENTS3. EVALUATIONS BREAK4. REVIEW PART II5. 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 ESTIMATIONNO 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. ALLOW NO MORE THAN 25 TO 30 MINUTES PER QUESTION.

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.

178

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

179

THE AFFECTS OF THE FOLLOWING EVENTS WILL TRICKLE DOWN INTO THE ECONOMY AND HAVE AN EFFECT ON WHICH AREAS AND WHAT PROPERTY TYPES?

THE IMPETUS:JAPANESE INVESTORS ARE DEFUNDING THEIR INVESTMENTS IN US BONDS, WHICH UNTIL NOW HAVE BEEN FLOATING THE MASSIVE US BUDGET DEFICIT. THE DEFUNDING WILL TAKE PLACE OVER TEN YEARS AND BE COMPLETE BY THE YEAR 2000.

THE IMPETUS:DROUGHT HITS EUROPE, FROM OSLO TO PALERMO, AND MOSCOW TO IRELAND. HOW DOES IT AFFECT THE US ECONOMY?

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.

********

180

MARS SCHEME

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,BOSTONOFFICE, R&D GOODINDUSTRIAL, 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 IN OFFICE AND WAREHOUSING CONSTRUCTION IN MANUFACTURING AREAS.

WEST COAST PORT CITIES MAY SEE AN INCREASE IN ASSEMBLY ORIENTED WAREHOUSING FACILITIES AS FOREIGN PARTS ARE SHIPPED TO US FOR ASSEMBLY.

181

LOOK FOR AN INCREASE IN ASSEMBLY FACTORIES.

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 THIRTEEN5/7/90

1. PAPERWORK2. PRESENTATIONS3. COMMENTS ON GOVERNMENT4. REVIEW III BREAK5. EVALUATIONSWASHINGTON 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.

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THE PEACE DIVIDEND; THE ECONOMIC VARIABLE

1. CUTTING TAXES2. REDUCING BUDGET3. REALLOCATING FUNDS4. REDUCTION OF MILITARY SPENDING

U.S. HAS A "MIXED ECONOMY". WHAT IS IN THE MIXTURE? WE DO NOT HAVE AN IDEOLOGICALLY PURE ECONOMY, IT IS ECLECTIC. IT IS NEITHER A CENTRALLY PLANNED ECONOMY, NOR A MARKET ECONOMY. IT IS A LOT OF BOTH. THERE IS CENTRAL GUIDANCE, ESPECIALLY DURING THE LAST 50 YEARS. IT IS NOT LAISSEZ-FAIRE THOUGH ELEMENTS OF IT ARE. WHEN GOVERNMENT ACTIONS IMPACT US WE REALIZE THAT WE ARE NOT PART OF A TOTALLY MARKET BASED ECONOMY. AS REAL ESTATE PROFESSIONALS WE MUST LEARN TO SUPERSEDE THE DICHOTOMOUS "ALL OR NOTHING" STANCE OF THE LAYMAN TO REALIZE THE MIXTURE AND BENEFITS OF A DIVERSIFIED AND MIXED ECONOMY. WHERE AT ANY GIVEN MOMENT ALONG THE CONTINUUM OF THE MIXED ECONOMY ARE YOU AT ANY POINT IN TIME?

──────────────────────────THE CONTINUUM─────────────────────────SOCIAL DISTRIBUTION FREE MARKET GOVERNMENTAL PATERNALISM SOCIAL DARWINISM

1. WHERE IS THE CURRENT CONSENSUS?2. WHERE IS THE CONSENSUS TENDING?3. WHERE IS THE TEMPER OF THE TIMES TAKING US?

NATURALISTIC FALLACY- "YOU CAN TAKE AN ANALYSIS OF WHAT YOU FIND OR DERIVE "OUGHT TO BE" FROM "IS".

JUST BECAUSE SOMETHING "IS" THE CONSENSUS, THAT MAY NOT BE WHAT "OUGHT" TO BE. YOU HAVE TO LEARN TO DISTINGUISH THE EMPIRICAL JUDGEMENT OF "IS" FROM THE "OUGHT".

WHEN THERE IS A HERD INSTINCT IN REAL ESTATE, YOU HAVE CAPITAL RATHER THAN DEMAND DRIVING THE INVESTMENT IN REAL ESTATE, CREATING A SPECULATIVE BUBBLE WHICH BURSTS. FOLLOWING HERD INSTINCT CAUSES A RISK TO FALL IN DEMISE OF THE SPECULATIVE BUBBLE.

THE CONVERSE OF THE NATURALISTIC FALLACY IS SAYING WHAT "OUGHT" TO BE "IS". OUR HOPES AND WISHES CAN NOT PERSUADE US THAT THE DATA SAYS SOMETHING OTHER THAN WHAT IS SAYS. APPROACH DATA WITH A WILLINGNESS TO BE SURPRISED, BECAUSE AS A PROFESSIONAL IT WILL BE ADVANTAGEOUS TO DO SO. THIS DOES NOT MEAN, HOWEVER, THAT YOU NEED TO GIVE UP YOUR "OUGHTS", OR

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YOUR IDEALS. THE BEST PEOPLE IN REAL ESTATE KEEP A SPOT IN THEIR BEING 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? BE SURE YOU KNOW.

LOW PRODUCTIVITY OF 1980'S DUE TO TRAINING PERIOD FOR ENTRY LEVEL EMPLOYEES. THERE WILL BE GREATER PRODUCTIVITY IN THE COMING YEARS AS BABY BOOMERS ADVANCE THROUGH THE POPULATION.

"LESSEN THE LOAD, KEEP A STEADY HAND ON THE RUDDER, DIVERSIFY HOLDINGS FOR DIFFICULT ECONOMIES".

REAL ESTATE IS A PEOPLE BUSINESS

RECIPE:

UNEQUAL PARTS OF 1. EXPERIENCE2. INSTINCT3. EXIGENCY4. AMBITION

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END OF CLASS THIRTEEN

FINAL EXAM NEXT WEEK

REAL ESTATE FINANCEPROFESSOR STEVE PEARLMAN

AUTUMN 1990NEW YORK UNIVERSITY

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REAL ESTATE FINANCESTEVE PEARLMAN836-9411RM.507

TEXT: BRUEGGEMAN, FISHER, AND STONE: REAL ESTATE FINANCE, 8TH EDITION , IRWIN (1989)

CLASS ONE: 9/11/90

PROFESSOR START WITH MANUFACTURERS HANOVER TRUST, IN CORPORATE FINANCE. HE IS NOW WITH JONES LANG WOOTTON.

IN ADDITION TO THE HARDBOUND TEXT, YOU WILL BE REQUIRED TO PURCHASE THE FOLLOWING FIVE MONOGRAPHS FROM THE BOOKSTORE.

1. REAL ESTATE GLOSSARY2. SOURCES OF REAL ESTATE INFORMATION3. FINANCIAL ANALYSIS OF REAL PROPERTY4. ANGES CARTWRIGHT5. FINANCIAL ANALYSIS - INTRODUCTION TO PRESENT VALUE, FUTURE VALUE AND THE INTERNAL RATE OF RETURN.

THE GOAL OF THE COURSE IS "TO GIVE US AS MUCH INFORMATION AS WE NEED TO UNDERSTAND HOW A PROJECT IS FINANCED BOTH FROM A DEBT AS WELL AS AN EQUITY BASIS. WE WILL BE TAUGHT HOW TO QUANTIFY THE DECISION ON WHETHER WE SHOULD BUY A PROPERTY."

THERE WILL BE A FINAL EXAMINATION, AND PROBABLY THERE WILL BE A MIDTERM. THERE WILL BE THREE MAJOR CASES FOR ANALYSIS AND GRADE. CASES SHOULD BE TYPEWRITTEN AND HANDED IN BY THE DUE DATE. SOMETIMES, THERE MAY BE HOMEWORK. GRADES WILL BE DETERMINED ON THE QUALITY OF THE PRODUCT WE TURN IN, AS WELL AS THE FINAL, MIDTERM, AND PARTICIPATION. ATTENDANCE WILL BE TAKEN.

THERE ARE THREE CASES. THEY ARE:1. ROCKEFELLER CENTER2. ANGES CARTWRIGHT3. FINANCE CASE: A CONSTRUCTION LOAN ON AN EXISTING PROPERTY THAT NEEDS A CONSTRUCTION LOAN THAT CAN NOT BE SECURED WITHOUT A "TAKE-OUT".

**************************************IMPORTANT ISSUES OF FINANCE IN REAL ESTATE**************************************

WHAT LEGAL ISSUES IMPACT REAL ESTATE?1. ZONING2. RENT CONTROL3. ENVIRONMENTAL4. REGULATION (BUILDING CODES)

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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 │ │ ││ │ │ │└──────────────────┘ └─────────────┘

DIAGRAM OF THE PROCESS OF INVESTMENT ANALYSIS

FINANCIAL ANALYSIS:

DATA COLLECTION AND ANALYSIS DEFINE THE PARAMETERS OF THE FOLLOWING FORCES ON THE PROJECT:

1. SOCIAL2. ECONOMIC3. GOVERNMENT4. ENVIRONMENTAL FORCES

DEFINE THESE FORCES BY GATHERING PRIMARY AND SECONDARY DATA.

PRIMARY DATA: COLLECTED THROUGH A DIRECT SURVEY OR INTERVIEW PROCESS. IE. REAL ESTATE BROKERS AND AGENTS, PLANNING AGENCIES, CHAMBERS OF COMMERCE, OTHER GOVERNMENT AGENCIES, DEVELOPERS/BUILDERS, USERS, TENANTS,

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APPRAISAL FIRMS, CONVENTION BUREAUS, ASSOCIATIONS SUCH AS THE BUILDING OWNERS AND MANAGERS ASSOCIATION (BOMA).

SECONDARY DATA: NEWSPAPER ARTICLES, RESEARCH REPORTS, CENSUS DATA, BUREAU OF LABOR STATISTICS.DETERMINE WHETHER YOU ARE LOOKING AT A FREEHOLD ESTATE OR A LEASEHOLD ESTATE.

IN A FREEHOLD ESTATE, YOU OWN THE LAND AND THE IMPROVEMENTS THEREON.IN A LEASEHOLD ESTATE, YOU LEASE THE LAND FROM THE OWNER, AND IMPROVE UPON IT SUBJECT TO THE TERMS OF THE LEASE.

POSSESSORY RIGHTS ARE THOSE SUCH AS IN A DEED, WHICH GIVE YOU THE RIGHT TO DO WITH THE PROPERTY AS YOU WISH WITHIN THE CONFINES OF LAW.

NON-POSSESSORY RIGHTS ARE THOSE SUCH AS IN A LICENSE OR EASEMENT, WHICH GRANT LIMITED RIGHTS UPON THE POSSESSION OF ANOTHER PERSON OR ENTITY.

THE MOST COMPLETE FORM OF OWNERSHIP IS THE FEE-SIMPLE ABSOLUTE ESTATE.

A DEED IS A LEGAL INSTRUMENT THAT CONVEYS LAND OR PROPERTY, AND CONTROLS THE USE OF IT. IT CONVEYS TITLE FROM ONE TO ANOTHER BY MEANS OF A WRITTEN INSTRUMENT (A CONTRACT), REQUIRED UNDER THE STATUTE OF FRAUDS. TO BE A VALID CONVEYANCE OF GOOD AND MARKETABLE TITLE, THE DEED MUST BE IN ACCORDANCE WITH LOCAL AND STATE LAWS.

DEEDS COME IN SEVERAL FORMS, FROM THE MOST PROTECTIVE TO THE LEAST.

GENERAL WARRANTEE DEED - TITLE CONVEYED FREE AND CLEAR EXCEPT FOR LISTED ENCUMBRANCES. THE WARRANTEE DEED CONVEYS:

1. GOOD TITLE2. THE RIGHT TO CONVEY PROPERTY3. COMPENSATES GRANTEE FOR LOSS OF PROPERTY OR EVICTION AS A RESULT OF SUPERIOR CLAIMS TO THE PROPERTY4. COVENANTS AGAINST OTHER ENCUMBRANCES THAN THOSE STATED.

SPECIAL WARRANTEE DEED - LIMITS TO ENCUMBRANCES PLACED WHILE THE GRANTOR OF TITLE OWNED PROPERTY.QUITCLAIM DEED - CLAIMS ONLY TO CONVEY WHATEVER THE GRANTOR OWNS. HE MAKES NO GUARANTEES, HOWEVER, THAT HE OWNS ANYTHING AT ALL.

GRANTOR = SELLERGRANTEE = BUYER

A TITLE SEARCH IS COMPLETED TO DETERMINE THE OWNERSHIP HISTORY OF THE PROPERTY.

ABSTRACTS WERE COMPLETED YEARS AGO, AND AT TIMES TODAY. THEY RESEARCH THE LAND BACK TO ITS LEGAL ESTABLISHMENT, AND AN ATTORNEY RENDERS AN

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OPINION AS TO THE PROPERTY'S STATUS AND ITS CLAIM OF TITLE.

TITLE INSURANCE SHIFTS THE RISK OF TITLE IMPAIRMENT THAT CAN NOT BE DISCOVERED THROUGH THE PUBLIC RECORD TO THE TITLE COMPANY.

OWNERSHIP MUST BE RECORDED TO GIVE NOTICE TO THE WORLD OF YOUR STATUS.

MECHANICS LIENS - RELATES BACK TO THE TIME THAT THE PROVIDER OF A SERVICE TO THE LANDOWNER IS PERFORMED. IF THEY DO NOT GET PAID FOR IT, THEY CAN ENCUMBER THE PROPERTY WITH A LIEN, AND TAKE PRECEDENCE BEFORE OTHER ENCUMBRANCES FILED AFTERWARD. THIS IS ONE REASON THAT CONSTRUCTION AND MORTGAGE LOANS ARE SEPARATED.

TAX LIENS TAKE PRECEDENCE OVER 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.

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ACCELERATION - HOW DO YOU ACCELERATE THE DEBT? THROUGH DEFAULT. IF ANY OF THE ABOVE ARE VIOLATED, PAYMENTS ARE ACCELERATED AND DUE IMMEDIATELY.

PREPAYMENT - YIELD MAINTENANCE FORMULA IS A FACTOR. IT WILL BE INSISTED ON BY INSURANCE COMPANIES ON THE FIRST FIVE EARS OF A TEN YEAR LOAN. NEXT, IF THEIR YIELD IS CUT BY YOUR PREPAYMENT, YOU WILL MAKE UP THE DIFFERENCE FROM THEIR ACTUAL AND POTENTIAL YIELD. THIS IS THE YIELD MAINTENANCE FORMULA. WHEN YOU PAY THIS PENALTY, YOU WILL WANT IT DISCOUNTED BACK TO PRESENT VALUE.

DEFEASANCE - THE PAYMENT OF THE OBLIGATION OF THE MORTGAGE THROUGH TRANSFERRING EQUITY TO THE PURCHASE OF NOTES THAT PAY OFF THE MORTGAGE WHEN A PREPAYMENT PENALTY WOULD OTHERWISE PREVENT PREPAYMENT. A WAY OF GETTING PAST PREPAYMENT PENALTIES.

DEFAULT - FAILURE TO MEET REQUIREMENTS AS PER A CONTRACT. IE. FAILURE TO PAY PRINCIPAL, INTEREST, TAXES OR INSURANCE.FORECLOSURE - LENDER MAY SUE FOR DEBT, AND EXECUTE JUDGEMENT ON THE PROPERTY. NEW YORK IS AN ELECTION STATE. YOU MUST ELECT WHETHER YOU WILL SUE ON THE NOTE, DEBT OR PROPERTY. IF YOU HAVE A GUARANTEE, YOU CAN SUE ON THE PROPERTY AND GO AGAINST THE GUARANTOR. MOST PROPERTY IS OWNED BY SINGLE PURPOSE CORPORATIONS. WHEN YOU SUE THEM, YOU ARE IN ESSENCE SUING AGAINST THE PROPERTY SINCE THE PROPERTY IS THE CORPORATIONS SOLE ASSET.

EQUITY OF REDEMPTION - BUYER MAY RECOVER THE PROPERTY AFTER FORECLOSURE AFTER PAYING ALL COSTS AND OUTSTANDING DEBTS ON THE PROPERTY TO THE FORECLOSING PARTY.

THERE ARE THREE PARTIES IN A DEED OF TRUST: THE BORROWER, TRUSTEE, & LENDER.

DEED OF TRUST > BORROWER > TRUSTEE > LENDER │ │ │ │ │ │ │ │ │ │ │ └────────HOLDS DEED FOR LENDER │ └───────────CREATES TRUST, TRANSFERS DEED TO TRUSTEE └─────────────────────DOCUMENT

WHEN BRINGING A FORECLOSURE AGAINST A DEED OF TRUST, YOU MUST SUE ALL PARTIES; THE BORROWER, TRUSTEE, ALL OTHER MORTGAGE HOLDERS, LIMITED PARTNERS, AND ALL INDIVIDUALS INDEPENDENTLY.

A JUNIOR HOLDER MAY BRING A SUIT AND MAY NOT JOIN A SENIOR LENDER, BUT SUE SUBJECT TO THE SENIOR LENDER. AS A JUNIOR LENDER I KNOW THAT THERE IS VALUE IN THE PROPERTY IN ADDITION TO THE SENIOR LENDER'S PRINCIPAL, I WANT TO CONTROL THE PROPERTY TO GET MY MONEY BACK.

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CHAPTER 7 - LIQUIDATION OF ASSETSCHAPTER 11 - PRESERVE PROPERTY WITH REORGANIZATION PLAN. HURTS THE LENDER THE MOST. JUDGES CAN DISAVOW CERTAIN EXECUTORY LEASES BY EXTENDING THE TIME FORWARD FOR PAYMENT OF THE OBLIGATION.CHAPTER 13 - ALTERNATIVE TO LIQUIDATION THROUGH A REPAYMENT PLAN.

WITHIN 90 DAYS OF BANKRUPTCY, THERE CAN NOT BE ANY DISTRIBUTION OF PROPERTY THROUGH SALES. THIS IS 12 MONTHS IF AN INSIDER.

OWNERSHIP OF REAL ESTATE:

1. CORPORATE - NO PERSONAL LIABILITY2. PARTNERSHIP - GENERAL: INDIVIDUAL UNLIMITED LIABILITY.

LIMITED: LIMITED LIABILITY, NO PERSONAL INVOLVEMENT.3. S CORPORATION - COMBINES CORPORATION AND LIMITED PARTNERSHIP. TAXED AS PARTNERSHIP, THOUGH ACTS AS A CORPORATION WITH LIMITED LIABILITY.

END OF CLASS ONE.

CLASS TWO9/18/90**********************************************************************TONIGHT'S CLASS:PRESENT VALUE ANALYSISREAL ESTATE MATHDEBT SERVICECOVERAGE RATIOSMAXIMUM LOAN FORMULADEBT ANALYSISSEMI-ANNUAL BOND INTEREST CONVERSION TO ANNUAL MORTGAGE INTEREST***********************************************************************

REAL ESTATE INVESTMENT AND EQUITY INVESTMENT PROJECTIONS ARE USED IN DETERMINING WHICH INVESTMENTS TO INVEST IN. PRESENT VALUE ANALYSIS CONSIDERS THE TIME VALUE OF MONEY, AND INVOLVES THE DISCOUNT OF FUTURE DOLLARS TO REFLECT PRESENT WORTH.

IF I HAVE THE CHOICE BETWEEN RECEIVING 100.00 DOLLARS TODAY AND 110.00 DOLLARS A YEAR FROM NOW, AND I TAKE THE LATER CHOICE, WHAT DO I LOSE? I LOSE THE OPPORTUNITY COST OF INVESTING THE 100.00 DOLLARS AND PERHAPS ENDING UP WITH 115.00 DOLLARS IN A PERIOD OF ONE YEAR. INSTEAD OF MAKING 10 PERCENT, I COULD HAVE MADE 15 PERCENT; THE OPPORTUNITY COST WAS 5 PERCENT.

INTEREST = PRINCIPAL X RATE

FUTURE VALUE: IF I INVEST 100.00 DOLLARS TODAY, AT 8%, IT IS WORTH

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108.00 DOLLARS AT THE END OF YEAR ONE. AT THE END OF YEAR TWO, IT IS (108.00 X 8 PERCENT) + 108.00 = 116.64 DOLLARS. FUTURE VALUE IS THE ANALYSIS OF WHAT MONEY TODAY WILL BE WORTH TOMORROW.

IF I HAVE 100 DOLLARS AT 10 PERCENT OVER 5 YEARS, WHAT WILL THE FUTURE VALUE BE? $161.05.

BY HP12C; 100, PV; 10, i; 5, n; FV; ANSWER IS 161.05BY TABLE, YOU FIND FACTOR OF 1.615101.61510 X 100 = 161.05

IF I HAVE 161.05 AT YEAR 5, AT 10 PERCENT, WHAT WOULD I NEED TO INVEST IN YEAR ONE. 100 DOLLARS IS THE ANSWER, WHICH IS THE PRESENT VALUE OF 161.05 IN THE 5TH YEAR INVESTED AT 10 PERCENT. IN THE TABLE THE FACTOR WOULD BE 0.619, WHICH IS THE INVERSE OF 1.6151, THE FACTOR FOR FUTURE VALUE. 161.05 X 0.619 = 100.00

WOULD YOU RATHER HAVE 75.00 DOLLARS TODAY, 85 DOLLARS IN ONE YEAR, OR 94 DOLLARS IN 2 YEARS FROM TODAY? YOU CAN INVEST AT 12 PERCENT. THE ANSWER IS YOU WOULD TAKE THE 85 DOLLARS IN ONE YEAR.

METHOD: FIGURE OUT THE PV OF 85 IN ONE YEAR AT 12 PERCENT AND THE PV OF 94 IN TWO YEARS AT 12 PERCENT (COMPOUNDED ANNUALLY). THE PV OF 85 IS 75.89 AND THE PV OF 94 IS 74.94. THE PV OF 85 IS 89 CENTS MORE THAN THE 75 DOLLARS YOU COULD RECEIVE TODAY, SO YOU TAKE THE 85 DOLLARS TO BE RECEIVED IN ONE YEAR, INVESTED AT 12 PERCENT.

WHAT HAPPENS AS INTEREST RATES INCREASE? PRESENT VALUES DECREASE. AS INTEREST RATES DECREASE, PRESENT VALUES INCREASE. WHEN WE DISCUSS PRESENT VALUE, WE ARE DISCOUNTING MONEY. WHEN WE DISCUSS FUTURE VALUE, WE ARE COMPOUNDING MONEY.

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: PRINCIPAL / (1 + (INT.RATE / # OF PERIODS)# OF PERIODS)

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PVannual = 1000 / (1 + .08) = 925.93PVsemi-annual = 1000 / (1 + (.08 / 2)2) = 924.56PVmonthly = 1000 / ( 1 + (.08 / 12)12) = 923.36PVdaily = 1000 / (1 + (.08 / 360)360) = 923.13

INCOME STREAMS AND ANNUITIES - AN ANNUITY IS AN INCOME STREAM WITH AN EQUAL PAYMENT PAID OVER EQUAL PERIODS OF TIME. ANNUITIES CONSIST OF A DEPOSIT, TIME, AND AN INTEREST FACTOR (IF).

TIME AMOUNT IF FUTURE VALUE1 1000 1.21551215.512 1000 1.15767 1157.633 1000 1.10251102.504 1000 1.050 1050.005 1000 1.000 1000.00

5525.63YOU 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 = 6105.10AT 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 AMOUNT IF PRESENT VALUE1 500 0.9434471.702 500 0.8900445.003 500 0.8396419.814 500 0.7921396.055 500 0.7473373.036 500 0.7050352.48

500 X 4.917324 = 2458.66

IF YOU TAKE 5000 TODAY DEPOSITED INTO AN ANNUALLY COMPOUNDING 10 PERCENT ACCOUNT, WHAT DO YOU HAVE IN FIVE YEARS?ANSWER IS 8,052.55 DOLLARS.

1.610510 IS THE INTEREST FACTOR. 5000 X 1.610510 = 8,052.55====================MR. DOE HAS A CHOICE OF 800 DOLLARS TODAY OR 1000 DOLLARS IN FIVE YEARS. BANKS PAY 5 PERCENT INTEREST. SHOULD DOE TAKE THE 800?

1000 (PVIF,5%,5 YEARS) = 783.53

DOE SHOULD NOT DO IT. HE SHOULD TAKE THE 800 NOW SINCE 800 > 783.53.======================

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YOU HAVE TEN ANNUAL DEPOSITS OF 1000 EACH, AT 9 PERCENT. AT ONE YEAR FROM NOW, WHAT DO YOU HAVE?

ANSWER IS 15,192.9310, 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: 1. ASSUMES ALL CASH FLOWS ARE REINVESTED EACH YEAR AT THE SAME RATE AS THE INTERNAL RATE OF RETURN.

2. ANYTHING OVER 20 PERCENT WOULD BE AN UNREALISTIC ANSWER.

3. INCOME STREAMS COULD INCLUDE CERTAIN NEGATIVE CASH FLOWS, WHICH COULD THROW THE ANSWER OFF DUE TO AN INHERENT WEAKNESS IN THE INTERNAL RATE OF RETURN FORMULA.

4. THE INTERNAL RATE OF RETURN IS CALCULATED BASED ON PRETAX MONEY.

INTEREST CONVERSIONS

GIVEN AN INTEREST RATE OF 12 PERCENT (ANNUAL) WHAT WOULD IT BE ON A SEMI-ANNUAL, MONTHLY OR DAILY BASIS IN THE SAME TERMS?

FORMULA FOR LESS FREQUENT RATE (IE. ANNUAL) TO MORE FREQUENT (IE. MONTHLY)

(((RATE + 1)1/X) - 1) X # OF COMPOUNDING PERIODS

(X = NUMBER OF COMPOUNDING PERIODS)

IE. (((12+1)1/4) - 1) X 4 = 11.49 PERCENT (QUARTERLY BASIS) = 10.78 PERCENT (MONTHLY BASIS)

THE FORMULA FOR MORE FREQUENT RATE TO LESS FREQUENT IS AS FOLLOWS:

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(( RATE / # OF PERIODS) + 1)# OF COMPOUNDING PERIODS

*********************REAL ESTATE MATH*********************

IE. 5 YEAR OLD COMPLEX WITH 84 APARTMENTS64 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 YEARSEQUITY 200,000 DOLLARS

STEP ONE - CREATE A PRO FORMA CASH FLOW

PRO FORMA MEANS HYPOTHETICAL.

WHAT IS THE GROSS POTENTIAL RENTAL INCOME?$163,800.

WHAT OTHER INCOME IS THERE?VENDING MACHINES, PARKING AND WASHER/DRYERS...$3,180

GROSS POTENTIAL INCOME?163,800 + 3,180 = 166,980

LESS VACANCY AND COLLECTION (5%) - $8349.00(USUALLY 3 TO 5 PERCENT)

GROSS EFFECTIVE INCOME?166,980 - 8349 = 158,631.00

LESS OPERATING EXPENSES AND REAL ESTATE TAXES(40 PERCENT OF GROSS POTENTIAL INCOME) - $66,792.00

EQUALS 91,839.00LESS DEBT SERVICE OF 80,000 ANNUALLY - $80,000.00(800,000 X 10 % (THE MORTGAGE CONSTANT)

CASH FLOW..........................................$11,839.00

THIS PRO FORMA DOES NOT CONSIDER EQUITY BUILD UP THROUGH DEPRECIATION OR APPRECIATION, NOR DOES IT CONSIDER INCOME TAXES.

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MORTGAGE CONSTANT - THE AMOUNT OF ANNUAL DEBT SERVICE NECESSARY TO PAY PRINCIPAL AND INTEREST OVER THE PAYMENT PERIOD, AS A PERCENT.

ANNUAL DEBT SERVICE = LOAN AMOUNT X MORTGAGE CONSTANT.

THIS IS CALCULATED BY DOING THE FOLLOWING OPERATION:

RATIONALE (MONTHLY PAYMENTS) KEYSTROKES DISPLAY*************************************************************************CLEAR EVERYTHING GOLD FIN MONTHLY PAYMENTS FOR 30 YRS. 30 BLUE 12X 360: AMORT PERIODS 10% ANNUAL INTEREST RATE 10 BLUE 12 / .83: MONTHLY INT. RATE $100 MORTGAGE AMOUNT 100 CHS PV -100.00 DETERMINE P&I PYMT./MONTH PMT .88 OR $0.87757 PER MONTH PER $100.00 ANNUAL MORTGAGE CONSTANT 12 X 10.53% MORTGAGE

CONSTANT

DEBT SERVICE RATIO = NET INCOME / DEBT SERVICE

IN THE ABOVE EXAMPLE, DEBT SERVICE = 91,839 / 80,000 = 1.15

THE 1.15 REPRESENTS AN ADDITIONAL 15 PERCENT INCOME TO COVER THE DEBT OF THE BORROWER. 1.2 OR A 20 PERCENT SURPLUS IS USUALLY THE MINIMUM ACCEPTABLE DSR. DSR IS A FACTOR THAT REPRESENTS AND MEASURES RISK.

TABLE OF MINIMUM ACCEPTABLE DSR RATES (INDUSTRY STANDARDS)

OFFICE..................................1.1 TO 1.2HOTELS..................................1.25 TO 1.3RESIDENTIAL.............................1.2 TO 1.3RETAIL..................................1.1 TO 1.2

MAXIMUM LOAN FORMULA = (NET INCOME / DESIRED DSR) / MORTGAGE CONSTANT

AS PER THE ABOVE EXAMPLE, (91,839 / 1.3) / 10% = 706,454

IF THE DSR WERE 1.15, THE MLF WOULD BE 798,600.

AS YOU LOWER THE DSR, THE MAXIMUM LOAN INCREASES.

(91,839/1.15) / 12% = 665,500

AS YOU RAISE THE MORTGAGE CONSTANT, THE MAXIMUM LOAN DECREASES.

THIS TOOL GIVES YOU AN UNDERSTANDING OF WHAT AMOUNT OF A LOAN YOU COULD EXPECT TO GET GIVEN A PRO FORMA'S PROJECTION OF INCOME FLOW.

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RETURN ON TOTAL CAPITAL (OR RETURN ON ASSETS (ROA) )

FORMULA: NET INCOME / CAPITAL

AS PER THE ABOVE EXAMPLE, 91,839 / 1,000,000 = 9.18 PERCENT

RETURN ON EQUITY (ROE)

NET CASH FLOW AFTER DEBT SERVICE / EQUITY INVESTMENT = ROE

AS PER THE ABOVE EXAMPLE, 11,839 / 200,000 = 5.92 PERCENT

OFTENTIMES, INCOME TAX FACTORS ARE IGNORED BECAUSE DEVELOPERS PRESUME THAT THE GENERATED LOSS FROM DEPRECIATION WILL NEGATE TAXABLE INCOME.

***********FOR NEXT WEEK, THE ROCKEFELLER CENTER CASE. READ ARTICLES ON REITS, DO IRR, VALUE OF MONEY (PRESENT VALUE ANALYSIS), ETC. EVALUATE WHETHER YOU SHOULD INVEST, YES OR NO, AND WHY. GET COMFORTABLE WITH THEIR PRESENTATION OF THEIR ANALYSIS.

END OF CLASS TWO.

CLASS THREE9/25/90

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. THE CASE WILL 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

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A. INCOME PROJECTIONS (ON A STABILIZED CASH BASIS)B. THE CONSEQUENCES OF THE INVESTMENTC. CASH FLOW MODEL - A MANAGEMENT TOOL DETERMINING WHETHER A

PROPERTY WILL MEET YOUR PROJECTIONS.D. WHAT IS THE TIME HORIZON? ANYTHING BEYOND THREE YEARS IS

"GUESS WORK", AND CAN NOT BE COUNTED ON FOR PRECISION. TEN YEARS IS AN ACCEPTABLE TIME LIMIT. IT IS VERY UNUSUAL FOR APPRAISALS TO USE THE INCOME PROJECTION METHOD USING CASH FLOWS BEYOND TEN YEARS. THE FURTHER YOU CAST OUT PROJECTIONS, THE LESS CERTAIN YOU ARE OF PRESENT VALUE. GOING FAR OUT ALSO HAS AN EFFECT ON LIQUIDITY. DEPENDING ON THE 15TH YEAR REVERSION TO BRING PRESENT VALUES INTO THE BLACK WON'T CUT IT IF

YOU ARE USING A TIME HORIZON THAT IS TEN YEARS LONG, AT WHICH POINT THE PROPERTY WILL BE SOLD OR REFINANCED.

IN LOOKING AT PROJECTS, BE RESPONSIVE TO ISSUES OF MARKET IN ANALYZING WHETHER GROWTH RATES ARE ACCEPTABLE. YOU TEND TO USE INFLATION AS A RULE OF THUMB TO PREDICT ANNUAL GROWTH RATES, UNLESS THE MARKET IS SOFT.

DETAILED STUDY OF RENT UP PERIODS ARE NECESSARY AND UNDERSTAND THE OPERATING BUDGET (IE. TAXES, ETC.).

EXAMINE THE LEASE STRUCTURE. INFLATION COULD BE COVERED BASED ON CPI INDEX, STEPPED RENT, PORTER'S WAGE, PERCENTAGE RENT (IN RETAIL USES), ESCALATIONS OVER A BASE OR EXPENSE STOPS (TAX STOPS, OPERATING STOPS, ETC.). SEE LEASES IN LEGAL ISSUES NOTES FOR MORE INFORMATION.

LOOK AT RESIDUAL VALUE - YOU HAVE GOT TO CONSIDER THE FUTURE SALE OR REFINANCING OF THE PROPERTY. WHAT KIND OF CAP RATE AND INTEREST WILL APPLY? THE BENEFIT OF REFINANCING A PROPERTY RATHER THAN SELLING IT AT THE END OF THE PERIOD IS THAT THE FUNDS GO INTO YOUR POCKET TAX FREE. WHAT WILL THE RESIDUAL VALUE BE TEN YEARS INTO THE FUTURE?

2. THE CONSTRUCTION BUDGET

TO BE SUCCESSFUL, THE DEVELOPER MUST CONTROL COST OVER-RUNS. YOU HAVE GOT TO BE ABLE TO ESTIMATE TOTAL PROJECT COST AND INVESTMENT BEFORE INVOLVING YOURSELF IN THE INVESTMENT.

1. LAND AND ACQUISITION COSTS

LOOK AT THE INVESTMENT VALUE OF THE LAND ALONE, IE. FARMING, MOBILE HOME PARK, PARKING LOT, ETC.

IN AN URBAN SETTING, THE VALUE OF LAND DEPENDS ON THE COST OF DEVELOPING AND THE TYPE OF USE. OFTEN, OLD BUILDINGS WILL BE REMOVED TO BE REPLACED BY MORE PROFITABLE USES.

LAND CAN BE CARRIED ON THE BUDGET AT EITHER MARKET VALUE OR COST VALUE.

199

IF YOU CAN SELL YOUR LAND AT MARKET, AND YOU USE IT TO DEVELOP, SHOULD YOU FOREGO THE PROFIT ON THE LAND? THE BANK WILL WANT YOU TO CARRY IT AT 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

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(PROJECT PRICE - CLOSING DRAW) X INT. RATE X CONST. PERIOD X PERIOD LOAN IS OUTSTANDING = INT. PAYMENT

700,000 X 12% X 2 YEARS X 50% = $84,000

*THE CLOSING DRAW IS THE AMOUNT THAT THE DEVELOPER TAKES FROM THE CONSTRUCTION LOAN TO PAY START HIS CONSTRUCTION AND PAY HIS EXPENSES FOR THE PROJECT.

*************************************************************************YOU GUESS "50%" FOR THE PERIOD THE LOAN IS OUTSTANDING BECAUSE YOU ARE ASSUMING THAT AFTER THE FIRST YEAR, 50% OF THE LOAN WILL HAVE BEEN CONSUMED BY THE CONSTRUCTION ACTIVITY. SOME USE 60% BECAUSE THE EARLIER CONSTRUCTION PERIODS OFTEN ARE MORE EXPENSIVE THAN THE LATER ONES.

THE 700,000 DOLLAR FIGURE INCLUDES THE INTEREST RESERVE.*************************************************************************INT. PAYMENT X CONST. PERIOD = TOTAL CARRYING COSTS FOR THE CONST. PERIOD

84,000 DOLLARS X 2 YEARS = 156,000 DOLLARS*************************************************************************RENT UP DEFICIT / CARRYING LOAN UP COSTS - DETERMINE, BASED ON THE FIRST MONTH OR YEAR OF INCOME, THE FACTORING IN OF INTEREST TO FIND YOUR "LEASE-UP RESERVE".

YEAR 1 YEAR 2 YEAR 3 YEAR 4INCOME 100,000INTEREST 120,000

(20,000)

THE 20,000 DEFICIT IS THE REQUIRED LEASE UP RESERVE.

GENERAL AND ADMINISTRATIVE COSTS - THE DEVELOPER'S OVERHEAD, OR THE DEVELOPER'S FEE, SUCH AS THAT WITH A MERCHANT BUILDER.

MERCHANT BUILDER - A BUILDER WHO MAKES HIS PROFIT ON THE MARGIN BETWEEN HIS COST OF BUILDING THE PROJECT, AND THE AGREED UPON DELIVERY PRICE. COST OVERRUNS CUT INTO HIS PROFIT. EXCEPT FOR HIS EXPOSURE TO OVERRUNS, HE RARELY HAS AN EQUITY POSITION IN THE PROJECT, OPERATING COMPLETELY ON OTHER PEOPLE'S MONEY.

*************************************************PROJECTING RISK THROUGH THE ANALYSIS OF CASH FLOW*************************************************

SETUP - PROJECTED CASH FLOW BASED ON A STABILIZED PERIOD, IE. 3 TO 5 YEARS AFTER THE COMPLETION OF CONSTRUCTION. USE IT AS A TOOL TO ANALYZE CASH FLOWS.

AN EXAMPLE OF A SETUP WAS HANDED OUT. SEE "ONE COMMERCE SQUARE" (1

201

PAGE).

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 INVESTMENT2. OPPORTUNITY COSTS3. "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 PERCENTASSUME 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 RATE25% RELATES TO A TYPICAL LOAN RATE, SAY 10 PERCENT

75% X 10.5 = 7.87525% X 10.0 = + 2.5

10.375% = 10 3/8%

CAP RATES - YOU HAVE UP-FRONT CAPS AND TERMINAL CAPS.

NOI / CAP RATE = RESIDUAL VALUE

CAP RATES ARE INDUSTRY STANDARDS SET BY DEMONSTRATED DEMAND FOR THE TYPE OF REAL ESTATE USE, AS A REFLECTION OF INVESTOR'S EXPECTATIONS FOR INCOME GROWTH RELATIVE TO EQUITY INVESTMENT, DEBT SERVICE, AND OPERATING EXPENSES.

EXAMPLE OF NPV AND IRR USE.SEE "ONE COMMERCE SQUARE" SETUP

REALIZE THAT INCOMES PREDICTED BEYOND 10 YEARS ARE USELESS.

202

NCF X IF = PV1990 YR 1 2374 X 0.909041 =2158

2 3688 0.826446 =3048 3 4223 0.751315 =3173 4 4411 0.0683013 =3013 5 4169 0.620921 =2589 6 4286 0.564474 =2419 7 3536 0.513158 =1815 8 2342 0.466507 =1093 9 4027 0.424080 =1708 10 4840 0.385543 =21387

+50632 42198 $55472

ASSUME SALE IS ON THE FIRST OF THE YEAR FOLLOWING YEAR TEN. ADD THE PROCEEDS OF THE ELEVENTH YEAR SALE AFTER DEDUCTING REAL ESTATE COMMISSIONS, LEASING COMMISSIONS, TENANT IMPROVEMENTS AND MORTGAGE.

THE SALE OF THE PROPERTY FOR CAP RATE PURPOSES IS PREDICATED ON THE ELEVENTH YEAR NOI, NOT THE TENTH YEAR'S.

TAKE CASH FLOW / CAP RATE = SALE PRICE

5242 / 10% = 52,420,000LESS 3% COMMISSIONS= (1573000)LESS LEASING COMMISSION= (93000)LESS TI (TENANT IMPROVEMENTS)= (122000)LESS MORTGAGE = (0)NET PROCEEDS 50,632,000

THE INCOME STREAM OF ONE COMMERCE SQUARE GIVES THE PROPERTY A VALUE OF 42,200,000 DOLLARS BASED ON A CONSERVATIVE CAP RATE FOR INCOME PROPERTIES THAT ARE OFFICE USES, BASED ON THE NET PRESENT VALUE OF THE INCOME STREAM. END OF CLASS THREE

CLASS FOUR10/2/90

LEVERAGE - RELATES TO HOW EFFICIENTLY YOU CAN BORROW MONEY BASED ON THE INTEREST YOU PAY, OR BASED ON THE MORTGAGE CONSTANT ( INCLUDES INTEREST + PRINCIPAL REPAYMENT). IF THE CONSTANT IS LESS THAN THE RETURN ON THE PROPERTY, YOU HAVE POSITIVE LEVERAGE. IF THE RETURN OF THE ASSET (ROA) IS LESS THAN THE INTEREST RATE, IT IS CONSIDERED TO BE NEGATIVE LEVERAGE.

THINK OF LEVERAGE AS A FULCRUM WITH THE MORTGAGE CONSTANT AND THE PROJECT'S RETURN ON COSTS AS WEIGHTS.

203

******************FINANCIAL LEVERAGE******************

FOR A PROPERTY COSTING 1,000,000 DOLLARSPROJECTED NOI = 12%, OR 120,000 DOLLARS PER ANNUM

MORTGAGE CONSTANT (10%) EQUITY RETURN (30%) \\\\\--------------------------------------\\\\\\\\ ^ ^^^ RETURN = 12 PERCENT

(THE FULCRUM)

90 % LEVERAGE (900,000 DOLLAR LOAN AMOUNT)900,000*/10%** = 90,000 (THE DEBT SERVICE)* = PRICE OF PROPERTY LESS DOWNPAYMENT (10% MORT. CONSTANT)** = MORTGAGE CONSTANT

120,000* - 90,000 DOLLARS** = 30,000 DOLLARS * = THE NOI** = THE DEBT SERVICE

30,000 DOLLARS / 100,000 DOLLARS* = 30 PERCENT EQUITY RETURN* = 1,000,000 (THE PROPERTY PRICE) - 900,000 (LOAN AMT.) = 100,000 DOLLARS

WITH A MORTGAGE CONSTANT OF 10 PERCENT, AND A RETURN OF 12 PERCENT, YOU HAVE A RETURN ON EQUITY OF 30 PERCENT.

WITH A 13 PERCENT MORTGAGE CONSTANT AND THE 900,000 DOLLAR DEBT YOU ARE PAYING 117,000 INSTEAD OF 90,000. YOUR RETURN ON EQUITY WILL BE 3 PERCENT, THE FREE AND CLEAR RETURN.(120,000 - 117,000) / 100,000 = 3 PERCENT

DEMONSTRATIONLEVERAGE RATIO LOAN AMT. ROI (12%) MORT.CONST. CASH ON CASH

0% 0 12% 10% 12%25% 250,000 12% 10% 12.7%50% 500,000 12% 10% 14%75% 750,000 12% 10% 18%90% 900,000 12% 10% 30%

204

SWITCHING THE RATE FOR ROI AND MORTGAGE CONSTANT, WE HAVE THE FOLLOWING RESULTS:

LEVERAGE RATIO LOAN AMT. ROI (10%) MORT.CONST. CASH ON CASH 0% 0 10% 12% 10%25% 250,000 10% 12% 9.3%50% 500,000 10% 12% 8%75% 750,000 10% 12% 4%90% 900,000 10% 12% NEGATIVE

AS LONG AS THE LEVERAGE IS POSITIVE, INCREASING THE LOAN AMOUNT WILL INCREASE THE RATE OF RETURN.

LEVERAGE PLAYS AN IMPORTANT ROLE IN EVERY INVESTMENT. WITH PROPER LEVERAGE, YOU CAN CONTROL THE RATE OF RETURN FOR ANY TYPE OF INVESTMENT.

"MORTGAGE CONSTANT" IS THE SAME AS THE RATE OF INTEREST.

OPERATING LEVERAGE IS MORE FUNDAMENTAL TO AN INVESTMENT BECAUSE IT RESULTS FROM THE MOVEMENT OF INCOME AND EXPENSES. IT AFFECTS OPERATING EXPENSES, WHICH CONSIST OF TWO ASPECTS. THESE ARE: VARIABLE AND FIXED.

VARIABLE OPERATING EXPENSES ARE THE COSTS THAT YOU CAN ALLOCATE PER SQUARE FOOT, SUCH AS LABOR, CLEANING AND UTILITIES.

FIXED OPERATING EXPENSES ARE INSURANCE, HEATING AND FUEL, WATER, SEWER, AND MAINTENANCE. THEY'RE FIXED BECAUSE THE NUMBERS ARE PREDICTABLE, AND CAN NOT BE BROKEN DOWN INTO FURTHER UNITS OF WORK. THESE COSTS ARE NOT BASED ON OCCUPANCY, BUT ARE PAID WHETHER OR NOT YOU HAVE OCCUPANTS. FOR EXAMPLE, YOU ARE CHARGED THE SAME SEWER CONNECTION CHARGE REGARDLESS OF HOW MANY TENANTS YOU HAVE.

EXAMPLES:100% VARIABLE EXPENSES

1. IF YOU HAD NO FIXED EXPENSES WITH A NET RENTAL REVENUE OF 250,000, WITH OPERATING EXPENSES VARIABLE OF 150,000, THEN YOUR NET OPERATING INCOME IS 100,000.

2/3 VARIABLE EXPENSES

2. WITH THE SAME NET RENTAL OF 250,000 AND VARIABLE OF 2/3 OR 100,000,AND FIXED EXPENSES OF 50,000, YOU HAVE THE SAME NET OPERATING INCOME OF 100,000.

50% VARIABLE EXPENSES

205

3. IF YOU HAVE NET REVENUE OF 250,000 AND FIXED EXPENSES AND VARIABLE EXPENSES EVENLY SPLIT (75,000 EACH), THE NET OPERATING INCOME IS 100,000.

FOR THE NEXT YEAR, IF YOU WANT A 10 PERCENT INCREASE IN REVENUES TO 275,000 AND VARIABLES WENT UP TEN PERCENT IN THE SAME YEAR, NOI WOULD GO UP TO 110,000 DOLLARS IN CASE ONE, WHICH IS A 10 PERCENT INCREASE.

IN THE SECOND CASE, THE FIXED FEES OF 50,000 AND VARIABLES UP TO 110,000, YOU INCREASE THE NOI TO 15%.

IN THE THIRD CASE, WITH 75,000 AT FIXED AND 75,000 AT VARIABLE, A 10 PERCENT INCREASE IN VARIABLE EXPENSES WOULD BRING TOTAL EXPENSES TO 157,000, GIVING A 17.5% INCREASE IN NOI.

CASE 1 YEAR ONE YEAR TWO(10% INCREASE) RATE OF RETURN

NET REVENUE 250,000 275,000OPERATING EXP. RATE OF RETURN VARIABLE 150,000 165,000 IS 10 PERCENT FIXED 0 0 LEVERAGE = 1.0NOI 100,000 110,000

CASE 2 YEAR ONE YEAR TWO(10% INCREASE) RATE OF RETURN

NET REVENUE 250,000 275,000OPERATING EXP. RATE OF RETURN VARIABLE 100,000 110,000 IS 15 PERCENT FIXED 50,000 50,000 150,000 160,000 LEVERAGE = 1.5NOI 100,000 115,000

CASE 3 YEAR ONE YEAR TWO(10% INCREASE) RATE OF RETURN

NET REVENUE 250,000 275,000OPERATING EXP. RATE OF RETURN

206

VARIABLE 75,000 75,000 IS 17.5% FIXED 75,000 75,000 150,000 157,500 LEVERAGE =1.75NOI 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 OPINIONS1. PREMIERE LANDMARK INVESTMENT2. 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 BALANCING6. HIGHLY MARKETABLE STOCK - GOOD LIQUIDITY7. LIC - SECURITY8. 95% PAYOUT OF INCOME9. CONVERSION OPTION

ANTI-INVESTMENT OPINIONS1. CASH FLOW INSUFFICIENT TO PAY DEBT SERVICE2. OPTIMISTIC PROJECTIONS3. 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,

207

MANY REITS TOOK A DIVE IN VALUE.

TODAY REITS ARE MORE CONSERVATIVE AND LESS LEVERAGED. THEY ARE LONG TERM IN PERSPECTIVE, AND LOOK FOR PREFERRED RATES WITH INTERESTS IN THE PROPERTY, ETC.

EACH LOAN GOES TO A PROPERTY WHICH CONSISTS OF DEBT AND EQUITY. USING ROCKEFELLER CENTER AS AN EXAMPLE;

┌────────────────────────────────┐ │ │ │ │ ╔════════════╡ ROCKEFELLER CENTER REIT │ 1.3 BILLION DOLLARS ║ │ │ PARTICIPATING ║ └────────────────────────────────┘ MORTGAGE ║ \/ ║ CONVERTIBLE EQUITY ║ ┌────────────────────────────────┐ TO 71.5 PERCENT ║ │ │ ╠═════════════╡ │ ║ ║ │ BORROWER: ROCKEFELLER CENTER │ ║ ║ │ │ ║ ║ └────────────────────────────────┘ ║ ║ ╚═════════════╝

CAPITALIZED WITH 37,500,000 SHARES (750,000,000 DOLLARS)CURRENT COUPON CONVERTIBLE DEBENTURES, 8 TO 13% RATE (335,000,000)ZERO COUPON CONVERTIBLE DEBENTURES;

PRINCIPLE, 952,250,000YIELD TO MATURITY = 10.25% (215,000,000)

-----------------------------------TOTAL 1,300,000,000 DOLLARS

CURRENT COUPON MEANS THAT IT PAYS INTEREST ANNUALLY.

ZERO COUPON MEANS THAT IT PAYS NO INTEREST. A DEEP DISCOUNT BOND. IF YOU HAVE A RESTRICTED CASH FLOW AND DO NOT WANT TO PAY INTEREST YOU FLOAT ONE OF THESE BONDS. THE INVESTOR PAYS TAX ON THE IMPUTED INTEREST OF THE BOND ANNUALLY UNLESS THE INVESTOR IS TAX EXEMPT, LIKE AN IRA.

DEBENTURE IS AN UNSECURED BOND.

SERIAL ZERO COUPON BOND IS "SERIAL" BECAUSE EACH YEAR FOR THE LIFE OF THE BOND A CERTAIN AMOUNT OF THE DEBT MATURES.

PROFESSOR'S EVALUATION OF ROCKEFELLER CENTER

208

FACTS: APPRAISAL AS OF 1/1/86 IS 1.6 BILLION DOLLARSASSUMPTIONS: 7 PERCENT AVERAGE ANNUAL RENTAL GROWTH.

6% AVERAGE ANNUAL OTHER INCOME GROWTH. 6% INCREASE IN EXPENSES ANNUALLY 3% REAL ESTATE TAXES GROWTH

8 PERCENT CAPITALIZATION RATE 13% DISCOUNT RATE

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 '96IN MILLIONS 229.4NOI 89.8 95.1 98.6 103.4 109.2 113.5 117.1 121.0 122.8 220.1CAP IMPR. 29.8 26.2 20.0T.I. 3.0 2.3 2.0 SEE ROCKEFELLER CENTER DATALEAS.COMM. 2.8 2.1 1.8--------------------------------------------------------------------------NCF 54.2 64.5 74.7 80.2 81.0 80.6 93.7 105.0 10.4 197.0FREE &CLEAR

NCF DISCOUNT FACTOR DISCOUNTED CASH FLOWYEAR ONE 54 .884 48YEAR TWO 64 .783 50YEAR THREE 74 .693 51YEAR FOUR 80 .613 49YEAR FIVE 81 .542 44YEAR SIX 81 .480 43YEAR SEVEN 94 .425 40YEAR EIGHT 105 .376 39YEAR NINE 10 .302 3YEAR TEN 197 .294 58 847 425 + 729 = 1,154,000,000TAKING 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 FIVE10/9/90

TOPICS: MORTGAGES, INVESTMENT ANALYSIS (AS OPPOSED TO FINANCIAL ANALYSIS)

209

CARTWRIGHT DUE IN 2 WEEKS ON OCTOBER 23RD.INSTRUCTIONS AND GLOSSARY TO BE HANDED OUT NEXT WEEK.

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

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- ADJUSTABLE RATE2. FHA (FEDERAL HOUSING ADMINISTRATION)

- INSURED BY FED. GOV'T. TO LENDERS AGAINST DEFAULT. CREATED IN 1934 TO STABILIZE HOUSING INDUSTRY.

- TOUGH TO GET FOR INCOME PROPERTY DUE TO GUIDELINES.3. VA GUARANTEED

- NOT INSURED, YET GUARANTEED UP TO A SPECIFIC AMOUNT- HAS THE ADVANTAGE OF NO DOWNPAYMENT REQUIREMENT.- THE MAX. GUARANTEE IS FOR 135,000 DOLLARS BASED ON THE REGIONAL

ELIGIBLE AMOUNT.

FEDERAL RESERVE REGULATION Q REGULATED SAVINGS INSTITUTIONS ABILITY TO PAY INTEREST ON DEPOSITS OF 5.5 PERCENT. AFTER ABORTING REGULATION Q (DEREGULATION UNDER THE REAGAN ADMINISTRATION), SAVINGS INSTITUTIONS BID UP RATES TO COMPETE WITH OTHER INVESTMENTS. WITH THE FIXED PORTFOLIO IN THE AREA OF 6 TO 7 PERCENT, THE BANKS WERE FUNDING DEPOSITS AT 12 TO 15 PERCENT, RESULTING IN A MISMATCH OF INSTITUTIONAL CASH FLOW. THE RESPONSE TO THIS WAS THE VARIABLE, ADJUSTABLE AND EQUITY MORTGAGES.

80/20 FINANCING WAS ONE OF THE ONLY KINDS OF RENTAL HOUSING THAT THE FHA WOULD PROVIDE A GUARANTEE FOR DUE TO ITS PUBLIC BENEFIT OF PROVIDING HOUSING TO FAMILIES EARNING LESS THAN 80 PERCENT OF THE AREA'S MEDIAN FAMILY INCOME. IN A DEVELOPMENT, IF 80 PERCENT OF THE PROPERTY WAS AT MARKET RATES AND 20 PERCENT AT A RATE THESE FAMILIES COULD AFFORD, THE FHA WOULD GUARANTEE IT. BONDS WERE CREATED AND SOLD TO INVESTORS WITH AN FHA GUARANTEE, TAX EXEMPT WITH INTEREST RATES IN THE 6 TO 7 PERCENT RANGE. 1986 SAW THE END OF THIS AT THE HAND OF THE INTERNAL REVENUE SERVICE.

THE BANK REVIEWS THE BORROWER'S INCOME WITH A POINT SYSTEM RATING PROCESS. FOR EVERY ITEM ON THE APPLICATION, SUCH AS PERIOD OF EMPLOYMENT, INCOME, ETC. AND THE LIKELIHOOD OF IT CONTINUING. THE ASSET VALUE WILL BE VERIFIED. ON THE BALANCE SHEET YOU SUBMIT THEY WILL LOOK FOR THE SOURCE OF YOUR DOWNPAYMENT, SUCH AS CASH, I.O.U.'S, ETC. THEY WILL LOOK AT YOUR CREDIT HISTORY. THEY WILL WANT AN ESTIMATE OF HOUSING EXPENSES, CONSISTING OF PRINCIPAL, INTEREST, PROPERTY TAX, INSURANCE, UTILITIES, ETC. THEY WILL WANT TO KNOW WHAT YOUR FINANCIAL OBLIGATIONS ARE.

FEDERAL RESERVE REGULATION THREE PROHIBITS DISCRIMINATION. REDLINING IS ILLEGAL, AND IS THE EVIDENCE OF DISCRIMINATING AGAINST A NEIGHBORHOOD (DIFFERENT THAN THAT OF REGULATION THREE). PROOF OF REDLINING IS THAT, FOR EXAMPLE, A BANK HAS MORTGAGES IN ALL OF BROOKLYN EXCEPT BROWNSVILLE. IF THE BANK THINKS BROWNSVILLE IS GOOD ENOUGH TO HAVE BRANCH THERE TO TAKE THE RESIDENT'S MONEY, THEN THEY SHOULD FEEL THAT THE COMMUNITY IS WORTH RISKING MAKING MORTGAGES IN.

AFTER REVIEW AND APPROVAL, A COMMITMENT IS GIVEN TELLING THE TERMS OF THE LOAN, SUCH AS TERM, POINTS, RATE, ETC. IN CLOSING THE LOAN, THERE ARE

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FINANCING COSTS AND OTHER COSTS THAT INCLUDE:

1. THE LOAN APPLICATION FEE2. CREDIT REPORT FEE3. LOAN ORIGINATION FEE (POINTS)4. ATTORNEY'S FEES5. SURVEY FEE6. LOAN DISCOUNT FEE7. PREPAID INTEREST8. APPRAISAL FEE9. ESCROW ACCT. FOR INSURANCE AND TAXES10. TITLE INSURANCE

REAL ESTATE SETTLEMENT AND PROCEDURES ACT (RESPA) ──┬─FORMS NEED TO BE │ FILLED OUT AND │ DISTRIBUTEDTRUTH IN LENDING ACT────────────────────────────────┘**********

ARM'S- ADJUSTABLE RATE MORTGAGE - INDEXED OF 6, 12, AND 36 MONTH TREASURY BONDS, OR OFF THE FEDERAL HOME LOAN BANK BOND INDEX.

YOU HAVE AN INITIAL INTEREST RATE THAT IS LOWER THAN THE PREVAILING RATE. THEN A SPREAD OVER THE INDEX, CALLED A MARGIN, IS APPLIED AFTER THE INITIAL PERIOD, SUCH AS 750 BASIS POINTS ABOVE THE 3 YEAR T-BILL. CAPS WILL LIMIT THE PERIODIC JUMP.

INVESTMENT ANALYSIS

PROPERTY TYPES:INCOME PROPERTIES - PROPERTY PURCHASED FOR THE PURPOSE OF RECEIVING AN INCOME STREAM.

RESIDENTIAL PROPERTYSINGLE FAMILY (ATTACHED AND DETACHED)MULTI-FAMILY (APARTMENT HOUSES)

HIGH RISE APARTMENTSLOW RISE APARTMENTSGARDEN APARTMENTS

COMMERCIAL PROPERTYOFFICE BUILDINGS

MULTI-TENANTCENTRAL BUSINESS DISTRICT (CBD), DISTINCT & SUBURBANSINGLE USER BUILDINGS

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IN CBD AND IN SUBURBIABUILD TO SUITOFFICE AND SHOWROOMRETAIL USES

REGIONAL MALLS (600 TO 800K S.F.)SUPER REGIONAL MALLS (1000K S.F.)NEIGHBORHOOD CENTER (200 TO 300K S.F.)STRIP CENTERSPECIALTY CENTERDISCOUNT CENTER

INDUSTRIALHEAVY MANUFACTURINGLIGHT MANUFACTURINGFLEX SPACE (OFFICE/WAREHOUSE)RESEARCH AND DEVELOPMENTWAREHOUSE SPACE

HOTEL/MOTELCONVENTION/BUSINESS CENTERSTOURIST/RESORT CENTERS

RECREATIONALGOLF CLUBSMARINASSPORTS COMPLEXESAMUSEMENT PARKS

INSTITUTIONALHOSPITALUNIVERSITYGOVERNMENT

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

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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".* 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.------------------------------------------------------------------------TOTALRENTABLE S.F. 10,000

ASSUMPTIONS:* 6 MONTH VACANCY BETWEEN EACH LEASE* EACH TENANT PAYS PROPORTIONATE SHARE OF INCREASES OVER BASE FOR 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

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 1991 1992

MKT.RENT 50.00 52.50 55.13 57.88TI 5.00 5.25 5.51 5.79 RENEWAL YEARPH'S BASE RENT 150,000* 150,000 330,750***

330,750OPERATING ESCALATION 3,000** 4,200 0 1,323****TAX ESCALATION 30,000 32,700 0 2,977

* 6000 S.F. X 25.00/S.F. = 150,000

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** 40,000 TAX / 10,000 TOTAL S.F. = 4.004.00 ACTUAL COST - 3.50 BASE COST = 50 CENT PER S.F. ESCALATION50 CENTS X 6000 S.F. = 3000 DOLLARS*** 55.13 X 6000 = 330,750**** 4.41 = NEW BASE46305/10000 = 4.634.63 - 4.41= 22 CENTS22 CENTS X 6000 = 1323.00

YEAR 1989 1990 1991 1992

MKT.RENT 50.00 52.50 55.13 57.88TI 5.00 5.25 5.51 5.79 RENEWAL YEARWH'S BASE RENT 140,000 210,000 210,000

210,000OPERATING ESCALATION 0 0 840 1,722TAX ESCALATION 4,000 0* 1,890 3,875* 94,500 =NEW BASE--------------------------------------------------------------------------LESS VACANCY 0 (105,000) (165,375) 0EFFECTIVE GROSS INCOME 327,000 291,900 378,105

550,646LESS OPERATING EXPENSES (40,000) (42,000) (44,000)

(46,305)LESS TAXES (90,000) (94,500) (99,225) (104,185)════════════════════════════════════════════════════════════════════════NOI 197,000 155,400 234,780

400,155LESS T.I. 0 (21,000)* (33,075)

0LESS COMMISSION 0 (52,500) (82,688)**

0═══════════════════════════════════════════════════════════════════════NET CASH AVAILABLEFOR DEBT SERVICE 197,000 81,900119,018 400,155(A.K.A. NET CASH FLOW)

* 5.25 X 4,000 = 21,000** 330,750 MARKET X 25% = 82,688END OF CLASS FIVE

CLASS SIX - 10/16/90GUEST SPEAKER - BILL HAYNES: PRESIDENT OF THE BROMLEY COMPANIES

STARTED IN 1972, MANAGEMENT AND CONSULTATION FOR REAL ESTATE INVESTMENT.

WHAT DOES A DEVELOPER DO, AND HOW DOES HE DO IT? WHAT IS A DEVELOPER? A DEVELOPER IS TWO THINGS: HE IS A CONCEPTUALIZER, AND HE IS A DOER. HE

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TURNS HIS CONCEPT INTO REALITY.

THERE ARE A LOT OF GREAT THINKERS BUT DEVELOPERS ARE MEN OF 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 TEAMSMALL 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

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NEED OUTSIDE AUDITING, ACCOUNTING, AND TAX ADVICE (BOTH LEGAL AND ACCOUNTING). YOU ALSO NEED TO HIRE CONSTRUCTION MANAGERS.

NEGOTIATING CONTRACTS WITH CONSTRUCTION MANAGERS IS TOUGH. YOU NEED TO HIRE AN ATTORNEY WHO SPECIALIZES IN CONSTRUCTION AGREEMENTS. YOU CAN HIRE ON A FEE BASIS TO UPSET PRICE WITH SHARED SAVINGS, ETC. BUT SINCE THE MANAGER HAS MORE EXPERIENCE IN NEGOTIATION CONTRACTS THAN YOU DUE TO THE VOLUME OF WORK HE HAS DONE, YOU NEED EXPERT ADVICE FROM A SPECIALIZED ATTORNEY.

GENERAL CONTRACTORS DIFFER FROM MANAGERS BECAUSE THEY WORK SOLELY ON A FIXED FEE.

IN BONDING, YOU BOND ANY SUBCONTRACTOR YOU ARE WORRIED ABOUT, AS WELL AS THE KEY TRADES AFFECTING THE INITIAL BUILDING OF THE STRUCTURE, INCLUDING ELECTRICAL, MECHANICAL AND CONCRETE. ELEVATORS WOULD NOT BE BONDED. YOU DO NOT BOND THE ENTIRE JOB SINCE THIS IS NOT FISCALLY PRACTICAL.

SMALLER JOBS WILL BE REQUIRED TO HAVE A FULL BOND, THOUGH BIGGER FINANCING SOURCES NO LONGER REQUIRE FULL BONDS SINCE THEY DEPEND ON THE DEVELOPER'S TRACK RECORD, AND SINCE THE COSTS ARE SO HIGH. THE BOND ONLY GIVES YOU THE RIGHT TO SUE THE INSURANCE COMPANY, AND DOES NOT GUARANTEE RECOVERY OF THE BOND MONEY. LENDERS ALMOST UNIVERSALLY REQUIRE DEVELOPERS TO GUARANTEE THE COMPLETION OF THE JOB.

FINANCIAL INSTRUMENTS: ILLUSTRATED BY AN EXAMPLE.

THE BROMLEY - 83RD AND BROADWAY

AFTER NETWORKING WITH LOEWS REAL ESTATE DIRECTOR, HAYNES PURCHASED LAND FROM THE LOEWS CORPORATION. NEEDED TO ACQUIRE LAND ON LONG-TERM CONTRACT WITHOUT PUTTING UP A LOT OF CASH. IDEALLY YOU DO NOT WANT TO PUT UP MONEY UNTIL SPADE HITS GROUND. BROMLEY PUT UP A LETTER OF CREDIT FOR 3/4 TO 1 PERCENT RATHER THAN PUT UP HIS OWN MONEY AT 9 TO 10 PERCENT FOR THE TWO YEARS HE TOOK TO ACQUIRE PERMITS. THIS SAVED 345,000 DOLLARS. THE LETTER OF CREDIT WAS FOR TWO YEARS. IT CAN BE BORROWED AGAINST AS COLLATERAL FOR THE SELLER.

THE ZONING VARIANCE WAS GOTTEN FOR ADDITIONAL BULK AND TO ALLOW TWO PARCELS TO BE JOINED TO MAKE ONE BUILDING. THE PARCEL WAS ALSO CAUGHT IN THE MIDDLE OF A ZONING CHANGE (CONTEXTUAL ZONING). ALL THE WHILE, THE OUTSIDE OF THE DESIGN WAS CHANGED TO SATISFY ZONING CRITERIA YET THE INSIDES WERE BEING REDESIGNED TO SATISFY CUSTOMERS.

CHASE BANK COMMITS TO FINANCE THE WHOLE JOB. A JAPANESE BANK JOINS AS A PARTNER IN EXCHANGE FOR TEACHING ITS PEOPLE HOW TO DEVELOP REAL ESTATE IN NEW YORK. THEY IN TURN BROUGHT IN MORE BANKS AND ALL WORKED WELL.

CONSTRUCTION TOOK PLACE DIRECTLY ONTO THE LOEWS THEATER. A LOT OF BLASTING TOOK PLACE TO INSTALL FOUNDATIONS INTO THE GRANITE HARDPAN.

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REMEMBER - "YOU DON'T MAKE THE MARKET, THE MARKET MAKES YOU."HARRY HELMSLEY

START MARKETING THE BUILDING THE DAY YOU SECURE THE LAND. NETWORK IT WITH BROKERS AND OTHERS.

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.

PEOPLE LIVE ON PERCEPTIONS. MARKET SUCCESS AND STRIVE FORE SUCCESS. NOTHING BREEDS FAILURE LIKE FAILURE.

FINANCING IS BASED IN PERMANENT FINANCING, WHICH IS SECURED ON RENTAL INCOME OR ABSORPTION FROM SALES.

THE LAST QUARTER OF THE YEAR IS EITHER GOOD OR BAD FOR GETTING FINANCING. THE FINANCIER EITHER HAS MONEY HE NEEDS TO UNLOAD BEFORE YEAR END, OR IF HE IS CLOSE TO EXCEEDING HIS BUDGET HE WILL WISH TO PUSH IT OVER TO THE NEXT YEAR.

SUCCESSFUL DEVELOPERS DO NOT TAKE RISKS. THEY ASSESS RISKS.

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

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LAWS DO CHANGE, HOWEVER, AND POTENTIAL CHANGES MUST BE CONSIDERED IN PLANNING.PRIOR TO 1986, REAL ESTATE INVESTMENT AND FINANCING WAS CONSIDERED TO BE AN EXCELLENT TAX SHELTER. THIS TAX BENEFIT CAUSED A LOT OF BUSINESS. ACCELERATED DEPRECIATION ON BUILDINGS ALLOWED A PROPERTY TO "WRITE DOWN" ITS INCOME, THEREBY CREATING A LOSS WHICH WHEN ADDED TO DEBT INTEREST COULD OFFSET INCOME. LOSSES PASSED THROUGH TO INVESTORS COULD REDUCE PERSONAL INCOME TAXES SUBSTANTIALLY. 1986'S ACT CHANGED THIS THROUGH CHANGES IN DEPRECIATION AND THE CONCEPT OF PASSIVE VS. ACTIVE PORTFOLIO INCOME. ADDITIONALLY, 1988 SAW A GRADUATED INCOME TAX WITH A 15 AND 28 PERCENT BRACKET APPLIED AS MARGINAL TAX RATES. INVESTMENT TAX CREDITS WERE RESTRICTED AND THE HANDLING OF CAPITAL GAINS WAS REVAMPED.

**************************FORMULA FOR TAXABLE INCOME**************************

TAXABLE INCOME = NET INCOME - DEPRECIATION - INTEREST ON DEBT

DEPRECIATION - THE 1986 ACT LENGTHENED THE DEPRECIABLE LIFE OF REAL ESTATE BY ELIMINATING ACCELERATED DEPRECIATION AND LENGTHENING THE TERM TO:

27.5 YEARS FOR RESIDENTIAL PROPERTIES31.5 YEARS FOR NON-RESIDENTIAL PROPERTIES

DEPRECIATION = COST OF IMPROVEMENT / DEPRECIATION PERIOD

IMPROVEMENT COST = ACQUISITION PRICE + ANY INSTALLATION COST, TRANSACTION COSTS AND LOAN POINTS AMORTIZED OVER THE LOAN TERM

LAND IS NOT A DEPRECIABLE ASSET.

GROSS SALES PRICE IS NOT ONLY MEASURED IN CASH EXCHANGED AT SALE, BUT IN TRANSFERRED DEBT, SERVICES, ETC.

GROSS SALES PRICE LESS SELLING EXPENSES = NET SALES PROCEEDS.

TAXABLE GAIN - THE ORIGINAL COST LESS ADJUSTED BASIS LESS CAPITAL IMPROVEMENTS LESS ACCUMULATED DEBTS.

SEE LAST WEEK'S EXAMPLE FOR MORE ON THE FOLLOWING PROBLEM

1989 1990 1991 1992 NET CASH 197,000 81,900119,018 400,155

DEPRECIATION PERIOD = 31.5 YEARSTAX RATE OF INVESTOR = 28 PERCENT15% OF VALUE ALLOCABLE TO LAND, 85% TO BUILDINGPURCHASE PRICE = 2,500,000

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1989 1990 1991 1992 PRETAX NOI 197,000 155,400 234,780DEPRECIATION(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 INCOMENOI 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 129,540 73,240129,46728% TAX 36,271 20,507 36,231

NET CASH FLOW 197,000 81,900119,018LESS TAXES (36,271) (20,507) 36,251 AFTER TAX CASH 160,729 61,39382,767

DEDUCTING TAXES FROM CASH FLOW GIVES YOU AFTER TAX CASH FLOW.

TAX ON SALE

NET SALE PRICE = 4,357,243LESS PURCHASE PRICE = (2,500,000)PLUS DEPRECIATION = 67,460 X 3 = 202,380PLUS ALLOCATION OF CAPITAL EXPENSES = 52,553

TAXABLE GAIN = 2,112,177FEDERAL TAX RATE = X 28%

TAXES 591,410

IF YOU LOOK AT THE INCOME FLOW, WE HAVE THE NET AFTER TAX CASH FLOW OF:

1989 1990 1991CASH FLOW 160,729 61,39382,767PLUS RESIDUAL VALUE -------- ------- 4,357,243LESS TAXES ON SALE-------- ------- (591,410)

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AFTER TAX CASH FLOW 160,729 61,3933,848,601

THE FORMAT IS AS FOLLOWS:

EFFECTIVE GROSSLESS OPERATING EXPENSESLESS REAL ESTATE TAX

EQUALS

NET OPERATING INCOMELESS TENANT WORKLESS COMMISSION

EQUALS

NET AVAILABLE FOR DEBT SERVICE (NET CASH FLOW)

END OF CLASS SIX

CLASS SEVEN

GUEST SPEAKER: MR. FRANK TROISICHIEF APPRAISER FOR MANUFACTURERS HANOVER TRUST

"REAL ESTATE IS A COMMODITY THAT HAS CYCLES. I HAVE BEEN THROUGH TWO HELLS - THIS (OF 1990) IS THE THIRD."

THE BULLSEYE OUTLOOK TO APPRAISAL ANALYSIS: ┌──────────────────────────┐│ │ MOVE FROM THE OUTSIDE IN, THIS IS, FROM THE│ THE MARKET │ MARKET STUDY OF DEMOGRAPHICS AND LOCAL SUPPLY│ │ AND DEMAND TO THE VALUATION PROCESS OF THOSE│ ┌─────────────┐ │ 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.

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"IF YOU DO YOUR MARKET ANALYSIS WELL, THE APPRAISAL IS A SNAP".

"ALL PROJECTS HAVE MINUSES....KNOW THEM".

KNOW GEOGRAPHY: IE. SEATTLE. A HEALTHY ECONOMY BECAUSE BOEING IS A HEALTHY FIRM. ATLANTA. CLAIMED TO BE RECESSION PROOF BECAUSE OF A DIVERSITY OF INDUSTRY.

KNOW LAW: IE. LOCAL LAW

KNOW SOCIOLOGY: IE. PEOPLE. TEN YEARS AGO YOU COULD NOT SELL 3 TO 4 BEDROOM UNITS IN MANHATTAN. TODAY YOU CAN'T SELL STUDIOS. THIS IS A 180 DEGREE REVERSAL OF THE SITUATION TEN YEARS AGO SINCE TODAY THE EXACT OPPOSITE IS TRUE.

KNOW ECONOMICS: BUILD WHERE COST EQUALS VALUE; THIS IS RARELY THE CASE HOWEVER. WHEN YOU BUILD THE PROPERTY SHOULD BE WORTH AT LEAST WHAT YOU PUT INTO IT.

REAL ESTATE IS A LONG TERM INVESTMENT/COMMODITY. IT COMPETES AGAINST OTHER COMMODITIES IN THE MARKET PLACE, AND HAS UNIQUE CHARACTERISTICS THAT NEED TO BE UNDERSTOOD.

VALUATION - THE PROCESS OF ESTIMATING MARKET VALUE, WHICH CONSISTS OF MANY THINGS. IT IS THE MOST PROBABLE CASH PRICE, IN A COMPETITIVE MARKET, WITH THE BUYER AND SELLER ACTING PRUDENTLY, WITH KNOWLEDGE, IN SELF-INTEREST, AND WITHOUT DURESS.

THE BUYER AND THE SELLER MUST BE MOTIVATED AND WELL-INFORMED. SPECIAL FINANCING CAN CLOUD THE VALUE OF THE PROPERTY. WHEN SOMEONE PUTS DOWN 25% HE MEANS BUSINESS. IF IT IS SOLD AT 0% DOWN, THEN THE PROPERTY IS BEING SOLD AT AN ACCOMMODATION PRICE, AND THE VALUE SHOULD BE ADJUSTED ACCORDINGLY TO A DISCOUNT.

EVALUATION - ADDRESSES SUPPLY AND DEMAND IN A MARKET PLACE. WHEN YOU DO A MARKET STUDY, YOU MUST TRY TO UNDERSTAND HOW THE MARKET WORKS....WHEN THINGS HAPPEN. IE. AFTER OCTOBER 87 AND THE STOCK MARKET CRASH, IT COULD HAVE BEEN SAID THAT THE MARKET FOLLOWING IS AN ENTIRELY DIFFERENT MARKET THAN THAT WHICH HAD PRECEDED IT. AN IMPETUS THAT CAN CHANGE MARKETS POSITIVELY WOULD BE A CHANGE IN THE DEPRECIATION RATE OF REAL ESTATE THAT ALLOWS ACCELERATION.

"PEOPLE CREATE AND DESTROY VALUE". OUTLOOK HAS A DEFINITE IMPACT ON THE MARKET.

KNOW THE CHARACTERISTICS OF MARKET STRUCTURE.IE. CLASS A, CLASS B, AND CLASS C ARE ALL OFFICE SPACE, YET THEY ARE NOT INTER-RELATED IN EVALUATION. THEY ARE DIFFERENT CLASSES OF REAL ESTATE. FOR EXAMPLE, IN NOTICING THAT CLASS B SPACE IN NEW JERSEY IS SIMILAR IN PRICE TO THAT OF CLASS B SPACE IN NEW YORK CITY, YOU CAN POSIT THAT NEW

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JERSEY CLASS B SPACE WILL LIKELY SUFFER ABSORPTION PROBLEMS. THIS WOULD NOT BE A GOOD EXTRAPOLATION TO MAKE ABOUT CLASS A OR C SPACE WITHOUT FIGURES TO SUPPORT IT, HOWEVER.

REAL ESTATE - THE PHYSICAL COMPONENTS OF LAND AND BUILDING.REAL PROPERTY - THE THINGS YOU DO NOT SEE- VIOLATIONS, TAXATION, BUILDING CODES. THEY ARE THINGS YOU DON'T SEE BUT THAT YOU ARE RESPONSIBLE FOR.PERSONAL PROPERTY - WHEN YOU REMOVE IT FROM THE REAL ESTATE DO YOU CREATE INJURY. IF NOT, IT IS PERSONAL PROPERTY RATHER THAN REAL PROPERTY.

COST DOES NOT DETERMINE VALUE. PRICE IS WHAT A PARTICULAR PURCHASER AGREES TO PAY AND WHAT THE PURCHASER AGREES TO ACCEPT. IT IS WHOLLY SUBJECTIVE RATHER THAN OBJECTIVE.

INVESTMENT VALUE- THE VALUE OF AN INVESTMENT TO A PARTICULAR INVESTOR.

LIQUIDATION VALUE - THE PRICE THAT OWNERS ARE COMPELLED TO SELL FOR IN A DOWN MARKET. IT IS A VALUE NOT BASED ON PRUDENCE. IT IS BASED ON PANIC.

PEOPLE BUY REAL ESTATE BASED ON ANTICIPATION OF GAIN RATHER THAN ON ANNUAL RETURN.

"PRESENT WORTH" FOR FUTURE ANTICIPATION IS WHAT YOU MUST ANALYZE. YOU MUST UNDERSTAND WHAT THE MARKET WILL BE LIKE WHEN THE PRODUCT COMES ON LINE AFTER THE CONSTRUCTION PERIOD.

THE VALUATION PROCESS:

DATE OF VALUE ESTIMATE - THE DAY YOU INSPECT THE REAL ESTATE, NOT THE DATE YOU ISSUE THE APPRAISAL REPORT.

"VALUE IS AN ART, NOT A SCIENCE. CALCULATORS DO NOT REALLY SOLVE THE QUESTION OF VALUE COMPLETELY".

COST METHOD OF EVALUATION IS RARELY USED, EXCEPT FOR PRODUCTS THAT ARE NOT DESIGNED TO GENERATE INCOME, SUCH AS A LIBRARY.

FROM SALES, YOU CAN EXTRACT UNITS OF COMPARISON. I.E. FINDING OUT GROSS AREA OF BUILDINGS AND NUMBERS OF UNITS CAN HELP YOU TO FIND A COMPARATIVE PRICE PER S.F. OR PER UNIT.

INCOME CAPITALIZATION - PEOPLE WHO BUY REAL ESTATE ARE INTERESTED IN REVENUE FLOW. RATES DEPEND ON WHETHER LEASES ARE ROLLING OVER INTO A WEAK OR A STRONG MARKET, MAINTENANCE PROGRAMS, ETC.

"A" RATED UTILITY BONDS ARE USED AS A BASE MEASURE WHEN RISK IS AN ISSUE. WHEN RISK IS NOT AN ISSUE, U.S. TREASURY BONDS ARE CONSIDERED A GOOD RATE, SUCH AS WHEN THE LEASE IS ISSUED TO A GOVERNMENT AGENCY.

DISCOUNT RATES DEPEND ON THE QUALITY OF THE TENANTS AMONGST OTHER THINGS.

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IE. 13% DISCOUNTS WITH A 9 3/4% REVERSION RATE.

250,000 S.F. OF OFFICE SPACE IS "MANAGEABLE". MORE THAN THAT IS DIFFICULT TO MANAGE, AND IS THEREFORE A BIGGER RISK.

END OF GUEST SPEAKER'S LECTURE

LOOK TO PREVIOUS LESSONS FOR MORE ON THE FOLLOWING EXAMPLES

1989 1990 1991 1992NET AVAILABLE 197,000 81,900119,018* 400155

4,357,243 AFTER TAX 160,729 61,3933,848,601

USING A 10 PERCENT DISCOUNT RATE, WHAT IS THE NPV?PURCHASE = 2.5 MILLION DOLLARSNPV = 1,109,858 DOLLARSAFTER TAX NPV = 588,366IRR AFTER TAX = 18.37%IRR BEFORE TAX = 25.03%

INITIAL CAP RATE = NOI / PURCHASE PRICETERMINAL CAP RATE = NOI / SALE PRICE

* 4,357,243 IS THE SALE PRICE, WHICH WHEN ADDED TO THE 119,018 CASH FLOW GIVES A TOTAL CASH FLOW OF 4,476,261 DOLLARS.

PRICE PER S.F. IS A MEASURE OF VALUE IN THAT YOU CAN LOOK AT THE REASONABLENESS OF THE PROPOSED PURCHASE PRICE.

IE. 36,000,000 / 175,000 S.F. = 205 DOLLARS PER S.F.

I WOULD HAVE TO EARN 20.50 DOLLARS PER S.F. TO GET FINANCING. IF OPERATING EXPENSES ARE 8.00 DOLLARS PER S.F., AND THE RESULTING 28.50 DOLLARS PER S.F. IS OVER THE MARKET LEVEL OF RENT, THE PROPERTY IS OVER-PRICED. IF MARKET RENT IS 21 DOLLARS PER S.F., THEN SUBTRACT 8.00 DOLLARS PER S.F. OPERATING EXPENSES TO ARRIVE AT 13 DOLLARS PER S.F.

13.00 X 175,000 S.F. = 2,275,000 / 10 PERCENT = 22,750,000 SALES PRICE.

CAP CONTRACT - A CAP OF INTEREST AT LIBOR, PRIME, COMMERCIAL PAPER OR OTHER INDEX FOR PRICING OF SHORT-TERM PAPER PLUS A BASIS POINT FACTOR. YOU ARE BUYING A FINANCIAL INSTRUMENT THAT AMOUNTS TO AN INSURANCE POLICY

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TO INSURE THE LARGEST INTEREST INCREASE POSSIBLE BEFORE INTEREST IS EFFECTIVELY FIXED.

COLLAR CONTRACT - A CAP CONTRACT SETS THE CEILING. COLLAR CONTACTS GOVERN THE FLOOR.

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 PERCENTCREDIT 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 EIGHT10/30/90CLASS DISCUSSION - ANGUS CARTWRIGHT

STEP ONE - DEFINE OBJECTIVES

MARTHA DeRIGHT

1. DIVERSIFICATION2. DOES NOT NEED THE INCOME, SO SHE IS LOOKING FOR CAPITAL APPRECIATION.3. NEEDS PROFESSIONAL MANAGEMENT

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4. MINIMUM RETURN OF 12 PERCENT.5. CAN DO A RISKIER INVESTMENT BECAUSE SHE DOES NOT HAVE TO WORRY ABOUT CASH FLOW.6. HAS 2.5 MILLION DOLLARS TO INVEST.

JAMES DeRIGHT

1. DIVERSIFICATION2. NEEDS CASH FLOW - SHELTERED3. LESS RISKY4. 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 S.F., BUILT IN 1978, 97 PERCENT OCCUPIED, 20 YEAR MORTGAGE.

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 IVY TERRACE FOWLER BUILDING

GROSS RENT 600,000 470,000 560,000 550,000

VACANCY 18,000 14,100 28,000 27,100

582,000 455,900 532,000 522,500

OP. EXP. 158,000 80,100 142,800 76,500

TAXES 84,000 65,800 67,200 66,000

NOI 340,000 310,000 322,000 380,000

FINANCING 268,125 282,550 264,560 299,060

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LEASE PMT. 0 0 20,000 55,000

PRETAX CF 71,880 27,450 37,440 23,936

EQUITY 800,000 400,000 500,000 1,000,000

DEBT RATIO 75% 85% 82% 72%

CAP AT PRCH. 10.63% 11.7% 11.5% 10.56%

CAP AT SALE 9.69% 12.22% 11.66% 8.49%

CASH ON CASH 8.98% 6.86% 7.49% 2.59%

INCR. IN VAL 46.9% 28.3% 32.14% 66.67%

NPV 494,500 381,025 359,469 571,620

IRR 22.01 25.5 23.51 20.42

PROF. INDEX 61.81 95.26 71.89 57.16

FINANCING OF REAL ESTATE SEE BOOK ON PAGE 598: FLOW OF FUNDS CONCEPT, AND SOURCES OF DEBT AND EQUITY IN THE ECONOMY.

SOURCES USES┌──────────────────────────────────┐ ┌───────────────────┐│ HOUSEHOLDS (SAVINGS) │ │ HOUSEHOLDS ││ BUSINESS (EARNINGS) ├───────────────> CONSUMER DURABLES││ NET FOREIGN INVESTMENT ├─┐ │ RESIDENCES ││ │ │ │ OTHER USES │└┬┬────────────────────────────────┘ │ │ │ ││ │ │ BUSINESS │ ││ │ │ PLANTS & EQUIP. │ ││ PRIMARY FINANCIAL INTERMEDIARIES│ │ INVENTORY LEVELS │ ││ ┌───────────────────────────────\/────────┐ │ OTHER USES │ ││ │ DEMAND DEPOSITS─┐ COMMERCIAL BANKS │ │ │ ││ │ NOW ACCOUNTS │─┐ SAVINGS & LOANS │ │ │ │└>│ SAVINGS ACCOUNTS│ │ MUTUAL SAVINGS │ └───────/\──────────┘ │ │ TIME DEPOSITS ──┘─┘ BANKS │ ║ │ │ │ ║ │ │ RESERVES: LIFE INSURANCE COMPANIES │ ┌──────────╨──────────┐ │ │ RESERVES: PENSION FUNDS AND TRUSTS │ │ │ │ │ SHARES: CREDIT UNIONS │ │ GOVERNMENT │ │ │ SHARES: INVESTMENT COMPANIES │ │ │ │ │ REAL ESTATE INVESTMENT TRUSTS │ └──────────/\─────────┘ │ │ MORTGAGE COMPANIES │ ║ │ │ OTHERS │ ║ ┌────────┐ │ │ │ ║ │FEDERAL │

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│ │ ╞═════════════╬═╡RESERVE │ │ │ │ ║ │ │ │ └──────╥──────────────────────────╥───────┘ ║ └───/\───┘ │ ║ ║ ║ ║ │ ║ ┌───────────────\/─────────────────────╨─────\/───┐ │ ║ │ CONSUMER LOANS │ │ ║ │ HOUSEHOLDS: MORTGAGE LOANS │ │ ║ │ OTHER ASSETS │ │ \/ │ │ │ FINANCIAL══════> BUSINESS: MORTGAGE LOANS │ │ ASSETS │ COMMERCIAL PAPER │ │ │ BANK LOANS │ │ │ CORPORATE STOCKS AND BONDS │ │ │ GOVERNMENT: US GOVERNMENT OBLIGATIONS │ │ │ STATE AND LOCAL OBLIGATIONS │ │ │ ISSUES OF FEDERAL AGENCIES │ │ │ │ │ └─────────────────────────────────────────/\──────┘ │ │ └─────────────────────────────────────────────────────────────┘

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 REQUIREMENTS2. DISCOUNT RATE CHARGED TO BANKS3. 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.

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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.

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. IE. 10 TO 11 PERCENT WHEN PRIME IS AT TEN PERCENT.

FINANCIAL INTERMEDIARIES

COMMERCIAL BANKSSAVINGS AND LOANSMUTUAL SAVINGS BANKSINSURANCE COMPANIESPENSION FUNDSFINANCE COMPANIESCREDIT UNIONSMORTGAGE BANKERSREITS

ALL OF THESE LENDERS CAN LEND OR INVEST MONEY FOR REAL ESTATE. INVESTMENT COULD BE THROUGH EQUITY OR THROUGH DEBT.

IN LOOKING AT THE RAISING OF EQUITY CAPITAL, THE MOST OBVIOUS SOURCE IS A JOINT VENTURE. ANY OF THE ABOVE CAN BE INVOLVED IN A JOINT VENTURE. IN THE GUISE OF A SUBORDINATE, CONVERTIBLE OR OTHER MORTGAGE, COMMERCIAL BANKS MAY BE, IN ESSENCE, JOINT VENTURERS. INSURANCE COMPANIES WILL EITHER OWN OUTRIGHT OR JOINT VENTURE.

GUARANTEED INVESTMENT CONTRACT (GIC) - OFTEN REFERRED TO BY ACRONYM, RHYMES WITH "STICK". MUCH OF THE INSURANCE COMPANY INVESTMENTS IN THE 1980'S WERE THROUGH GICS. IT IS A TYPE OF GUARANTEED RETURN. GICS ARE A PRODUCT THAT ONLY INSURANCE COMPANIES ISSUE. IT IS AN INSURED RETURN.

PENSION FUNDS - INVEST PRIMARILY IN EQUITYFINANCE COMPANIES - NOT BIG EQUITY PLAYERS, EXCEPT FOR THE BIGGEST FINANCE COMPANIES; MAY GIVE PARTICIPATING MORTGAGES.

IN THE EARLY 1970'S, THERE WERE SIGNIFICANT EQUITY DEVELOPMENT FINANCING THROUGH REITS. IT WAS ONE OF THE BEST WAYS OF INVESTING IN REAL ESTATE. IN THE 1980'S, WE HAD SPECULATIVE SYNDICATIONS USING LIMITED PARTNERSHIPS.

IN THE 1990'S, HOPEFULLY, THERE WILL BE THE GROWTH OF THE FOREIGN INVESTOR (DUTCH, ENGLISH, JAPANESE, SWEDISH).

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AS A DEVELOPER, IF I AM GOING TO ATTRACT EQUITY WITHOUT PUTTING MY OWN MONEY INTO IT, WHAT DO I HAVE TO OFFER THE EQUITY SOURCE?

1. A PREFERRED RETURN, IE. 8 TO 10 PERCENT.

ON A 100,000,000 INVESTMENT, WITH 60 PERCENT PRELEASED, I CAN GET A 70,000,000 DOLLAR LOAN. EQUITY WILL BE 30,000,000 DOLLARS, TO BE FOOTED BY THE EQUITY PARTNER. IN TURN, WE ARE OFFERING A 50 PERCENT INTEREST IN THE PROPERTY.

A CUMULATIVE PREFERENTIAL RETURN IS WHEN THE CASH FLOW IS NOT THERE TO MAKE DEBT PAYMENTS, SO IT ACCUMULATES WITH INTEREST UNTIL THE CASH FLOW OR SALE CAN PROVIDE THE RETURN.

2. 50 PERCENT OF THE CASH FLOW3. 50 PERCENT OF THE RESIDUAL

A LOOK BACK INTERNAL RATE OF RETURN IS A GUARANTEE OF A RETURN. FOR EXAMPLE, I WILL GUARANTEE YOU, AN EQUITY PARTNER, A 12 PERCENT TARGET INTERNAL RATE OF RETURN, AND YOU WERE AT A 8 TO 10 PERCENT PREFERRED RETURN WITH 50 PERCENT OF THE CASH FLOW AND 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 NINE11/6/90

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.

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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 5.5 PERCENT INTEREST FROM DEPOSITORS, YET CERTIFICATES OF DEPOSIT WERE PAYING AS MUCH AS 17 TO 18 PERCENT. REGULATION D WAS ANNULLED TO ALLOW S&L'S TO OFFER HIGHER RATES IN SAVINGS ACCOUNTS TO SAVERS. TO PAY THE HIGHER RATES, THE S&L'S TOOK GREATER RISKS. DISINTERMEDIATION IS WHEN BANKS PAID OUT MORE IN THESE INTEREST PAYMENTS THAN THEY WERE RECEIVING IN RETURN FROM THEIR ASSET PORTFOLIOS.

INSURANCE COMPANIES HAVE TWO WAYS OF SUPPLYING FUNDS TO REAL ESTATE INVESTORS:1. GENERAL ACCOUNT MONEY - FROM INSURANCE PREMIUMS2. OTHER MONEY - FROM GICS, OR FROM FEES FOR MANAGING AND ADVISING

PENSION FUNDS.

WHEN YOU GO TO AN INSURANCE COMPANY AND THEY APPROVE YOUR LOAN, THEY HAVE TO PUT THE FUNDING IN PLACE. IF YOU HAVE A TEN YEAR LOAN, THEY NEED TEN YEAR MONEY. SOME MAY ONLY HAVE 5 YEAR MONEY, WHILE OTHERS ONLY TEN MONEY. IF COMPANIES FEEL INTEREST RATES WILL BE GOING HIGHER, THEY WILL INVEST SHORT. IF THEY BELIEVE THE OPPOSITE THEY WILL INVEST LONG TERM ( IE., IN TEN YEAR INVESTMENTS AS OPPOSED TO 5 YEAR INVESTMENTS).

INSURANCE COMPANIES TEND TO BE MULTI-TERM LENDERS, FROM 5 TO 30 YEARS. MOST LEND BETWEEN 5 TO 15 YEARS. THEY ARE A FIXED RATE LENDER, PRICING OFF OF A SPREAD OVER THE TERM TREASURY BILLS. IF A 10 YEAR TREASURY CLOSES AT 8.5 PERCENT, ADD A SPREAD FOR AN A RATED DEAL OF 150 BASIS POINTS TO EQUAL A 10 PERCENT RATE (AS AN EXAMPLE).

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. THEY REQUIRE LOAN TO VALUE RATIOS OF 75 PERCENT.

INSURANCE COMPANIES LIKE AMORTIZATION. THEY MAY, HOWEVER, ALLOW INTEREST ONLY PAYMENTS FOR THE FIRST 2 OR 3 YEARS OF A LONG TERM LOAN IF CASH FLOWS ARE NOT ADEQUATE TO MAKE THE PAYMENT.

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COMMERCIAL BANKS HISTORICALLY HAVE BEEN SHORT TERM INTERIM LENDERS. FOR EXAMPLE, THEY LEND ON CONSTRUCTION LOANS, MINI-PERMS, AND BRIDGE FINANCING FROM 7 TO 10 YEARS IN DURATION.

A MINI-PERM FINANCING TAKES THE PROJECT THROUGH THE 2 TO 3 YEAR LEASE-UP PERIOD.

BRIDGE FINANCING COULD BE AN ACQUISITION LOAN WHERE MONEY IS ADVANCED TO THE PROJECT. LASTS 1 TO 7 YEARS.

COMMERCIAL BANKS OFFER FLOATING RATES (VARIABLE RATES) BASED ON A SPREAD OVER PRIME, LIBOR, FED FUNDS, CD INDEX OR OTHER OBJECTIVE STANDARD. FLOATING RATES CAN BE FIXED WITH SWAPS, COLLARS, AND CAPS, WHICH ARE ALL TYPES OF HEDGES. A HEDGE IS A TERM THAT DESCRIBES A FINANCIAL INSTRUMENT THAT IS PUT INTO PLACE TO BUFFER THE EFFECTS OF AN UNEXPECTED CHANGE IN A VARIABLE RATE.

COMMERCIAL BANKS WILL ALLOW PREPAYMENT IN MOST CASES. USUALLY COMMERCIAL BANKS DO NOT REQUIRE AMORTIZATION, AS NO ASSET IS LIKELY BUILT YET THAT CAN EARN A CASH FLOW. THEY REQUIRE 75% LOAN TO VALUE RATIO OR LOWER.

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. REFER TO PREVIOUS NOTES.

MASTER LIMITED PARTNERSHIPS - MLP'S CAN BE FORMED AS SUCH IN THE BEGINNING, OR BY A PROCESS CALLED ROLL-UP. ROLL-UPS ARE THE AGREEMENT OF THE PARTNERS OF SEPARATE LIMITED PARTNERSHIPS TO CONVERT THEIR ASSETS INTO SHARES OF A LARGER MASTER LIMITED PARTNERSHIP. SOME ROLL-UPS GIVE EQUIVALENT, LESSER, OR GREATER VALUE IN SHARES TO VALUE. THE NEW SHARES ARE PLACED ON THE MARKET AND CAN BE SOLD, THEREBY GRANTING THE BENEFIT OF LIQUIDITY. THE ASSET NEED NOT BE SOLD TO PULL EQUITY BACK OUT. A TOTAL OF 51 PERCENT OR MORE OF THE PARTNERS MUST AGREE TO JOIN A MLP. THE

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REASON FOR JOINING AN MLP, OTHER THAN LIQUIDITY, IS THAT THE SUM OF PARTNERSHIP ASSETS IS GREATER THAN THE PARTS DUE TO SUPERIOR DIVERSITY OF INVESTMENT.

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.

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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 ANALYSISLOAN ANALYSISEVALUATIONARCHITECT'S OR ENGINEER'S STUDYLEGAL ISSUES OF THE PROPERTYFINANCIAL 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. PEOPLE2. PURPOSE3. PAYMENT4. PROTECTION5. PERSPECTIVE

PEOPLE - VERY IMPORTANT TO ANY LENDER TRANSACTION. "PEOPLE" PAY BACK LOANS, NOT PROPERTIES. NO MATTER HOW GOOD AN INVESTMENT, BAD PEOPLE DO NOT PAY. NO MATTER HOW BAD AND INVESTMENT, GOOD PEOPLE ALWAYS PAY.

THINGS TO EXAMINE:THE LEGAL STRUCTURE OF THE BORROWER; GUARANTEES; CONTRACTORS AND SUBCONTRACTORS; TENANTS AND TENANT MIXES (RELATION TO THE MARKET), ARE THERE ANY TAKE OUTS ON THE CONSTRUCTION LOAN; WHAT ARE THE MOTIVES OF THE INVESTOR; IS HE RELIABLE; WHAT IS THE DEVELOPER'S BACKGROUND.

PURPOSE - WHAT IS THE PURPOSE OF THE PRODUCT WITHIN THE MARKET PLACE? REGARDLESS OF USE, HOW DOES THE PRODUCT FIT INTO THE MARKET PLACE? WHAT

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IS THE DESIGN OF THE BUILDING, AND HOW DOES IF FIT INTO THE MARKET?

PAYMENT- THE ABILITY OF THE PROJECT TO REPAY THE DEBT. 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

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MEASURED IN FEES (IE., 1/2 TO 1 PERCENT) OR IN RETURN OVER PRIME, LIBOR, OR OTHER STANDARD.

END OF CLASS NINE

CLASS TEN11/13/90

INFORMATION NEEDED BY THE LENDER FOR PRESENTATION TO THE CREDIT COMMITTEE LOAN REVIEW PACKAGE:

o INFORMATION ABOUT THE BORROWERo WHAT, WHERE, WHEN OF THE PROJECTo MARKET INFORMATION, AREA ECONOMICS, COMPARABLES, OPERATING EXPENSES, TYPE OF LOANo CASH FLOW ANALYSIS, ABILITY TO GET FINANCED OUT AT 5 TO 10 YEAR HORIZON

DEBT SERVICE COVERAGE (IE. 1.1 TO 1.3)DEBT CAPACITY = (NOI/DSC)/INT. RATE CONSTANT

(INT. RATE CONSTANT MEASUREMENT OF ABILITY TO REFINANCE AT 5 TO 10 YR. HORIZON NEEDS TO BE PREDICTED AT THE HORIZON TIME).

IN STUDYING PROJECTED CASH FLOWS, BE CAREFUL TO EXAMINE THE GROWTH ASSUMPTIONS, PARTICULARLY WHEN THE CASH FLOWS ARE NOTED WITH "PROJECTIONS SUPPLIED BY BORROWER". DEVELOPERS CAN BE OPTIMISTIC

TO A FAULT. IT IS YOUR JOB TO DETERMINE CREDIBLE ASSUMPTIONS.

BULLET LOAN - A LOAN THAT IS INTEREST ONLY.

BALLOON LOAN - A PARTIALLY AMORTIZING LOAN, WITH THE MAJORITY OF EACH PERIODIC PAYMENT CONSISTING OF INTEREST.

WHEN LEASES COME DUE DURING THE LOAN PERIOD, EXAMINE WHETHER OR NOT THE MARKET IS GROWING, STAYING LEVEL OR SLIDING WITH RESPECT TO RENTS. THIS HAS A BEARING ON THE FUTURE REFINANCING OF THE SITE.

COLLATERAL SECURITY - EXAMINE THE GUARANTEES, LETTERS OF CREDIT, LOAN TO VALUE RATIO, APPRAISALS, TAKEOUTS AND TRI-PARTY AGREEMENTS, INSURANCE, AND SWAPS REQUIRED BY THE LENDER OR NEGOTIATED BY THE BORROWER.

AFTER EXAMINING THE DATA, YOU WILL DECLINE, RECOMMEND, OR MODIFY THE TERMS AND AMOUNTS OF THE LOAN. ASSUME FOR THE SAKE OF THE FINANCING ASSIGNMENT THAT THE BORROWER IS THE BANK PRESIDENT'S BEST FRIEND AND THAT HE NEEDS GOOD REASONS NOT TO MAKE THE LOAN.

PUT / CALL - AN OBLIGATION UPON THE SELLER TO SELL HIS PROPERTY WHEN THE PURCHASER ISSUES HIS OPTION TO BUY. THIS OPTION TO BUY IS A "CALL". WHEN THE OBLIGATION OF THE BUYER TO BUY IS ENFORCED BY THE SELLER HOLDING THIS OPTION, THIS OPTION IS CALLED A "PUT".

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CALLS ARE HELD BY THE PURCHASERS AND PUTS ARE HELD BY SELLERS. A PUT / CALL AGREEMENT MEANS THAT THE POTENTIAL PURCHASER AND THE POTENTIAL SELLER HAVE AGREED TO SELL OR PURCHASE (AS APPLICABLE) THE PROPERTY UPON THE REQUEST OF THE OTHER PARTY TO THE AGREEMENT. THERE IS NOT A REQUIREMENT TO EXERCISE THIS OPTION.

GIVEN A CASE AS FOLLOWS:

* THE BUYER AGREES TO PAY 4.9 MILLION DOLLARS PER YEAR FOR A 4 YEAR PERIOD, OR UNTIL A 70 PERCENT OCCUPANCY IS REACHED, WHICHEVER IS LONGER.

* THE BUILDING IS 350,000 S.F.

* THE MARKET RENTS ARE 34 DOLLARS PER S.F.

* THE COST TO BUILD IS 150 DOLLARS PER S.F.

* THE BORROWER WISHES TO BORROW 52,500,000 DOLLARS.

* OPERATING EXPENSES ARE PREDICTED TO BE 10 DOLLARS PER S.F.

* THERE IS A 10 YEAR PUT / CALL FOR THE PROPERTY FOR 63 MILLION DOLLARS.

14 DOLLARS PER S.F. WILL BE SPENT ON THE LAND LEASE PER ANNUM (4.9 M / 350 K = 14.00 ) FOR THE FIRST FOUR YEARS.

THERE IS A 15 DOLLARS PER S.F. DEBT SERVICE ON THE 52.5 MILLION THAT WAS BORROWED FOR THE BUILDING'S CONSTRUCTION ( 52.5M X .10 INT. CONSTANT / 350K = 15.00 )

14 + 15 = 29 DOLLARS + 10 DOLLARS FOR OPERATING EXPENSES = 39 DOLLARS PER S.F. PER YEAR. THIS IS FIVE DOLLARS OVER MARKET RENT, PRESENTING A LOSS. THE BENEFIT OF THIS AGREEMENT IS THAT THE MONEY FOR THE LAND SALE IS ALL AT THE END OF THE REFINANCE PERIOD (YEAR TEN) AND THAT A GREATER AMOUNT OF MONEY COULD BE BORROWED TO FUND CONSTRUCTION OF THE 52.5 MILLION DOLLAR BUILDING.

******************* LOANS *******************

FIXED RATE MORTGAGE - (CONVENTIONAL) 15 TO 25 YEARS. TODAY, MOST OF THESE LOANS ARE AT 10 YEARS.

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THE LOANS WERE MEANT TO APPROXIMATE THE ECONOMIC LIFE OF THE PROPERTY. IN RECENT YEARS, DUE TO UNPREDICTABLE ECONOMIC CONDITIONS, FIXED RATE MORTGAGES HAVE BEEN REDEFINED TO BE SHORTER AS OPPOSED TO LONGER TERM, THE STANDARD NO LONGER BEING APPLIED TO THE PROPERTIES ECONOMIC LIFE. BECAUSE TERMS ARE SHORTER, THE LOANS CANNOT BE FULLY AMORTIZED OVER THE LOAN TERM. THERE WILL BE A BALLOON PAYMENT AT THE END OF THE LOAN TERM, AS AMORTIZATION TERMS ARE FIGURED OVER A LONGER PERIOD, SUCH AS 25 TO 40 YEARS.

INSURANCE COMPANIES, PENSION FUNDS, THRIFTS, ETC. TEND TO BE SOURCES OF FIXED RATE MORTGAGES. FIXED RATE MORTGAGES HAVE A PREPAYMENT PENALTY, AS WELL AS DUE ON SALE CLAUSES. IF YOU SELL THE PROPERTY THE LOAN BECOMES DUE. SOMETIMES, THE LENDER CONSIDERS WHO THE SALE IS TO IN DETERMINING WHETHER TO EXERCISE THE DUE ON SALE CLAUSE. IT IS POSSIBLE NOT TO EXERCISE THE CLAUSE SIMPLY BY TRANSFERRING THE MORTGAGE TO THE NEW BUYER, WHO IN TURN WOULD BECOME THE NEW BORROWER BY ASSIGNMENT. DUE ON SALE CLAUSES DO NOT NORMALLY ALLOW ASSIGNMENT UNLESS THIS IS NEGOTIATED INTO THE LOAN COMMITMENT.

IF YOU EXPECT RATES TO GO UP OR IF RATES ARE LOW, YOU WILL SEEK A FIXED RATE MORTGAGE. OTHERWISE YOU WILL SEEK A VARIABLE RATE MORTGAGE.

RATES ARE OFTEN SET ON A TERM TREASURY PLUS A SPREAD, SUCH AS IN THE FOLLOWING EXAMPLE:

5 YR MONEY 10 YR MONEY

IF TERM TREASURY IS 8.00 8.35PLUS 150 BASIS POINT SPREAD 1.50 1.60

(160 FOR 10 YR.)----- -----9.5% 9.95%

VARIABLE RATE MORTGAGE (ALSO CALLED FLOATING RATE MORTGAGE) - A PERMANENT LOAN THAT FEATURES AN INTEREST RATE THAT VARIES OVER TIME, BASED UPON A FORMULA PEGGED TO FED FUNDS, LIBOR, PRIME RATE OR OTHER INDEX.

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

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AAA 60 TO 75 BASIS POINTSAA 100 BASIS POINTSZZZ 250 BASIS POINTS

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 rate0.7% 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 RATESMIN. RENT PER S.F.FINANCIAL CONDITIONS GUARANTEE3.0% + PRIME RATE2% FINANCING FEE15% PARTICIPATION INTERESTCHANGE 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

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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 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?

COMPLETION RISK IS OFFSET BY:1. EQUITY2. GUARANTEES OF COMPLETION

CONSTRUCTION DRAWS ARE PARTIALLY WITHHELD ( CALLED RETAINAGE ) TO ASSURE THAT SUBCONTRACTORS WILL COMPLETE WORK ( 5 TO 15% WITHHOLDING ).

CONSTRUCTION LOAN AGREEMENTS DESCRIBE THE CONDITIONS FOR DISPENSING PAYMENTS ON CONSTRUCTION PROJECTS. IN NEW YORK STATE, THE LOAN MUST BE SPLIT INTO TWO DISTINCT PARTS.

1. THE BUILDING LOAN AGREEMENT2. THE PROJECT LOAN AGREEMENT

THE BUILDING LOAN AGREEMENT COVERS ALL COSTS ATTRIBUTABLE TO THE

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BUILDING, SUCH AS BRICKS, MORTAR, ARCHITECT'S FEES, ETC. BOTH AGREEMENTS ARE FILED UNDER THE NEW YORK STATE LIEN LAW. IT LIST THE FINANCING AND THE TERMS SO THAT CONTRACTORS AND DEVELOPERS CAN GIVE NOTICE TO EACH OTHER AS TO PRIORITY OF LIEN.

FOR EXAMPLE:

THE JOB BEGINS IN MONTH ZERO AND 500,000 DOLLARS IS DISTRIBUTED PER MONTH AS THE DRAW DOWN. IN MONTH THREE A DISPUTE BETWEEN THE CONTRACTOR AND THE DEVELOPER OCCURS. THE CONTRACTOR HAS THE RIGHT TO FILE HIS LIEN WITH THE STATE. IF HE FILES IN MONTH THREE, HIS LIEN GAINS PRIORITY OVER THE 500,000 DOLLAR DRAW DOWNS IN THE FOLLOWING MONTHS. IF HE DOES NOT FILE HIS LIEN UNTIL MONTH SEVEN, HIS LIEN TAKES PRIORITY OVER PAYMENTS IN THE FOLLOWING PERIODS, EVEN THOUGH THE DISPUTE GOES BACK TO MONTH THREE, UNLESS THE DRAW DOWN IN MONTHS FOUR THROUGH SEVEN WERE NOT RECORDED WITH THE STATE BY THE CONSTRUCTION LENDER. IN THAT EVENT, THE LIEN WOULD GAIN PRIORITY ALL THE WAY BACK TO MONTH THREE.

FOR THIS REASON, ALL DRAW DOWNS ARE RECORDED BY THE CONSTRUCTION LENDER WITH THE STATE UNDER THE LIEN LAW. ADDITIONALLY, CONSTRUCTION LENDERS WILL NOT AGREE TO DISTRIBUTE THE DRAW DOWN UNTIL THE DISPUTE WITH THE CONTRACTOR IS RESOLVED, EITHER BY BOND, ARBITRATION OR DIRECT PAYOFF.

END OF CLASS TEN

CLASS ELEVEN11/20/90

MIKE DeJACAMOYALE - ATTORNEYGRAD FORDHAM LAWWORKED FOR DEWEY VALENTINE

MOVED FROM D.V. TO KIDDER PEABODY AS A PRINCIPAL IN FINANCING DEALING WITH ASSET BASED LENDING WITH AN EMPHASIS IN REAL ESTATE.

NOW WORKS FOR JONES LANG WOOTTON.

************************************************************************THE USE OF CAPITAL MARKETS TO FINANCE REAL ESTATE FOR COMMERCIAL MORTGAGES AND OTHER MORTGAGES**************************************************************************

CHRONOLOGICAL OVERVIEW OF ASSET FINANCE

ASSET SECURITIZATION - THE PROCESS BY WHICH LIQUID FINANCIAL ASSETS ARE TURNED INTO CAPITAL MARKET ASSETS. THE CREATION OF DEBT SECURITIES, BACKED BY SPECIFIED POOLS OF ASSETS AND SOLD IN THE MARKET. THE ASSET CAN BE ANY INSTRUMENT THAT PRODUCES AN INCOME STREAM.

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HISTORY

FIRST ASSET SECURITY CREATED 15 YEARS AGO. THEY WERE PASS THROUGH SECURITIES CREATED BY FREDDIE MAC, GINNIE MAE AND FANNIE MAE. THE FIRST ASSET SECURITIES WERE POOLS OF SINGLE FAMILY LOANS. AS INSTRUMENTS OF FEDERAL AGENCIES, THEY WERE CONSIDERED AAA INSTRUMENTS.

PASS THROUGH SECURITIES ARE AN UNDIVIDED INTEREST OF PRINCIPAL AND INTEREST OF THE PASS THROUGH SECURITY POOL.

┌──────────────────┐│ 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 │ │└──────────────────┘ │POOL OF MORTGAGES WORTH MILLIONS─┘X = INDIVIDUAL MORTGAGE WORTH THOUSANDS

THE PREPAYMENT ASPECT OF THE SECURITY IS INTEREST RATE SENSITIVE. AS INTEREST RATES GO DOWN, LOWER PAYMENT INCENTIVES CAUSE MORTGAGE HOLDER "X" TO PREPAY AND GET A LOWER LOAN RATE. THE HOLDER OF THE SECURITY TAKES A SHARE OF PREPAYMENTS. UNPREDICTABILITY OF PREPAYMENT MADE THE SECURITY LESS ATTRACTIVE TO INVESTORS.

APPROXIMATELY 100 MILLION IS THE TYPICAL POOL SIZE.

WEIGHTED AVERAGE MATURITY (WAM)─┬───┐WEIGHTED AVERAGE COUPON (WAC) ──┘ │┌───────────────────────────────────┘└CALCULATED RATES PASSED THROUGH TO INVESTORS. IT IS DETERMINED BY AVERAGING ALL OF THE INDIVIDUAL MORTGAGE RATES. GINNIE MAE TAKES A SMALL CUT TO PROVIDE THE GUARANTEE.

THE CMO, OR COLLATERALIZED MORTGAGE OBLIGATION WAS A REORIENTING OF CASH FLOW FROM THE PASS THROUGH SECURITY TO OVERCOME THE UNCERTAINTIES OF PREPAYMENT OF INDIVIDUAL MORTGAGES IN THE POOL.

THERE ARE FOUR CLASSES OF CMO. ALL THE PREPAYMENTS IN THE POOL ARE FIRST ASSIGNED TO PAY OFF THE CLASS I CMO. AFTER PAY OFF OF CLASS ONE, THE COMES CLASS II AND SO FORTH. IF YOU WANT A LONGER PERIOD BEFORE YOUR SECURITY "MATURES", YOU BUY A CLASS III OR IV CMO. YOU CAN GENERALLY CALCULATE LIFE SPANS, IE., CLASS I = 3 YEARS, CLASS II = 7 YEARS, CLASS III = 10 TO 12 YEARS, AND CLASS IV = 15 TO 17 YEARS.

INSTEAD OF THE MONTHLY PAYMENTS RECEIVED WITH PASS THROUGHS, CMO'S HAVE

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QUARTERLY PAYMENTS. INSTITUTIONAL INVESTORS PREFER THIS FOR ACCOUNTING SIMPLICITY REASONS.

SECURITIZATION OF COMMERCIAL MORTGAGES

THE MOTIVATION FOR COMMERCIAL MORTGAGE SECURITIZATION:

WE WILL SEE MORE SECURITIZATION OF COMMERCIAL MORTGAGES BECAUSE TRADITIONAL LENDING SOURCES ARE DISAPPEARING AS A SOURCE FOR LENDING. FURTHERMORE, SECURITIZATION IS A MORE EFFICIENT MEANS OF SECURING SHORT TERM FUNDING BY CUTTING OUT THE MIDDLEMEN AND GOING TO THE SOURCE OF THE MONEY.

THERE ARE TWO KINDS OF SECURITIZED GENERIC COMMERCIAL MORTGAGE.

1. ON A SINGLE PROPERTY ( "PROPERTY SPECIFIC SECURITY" )2. POOLED FINANCINGS - POOLS OF COMMERCIAL MORTGAGES ON MANY COMMERCIAL

PROPERTIES ( "ACTUARIAL MORTGAGE SECURITY")

SECURITIZATION IS A TWO STEP PROCESS:

1. OBTAIN A CREDIT RATING FROM FITCHES DUFF & PHELPS, MOODY'S, OR FROM STANDARD & POOR'S. YOU NEED A CREDIT RATING TO GIVE THE INVESTOR WITH NO UNDERSTANDING OF THE INVESTMENT A SENSE OF SECURITY ABOUT HIS INVESTMENT. THE RATING MAKES THE LARGER MARKET MORE CERTAIN OF THE INVESTMENTS QUALITY.

2. EXECUTE THE TRADE.

HOW DO YOU GET THE RATING?o METHOD ONE

1. FROM A RATING AGENCY, PARTICULARLY STANDARD & POOR AND MOODY HAVE COME UP WITH TECHNIQUES OF RATING THE BOND.

A. GETTING ONE FOR A PROPERTY SPECIFIC SECURITY CANT TAKE A LONG TIME (AS MUCH AS SIX MONTHS TO A YEAR).

B. THEY ARE VERY CONSERVATIVE - ALMOST DRACONIAN.C. THERE IS A SKEPTICISM ABOUT RATINGS APPLIED TO SPECIFIC PROPERTIES.

THE MARKET WILL PRICE THE PAPER CHEAPLY (AT A HIGHER INTEREST RATE) REGARDLESS OF THE RATING GIVEN BY THE RATING AGENCY.

RATING AGENCIES GET PAID A PERCENTAGE FEE ON THE DEAL AT CLOSING. THEY WILL REQUIRE EXPENSES AND A BREAK-UP FEE IF THE DEAL DOES NOT CLOSE.

o THE SECOND TECHNIQUE FOR GETTING A RATING:

STRUCTURE THE TRANSACTION TO GAIN THE DESIRED RATING.

IE. A GIVEN OFFICE BUILDING:┌──────────────────────┐│ SENIOR │═╦╗

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│ SECURITY │ ║║│ │ ║║│ 65 % │ ║║│ │ ╠╬═══ 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 THE THIRD TECHNIQUE FOR GETTING A RATING:

GIVE THE CREDIT WORTHINESS OF THE TENANT A ROLE IN THE SECURITIZATION. IE. AAA RATING PROVIDED TO A TRIPLE NET LEASE TO THE FEDERAL GOVERNMENT. PRESENT VALUE THE LEASE AMOUNTS TO PRESENT DAY AND RAISE FUNDS TO EQUAL THE AMOUNT.

o THE FOURTH TECHNIQUE FOR GETTING A RATING:

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:

FSA - FINANCIAL SECURITY ASSURANCETHEY ARE AAA RATED, A NEW YORK INSURANCE COMPANY OWNED BY US WEST.

FGIC - FINANCIAL GUARANTEE INSURANCE CORPORATIONTHEY ARE AAA RATED, WHOLLY OWNED BY GENERAL ELECTRIC CAPITAL

CAPMAC - CAPITAL MARKETS ASSURANCE CORPORATIONTHEY ARE AAA RATED, OWNED BY CITIBANK

THEY ALL PROVIDE INSURANCE FOR A 45 TO 50 BASIS POINTS PER YEAR FEE.

VERY LARGE DEALS HAVE THE APPEARANCE OF LIQUIDITY.

A TRANSACTION BELOW 50 MILLION DOLLARS WOULD NOT BE FINANCED BY

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SECURITIZATION.

NOTE THAT CREDIT ENHANCING INSTITUTIONS ARE NOT THE SAME AS RATING 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. THE 4TH WILL BE SPENT IN REVIEW AND DISCUSSING CAPS AND SWAPS.

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 NON-FORECLOSURE 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 TWELVE11/27/90

244

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 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 = 100,000INCREASE IN ANNUAL NOI = 3 PERCENTPURCHASE PRICE = 1 MILLION

900,000 ALLOCATED TO BUILDING100,000 ALLOCATED TO LAND

DEPRECIATION = 27.5 YEARSANNUAL VALUE INCREASE = 3 PERCENT LOAN AMOUNT = 700,000TERM = 15 YEARSPARTICIPATION = 50% OF NOI IN EXCESS OF 100,000 PLUS 45% PARTICIPATION IN

GAIN.

ASSUME A FIVE YEAR TIME HORIZON.

***************YEAR ONE YEAR TWO YEAR THREE YEAR FOUR YEAR FIVE

NOI 100,000 103,000 106,090 109,273 112,551

DEBT SERV. 80,275 80,275 80,275 80,275 80,275

CASH FLOW 19,275 22,275 25,815 28,998 32,276

PARTICPTN 0 1,500 3,045 4,636 6,275

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%

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SALES PRICE IN YEAR FIVE AFTER COMMISSIONS = 1,159,274

MTG BALANCE = 551,364

NET = 607,910

PARTICIPATION = 45% = 71,673 = (1,159,274 - 1,000,000) X 45%

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.

TO COMPARE A CONVENTIONAL LOAN AND SALE TO GAIN CASH WITH A CONVERTIBLE MORTGAGE LOAN TO GAIN CASH, OBSERVE THE FOLLOWING:

SALE VS. CONVERTIBLE

PROCEEDS = 100,000,000 FINANCE FOR 75,000,000 AT TAXES = 32,000,000 BELOW MARKET RATECASH GAIN = 68,000,000 TAXES = 0

CASH GAIN = 75,000,000THIS IS A 7,000,000 ADVANTAGE

CONSIDER FURTHER THE TOTAL PRESENT VALUE:75,000,000 PRINCIPAL(10,000,000) TAX13,000,000 CASH FLOW FROM BUILDING24,000,000 ADDITIONAL SALE VALUE

102,000,000 TOTAL PRESENT VALUE VS. 68,000,000 VALUE OF CASH IF SOLD TODAY. THIS DEMONSTRATES THE VALUE OF CONVERTIBLE LOANS.

DURING THE OPTION PERIOD, WHICH ON A TEN YEAR LOAN COULD BE IN THE YEARS FIVE TO TEN, THE BORROWER OR LENDER HAVE THE OPTION TO CONVERT THE DEBT TO EQUITY.

END OF CLASS TWELVE

CLASS TWELVE 12/4/90

TODAY THE CLASS WAS DEVOTED TO SWAPS AND REVIEW.

COULD NOT ATTEND DUE TO ILLNESS.

END OF COURSE

LEGAL ISSUES IN REAL ESTATE NOTESPROFESSOR DANIEL ZANINI

SUMMER 1990

240

CLASS ONE 5/21/90

DAN ZANINI11 YEARS PRACTICE IN REAL ESTATE

SPECIALIZES IN CONTRACTSCLOSINGSMORTGAGESEXEMPTIONS

ATTORNEY AT PARKER-DURRIER529 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

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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 AND A PRIVATE PLACEMENT ARE VEHICLES FOR FORMING SYNDICATES.

IN A COOPERATIVE OR CONDOMINIUM SALE OF AN EXISTING BUILDING IN NEW YORK STATE, THE FOLLOWING APPLY:

15% OR MORE OF THE UNITS MUST BE SOLD UNDER A NON-EVICTION PLAN51% OR MORE OF THE UNITS MUST BE SOLD UNDER AN EVICTION PLAN

CONTRACTS (CONT)

EXCULPATORY PROVISIONS - PROVISION WHICH STATES THAT THERE IS NO GUARANTEE OF PAYMENT ON THE LOAN PRINCIPAL AND INTEREST WITH RECOURSE TO THE ASSETS OF THE PERSON OR CORPORATION TAKING OUT THE LOAN.**************

THE PAPER

IT IS A "BRIEF" OF NO LIMIT OF PAGES, BUT BE REASONABLE. YOU MAY PICK YOUR OWN TOPIC WITH THE APPROVAL OF THE PROFESSOR, BUT BE AS SPECIFIC AS POSSIBLE. IT SHOULD BE A LEGAL ISSUE OR RELATED TO LEGAL ISSUES.

ADDRESS THE ISSUE TAKING A POSITION OF "PRO" OR "CON", HAVING RECOGNIZED THE OPPOSING POINT OF VIEW AND REBUTTING IT.

"WHAT IS THE BASIS FOR RENT REGULATION" WOULD BE A TOPIC, FOR EXAMPLE.

****************

ASSIGNMENT LEASE - HAVING DEPARTED FROM A LEASED SPACE, YOU RENT IT OUT, BUT YOU ARE STILL RESPONSIBLE TO PAY THE LANDLORD.

SUBLET LEASE - YOU LEASE ALL OR PART OF A SPACE TO A SUBLETTER FOR A LIMITED PERIOD OF TIME.

NOVATION - A TRUE SUBSTITUTION OF A NEW TENANT FOR A PRIME TENANT. THIS IS A RARE PHENOMENON.

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PRACTICAL VS.THEORETICAL LAW - THIS CLASS WILL BE PREDOMINANTLY PRACTICAL.

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 N ┌─────────────────────────────*┬*─────────────────────────────────┐│ └── 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 ACTENVIRONMENTAL LAWSINTERCOASTAL WATERWAYSBANKING

STATE: REAL PROPERTY LAWREAL PROPERTY ACTIONS AND PROCEEDINGS LAWMULTIPLE DWELLING LAW

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LOCAL: ZONINGBUILDING CODE

"STATUTES ARE CODIFIED AND PUT TOGETHER"

COMMON LAW: (LEADING TO CASE LAW)DISPUTES THAT ARISE THAT ARE NOT COVERED EXPLICITLY BY

STATUTORY LAW. IT IS NON-STATUTORY.

AT EACH LEVEL OF COURT SYSTEMS THERE ARE "REPORTS".

THE HIGHEST IN THE HIERARCHY IN NEW YORK IS THE COURT OF APPEALS. NEXT COMES THE APPELLATE DIVISION, AND LASTLY THE NEW YORK SUPREME COURT.

THE "NEW YORK REPORTS" ARE CATEGORIZED AS FOLLOWS:

TYSON V. DOUGLAS (THE CASE NAME)54 NY 2d 100, 400 NYS 2d 302

DATE─────(1989)OF CASE │ │ │ │ │ │ │ │ │ │ │ │ │ │ │ └─── PAGE NUMBER │ │ │ │ │ │ │ │ │ │ │ │ │ └───────2ND SERIES │ │ │ │ │ │ │ │ │ │ │ └────────────NEW YORK SUPPLEMENT │ │ │ │ │ (UNOFFICIAL CITE) │ │ │ │ └────────────────VOLUME NUMBER │ │ │ │ │ │ │ └─────────────────────PAGE NUMBER │ │ │ │ │ └─────────────────────────2ND SERIES │ │ │ └─────────────────────────── COURT OF APPEALS │ └───────────────────────────────VOLUME NUMBER

AD = APPELLATE DIVISIONNY = 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 │ │ │ └──FIRST SECTION OF ARTICLE 7C └────────MULTIPLE DWELLING LAW

NEW YORK CITY HAS LAWS THAT ARE BASED ON THE NEW YORK CITY ADMINISTRATIVE CODE.

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THE AMERICAN JURIST REVIEW (AMJUR) GIVES A NARRATIVE DISCUSSION WHICH OVERVIEWS PERTINENT CASES - A GOOD START WHEN RESEARCHING.

SHEPHERDING - THE SHEPHERD PUBLICATIONS RECORD EVERY CASE AND THROUGH A LEGEND, TELLS YOU WHAT HAPPENS THROUGHOUT THE CASE'S HISTORY, AND EVERY CASE IN WHICH THIS CASE IS CITED.

REAL ESTATE- EVERYTHING ABOVE AND BELOW THE LAND AND ATTACHED TO IT.BLACK ACRES - THE GENERIC TERM FOR "A PARCEL TAKEN AS A "FOR INSTANCE"".

BUNDLE OF RIGHTS- THE KEY ASPECTS OF OWNERSHIP.

WHEN YOU OWN REAL ESTATE, YOU OWN FEE TITLE. IF YOU OWN FEE TITLE, YOU HAVE THE BROADEST RIGHTS POSSIBLE. YOU CAN:

SELL ITMORTGAGE ITAND 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. IT IS A SECURITY OR COLLATERAL INTEREST AS A GUARANTEE FOR THE LOAN.

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:

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1. HOW ATTACHED?A. PERMANENTB. TEMPORARY

2. CHARACTERISTIC OF THE ITEM (IE. PIPING VS. VENETIAN BLINDS)3. WHAT IS INTENDED BY THE CONTRACT?

END OF CLASS ONE

CLASS TWO6/4/90

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 DISTANCEBOUND = BOUNDARY

**********FIRST PAGE OF A DEED AND A SURVEY PASSED OUT FOR CLASS DISCUSSION.*********HOW TO READ A SURVEY

1. FIND A NORTH ARROW2. 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 UP IN A DEED AS AN ERROR, YOU CAN FILE A CORRECTION DEED.

STREET ADDRESSES IN A CONTRACT MAY BE USEABLE, BUT THEY ARE NOT ADEQUATE

246

FOR THE CONVEYANCE OF A DEED. THE SAME IS TRUE WHEN DESCRIBING THE PROPERTY BY NAME IE., "THE SMITH FARM".

THESE ARE TECHNICALLY OK FOR A CONTRACT, YET FROWNED UPON.

EVERY RECORDED DOCUMENT IN NEW YORK STATE MUST BE NOTED BY BLOCK AND LOT NUMBER.

***********CONDOMINIUM DESCRIPTION FOR A DEED***********1. BLOCK AND LOT NUMBER2. DESCRIPTION OF THE COMMON ELEMENTS AND THE PERCENTAGE THEREOF.**************BROKERAGE**************

SELLING BROKER- ACTS TO FIND SELLERS AND BUYERS.

LEASING BROKER- ACTS TO FIND LESSEES.

THE ROLE OF THE BROKER IS ESSENTIAL TO THE REAL ESTATE TRANSACTION. THEY BRING THE PARTIES TOGETHER.

IN NEW YORK A BROKER MUST BE LICENSED THROUGH A WRITTEN EXAMINATION. IF THEY ARE NOT LICENSED THEY ARE NOT ENTITLED TO BE PAID, EXCEPT FOR LAWYERS WHICH ARE AUTOMATICALLY ACCORDED BROKER'S STANDING.

FEES ARE CALLED COMMISSIONS, WHICH ARE TYPICALLY PAID BY THE SELLERS (USUALLY 6 PERCENT OF THE CONSIDERATION, WHICH IS TO SAY, THE PURCHASE PRICE).

LEASING BROKER COMMISSIONS ARE ON A SLIDING SCALE BASED UPON THE RENT.

IE. 5 PERCENT OF YEAR ONE'S RENT4 PERCENT OF YEAR TWO'S AND THREE'S RENT3 PERCENT OF YEAR FOUR AND FIVE'S RENT2 PERCENT OF YEAR 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.

247

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. NAMES OF THE PARTIES2. DESCRIPTION OF THE PROPERTY3. TERMS4. LENGTH OF CONTRACT5. SPECIAL OR UNIQUE PROVISIONS.

MOST BROKERS INSIST ON A TYPE OF ARRANGEMENT WITH THE SELLER.OPEN LISTING - LEAST COMMON - WHERE BROKER UNDERSTANDS THAT MORE BROKERS THAN HE MAY HAVE THE LISTING, AND THAT THE OWNER RESERVES THE RIGHT TO SELL ALSO. IF ANY OTHER THAN HE SELL, HE GETS NO COMMISSION.

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. IF YOU ARE A BUYER, YOU

248

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

249

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.

5 ELEMENTS TO A VALID CONTRACT FOR REAL ESTATE

1. IT NEEDS TO BE IN WRITING

2. STATE THE NAMES OF THE BUYER AND THE SELLER. THE DEED WILL SHOW WHAT THE SELLER OWNS OR THAT THEY OWN IT WITH SOMEONE ELSE. AS A BUYER, YOU NEED TO GIVE THOUGHT AS TO WHOM YOU WANT THE PROPERTY TO BE SOLD TO. IE. A CORPORATION, IN YOUR WIFE'S NAME, ETC. A GOOD PRACTICE IS TO PUT THE ADDRESS OF THE PARTIES IN THE CONTRACT. IN A DEED, THIS IS REQUIRED.

3. AN ADEQUATE AND SATISFACTORY DESCRIPTION OF THE PROPERTY.

4. CONSIDERATION (PAYMENT)

5. SIGNATURES BY THE PARTIES AGAINST WHOM EITHER WOULD SEEK TO HAVE THE CONTRACT ENFORCED AGAINST.

STATE SALE TAX IS 0.004 (4 TENTHS OF ONE PERCENT) OF THE PURCHASE PRICE.

END OF CLASS TWO

CLASS THREE6/11/90

5 ELEMENTS OF A CONTRACT

1. MUST BE IN WRITING2. MUST HAVE BUYER AND SELLER'S SIGNATURES3. DESCRIPTION OF WHAT IS BEING SOLD4. CONSIDERATION

250

5. THE NAMES OF THE PARTIES IN THE SALE

TO MISS ANY OF THESE PROVISIONS IS A FATAL ERROR. ANY OF THE OTHER ELEMENTS WHEN MISSED DO NOT INVALIDATE THE CONTRACT.

THE PARAGRAPH CONTENTS OF THE REAL ESTATE CONTRACT

10 PERCENT IS A TYPICAL DOWNPAYMENT WITH THE REMAINING 90 PERCENT THROUGH A GOOD OR CERTIFIED CHECK DUE AT CLOSING. I.E. ON 100,000, THE DOWNPAYMENT IS 10,000. THE GOOD OR CERTIFIED CHECK IS FOR 20,000, AND THE TAKING OVER OF THE EXISTING MORTGAGE OF 30,000 AND 40,000 PURCHASE MONEY MORTGAGE FROM THE SELLER. THIS ARRIVES AT THE TOTAL PRICE OF 100,000 DOLLARS.

PURCHASE MONEY MORTGAGE - ANY FUNDS USED TO BUY PROPERTY, TECHNICALLY SPEAKING. USUALLY CONVEYS THE IDEA THAT THE SELLER IS TAKING A NOTE IN LIEU OF THE MONIES OWED.

THE TYPE OF FORM TO BE USED FOR THE PURCHASE MONEY MORTGAGE IS THE LAST ENTRY IN THE CONTRACT. A COPY OF THE CONTRACT MAY BE APPENDED TO THE CONTRACT AS AN EXHIBIT.

THE FOURTH PARAGRAPH - ALSO ABOUT A PURCHASE MONEY MORTGAGE, AND IS A COMPLICATED TOPIC WHICH REQUIRES KNOWLEDGE OF HOW MORTGAGES WORK.

THE PERSON BORROWING IS THE MORTGAGOR.

THE PERSON LOANING IS THE MORTGAGEE.

YOU CAN FORECLOSE ON A MORTGAGE AND ON A LIEN. THIS IS AN IMPORTANT POINT OF FACT!!!!!!!!!!!!!!!!!

I.E. GIVEN A 100,000 PROPERTY

1ST MORTGAGE = 50,000 TO CITIBANK MORTGAGE SERVICES2ND MORTGAGE = 10,000 TO JOE'S, THE SELLER

THE EQUITY IS THEREFORE 40,000.

IF THE PURCHASE MONEY MORTGAGE IS TO BE SUBORDINATE TO A SUPERIOR MORTGAGE, THE AMOUNT AND INTEREST RATE OF THE SUPERIOR MORTGAGE MUST BE WRITTEN INTO THE CONTRACT SO THAT THE BUYER DOES NOT REFINANCE, SAY, FROM 50,000 UP TO 90,000 SEVERELY LESSENING THE ABILITY OF JOE TO COLLECT IF HE HAS TO FORECLOSE.

IN OTHER WORDS JOE IS ONLY WILLING TO TAKE A 2ND MORTGAGE BEHIND A 50,000 SUPERIOR MORTGAGE AT 10%.****************NOTHING SUBSTITUTES FOR PREPARATION - COVER THE ISSUES, KNOW THE DOCUMENTS, READ THE CONTRACTS. IT IS CRITICAL THAT YOU KNOW WHAT YOU ARE

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DOING.

PREPARE A CHECKLIST. YOU MUST HAVE YOUR BASES COVERED AND HAVE FULL DETAILS.****************

WHEN YOU ASSUME AN EXISTING MORTGAGE YOU WILL WANT A "CERTIFICATE OF REDUCTION" FROM THE FIRST MORTGAGEE. THIS IS SOMETIMES CALLED AN ESTOPPEL CERTIFICATE.

ESTOPPEL - A CONFIRMATORY INSTRUMENT WHICH CONFIRMS A SITUATION AS A MATTER OF FACT.

ONE OF THE THINGS THE CERTIFICATE OF REDUCTION, WHICH IS SIGNED BY A 1ST MORTGAGEE WILL SAY, IS THAT THE TRANSFER OF PROPERTY WILL NOT CAUSE THE MORTGAGE TO BE "DUE ON SALE".

THE GENERAL RULE WHEN YOU ARE A BUYER IS THAT YOU ARE ACQUIRING TITLE "FREE AND CLEAR".

PARAGRAPH SIX MODIFIES THIS GENERAL RULE. IT IS CALLED THE "SUBJECT TO" PARAGRAPH.

"UNMARKETABLE" VS. "UNINSURABLE"

UNMARKETABLE IS THE PREFERRED WORD BY THE BUYER.UNINSURABLE IS THE PREFERRED WORD BY THE SELLER.

UNMARKETABLE BECAUSE A REASONABLE PERSON WOULD NOT BUY THE PROPERTY DUE TO THE "PROBLEM" WHICH AROSE OR CAME TO LIGHT DURING THE CONTRACT PERIOD.

UNINSURABLE BECAUSE INSURANCE TO RECTIFY A PROBLEM IS EASIER TO SECURE THAN AN NEW BUYER.

AFTER A, B, AND C IN THE "SUBJECT TO" PARAGRAPH, YOU WILL NEED TO ADD SEVERAL MORE STIPULATIONS.

IF THE TAX INFORMATION IS FOR THIS─────│*───────────────────────────┐ │ PROPERTY A │BUT YOU BOUGHT THIS ═══════════════════╪════════ *═══════╗ │ │ ║PROP'TY║ │THEN STATE YOU HAVE BOUGHT THE │ ║ B ║ │PROPERTY SUBJECT TO THE TAXES BEING │ ╔═══╣ ║ │FOR THIS ══════════════════════════════╪═════╝ ╚═══════╝ │AND NOT THAT ──────────────────────────** │ └────────────────────────────┘

DO NOT GUARANTEE THAT A SALE IS SUBJECT TO A TAX BEING SO AND SO LAST YEAR. IF THE INFORMATION IS KNOWN THROUGH AN INDEPENDENT 3RD PARTY, LET

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THEM FIND OUT ON THEIR OWN.

VIOLATIONS CLAUSE - TYPICALLY THE SELLERS OBLIGATION IS TO CLEAR ALL VIOLATIONS THAT HAVE BEEN POSTED AS OF THE DAY OF THE CONTRACT, NOT THE CLOSING. THIS IS GENERALLY SUBJECT TO NEGOTIATIONS. IT IS AS OF THE CONTRACT DATE BECAUSE THE SELLER ASSUMES THAT THE BUYER WILL CALL THE BUILDING INSPECTOR AND TELL THEM TO EXAMINE IT FOR VIOLATIONS.

THE NEXT TWO PROVISIONS APPLY ONLY TO N.Y.C. PROPERTY.

1. A SITUATION THAT HAS BECOME SO HAZARDOUS THAT THE CITY FIXED IT AND ADDED AN EMERGENCY REPAIR LIEN. IF YOU HAVE AN ERL, YOU THE SELLER MUST PAY IT AT OR BEFORE THE CLOSING.

2. A SPECIAL ASSESSMENT, SAY 5000 DOLLARS FOR A SIDEWALK, IS ASSESSED AS A ONE TIME REAL ESTATE TAX WHICH MUST BE PAID BY THE CLOSING BY THE SELLER.

THE NEXT PARAGRAPH, AN EXAMPLE OF EACH ITEM.

WE NEED TO DEAL WITH A SITUATION WHERE CERTAIN EXPENSES HAVE BEEN PREPAID BY THE SELLER AND SHOULD BE CONTRIBUTED TO BY THE BUYER SINCE THE EXPENSE HAS BEEN PAID - I.E. 12,000 REAL ESTATE TAXES PAID TWICE A YEAR, JANUARY 1 OR JULY 1. BUYER PURCHASES THE PROPERTY. 6000 DUE JAN 1, 6000 DUE ON JULY 1. CLOSING TAKES PLACE ON APRIL 1ST. THE BUYER REIMBURSES THE SELLER 3000. THIS IS CALLED AN APPORTIONMENT, BASED UPON THE DAY OF CLOSING, REIMBURSING THE SELLER FOR PREPAID EXPENSES.

RENTS - IF MONTHLY RENT IS 30,000 AND ITS THE 15TH, AND THE BUYER IS REIMBURSED 15,000.

INTEREST - 30,000 MORTGAGE PAYMENT, AND ITS THE 15TH. THE SELLER PAYS THE BUYER 15,000 (WHERE SELLER TAKES OVER THE MORTGAGE).

PREMIUM ON INSURANCE - SAME CONCEPT. AN ENDORSEMENT MUST BE GOTTEN FROM THE INSURANCE COMPANY TO TRANSFER THE INSURANCE. MOST PEOPLE GET THEIR OWN INSURANCE ANYWAY.

UNCOLLECTED RENTS - TO WHOM ARE THEY OWED? USUALLY COVERED SEPARATELY, AND ADJUSTED BASED ON THE OVERALL RENT ROLE. PROVISIONS FOR A PERIOD OF TIME, SAY A MONTH, WILL BE COLLECTED BY THE BUYER FOR THE SELLER.

WATER CHARGES - SELF EXPLANATORY

FUEL - 1000 GALLONS IN THE TANK - BUYER PAYS FOR ITS VALUE.

DUES - FOR CONDOS OR HOA'S

MAINTENANCE - FOR COOPS*****

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TOP OF THE THIRD PAGE, PARAGRAPH ELEVEN

NOT VERY IMPORTANT PARAGRAPH - SPEAKS FOR ITSELF. SPEAKS TO THE MATTERS OF TAX RATES.

PARAGRAPH TWELVE - IF BASED ON FRONTAGE, BILLED LIKE A TAX.IF BASED ON A METER, NOTES THAT A READING WILL BE

TAKEN SOON BEFORE CLOSING.

PARAGRAPH THIRTEEN - IMPORTANTTHE DEED SHOULD BE THE USUAL ................... THE TYPE OF DEED TO BE USED AT THE CLOSING IS TO BE LISTED HERE.

THE CHOICES ARE:1. QUITCLAIM DEED - SEE LECTURE ONE2. BARGAIN AND SALE DEED WITH COVENANTS AGAINST GUARANTORS ACTS

COVENANT = REPRESENTATIONS OR PROMISESSTATES THAT GOOD AND CLEAR TITLE WITH THE LISTED EXCEPTIONS ARE THE CASE, IN AN ARMS LENGTH TRANSACTION.

3. BARGAIN AND SALE DEED WITHOUT COVENANTS.4. EXECUTORS DEED5. WARRANTY DEED

SECTION 909 OF THE BUSINESS CORPORATION LAWSTATES THAT TO THE EXTENT THAT THERE ARE LIENS ON THE PROPERTY, THE MONEYS RECEIVED INT HE TRANSACTION WILL BE USED TO REPAIR THE LIENS.

2ND PART OF PARAGRAPH 13THE CORPORATE SELLER. IF THE SELLER IS AN INDIVIDUAL OR A PARTNERSHIP, CROSS THIS OUT.

2ND PART OF PARAGRAPH 13 CONTINUEDCERTAIN BASICS MUST BE SATISFIED IN ORDER FOR A CORPORATION TO BE SOLD IN N.Y. THE CORPORATION MUST BE INT HE REAL ESTATE BUSINESS OR THE SALE MUST BE CONSENTED TO BY THE REQUIRED NUMBER OF SHAREHOLDERS. THERE MUST BE A RECITATION THAT THE BYLAWS HAVE BEEN COMPLIED WITH. THE RECITATION COULD SAY THAT THE SALE IS PURSUANT TO A VOTE OF THE BOARD, AND DOES NOT REPRESENT A MATERIAL PORTION OF CORPORATE ASSETS.

PARAGRAPH 14 THE REQUIREMENT THAT THE SELLER DELIVER A CHECK AT CLOSING TO PAY THE STATE TRANSFER TAX. IT IS THE OBLIGATION OF THE SELLER.

ADDED TO THIS SOMETIMES IS ANOTHER TAX CALLED THE CUOMO TAX, WHICH IS THE NYS TRANSFERS GAINS TAX. IF THE PURCHASE PRICE IS MORE THAN ONE MILLION, THE SELLER MUST PAY A TAX EQUIVALENT TO TEN PERCENT OF THE GAIN. IF THE SALE PRICE IS BETWEEN 500,000 AND 1,000,000, YOU REPORT IT AND THE STATE SENDS YOU A NOTE SAYING "NO TAX DUE". IF MORE, YOU REPORT THE SALE PRICE AND THE STATE SENDS BACK A TENTATIVE TAX DUE NOTE.

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PARAGRAPH 15 - OMITTED IF NOT A N.Y.C. PROPERTY. AT THE CLOSING BOTH SIDES WILL SIGN A NYC TRANSFER TAX RETURN OR THE RPT (REAL PROPERTY TRANSFER). 1.425% BELOW 500,0002.5% ABOVE 500,000

PARAGRAPH 16 - FILL IN THE BLANK. WHICH TITLE COMPANY DO YOU WANT TO PUT IN? YOU SHOULD AVOID LEAVING IT UP IN THE AIR AS TO WHAT KIND OF TITLE IS BEING CREATED, AND BUYERS WILL PREFER TO DEAL WITH TITLE COMPANIES THEY ARE USED TO WORKING WITH. THE SELLER DOES NOT LIKE THIS SINCE HE IS AFRAID THAT THE BUYER WILL MANIPULATE HIS TITLE COMPANY SO AS NOT TO PASS ON THE TITLE WHEN AND IF THE BUYER WOULD LIKE TO BACK OUT OF THE DEAL.

YOU HAVE TO DISTINGUISH BETWEEN ABSTRACT COMPANIES WHICH ARE ONLY AGENTS AND DO NOT UNDERWRITE TITLES. YOU NEED TO KNOW OF THE FINANCIAL WHEREWITHAL OF THE TITLE COMPANY TO INSURE THE TRANSACTION.

PARAGRAPH 17 - THE BUYER THAT SIGNS A CONTRACT IS CALLED THE CONTRACT VENDEE.

THE SELLER THAT SIGNS THE CONTRACT IS CALLED THE CONTRACT VENDOR.

THE CONTRACT IN AND OF ITSELF CREATES A LIEN FOR THE BUYER, BUT DOES NOT MEAN MUCH IF THE MEMORANDUM OF THE CONTRACT (A BRIEF SUMMARY OF THE PENDING DEAL, IN WRITING AND SIGNED BY BOTH PARTIES, IDENTIFYING THE PARTY, DESCRIBING THE PROPERTY, AND SETTING FORTH THE APPROXIMATE CLOSING DATE. DOES NOT MENTION CONSIDERATION) IS NOT ALLOWED TO BE RECORDED ACCORDING TO THE CONTRACT. IT IS THE EXCEPTION TO RECORD IT, AND USUALLY ONLY HAPPENS WHEN THE CONTRACT PERIOD IS EXTENDED OVER A LONG TIME, SAY A YEAR OR MORE. THE SELLER DOES NOT LIKE IT BECAUSE IT IS AN ENCUMBRANCE WHICH ATTACHES ITSELF TO A LIEN. IF THE DEAL BREAKS UP, THE SELLER HAS TO TROUBLE HIMSELF WITH REMOVING THE LIEN ON THE PROPERTY.

PARAGRAPH 18 - FIXTURES

THE PERSONAL PROPERTY PROVISION

SELF EXPLANATORY; WHATEVER IS BEING SOLD, IT IS INCLUDED HERE. IF IT IS LISTED BUT NOT TO BE SOLD, STRIKE IT OUT. THE BLANK AFTER THE PARAGRAPH IS TO EXPRESSLY STATE WHAT SHOULD NOT BE INCLUDED IN THE PROPERTY SALE.

PARAGRAPH 19 - NOT A MAJOR PARAGRAPH. AN ACCOMMODATION PROVISION. ANY UNPAID TAXES ARE TO BE PAID FOR FROM THE MONIES PAID AT CLOSING. SAY OF THE 100,000 PAID, THE BUYER COULD BE ASKED TO "CUT CHECKS" TO PAY THE TAXES OUT OF THIS FEE, PAY THE COMMISSION TO THE BROKERS, ETC.

PARAGRAPH 20 - SAME AS ABOVE WITH RESPECT TO ALL BUT TAXES. CHECKS CUT FOR CLEARING OF TITLE, FOR EXAMPLE.

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PARAGRAPH 21 - A TITLE ISSUE OF MODERATE IMPORTANCE - ESTABLISHES AT CLOSING THE RIGHTS AND RESPONSIBILITIES. IF A SEARCH LOCATES A LIEN AGAINST SOMEONE WITH THE SAME NAME AS THE SELLER, THE PURCHASER CAN ACCEPT AN AFFIDAVIT FROM THE SELLER THAT THE LIEN IS AGAINST HIM IF THE TITLE COMPANY IS WILLING TO ACCEPT THIS.

PARAGRAPH 22 - IF FOR SOME REASON THE SELLER CAN NOT CONVEY TITLE, AS IN A DEFECT IN THE TITLE NOT DISCUSSED IN THE CONTRACT THAT CAN NOT BE CLEANED UP, THE SOLE RESPONSIBILITY OF THE SELLER IS TO RETURN THE DOWNPAYMENT PLUS TITLE SEARCH AND SURVEY COSTS TO THE BUYER. GET A LIQUIDATED DAMAGE AGREEMENT IN. TEN PERCENT OF THE PRICE IS TYPICAL. DEFINE WHAT DAMAGES ARE. IF YOU DO NOT HAVE IT AND THE BUYER BACKS OUT, HE COULD BE LIABLE NOT ONLY FOR THE DOWNPAYMENT BUT FOR THE ENTIRE PURCHASE PRICE.

THE SELLER AS HIS SOLE AND EXCLUSIVE REMEDY MAY IN THE EVENT OF DEFAULT OR BREACH BY THE BUYER RETAIN THE ENTIRE DOWNPAYMENT.

PARAGRAPH 23 - WHERE PAYMENTS SHOULD BE RECEIVED - SELF EXPLANATORYTHIS IS THE WHEN AND THE WHERE.

YOU TYPICALLY PROVIDE ENOUGH TIME TO FINISH OFF BY CLOSING - IE. 45, 60, OR 90 DAYS. BOTH PARTIES HAVE A RIGHT TO A REASONABLE ADJOURNMENT (30 DAYS). TO AVOID THE POSSIBILITY OF ONGOING ADJOURNMENTS, THE SELLER INSISTS THAT IT BE A "TIME IS OF THE ESSENCE" CLOSING DATE.

THIS PHRASE ALLOWS DAMAGES EITHER WAY, FOR THE BUYER OR THE SELLER, UNLESS STATED DIFFERENTLY, IF A LOSS IS EXPERIENCED, THE OPPOSING PARTY CAN BE SUED FOR THOSE DAMAGES. EVEN IF THE CLOSING DATE IS NOT "TIME IS OF THE ESSENCE", EXTENSIONS CAN BE "TIME IS OF THE ESSENCE".

PARAGRAPH 24 - AGREEMENT AS TO WHO IS THE BROKER, AND ALSO CAN EXPECT A CLAIM FOR COMMISSION. A RIDER SHOULD BE ADDED TO COVER CROSS-INDEMNITIES, ETC. TO BE COVERED IN THE LECTURE ON CLOSING DOCUMENTS.

PARAGRAPH 25 - MERGER PROVISION. INTENDED TO CLEAR UP ANY "MINI CONTRACTS" SUCH AS BINDERS. "IF IT IS NOT IN THE CONTRACT, IT DOES NOT EXIST" STATEMENT. THE PROVISION STATES THE PROPERTY IS "AS IS", SUBJECT TO DAMAGE BEYOND NORMAL WEAR AND TEAR.

PARAGRAPH 26 - MODIFICATIONS - ORAL AGREEMENTS CAN NOT MODIFY THE AGREEMENT. THE ESTATE IS OBLIGATED IF THE BUYER OR THE SELLER DIES.

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.

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END OF CLASS THREE

CLASS FOUR6/18/90

RIDERS TO THE CONTRACT; CONTINUED

TYPICALLY DOWNPAYMENTS ARE 10 PERCENT. ON VERY LARGE CONTRACTS THIS CAN BE REDUCED BY NEGOTIATION. THE CHECK, NOT CERTIFIED, IS MADE OUT TO THE SELLER'S ATTORNEY, WHO ACTS AS ESCROWEE. THIS MUST BE COVERED ON AN ESCROW PROVISION RIDER WHICH SPELLS OUT WHERE THE DEPOSIT WILL BE HELD, IF THE ACCOUNT IS INTEREST BEARING, AND WHAT THE INTEREST IS. IN NEW YORK, THE ATTORNEY DOES NOT CHARGE FOR THIS. IN CALIFORNIA THIS IS DIFFERENT. ON A 100,000 ESCROW THE FEE WOULD BE 2000. THE PROVISION PROVIDES NOT ONLY FOR THE STORAGE OF THE MONEY, BUT THE WAY THE ESCROW WILL BE DISTRIBUTED AND UNDER WHAT TERMS.

WHEN THE PARTIES TO THE CONTRACT HAVE A FALLING-OUT, THE CLAIMANT GOES TO THE ESCROWEE TO COLLECT HIS MONEY. THE ESCROWEE WILL SEND A LETTER TO THE NON-CLAIMEE TO TELL HIM WHAT THE CLAIMANT PLANS. IF THE TWO CAN NOT AGREE, THE ESCROWEE CAN DEPOSIT THE ESCROW WITH THE COURT, OR IN ANOTHER ESCROW ACCOUNT. AN INTERPLEADER IS WHEN THE ESCROWEE REDEPOSITS THE MONEY TO BRING THE TWO TO COURT TO SOLVE THE DISPUTE. THE AGREEMENT WILL OFTEN SAY THAT THE ATTORNEY/ESCROWEE CAN BE THE NON-CLAIMANT'S ATTORNEY. THE ATTORNEY, DUE TO CONFLICT OF INTEREST ISSUES INHERENT IN ACTING AS ESCROWEE OFTEN DEPOSITS THE ESCROW WITH A THIRD PARTY TO BEGIN WITH.

THE NOTICE PROVISION - THE METHOD BY WHICH ONE PARTY GIVES NOTICE TO THE OTHER. I.E. CERTIFIED, REGISTERED MAIL; HAND DELIVERY; FAX. IN A FALLING-OUT, AN ARGUMENT CAN ENSUE OVER WHETHER OR NOT NOTICE HAS BEEN PROPERLY GIVEN.

ADDITIONAL COMMENTS ON THE VIOLATIONS CLAUSE;

THE SELLER IS LIABLE TO CURE VIOLATIONS AS OF THE DATE OF THE CONTRACT. IF FOR EXAMPLE THE VIOLATIONS COST 25% OF THE PURCHASE PRICE, THE SELLER MAY PROTECT HIMSELF IN THE RIDER BY SAYING THAT THE VIOLATIONS ABOVE, SAY THE USUAL 2 PERCENT OF THE SALES PRICE, WILL NOT HAVE TO BE CORRECTED BY THE SELLER. HE WILL THEN BE RESPONSIBLE FOR MAKING A CHOICE. EITHER FIX THE PROBLEM, OR TERMINATE THE CONTRACT. IF THE SELLER REFUSES TO FIX THE VIOLATIONS ABOVE THE SPECIFIED AMOUNT, THE BUYER MAY OFFER TO TAKE THE PROPERTY WITH THE AMOUNT DEBITED AGAINST THE PURCHASE PRICE. THE COST OF REPAIRS SHOULD BE DETERMINED BY EXPERTS.

TRANSFER TAX CLAUSE: "THE SELLER WILL PAY FOR ALL TRANSFER TAXES, AND THE BUYER WILL COOPERATE WITH THE SELLER TO DETERMINE THE TAXES REQUIRED".

THE CONTRACT PERIOD: THE 30 TO 90 DAYS AFTER A CONTRACT IS SIGNED.

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WHAT ARE THE PARTIES TO THE CONTRACT DOING?

BUYER:

ORDERS THE TITLE SEARCH

OBTAINS FINANCING COMMITMENTS

SENDS INSPECTOR TO EXAMINE PROPERTYenvironmentalstructuralradontermitesIF A PROBLEM IS FOUND DURING THE INSPECTION,THEN AT THE OUTSET THE SELLERS OPTION IS TO CURE THE PROBLEM OR NOT TO. IF THE SELLER CURES THE PROBLEM THE BUYER MUST CLOSE. IF NOT, THE BUYER MAY CHOOSE TO EITHER BUY THE PROPERTY OR BACK OUT OF THE DEAL. A "PROBLEM" SHOULD BE DEFINED BY A DOLLAR AMOUNT. THE SELLER WILL USUALLY REQUEST THAT THIS BE DONE BEFORE CONTRACT IF THE BUYER'S CLAUSES FOR INSPECTION ARE TOO ONEROUS. INSPECTION CLAUSES ARE RELATIVELY RARE.

OBTAIN A SURVEY OR A SURVEY INSPECTION

SELLER:

CONTACTS THE MORTGAGEE TO ADDRESS PREPAYMENT OR TRANSFER OF MORTGAGE ISSUES. THE SELLER IS OBLIGATED TO GET THE PAYOFF LETTER.

CLOSING DOCUMENTS PREPARED (MOST BY THE SELLERS' ATTORNEY, SOME BY THE BUYER'S ATTORNEY).

PROPERTY TRANSFER TAXES (TENTATIVE ASSESSMENT) USUALLY TAKES 20 TO 30 DAYS TO GET FROM ALBANY. FROM THE POINT OF VIEW OF THE BUYER, THE BUYER CAN NOT CLOSE WITHOUT IT SINCE HE CAN NOT RECORD THE DEED.ARTICLE 31B - THE NEW YORK TAX LAW - THE NEW YORK STATE TRANSFER GAINS TAX (CUOMO TAX):IT APPLIES TO SALES OF OVER ONE MILLION DOLLARS. THE TAX IS EQUAL TO 10 PERCENT OF THE GAIN BEING REALIZED FROM THE SALE. THE GAIN IS THE SELLERS ORIGINAL PURCHASE PRICE PLUS THE COST OF CERTAIN SPECIFIED CAPITAL IMPROVEMENTS, PLUS THE COST OF SELLING THE PROPERTY; THIS IS SUBTRACTED FROM THE CONSIDERATION AND DIVIDED BY 10 TO EQUAL THE TAX. APPLIES BOTH TO RESIDENTIAL AND COMMERCIAL.

A TRANSFEROR AND A TRANSFEREE QUESTIONNAIRE IS USED TOGETHER WITH A COPY OF THE CONTRACT, THE SELLER'S CLOSING STATEMENT, AND ANY BROKERAGE AGREEMENT AS A PACKAGE SENT TO ALBANY. 20 TO 30 DAYS LATER YOU GET A TENTATIVE ASSESSMENT OF TAXES DUE. IT IS TENTATIVE BECAUSE N.Y.S. RESERVES THE RIGHT TO AUDIT LATER. IF THE SELLER DOES NOT PAY THE TAXES,

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THE STATE MAY GO AFTER THE BUYER.

*********THE NEW YORK STATE TRANSFER TAX*********

DOES NOT HAVE A THRESHOLD AMOUNT - APPLIES TO EVERY SALE. 4 DOLLARS FOR EVERY ONE THOUSAND DOLLARS OF CONSIDERATION. ONE FORM COMBINES THE TRANSFER TAXES WITH A CREDIT-LINE MORTGAGE CERTIFICATE AND OTHER FORMS. THE CREDIT LINE MORTGAGE CERTIFICATE IS SIGNED BY THE SELLER SWEARING TO THE AMOUNT OR LACK OF A HOME EQUITY LOAN SECURED BY THE REAL ESTATE.

*********THE NEW YORK CITY TRANSFER TAX*********RATE DEPENDS ON IT BEING 500,000 OR MORE

RESIDENTIAL LESS THAN 500K = 1 PERCENTRESIDENTIAL MORE THAN 500K = 2 PERCENT

COMMERCIAL LESS THAN 500K = 1.425 PERCENTCOMMERCIAL MORE THAN 500K = 2.625 PERCENT

THIS TAX IS NOT STEPPED, IT IS INCREMENTAL. 499K PROPERTY IS TAXED FULLY AT 1 PERCENT. IF RESIDENTIAL 501K PROPERTY IS TAXED FULLY AT 2 PERCENT.***********THE MANSION TAX***********

PASSED LAST SUMMER. HAS A THRESHOLD AMOUNT OF ONE MILLION DOLLARS. PAYABLE BY THE BUYER - 1 PERCENT OF THE PURCHASE PRICE PAID. NO PRE-FILING; THIS TAX IS PAID AT CLOSING. PAID TO NEW YORK STATE. ONLY FOR RESIDENCES. DOES NOT APPLY TO RESIDENTIAL LAND THAT IS UNIMPROVED.

DOCUMENTS PREPARED DURING THE CONTRACT PERIOD:

THE TITLE REPORT - ORDERED BY THE ATTORNEY FOR THE BUYER FROM THE TITLE COMPANY ( THE UNDERWRITER ) OR AN AGENT OF ONE OR MORE TITLE COMPANIES (AN ABSTRACT COMPANY). MOST REAL ESTATE ATTORNEYS HAVE DEVELOPED A RELATIONSHIP WITH ONE OR TWO TITLE OR ABSTRACT COMPANIES. THERE IS NOT A WHOLE LOT TO WORRY ABOUT WHERE SELECTING ONE OF A HALF DOZEN TO TEN COMPANIES THAT ARE MAJOR UNDERWRITERS. WHY? BECAUSE MOST HAVE ASSETS THAT ARE MORE THAN SUFFICIENT TO COVER POTENTIAL CLAIMS. NOT A COMPETITIVE BUSINESS. THE TITLE FEE IS SET BY STATE LAW. IT IS A PERCENTAGE OF THE INSURANCE, WHICH IN TURN IS A PERCENTAGE OF THE PROPERTY VALUE. I.E. A DEAL OF 1.5 MILLION DOLLARS WILL HAVE A TITLE

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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 REPORTDEED

THERE ARE THE TRANSFER TAX FORMS:

THE NYCRPT: THE NEW YORK CITY REAL PROPERTY TRANSFER TAX.

THE COMBINED N.Y.S. TRANSFER TAX AFFIDAVIT

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THE MANSION TAX, TRANSFER TAX, AND CREDIT FORMTHE N.Y.S. TRANSFER GAINS TENTATIVE ASSESSMENTTHE MULTIPLE DWELLING TRANSFER CARD

IF THE TRANSACTION REQUIRES A LOAN, THERE IS A:

RESPA - A HUD FORM WHICH IS PREPARED BY THE BANK WHICH DEMONSTRATES THE BUYER AND SELLER'S CLOSING DETAILS IN A SUMMARY FORM.

FIRPTA - FOREIGN INVESTORS REAL PROPERTY TAX ACT. THE BUYER SHOULD GET FROM THE SELLER A FIRPTA AFFIDAVIT STATING

THAT THE SELLER IS FOR TAX PURPOSES NOT A FOREIGN PERSON AS DEFINED BY THE IRC. IF THE SELLER IS A FOREIGN INVESTOR, THEN YOU AS THE SELLER ARE OBLIGATED TO WITHHOLD TEN PERCENT OF THE PRICE. THERE ARE DIFFERENT FIRPTA FORMS FOR PARTNERSHIPS, INDIVIDUALS AND CORPORATIONS.

REAL ESTATE TAX BILL FOR PURPOSES OF VERIFYING THAT THE TAXES HAVE BEEN PAID.

THE ADJUSTMENT (APPORTIONMENT) SCHEDULE; SHOULD BE AGREED ON AND PREPARED BEFORE THE CLOSING.

INSPECTION REPORTS.

SMOKE DETECTOR AFFIDAVIT (ATTACHED TO NYCRPT).

WINDOWS GUARD NOTICE (IN NEW YORK CITY)

MULTIPLE DWELLING REGISTRATION CARD (3 APARTMENTS OR MORE )FILED WITH THE HOUSING DEPARTMENT. MUST BE PRESENTED TO REGISTRAR WITH THE RECORDING OF THE DEED. INCLUDES A 24 HOUR PHONE NUMBER WHERE A SUPERINTENDENT MAY BE REACHED, AND THE INSURANCE CARRIER.

SURVIVAL AGREEMENT - "SURVIVES" THE CLOSING; AGREEMENT AS TO WHAT NEEDS TO BE DONE "POST CLOSING" IE. PRODUCING A CERTIFICATE OF OCCUPANCY FOR THE DECK WHICH WAS NOT PRODUCED AT THE CLOSING. THE DEAL MAY NOT BE RESCINDED IF THE AGREEMENT IS NOT CARRIED THROUGH, AND THE SELLER MAY SUE FOR ESCROW AND DAMAGES.

POWER OF ATTORNEY - MUST BE IN WRITING, SIGNED BY THE PARTY GIVING THE POWER, SIGNATURE MUST BE ACKNOWLEDGED, MUST BE RECORDED ( ALL TRUE IN A REAL ESTATE DEAL). YOU ALSO HAVE A CERTIFICATE BY THE ATTORNEY-IN-FACT STATING THAT THE POWER OF ATTORNEY HAS NOT BEEN REVOKED AND REMAINS IN EFFECT. THE POWER OF ATTORNEY TAKES PLACE WHEN THE APPROPRIATE PARTY CAN NOT ATTEND THE CLOSING. THE ATTORNEY-IN-FACT IS A TERM REPRESENTING A ROLE, AND NEED NOT ACTUALLY BE AN ATTORNEY.

EVIDENCE THAT EXCEPTIONS ON THE TITLE ARE NOT VALID AND SHOULD BE OMITTED.

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A BILL AT CLOSING FOR BROKER OR BANK'S ATTORNEY FEE AS A RECEIPT SHOULD BE ATTACHED AS A CLOSING DOCUMENT.

COPIES OF ANY CHECKS THAT ARE WRITTEN.

IN FACT, GET A COPY OF EVERYTHING AT THE CLOSING.

AFTER THE CLOSING, EACH ATTORNEY PREPARES A CLOSING STATEMENT OF APPROXIMATELY SIX PAGES LONG SUMMARIZING THE TRANSACTION AND ATTACHING AS EXHIBITS ALL OF THE DOCUMENTS PERTINENT TO THE CLOSING; I.E.

THE DEEDLOAN DOCUMENTSCLOSING DOCUMENTSEVERYTHING ELSE GERMANE TO THE CLOSINGBILL FOR LEGAL FEES.

****************TOPIC FOR TERM PAPERS HANDED OUT****************10 SINGLE SPACED PAGES, THOUGH NO LIMIT

REPRESENT QUALITY AS WILL AS QUANTITY OF SOURCES USED.STATUTESCASE LAWTREATISES (LAW REVIEW ARTICLES)NEWSPAPERS AND MAGAZINESPROFESSIONALS IN FIELD WITH RELATION TO THE TOPIC.

END OF CLASS FOUR

CLASS FIVE 6/25/90

TOPICS OF TODAY'S LECTURE

LEGAL RESEARCHCLOSINGS AND DEEDSREAL ESTATE FINANCE (MORTGAGES)MIDTERM EXAMINATION

LEGAL RESEARCH***************3 BASIC SOURCES

1. CASE LAW

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A. UNOFFICIAL REPORTSB. OFFICIAL REPORTS

2. STATUTESA. McKINNEY'S

3. TREATISESA. LAW REVIEWB. AMERICAN LAW REVIEW

A PRIVATE COMPANY COMPILING ARTICLES ON DIFFERENT TYPES OF LAW

C. MATTHEW BENDERREAL ACTION PROPERTY AND PROCEEDINGS LAWSUBSTANTIVE TEXTS IN REAL ESTATE LAW

THE WARRENS, WEED TREATISE ON REAL PROPERTY LAWD. 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'SNEW 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***********

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BROKEN OUT INTO :

*FEDERAL REPORTS*F. = FEDERAL REPORTS (OFFICIAL) INTERPRETS FEDERAL LAWSF. SUPP = FEDERAL SUPPLEMENT (UNOFFICIAL)

IE. PLAINTIFF >>>>>>>>>>DOE VS. SMITH >>>>>>>>DEFENDANT405 (THE VOLUME) F.201 (THE PAGE IN THE FEDERAL REPORTS)320(THE VOLUME) F.SUPP.19(THE PAGE IN THE FEDERAL SUPPLEMENT)(1990) (YEAR)

OR WRITTEN WITHOUT THE PARENTHETICALLY PLACED INSTRUCTIONS, IT WOULD APPEAR AS :

DOE VS. SMITH405 F.201320 F.SUPP. 19 (1990)

*STATE REPORTS*NY= NEW YORK REPORTS - THE COURT OF APPEALS CASES (OFFICIAL)NY. SUPP. = THE NEW YORK SUPPLEMENT

THEN YOU HAVE REPORTS FOR GEOGRAPHIC REGIONS SUCH ASATLANTIC = THE REPORT FOR ATLANTIC STATES

AGAIN, YOU CITE BOTH OFFICIAL AND UNOFFICIAL REPORTS.

WHEN YOU ARE CORRECTLY CITING A CASE, YOU CITE BOTH THE SUPPLEMENT AND THE REPORT. USUALLY, BOTH TEXTS ARE EXACTLY THE SAME ALTHOUGH THE SUPPLEMENT TAKES LIBERTIES IN EDITING THE PLACEMENT OF TOPICS.

EXPERT TESTIMONY IS SOMETIMES AVAILABLE AS A COURTESY BY ATTORNEYS INVOLVED IN THE CASE, IF NOT AVAILABLE FROM THE RECORD OF THE COURT (THE COURT CHARGES A FEE)

CASES ARE INDEXED A NUMBER OF WAYS:BY PLAINTIFFBY DEFENDANTBY DESCRIPTIVE WORD INDEX BASED ONE TO FOUR WORD INDEX (IE. LEASE SUBORDINATION) DESCRIBING THE CASE TYPE.

LEXIS, NEXIS, WESTLAWCOMPUTERIZED LEGAL RESEARCH LIBRARY. TO USE IT YOU NEED TO KNOW THE AREA OF RESEARCH AND THE TYPE OF SOURCE, SUCH AS FEDERAL CASES ON HOUSING DISCRIMINATION.*************************************************************************CLOSINGS AND DEEDS CONTINUED FROM LAST LECTURE

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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 DEED2. A BARGAIN AND SALE DEED WITH COVENANTS

AND A BARGAIN AND SALE DEED WITHOUT COVENANTS3. 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 GRANTORLEGAL AGEOF SOUND MIND

2. A GRANTEEMUST BE IDENTIFIED SOMEHOW, GOOD ENOUGH TO PLACE TITLE.

3. CONSIDERATIONHOW 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.

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IF THERE IS A MISTAKE, FRAUD, OR COERCION, THE DEED CAN BE VOIDED BY EITHER PARTY. WHEN YOU HAVE TWO PEOPLE ON THE DEED AS GRANTEES, THERE SHOULD BE A STATEMENT AS TO HOW THEY ARE TAKING TITLE - AS TENANTS IN COMMON, TENANTS BY THE ENTIRETIES, OR JUST TENANTS WITH THE RIGHT OF SURVIVORSHIP (TWRS).

IF NOTHING IS SAID AS TO HOW THE PROPERTY IS CONVEYED, IT IS ASSUMED THAT IT IS TRANSFERRED AS A TENANT IN COMMON TRANSFERENCE. WHEN ONE DIES, THEN THAT PERSON'S SHARE GOES TO THEIR ESTATE, NOT TO THE OTHER TENANT. IF THE DEED SAYS "JOINT TENANT", OR "JOINT TENANT WITH THE RIGHT OF SURVIVORSHIP", THEN WHEN ONE TENANT DIES, THE OTHER RETAINS THE FULL 100 PERCENT OF OWNERSHIP. WHEN FOUR THINGS HAPPEN TOGETHER (THE FOUR UNITIES)YOU HAVE THIS JOINT TENANCY.

1. UNIT OF PROPERTY (ALL PARTIES OWN THE SAME PROPERTY).2. UNITY OF TITLE (THE INTEREST ARISE FROM THE SAME DEED).3. UNITY OF POSSESSION ( EACH IS ENTITLED TO USE THE PROPERTY).4. UNITY OF TIME (OWNERSHIP BEGINS AT THE SAME TIME).

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.

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A DEED IN TRUST IS EXCHANGED FOR A MORTGAGE IN A TITLE THEORY STATE.

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 BORROWER2. IF THERE IS AN ENVIRONMENTAL PROBLEM WITH THE PROPERTY, THE EXCULPATION WILL NOT EXTEND TO COVER THE BORROWER FOR THE BANKS LIABILITIES IN CLEANING UP THE MESS.

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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.

MORTGAGES MUST BE RECORDED IN ORDER TO ESTABLISH THE SUBORDINATION OF LIENS (LIEN PRIORITY). THE AMOUNT OF EACH MORTGAGE MUST BE NOTED IN ORDER TO PRECLUDE ADJUSTMENT BY THE BORROWER AND THE LENDER OVER TIME, THEREBY MAKING IT IMPOSSIBLE TO INDEPENDENTLY ASSESS THE LIABILITIES AGAINST THE PROPERTY. IT MUST LIST THE AMOUNT, LENGTH OF PERIOD, AND INTEREST RATE. CO-OPS HAVE A NOTE AND A SECURITY AGREEMENT. SECURITY INTERESTS (ABBREVIATED FORM OF SECURITY AGREEMENT) CAN BE RECORDED, BUT SECURITY AGREEMENTS ARE NOT. UNIFORM COMMERCIAL CODE FORM ONE (UCC1) LISTS THE LENDER, BORROWER, COLLATERAL, AND PROPERTY AND IS RECORDED. IT IS ALSO CALLED THE FINANCING STATEMENT.

THE MIDTERM IS PASSED OUT.

END OF CLASS FIVE

CLASS SIX 7/2/90

LOAN TO VALUE (LTV) - MEASUREMENT OF EXPOSURE TO DEFAULT. ONCE THERE IS A DEFAULT, THE LTV GIVES THE MORTGAGEE AN IDEA OF WHAT THEY CAN RECOUP IN A FORECLOSURE, BEING THAT THEIR FEES, INTEREST,A ND COURT COSTS ARE ALL

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NEEDED IN ADDITION TO THE MORTGAGE DUE.

IN A COMMERCIAL TRANSACTION, LTV CONTROLS THE LIKELIHOOD OF GRANTING EXCULPATION, SINCE THE BANK LENDING ON A HIGH LTV WILL NOT GRANT EXCULPATION, BEING THAT IT MAY HAVE TO GO AFTER THE MORTGAGOR TO BE MADE WHOLE AFTER THE FORECLOSURE.

MORTGAGES**********THE STANDARD MORTGAGE FORM IS FAR LESS THAN ADEQUATE. IT EXCLUDES MORE THAN IT INCLUDES. OFTENTIMES, CONTRACTS WILL BE REDRAFTED ON WORD PROCESSORS BASED UPON THE BASIC FORM, BUT IN MUCH MORE DETAIL.

THE DOCUMENTS IN A LOAN CLOSING INCLUDE THE NOTE AND THE MORTGAGE. TONIGHT THE MORTGAGE WILL BE DISCUSSED IN DETAIL. SOME OF THE FORMS USED BY THE BANK AND EXCHANGED AT THE LOAN CLOSING, ATTENDED BY COUNSEL FOR THE BANK, A TITLE COMPANY REPRESENTATIVE, THE BUYER AND THE SELLER. MAY OR MAY NOT BE ATTENDED BY AN OFFICER OF THE BANK.

THERE IS A REVIEW OF TITLE. IF ACCEPTABLE TO THE BANK'S COUNSEL, THERE IS A SLEW OF DOCUMENTS, REVIEWED AHEAD OF TIME AND REVIEWED BY THE BANK, WHICH IS EXCHANGED.

WHEN YOU GET THE PACKAGE OF DOCUMENTS FROM THE BANK, CHECK THE TERMS AGAINST THE LETTER OF COMMITMENT, SUCH AS INTEREST RATE, ESCROW, DUE ON SALE, TERM, ENVIRONMENTAL LIABILITY, ETC. THE COMMITMENT IS TO THE CONTRACT WHAT THE DEED IS TO THE MORTGAGE. IF YOU ARE GEARING UP FOR A TITLE CLOSING, YOU REVIEW THE CONTRACT. IF YOU ARE PICKING UP THE MORTGAGE DOCUMENTS YOU EXAMINE THE COMMITMENT.

NEXT YOU LOOK AT THE TITLE REPORT. TAXES DUE, JUDGEMENTS, ETC.; EXACTLY THE SAME REPORT FROM THE TITLE COMPANY THAT YOU GOT BUT IS CERTIFIED TO THE BANK FOR LENDING PURPOSES. IN A REFINANCE SITUATION THIS REPORT IS THE SAME FOR THE BUYER AND THE LENDER.

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 1,000,000 1ST MORTGAGE TOMORROW

THE TAX PAID WILL BE BASED ON (1,000,000 - 500,000) = 500,000 X .025 =12,500 DOLLARS.

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THERE IS A CONSOLIDATION AGREEMENT WHEREBY THE SECOND 1ST MORTGAGE (THE ONE FOR 1,000,000 DOLLARS) TAKES A NOTE FOR A NEW 500,000 DOLLAR MORTGAGE WHILE CONSOLIDATING THE OLD 1ST MORTGAGE INTO IT. IN ORDER TO DUE THIS, THE MORTGAGE CANNOT BE EXTINGUISHED. THIS OLD MORTGAGE IS SOMETIMES CALLED A DORMANT MORTGAGE. A DORMANT MORTGAGE USED TO BE USEABLE IN A VARIETY OF WAYS. UNDER THE REVISED SECTION 255 OF THE NEW YORK STATE TAX CODE, THE USE OF DORMANT MORTGAGES WAS RESTRICTED. THIS IS WHAT USED TO BE POSSIBLE:

JOE TAKES A MORTGAGE WITH A BANK. JOE IS SELLING A "DUE ON SALE" PROPERTY. JOE WISHES TO BUY ANOTHER PROPERTY FOR WHICH HE WILL PAY THE MORTGAGE TAX. JOE CAN CHOOSE TO TAKE A SATISFACTION AND LET THE MORTGAGE DIE UPON SALE, OR HE CAN ASSIGN THE MORTGAGE TO HIS COMPANY. HE WILL THEN PUT IT ON THE OTHER PROPERTY THAT HE NOW OWNS, IN CASE HE LATER NEEDS TO SHIFT THE MORTGAGE BACK. WHEN HE NEEDS TO MAKE A REAL MORTGAGE, HE WILL ASSIGN THE MORTGAGE BACK TO JACK'S BANK, AND JACK'S WILL PAY JOE THE VALUE OF THE MORTGAGE, AND THE TAX CREDIT FOR THAT ASSIGNED MORTGAGE WILL BE JOE'S SINCE JOE ASSIGNED IT TO HIMSELF BEFORE HE REASSIGNED IT TO JACK'S BANK.

ANYTIME A MORTGAGE IS RECORDED IN NEW YORK STATE, AND THE MORTGAGE IS GREATER THAN 500,000 DOLLARS, A MORTGAGE TAX IS REQUIRED. A CHECK IS CUT TO THE TITLE COMPANY AT THE CLOSING. THE RECORDING CHARGE IS ABOVE THIS. IT IS AT THIS TIME TEN DOLLARS PER DOCUMENT PLUS 2 DOLLARS PER PAGE. A TYPICAL FEE WOULD BE APPROXIMATELY 100.00 DOLLARS.

WRAPAROUND MORTGAGE - THE UNDERLYING FIRST MORTGAGE STAYS THE SAME. THE OWNER, WHEN SELLING HIS PROPERTY, GAVE PERSONALLY A MORTGAGE TO THE BUYER. THE BUYER PAYS THE SELLER, AND THE SELLER PAYS THE FIRST MORTGAGE. THE SELLER USUALLY MAKES PROFIT ON THE INTEREST RATE OVER WHAT HE IS PAYING ON THE UNDERLYING LOAN, AS WELL AS ON THE DIFFERENCE IN PAYMENTS.

MORTGAGES AND THE DIFFERENT DOCUMENTS OF THE MORTGAGE LOAN (CONT.)

A CONSOLIDATION LOAN RESTATES THE MATERIAL TERMS OF, BY AND LARGE, COMMERCIAL DEALS, BINDING TWO MORTGAGES TOGETHER INTO A NEW SINGLE MORTGAGE.

A COLLATERAL ASSIGNMENT OF RENTS (OVERKILL BY THE BANK) - THE OWNER OF THE PROPERTY AGREES TO ASSIGN ALL RENT PAID BY THE TENANTS IN THE BUILDING. THE BANK AGREES THAT IT WILL NOT EXERCISE THIS RIGHT UNTIL THE MORTGAGOR STOPS MAKING PAYMENTS ON THE MORTGAGE. THIS HAS ALREADY BEEN COVERED IN THE MORTGAGE, SO IT IS NOT REALLY AN ESSENTIAL CLAUSE.

THE SECURITY INTEREST AND THE UCC1 FORM, ALSO KNOWN AS A FINANCING STATEMENT - IN ADDITION TO THE MORTGAGE, THE BANK TAKES AN INTEREST IN THE FIXTURES THAT ARE PART AND PARCEL OF THE BUILDING, AND GETS FILED SEPARATELY WITH THE RECORDER. (THE UNIFORM COMMERCIAL CODE, UCC, IS A

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NATIONWIDE STATUTE COVERING COMMERCIAL TRANSACTIONS). THIS IS THE SAME AS A CHATTEL MORTGAGE.

PLEDGE AGREEMENT AND NEGATIVE PLEDGE AGREEMENT - A PROMISE OF AN INTEREST IN ADDITIONAL COLLATERAL ABOVE WHAT HAS BEEN PLEDGED AS SECURITY, SUCH AS:

SECURITY INTEREST IN REAL ESTATENOTEASSIGNMENT OF RENTSSECURITY INTEREST IN FIXTURES AND PERSONALTY

PLEDGE AGREEMENTS ARE USED IN HIGH LTV LOANS. IT IS COLLATERAL NOT ASSOCIATED DIRECTLY WITH THE PROPERTY, SUCH AS SHARES OF STOCK IN THE MORTGAGOR'S CORPORATION.

OOPS AFFIDAVIT - WHEN CITIBANK WAS DOING A LOT OF VOLUME IN HOME MORTGAGES, NO ONE COULD ADEQUATELY MONITOR IT. THE SENSE THAT SOMETHING WOULD SLIP BETWEEN THE CRACKS CAUSED THE BANK TO HAVE AN OOPS AFFIDAVIT INSERTED INTO THE CONTRACT, WHICH WHEN SIGNED CAUSES THE BUYER TO PERFORM A CORRECTION DEED OR FILL IN THE MISSING BLANK SHOULD SOMETHING BE OVERLOOKED.

CERTIFIED RENT ROLE - A COPY OF THE RENT ROLL FOR A GIVEN BUILDING THAT IS BEING ENCUMBERED, AND CERTIFIED BY THE OWNER AS CORRECT.

ESTOPPEL CERTIFICATE - STATEMENTS FROM THE TENANTS TO THE BANK SAYING, "I HAVE A LEASE, VALID AND IN EFFECT, WITHOUT OFFSETS AND DEFENSES, AND NOT PREPAID AT A GIVEN RATE OVER A CERTAIN TERM". PART OF THE CERTIFIED RENT ROLE.

FLOOD CERTIFICATION - A CERTIFICATION (COSTS 17 DOLLARS) FROM A COMPANY IN NEW JERSEY THAT FOR ANY PLACE IN THE COUNTRY WILL CERTIFY ITS STATUS AS IN OR OUT OF A FLOOD PRONE AREA.

RESPA - REAL ESTATE SETTLEMENT PROCEDURES ACT. TELLS THE BUYER WHAT THE TOTAL COST OF THE LOAN IS, WHERE THE MONIES WENT, AND WHAT COSTS WERE INCURRED. PREPARED BY THE BANK, AND USED BY ATTORNEYS AS PART OF THEIR CLOSING STATEMENT. IT TELLS THE SELLER THE CONTRACT DEPOSIT AND DEPOSITS DUE.

TRUTH IN LENDING STATEMENT - SUMMARIZES THE AFFECT OF AN ADJUSTABLE RATE LOAN, ITS TERMS, AND TELLS YOU WHAT YOU WILL PAY THE BANK IF YOU PAY OFF AT ANY TIME DURING THE TERM.

CERCLA - COMPREHENSIVE ENVIRONMENTAL COMPENSATION LIABILITY ACT - ALMOST ALL COMMERCIAL LENDERS REQUIRE A PHASE I ENVIRONMENTAL AUDIT DUE TO SUPERFUND LAWS MAKING THE LENDER LIABLE IN SOME INSTANCES. THE MORTGAGEE WILL STILL INSIST THAT THE MORTGAGOR BE LIABLE FOR THE COST OF ENVIRONMENTAL CLEAN-UP.

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UNDER CERCLA, THERE IS A LIABILITY BASED ON BOTH CONDUCT AND STATUS. BY THIS, WE MEAN THAT IF YOU ENJOY STATUS AS AN OWNER, OPERATOR, PERSON RESPONSIBLE FOR COLLECTION AND CLEANUP, OR CARTING AT THE PLACE, YOU ARE FULLY RESPONSIBLE FOR CLEANUP UNDER CERCLA. IF AS A LENDER YOU HAVE AN INFLUENCE ON THE DAY TO DAY AFFAIRS OF THE PROPERTY, YOU ARE ALSO RESPONSIBLE. THIS IS TRUE ESPECIALLY AFTER FORECLOSURE, BUT MAY BE TRUE BEFORE A FORECLOSURE WHEN THE MORTGAGE IS CURRENT.

THE MORTGAGE FORM

PARAGRAPH ONE - LISTS THE PRINCIPAL AMOUNT (THE AMOUNT OF THE LOAN), THE TERMS, ANNUAL RATE, THE DATE, AND THE BORROWER'S AND LENDER'S NAMES.

YOU PAY THE MORTGAGE IN ARREARS. YOUR PAYMENT IS FOR THE MONTH THAT HAS JUST PASSED, NOT THE ONE COMING. WHEN CLOSING IS JUNE 1ST, THE DATE PLACED HERE IS AUGUST 1ST. YOU SKIP A MONTH AFTER CLOSING, AND START PAYING A MONTH LATER.SHORT INTEREST COVERS THE PERIOD OF INTEREST FROM THE DATE OF THE CLOSING TO THE END OF THE MONTH. MONTHS FOR THIS PURPOSE ARE ALL 30 DAYS.

FIXTURES, PERSONAL PROPERTY, AWARDS OF EMINENT DOMAIN ARE COVERED.

A COVENANT IS AN AGREEMENT TO DO SOMETHING. THE BORROWER AGREES TO PAY THE DEBT. HE AGREES TO INSURE THE PROPERTY. HE AGREES THAT IT SHOULD BE ADEQUATELY INSURED IN THE EYES OF THE MORTGAGE. HE AGREES NOT TO ALTER OR DEMOLISH THE BUILDING WITHOUT THE LENDER'S CONSENT. THE BANK DOES NOT WANT TO INHERIT A PROPERTY IN MID-CONSTRUCTION.

DEFAULT PROVISION - A 15 DAY GRACE PERIOD, WITHOUT PENALTY. ALSO CALLED A MONETARY DEFAULT.

NON-MONETARY DEFAULTS MAY BE CURED IN 30 DAYS AFTER THE BANK NOTIFIES YOU. PARAGRAPH 5

THE BANK RESERVES THE RIGHT TO APPOINT A RECEIVER IN THE EVENT OF A FORECLOSURE.

PARAGRAPH 6

THE MORTGAGOR AGREES TO PAY TAXES, WATER, AND INSURANCE PREMIUMS. USUALLY, THE BANK IS THE ONE TO COLLECT THIS, AND THEY PAY THESE ITEMS FROM AN ESCROW ACCOUNT. THE BANKS MAKE MONEY ON THE SPREAD IN TIME BETWEEN ESCROWAGE AND PAYMENT.

PARAGRAPH 7 - THE SAME PURPOSE AS AN ESTOPPEL CERTIFICATE. MORTGAGOR SAYS, "I HAVE NOT PAID OFF THE DEBT, AND AM NOT IN A BATTLE WITH THE BANK, AND I AM WILLING TO SAY SO".

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PARAGRAPH 12 - IN THE EVENT OF A FORECLOSURE, ALL SUMS DUE BY WAY OF COSTS GET THROWN INTO THE MORTGAGE DUE. IF MONIES ARE DUE, SUCH AS TAXES, THAT IS ADDED AS WELL AS INTEREST FOR THOSE SUMS.

PARAGRAPH 13 - REDUNDANT - STATES ESSENTIALLY THE SAME AS THE ASSIGNMENT OF RENT DOCUMENT. THE MORTGAGOR IS GIVING TO THE MORTGAGEE RIGHTS TO INCOME STREAM, AND THE RIGHT TO STEP IN AND OPERATE THE PROPERTY AS OWNER EVEN BEFORE THE PROPERTY IS FORECLOSED. THE RIGHT IS WAIVED AS LONG AS PAYMENTS ARE MADE. MORTGAGOR AGREES NOT TO COLLECT RENTS TOO FAR IN ADVANCE, SINCE THE TENANT WILL NOT OTHERWISE PAY THE BANK IN THE EVENT OF FORECLOSURE ON THE MONIES DUE IT.

PARAGRAPH 14 - WHEN THE LOAN MAY BE ACCELERATED - ANOTHER DEFAULT PROVISION;WHEN THE PROPERTY BECOMES UNINSURABLEWHEN THE TAXES ARE NOT PAIDWHEN THE BUILDING IS ALTERED OR DEMOLISHED, OR FIXTURES REMOVED.WHEN THE PROPERTY IS NOT KEPT IN REPAIR.WHEN THERE ARE UNADDRESSED VIOLATIONS.WHEN RENTS ARE ASSIGNED TO SOMEONE OTHER THAN THE MORTGAGEEIT IS AN ELEMENT OF EQUITY AND NOT LAW. THEREFORE JUDGEMENTS IN DISPUTES ON THESE MATTERS MUST BE FAIR. ACCELERATION MAY TAKE PLACE WHEN AN ACT OF LAW REDUCES THE PROPERTY VALUE BELOW A CERTAIN GIVEN LTV RATIO.

PARAGRAPH 15 - REQUIRES THE MORTGAGOR TO TAKE THE MONEY FROM THE BANK AND SETTLE ENCUMBERING LIENS ON THE PROPERTY.

PARAGRAPH 16 - DULY AUTHORIZED BY THE OFFICERS OF THE CORPORATION OR RESOLUTION OF THE BOARD OF THE CORPORATION STATING THAT THE MORTGAGE IS ACCEPTABLE.

BOTTOM

SIGNED BY THE MORTGAGOR, NOT THE BANK (EXCEPT WHEN A CONSOLIDATION AGREEMENT)

SIGNATURE MUST BE NOTARIZED.

BECAUSE RECORDED, THE BLOCK AND LOT MUST BE LISTED, AND THE NAME TO WHOM THE MORTGAGE WILL BE RETURNED (USUALLY THE BANK'S ATTORNEY)

END OF CLASS SIX

CLASS SEVEN - 7/9/90

LOCUS SIGILLI (SEE-JEE-LEE) - LOCATION OF THE SEAL; WHERE THE SEAL IS TO BE AFFIXED ON A CONTRACT. INITIALS ARE L.S.

WITNESS - STATES; "I SAW A PERSON SIGN THIS DOCUMENT AND I MAKE NO STATEMENT AS TO THE AUTHENTICITY OF THE SIGNATURE".

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NOTARIZATION- "I SWEAR TO THE FACT THAT A SIGNATURE IS AUTHENTIC, AND THAT THE I THE NOTARY SAW THE PERSON SIGN IT."

MORTGAGES

EXCULPATION CLAUSES DETERMINE WHETHER OR NOT THE BANK CAN GO BEYOND THE REAL ESTATE MORTGAGED TO REMEDY THE LOSS OF FUNDS EXPERIENCED BY THE MORTGAGEE WHEN THE REAL ESTATE IS FORECLOSED. IF THE BANK FORECLOSES AND THERE IS AN EXCULPATION CLAUSE, THE BANK MAY (1) COLLECT THE PRINCIPAL DUE PLUS (2) RECOUP ACCRUED INTEREST TO THE DATE OF THE SALE, (3) LATE FEES AND REPAYMENT FEES, (4) AND THE COST OF FORECLOSURE SUCH AS ATTORNEY'S FEES, PREPAYMENT FEES, LATE FEES, ETC. THIS LAST ITEM CAN BE A SUBSTANTIAL AMOUNT. IF AFTER RECOUPING THESE FOUR ITEMS THERE IS ANY MONEY LEFT FROM THE SALE, IT GOES TO THE MORTGAGOR. IF IN SELLING THE PROPERTY THE BANK DOES NOT RECOUP THESE ITEMS, A "DEFICIENCY JUDGEMENT" CAN BE SOUGHT AGAINST THE MORTGAGOR TO SEEK REDRESS IF THE LOAN IS A RECOURSE LOAN. A NON-RECOURSE (EXCULPATORY) LOAN WILL NOT ALLOW THE MORTGAGEE TO LOOK FURTHER THAN TO THE REAL ESTATE FOR REDRESS. EXCULPATION, WHEN AVAILABLE SUCH AS WHEN THE LTV RATIO IS LOW, IS NEGOTIATED AT THE COMMITMENT. EVEN WHEN EXCULPATION IS GRANTED,L IT HAS BEEN "CHIPPED AWAY" OVER THE PAST SEVERAL YEARS. OFTEN THE RIGHT WILL BE RESERVED TO GO AFTER THE MORTGAGOR IF:

1) THE MORTGAGOR COMMITTED A FRAUD WITH RESPECT TO A MATERIAL ASPECT OF THE AGREEMENT BETWEEN THE BANK AND THE MORTGAGOR. SUCH AS:

MISSTATEMENT AS TO INCOME (FRAUD AND MISREPRESENTATION)MISSTATEMENT AS TO BROKER RELATIONSHIPETC.

2) ENVIRONMENTAL LIABILITY - SEE LECTURE SIXTO PROTECT THEMSELVES FROM ENVIRONMENTAL LIABILITY, BANKS TYPICALLY EXPECT A SERIES OF REPRESENTATIONS FROM THE MORTGAGOR THAT IT HAS DONE NOTHING:

1) IN THE PAST TO CAUSE ENVIRONMENTAL PROBLEMS ON THE PROPERTY;2) WILL NOT DO ANYTHING TO THE PROPERTY TO CAUSE ENVIRONMENTAL PROBLEMS IN THE FUTURE;3) WILL INDEMNIFY THE BANK FROM LIABILITY FOR THE ENVIRONMENTAL DAMAGE, IF ANY;4) THEY WILL ALSO INSIST THAT AN ENVIRONMENTAL AUDIT BE TAKEN AS A CONDITION OF MAKING THE LOAN.

REPRESENTATION - MADE IN THE CONTEXT OF A CONTRACT, GIVES RISE TO A BREACH IF VIOLATED, WHICH CAN BE PURSUED IN COURT AS A BREACH OF CONTRACT.

WARRANT - A "STAND ALONE" TYPE OF PROMISE, GIVING RISE TO A TORT CLAIM.

NOTE: ALWAYS DEMAND TO SEE AN UNSIGNED AND UNDATED DRAFT OF THE ENVIRONMENTAL AUDIT THAT YOU COMMISSIONED SO THAT PRIOR TO SUBMISSION TO THE BANK YOU HAVE THE OPPORTUNITY TO ELIMINATE ALL UNWARRANTED

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CONCLUSIONS OR STATEMENTS MADE BY THE CONSULTANT IN HIS EFFORT TO PROTECT HIMSELF FROM LIABILITIES.

A PHASE ONE REPORT - THE BANK ASKS THE MORTGAGOR TO CERTIFY THAT HE, WITH DUE DILIGENCE, HAS PURSUED AN AUDIT OF THE PROPERTY AND HAS DETERMINED THAT THERE IS NO ENVIRONMENTAL PROBLEM.

DUE ON SALE CLAUSE - SEE PAST LECTURES

PREPAYMENT PENALTY CLAUSE - SEE PAST LECTURESRESIDENTIAL UNITS, OWNER OCCUPIED AND ONE TO SIX UNITS, ARE ALL PREPAYABLE AFTER THE FIRST YEAR IN NEW YORK. COMMERCIAL TERMS DIFFER AND ARE NEGOTIATED AT THE COMMITMENT PHASE. THE BANK MAY CONSENT TO PREPAYMENT PROVIDED THAT THE BANK IS PAID A PREMIUM TO DO SO. SEE YIELD MAINTENANCE FORMULA, LECTURE FOUR. YIELD MAINTENANCE FORMULAS WILL GUARANTEE THE MORTGAGEE THE MARGIN BETWEEN THEIR INVESTMENT IN, SAY, T-BILLS, AND THE RATE ON THE MORTGAGE. MOST BANKS WILL NOT ACCEPT PARTIAL PREPAYMENT. SOME MAY ALLOW PREPAYMENTS IN, SAY, 50,000 OR 100,000 DOLLAR INCREMENTS. THE YMF IS NOT A PENALTY, AS PER STATEMENTS TO THAT POINT IN THE CONTRACT FOR THE MORTGAGE. PENALTIES FOR PREPAYMENT ARE ILLEGAL.

EXCULPATION CLAUSE - RESIDENTIAL LOANS ARE NEVER EXCULPATORY AS A MATTER OF PRACTICE.

LATE FEES CLAUSE - 2 TO 5 PERCENT OF THE PAYMENT IF NOT PAID WITHIN 15 DAYS OF DUE DATE.SUBORDINATION CLAUSE - DEALS WITH PRIORITY OF LIEN ON THE MORTGAGE. PROVIDES FOR WHETHER OTHER MORTGAGES MAY BE PLACED ON THE PROPERTY EVEN WHEN THE OTHER MORTGAGES ARE SUBORDINATE IN LIEN. IF MORTGAGOR'S ABILITY TO REPAY THE FIRST MORTGAGE IS IMPEDED BY THE SECOND MORTGAGE, THE FIRST MORTGAGEE WILL INSIST THAT THE MORTGAGOR NOT TAKE THE LOAN, AND WOULD HAVE A RIGHT TO INSIST ON THIS IN A SUBORDINATION CLAUSE. IF THE MORTGAGOR SEEKS TO GAIN A SECOND MORTGAGE TO IMPROVE THE PROPERTY, THE FIRST MORTGAGOR WOULD BE HARD-PRESSED TO WIN IN COURT IF IN EFFECT THE IMPROVEMENTS IMPROVE THE PROPERTY'S VALUE, IN TURN INCREASING OR ANCHORING THE EQUITY IN THE PROPERTY THAT THE FIRST MORTGAGOR IS TRYING TO PROTECT.

DIFFERENT TYPES OF MORTGAGES

FIXED RATE MORTGAGE - (RESIDENTIAL PROPERTY, ONE TO SIX FAMILY)TYPICALLY PROVIDES THAT THE INTEREST RATE IS LOCKED IN BEFORE CLOSING AND FOR THE LIFE OF THE LOAN. USUALLY 15, 30, OR 40 YEAR LOANS.

A.P.R. - ANNUAL PERCENTAGE RATE - THE REAL COST OF THE BORROWING.

FUNDING COMPANY - A FUNDING COMPANY IS A PRIVATE LENDER. IT DOES NOT NEED TO MEET THE STATUTORY REQUIREMENTS FOR BANKING. THEY OFTEN HAVE NO MONEY OF THEIR OWN. THEY ACT AS INTERMEDIARIES. THEY FIND A LENDER, MAKE A LOAN, AND SELL THE LOAN ON THE SECONDARY MARKET. USUALLY THEY ARE

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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 T-BILLS, 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

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SYNDICATE, A SMALL GROUP MAY NOT REQUIRE A PROSPECTUS. UNDER 35 PEOPLE, YOU CAN USE A PRIVATE PLACEMENT MEMORANDUM OR DO WITHOUT IT OR THE PROSPECTUS AS YOU FEEL COMFORTABLE DOING. A PRIVATE PLACEMENT MEMORANDUM IS A SHORT FORM PROSPECTUS FILED WITH THE ATTORNEY GENERAL "AFTER THE FACT". THE ATTORNEY GENERAL DOES NOT EXAMINE IT BEFOREHAND AS WITH A PROSPECTUS. THE AMOUNT OF MONEY DOES NOT DISTINGUISH WHETHER YOU CAN FILE A PRIVATE PLACEMENT MEMORANDUM. IT IS THE NUMBER OF ENTITIES (SUCH AS PERSONS OR CORPORATIONS, EACH AS AN ENTITY).

UNITS (MONETARY BLOCKS OF VALUE, USUALLY 50,000 OR 100,000) ARE LISTED IN THE PRIVATE PLACEMENT MEMORANDUM. UNITS CAN BE CONVERTED TO A LIMITED PARTNERSHIP SHARE OF THE PARTNERSHIP. THE PERSON RAISING THE MONEY IS OFTEN THE GENERAL PARTNER, AND HOLDS 40 TO 50 PERCENT OF THE UNITS. TO MARKET THE SYNDICATION IN DIFFERENT STATES, YOU HAVE TO MEET THE REQUIREMENTS OF EACH STATE.

END OF CLASS SEVEN

CLASS EIGHT7/16/90

DRAGNET CLAUSE - IN MORTGAGES, WHEN A BUYS FROM B, WHO GIVES A 10,000 LOAN TO A, AND WHEN A GETS A 100,000 LOAN FROM BANK C, IF BANK C BUYS OR IN ANOTHER WAY ACQUIRES THE 10,000 LOAN FROM B THAT 10,000 LOAN WILL JOIN WITH THE 100,000 DOLLAR LOAN TO FORM A 110,000 LOAN WITH PRIORITY OF LIEN IN THE EVENT OF A FORECLOSURE. THIS IS ALSO CALLED AN ANACONDA CLAUSE.

***********************LEASING (WITH AN EMPHASIS ON OFFICE LEASING)

A LEASEHOLD INTEREST IS AN INTEREST IN REAL PROPERTY THAT ALLOWS THE TENANT TO GAIN THE USE AND PROFITS OF THE REAL ESTATE IN TURN FOR RENT TO THE LANDLORD. IT CREATES A TENANT INTEREST IN THE PROPERTY. A LEASE IS DIFFERENT THAN A MORTGAGE IN THAT THE BANK DOES NOT HAVE THE RIGHT TO POSSESS THE PROPERTY. IN LIEN THEORY STATES, A MORTGAGE SECURES REPAYMENT WHEREAS A LOAN DOES NOT. A LEASE IS DIFFERENT FROM A LICENSE. A LICENSE IS AN ARRANGEMENT THAT GRANTS RIGHTS, IS REVERSIBLE, AND INVOLVES PAYMENTS DIFFERENT THAN THAT REQUIRED UNDER LEASEHOLD SITUATIONS. THEY ARE ALSO TYPICALLY SHORT TERM AGREEMENTS.

REBNY FORM (REAL ESTATE BOARD OF NEW YORK) - PRO-LANDLORD DOCUMENT FOR LEASING.

BLUMBERG FORM - PRO-LANDLORD, BUT NOT TO THE DEGREE THAT THIS IS TRUE WITH THE REBNY FORM.

NEW YORK BAR ASSOCIATION FORM - FAIR TO BOTH TENANT AND THE LANDLORD, THEREFORE IS LEAST USED.

THE DEGREE OF REVIEW IN NEGOTIATION RELATES DIRECTLY TO THE SIZE OF THE

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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 ABOVE-MENTIONED 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.

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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 ESCALATIONSDIRECT OPERATING EXPENSE ESCALATIONSREAL ESTATE TAX ESCALATIONSRENT INCLUSION PROVISION FOR ELECTRICITYLATE FEESCONTRIBUTION TOWARD COSTS OF WATER USECONTRIBUTION TOWARD COSTS OF SPRINKLER MAINTENANCE CONTRACTHVAC 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

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THE ATTORNEY TO CREATE THIS OBLIGATION IN THE LEASE. "THE LANDLORD AGREES TO MAKE STRUCTURAL REPAIRS, INCLUDING PLUMBING, ELECTRICAL, ELEVATOR, FOUNDATION, BEARING WALLS, ETC. ANYTHING WITHIN THE DEMISED PREMISES IS THE RESPONSIBILITY OF THE TENANT".

THE TENANT AGREES TO MAINTAIN THE AREA IN THE DEMISED AREA. IF THE TENANT'S COURSE OF CONDUCT RESULTS IN DAMAGE TO THE STRUCTURE THEN HE IS RESPONSIBLE TO CORRECT THE DAMAGE. OTHERWISE THE TENANT LIMITS HIS RESPONSIBILITY TO NON-STRUCTURAL PROBLEMS WHILE MAINTAINING THAT THE LANDLORD IS RESPONSIBLE FOR STRUCTURAL REPAIRS.

IF THE LANDLORD NEEDS TO MAKE REPAIRS THAT THE TENANT SHOULD HAVE MADE, HE IS ALLOWED TO CHARGE BACK THE MONEY AS ADDITIONAL RENT. THE LANDLORD IS OBLIGATED TO FIRST GRANT THE TENANT A CHANCE TO CURE THE ITEM AND APPROVE IT SUBJECT TO A REASONABLE CHARGE FOR THE REPAIR.

THE RIGHT TO OFFSET EXPENSES BY THE TENANT FOR WORK THAT SHOULD HAVE BEEN PERFORMED BY THE LANDLORD IS SPECIFICALLY GUARANTEED IN SOME STATES.

DEMISED PREMISES - THE SPACE DESIGNATED BY, FOR EXAMPLE, 8TH FLOOR, 525 8TH AVENUE. ADDITIONALLY THERE IS USUALLY A FLOOR PLAN THAT IS ATTACHED TO THE LEASE THAT IS DEFINED AS THE DEMISED PREMISES. DOES NOT INCLUDE COMMON AREAS. THE DEMISING WALL IS THE WALL DELINEATING THE EXTENT OF THE DEMISED PREMISES.

DOCTRINE OF INDEPENDENT COVENANTS - THE TENANTS OBLIGATION TO PAY RENT IS INDEPENDENT OF THE LANDLORD'S OBLIGATION TO REPAIR HIS BUILDING. THE TENANT ALWAYS CROSSES OUT THE PROVISION THAT SAYS IT SHOULD NOT BE RELEVANT HOW GOOD OF A TENANT HE IS, THE LANDLORD SHALL NOT BE ALLOWED TO CUT OFF SERVICES.

YOU NEED TO HARMONIZE THE PROVISIONS THAT REQUIRE THE TENANT TO CARRY INSURANCE, THE BANK TO COLLECT THE INSURANCE AND THE LANDLORD'S OBLIGATION TO MAKE REPAIRS.

FOUR TYPES OF LEASES:

RETAIL LEASES APARTMENT LEASESOFFICE LEASES LOFT LEASES

ONE OF THE MOST IMPORTANT PROVISIONS IS THE "REQUIREMENT OF LAW CLAUSE" STATING THAT THE TENANT SHALL COMPLY WITH ALL LAWS EXISTING OR FUTURE, WHETHER OR NOT ARISING FROM THE TENANTS MANNER OF USE OR OCCUPANCY. THE TENANT MAY HAVE TO BEAR THE EXPENSE OF CHANGES IN LAW THAT WOULD OTHERWISE HAVE BEEN BORN BY THE LANDLORD.

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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 REQUIREMENTS, EPA, OSHA, CERTIFICATES OF OCCUPANCY REQUIREMENTS, ETC.

THEREFORE WHEN CONFRONTED WITH A STANDARD FORM OF PUTTING ALL OF THE LIABILITIES ON THE TENANT, AS THE TENANT'S ATTORNEY YOU WOULD WANT THE TENANT ONLY TO PAY FOR EXPENSES ATTRIBUTABLE TO HIS "MANNER OF USE". A SPRINKLER CODE, SINCE UNIVERSALLY APPLIED TO ALL OFFICE SPACES, WOULD NOT BE PAID FOR BY THE TENANT IF IT DOES NOT APPLY TO HIM SPECIFICALLY, AS WOULD, SAY, A VENTILATION LAW APPLYING TO RESTAURANTS WHEN YOU OWN A RESTAURANT.

THERE SHOULD BE A PROVISION THAT STATES THAT A TENANT'S SHARE SHOULD BE PRO-RATED AS PER THE REMAINING TERM IN THE LEASE RELATIVE TO THE TOTAL LEASE PERIOD. YOU WILL WANT TO EXCLUDE ALL VIOLATIONS EXTANT BEFORE OCCUPANCY FROM TENANT RESPONSIBILITY.

LOCAL LAW 5 REQUIRES CONTAINERIZATION OF OFFICE SPACE FOR PROTECTION FROM THE SPREAD OF FIRE. THE TENANT WILL AGREE TO COMPLY WITH THE RECOMMENDATIONS OF THE BOARD OF FIRE UNDERWRITERS. IF IMPLEMENTING THE RECOMMENDATIONS SAVES INSURANCE PREMIUMS, THE TENANT WILL WANT A SHARE OF THOSE SAVINGS.

THE OPTIONS FOR THE LANDLORD TO TERMINATE THE LEASE IF A REPAIR EXCEEDS A GIVEN SUM SHOULD NOT BE AGREED TO BY THE TENANT, UNLESS THE TENANT HAS THE EXPRESSED RIGHT TO PAY THE AMOUNT TO SAVE THE LEASE.

THE SUBORDINATION PROVISION- PRIORITY OF POSITION: WHICH INTEREST HAS THE SUPERIOR POSITION? WE LUMP IN THIS TOGETHER ALL POTENTIAL ENCUMBRANCES AND LIENS. GENERALLY THIS IS DETERMINED BY WHICH WAS RECORDED FIRST. A RECORDED MORTGAGE HAS WILL NEED PRIORITY OVER ALL LEASES BEFORE IT. A RECORDED LEASE HAS PRIORITY OVER MORTGAGES AFTER IT. IF A TENANT TAKES POSSESSION OF A SPACE PURSUANT TO A LEASE, AND SUBSEQUENT TO THAT THE BANK PUTS A MORTGAGE ON THE PROPERTY, THE LEASEHOLD IS SUPERIOR EVEN THOUGH THE LEASE IS NOT RECORDED. THE POSSESSION OF THE SPACE IS EVIDENCE OF "GIVING NOTICE" TO THE WORLD OF THE TENANCY LEASEHOLD.

A MORTGAGE TAKING PLACE AFTER THE LEASE IS SUPERIOR TO A LEASE SINCE THE SUBORDINATION CLAUSE STATES THAT THE TENANTS AGREE TO MAKE THE MORTGAGE SUPERIOR IN LIEN TO THE LEASEHOLD.

A MORTGAGE ADJUSTMENT TO AN AMOUNT GREATER THAN THE MORTGAGE AMOUNT AT THE TIME OF THE LIEN IS SECOND IN LIEN AFTER THE LEASEHOLD. WITH PROVISIONS IN AN AGREEMENT, A MORTGAGE IS SUPERIOR TO THE LEASE. A GROUND LEASE IS SUPERIOR TO THE LEASE, AND WIPES THEM OUT WHEN IT IS WIPED OUT.

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A NON-DISTURBANCE AGREEMENT IS DESIGNED TO PREVENT THE LANDLORD FROM UNDERMINING THE TENANT'S USE OF THE LEASEHOLD WHEN SUPERIOR INTEREST WIPE OUT THE LEASEHOLD. THIS IS GENERALLY DONE IN TURN FOR AGREEING TO MAKE THE LEASEHOLD SUBSERVIENT TO THE MORTGAGES.

THE ATTORNMENT PROVISION: THE LANDLORD SAYS THAT HE WILL GIVE THE NON-DISTURBANCE 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 IS ULTIMATELY THE BANK'S DECISION, BASED ON FOUR CRITERION:

1. RENTAL RATE PER SQUARE FOOT >> IS IT MARKET RATE OR BETTER?2. ESCALATION PROVISIONS3. THE SIZE OF THE SPACE - SMALL SPACES WILL NOT GET IT.4. THE CREDITWORTHINESS OF THE TENANT.

IF YOU CAN NOT GET A NON-DISTURBANCE GUARANTEE, THE LANDLORD WILL TYPICALLY ATTEMPT TO GET IT "AFTER THE FACT". "BEST EFFORTS" WILL BE EXPENDED BY THE LANDLORD IN GETTING THE BANK TO OFFER THE NON-DISTURBANCE GUARANTEE, AND IS THE NEXT BEST WAY OF ATTEMPTING TO SECURE THE GUARANTEE. THE LANDLORD WILL STIPULATE, HOWEVER, THAT "BEST EFFORT" DOES NOT INCLUDE THE SPENDING OF MONEY. IF THE TENANT IS A MAJOR TENANT, THEN THE ATTORNEY WILL WANT TO EXAMINE THE GROUND LEASE AND THE LEASEHOLD.

YOU WILL WISH TO EXAMINE THE GROUND LEASE. IF THE GROUND LEASE HAS, FOR EXAMPLE, A DEMOLITION AGREEMENT THAT ALLOWS THE BUILDING TO BE TORN DOWN TO TERMINATE THE LEASE, YOU SHOULD KNOW THIS SINCE YOUR LEASE WILL BE WIPED OUT BY THE TERMINATION OF THE GROUND LEASE.

YOU WILL WANT A REPRESENTATION IN THE LEASE AS TO WHAT GROUND LEASES AND MORTGAGES THERE ARE ON THE BUILDING.

DELIVERY OF POSSESSION OF THE SPACE - THE TENANT WANTS TO NOT ONLY KNOW WHEN HE WILL GAIN POSSESSION OF THE LEASE, BUT WILL NEED TO ARRANGE FOR MOVING INTO THE SPACE. THE GENERAL UNDERSTANDING IS THAT THE POSSESSION TAKES PLACE ON COMMENCEMENT. THE TENANT HAS THE RIGHT TO DAMAGES IF THE POSSESSION IS NOT DELIVERED ON TIME, AND HAS THE RIGHT TO BACK OUT OF THE LEASE.

THE LANDLORD WILL PUT IN A PROVISION THAT THE TENANT WAIVES HIS RIGHT TO

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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 NINE7/23/90

PAPER DUE NEXT WEEK, MIDTERM RETURNED TODAY

SECTION 255 - DEALS WITH THE ASSIGNMENT OF MORTGAGES AND DORMANT MORTGAGES.

SECTION 275 - DEALS WITH THE MORTGAGE TAX WHEN THE INDEBTEDNESS ALREADY EXISTS.

TENANCY BY THE ENTIRETIES VS. COMMUNITY PROPERTY;COMMUNITY PROPERTY IS ANY TYPE OF PROPERTY BROUGHT INTO A MARRIAGE DURING THE MARRIAGE. IN N.Y., REAL ESTATE PURCHASED DURING MARRIAGE HAS THE STATUS OF TENANCY WITH THE RIGHT OF SURVIVORSHIP UNLESS OTHERWISE 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:

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1. PORTER'S WAGE2. CONSUMER PRICE INDEX3. DIRECT OPERATING EXPENSE4. REAL ESTATE TAXES

COMMON QUALITIES OF ESCALATIONS:

1. WHATEVER YOU CALL IT, BE IT AN ESCALATION, RENT, SURCHARGE, ETC., YOUR NEGOTIATING STANCE SHOULD BE FROM THE PERSPECTIVE THAT IT IS MONEY FROM THE TENANT TO THE LANDLORD.2. ALL ADDITIONAL RENT OF ONE FORM OR ANOTHER.3. THE PURPOSE OF THEM IS TO DEFRAY THE COSTS OF OPERATING THE BUILDING.4. THEY ARE ALL CALCULATED FROM A STARTING POINT CALLED THE BASE YEAR, A POINT NEGOTIATED WITH CARE. TYPICALLY, THE BASE YEAR IS A CALENDAR YEAR...THE QUESTION IS "WHICH" CALENDAR YEAR. USUALLY YOU TRY TO GET THE BASE YEAR TO BE THE YEAR ONE YEAR AFTER THE LEASE BEGINS IF YOU ARE THE TENANT.5. CALCULATED WITH REGARD TO THE SIZE OF THE SPACE OCCUPIED BY THE TENANT EITHER IN S.F., OR AS A PERCENTAGE OF THE SQUARE FOOTAGE INT HE BUILDING USING RENTABLE S.F.6. THE PRACTICAL ASPECT OF CONCERN FOR WHAT THE FUTURE WILL HOLD WITH RESPECT TO THE INCREASES. YOU MAY WANT TO LIMIT THE ESCALATIONS WITH A CAP, WHICH IS A FUNCTION OF NEGOTIATIONS.

THERE IS A CLAUSE IN LEASE CONTRACTS THAT IS A STOP GAP, FROM THE LANDLORD'S POINT OF VIEW, TO PREVENT RENT FROM FALLING BELOW BASE RENT IN THE EVENT THAT EXPENSES DECREASE BELOW THAT OF THE BASE YEAR.

WITH PORTER'S WAGE INCREASES, THE LANDLORD WISHES TO COLLECT THE ESCALATION WITHIN TEN DAYS OF THE STATEMENT. THIS DOES NOT RAISE A QUESTION WITH PREPAYMENT TO THE BANK BECAUSE THE COLLATERAL IS ENHANCED BY THE PREPAYMENT AND IS ENDANGERED BY ITS ABSENCE.

BASE RENT IS MANY TIMES SUBJECT TO ESCALATIONS, SOMETIMES ON A STRAIGHT LINE BASIS, SOMETIMES ON A CPI BASIS. LEASING COMMISSIONS ARE BASED ON THE BASE RENT WITHOUT CPI INCREASES IN THE VAST MAJORITY OF CASES.

YOU DO NOT USUALLY SEE PORTER'S WAGE ESCALATIONS AS A COMPONENT OF OPERATING EXPENSES. YOU WILL SEE EITHER PORTER'S WAGE, CONSUMER PRICE INDEX, OR DIRECT OPERATING EXPENSE, BUT NOT ALL THREE AT ONCE IN THE SAME LEASE WITH REAL ESTATE ESCALATIONS.

OPERATING EXPENSES

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STEP ONE: DEFINE OPERATING EXPENSES!

"ALL COSTS AND EXPENSES INCURRED BY THE LANDLORD IN THE OPERATION AND MAINTENANCE OF THE LAND AND BUILDING TO COMPLY WITH LOANS AND MAINTAIN LANDSCAPING, ETC. ARE OPERATING EXPENSES".

"OPERATING EXPENSES SHALL SPECIFICALLY INCLUDE BUT NOT BE LIMITED TO THE FOLLOWING:"

TAXES TO THE EXTENT UNPAID BY SALARIES AND FRINGE BENEFITSTHE TENANT PAYMENTS TO INDEPENDENT CONTRACTORSDUES AND FEES TO TRADE GROUPS FUEL, WATER, SEWERDEPRECIATION (!?) INSURANCEOVERHEAD SUPPLIESBROKER'S COMMISSIONS REPAIRS AND ALTERATIONSMANAGEMENT (!?) PROFESSIONAL FEES

ALL OF THESE ARE, OF COURSE, NEGOTIABLE.

THE QUESTION IS, ONCE AGAIN, "WHAT ARE YOU PAYING OUT AS THE TENANT".

STEP TWO:

DETERMINE THE BASE YEAR -- LENDS ITSELF TO A CALENDAR YEAR BASE.

"IT IS AGREED THAT IN THAT YEAR THE OPERATING EXPENSES WERE XX DOLLARS. IN ANY SUBSEQUENT YEAR THE OPERATING EXPENSES EXCEED XX, THE TENANT WILL PAY YY PERCENT OF THE OPERATING EXPENSES."

"YY PERCENT" IS A NEGOTIATED FIGURE, AND MAY NOT BE EXACTLY REPRESENTATIVE OF THE TENANT'S PROPORTIONAL SHARE OF THE BUILDING'S SQUARE FOOTAGE.

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.

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PORTER'S WAGE INCREASES

THE HOURLY RATE PLUS FRINGES IN A GIVEN BASE YEAR FOR PORTERS IN A PARTICULAR CLASS OF OFFICE BUILDING AS ESTABLISHED BY NEGOTIATION BETWEEN THE REAL ESTATE BOARD OF ADVISORY SERVICES AND LOCAL 34B OF THE AFL-CIO...CONSIDERED A GOOD MEASUREMENT OF THE INCREASE IN THE COST OF OPERATION. THE PORTER'S CLASSIFICATION IS A SPECIFIC LABOR CATEGORY. NOT UNUSUAL TO HAVE THIS CLAUSE EVEN IF YOU HAVE NO PORTERS IN THE BUILDING. IF THE LABOR RATE IN A SUBSEQUENT YEAR INCREASES OVER THE BASE YEAR, THE INCREASE WILL BE REMUNERATED AT THE RATE OF "PENNY FOR PENNY" UPON THE AGREED UPON SQUARE FOOTAGE OF THE BUILDING (AGREED UPON BECAUSE THE LANDLORD DOES NOT WANT TO WARRANT THE SQUARE FOOTAGE OF THE BUILDING IN THE CASE THAT HE MAY WANT TO "INCREASE" IT LATER WITH PSEUDO-ADDITIONAL SPACE. THE INCREASE CAN BE NEGOTIATED TO INCLUDE FRINGE BENEFITS, OR TO EXCLUDE THEM AS THE CASE MAY BE.

YEAR WAGE RATE INCREASE 40% FRINGE TOTAL INCREASE*********************************************************************D.P. = 10,000 S.F.

1991 11.00 NA NA NA1992 11.50 0.50 0.20 0.701993 11.75 0.75 0.30 1.05

(1992) 10,000 S.F. X 0.70 = 7,000 ESCALATION(1993) 10,000 S.F. X 1.05 = 10,500 ESCALATION

THIS IS AN EXAMPLE OF A PENNY FOR PENNY PORTER'S WAGE ESCALATION SCHEDULE. IF WE HAVE A 3/4 PENNY FOR PENNY ESCALATION, THIS TABLE WOULD BE DECREASED IN THE "TOTAL INCREASE" COLUMN BY 25%. SOMETIMES IT MAY EVEN BE 1.25 PENNY FOR PENNY!

CONSUMER'S PRICE INDEX ESCALATION (CPI)

SIMILAR TO "PORTER'S WAGE" IN THAT IT SUPPLIES AN OBJECTIVE SCALE FOR INCREASES NOT SUBJECT TO MANIPULATION BY THE LANDLORD. YOU STIPULATE THAT IT WILL BE THE FIGURE PUBLISHED BY THE BUREAU OF LABOR STATISTICS OF THE DEPARTMENT OF LABOR FOR THE NEW YORK/NEW JERSEY AREA. THE CPI IS BASED ON A THEORETICAL "BASKET OF GOODS AND SERVICES" WITH 100 BEING THE BASE IN THE YEAR 1967. ANNUAL INCREASES IN THE COST OF THIS BASKET OF GOODS AND SERVICES IS DESCRIBED NUMERICALLY. A 200% INCREASE WOULD REGISTER AS A CPI OF 300 (100 IN THE BASE YEAR + 200% INCREASE)

THERE ARE TWO APPROACHES.

1. BASED ON THE CHANGE OF CPI IE. 1991 = 303; 1992 = 315; THE CHANGE IS

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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. 3/102 = THE BASE CPI = 2.941 PERCENT.

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 START WITH A BASE YEAR. IN NEW YORK CITY, THE FISCAL YEAR IS JULY ONE TO JUNE 30. WE ARE CURRENTLY IN THE 1990 TO 1991 TAX YEAR. IF NOT A TAX YEAR, IT IS LEASED ON A CALENDAR YEAR; YO AVERAGE THE SECOND PART OF THE FIRST YEAR WITH THE FIRST PART OF THE SECOND YEAR IN THIS CASE, SINCE THE 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 TAXESSPECIAL ASSESSMENTSOTHER TAXES, FEES, OR IMPOSITIONS ASSESSED BY THE LANDLORD.

REVIEW CAREFULLY TO EXCLUDE THE INCOME TAX FROM THIS TAX PROVISION. HAVE THE LEASE STATE SPECIFICALLY THAT THEY ARE NOT INCLUDED.

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"TAXES PAYABLE BY LANDLORD" SHOULD BE REPLACED BY "TAXES PAID BY LANDLORD" SINCE CONCEPTUALLY A TAX LIEN CAN WIPE OUT THE LEASE IF THE TAXES ARE NOT PAID. YOU WANT TO BE CERTAIN THAT THE MONEY WILL BE USED TO PAY TAXES. IF THE TAXES PAYABLE IN A GIVEN YEAR ARE MORE THAN IN A BASE YEAR, THE TENANT PAYS HIS SHARE OF THE GAIN.

IE. TAX PAID IN BASE YEAR 10,000SUBSEQUENT YEAR 12,000INCREASE 2,000TENANT PORTION (10%) 2,000 X 10% = 200.00

ISSUES THAT THE TENANT WILL WISH TO COVER:

1. APPLIES TO ALL ESCALATIONS: THE CAP.MOST DIFFICULT TO GET NEGOTIATED, YET NOT IMPOSSIBLE.2. DEFINITION OF REAL ESTATE TAXES IS LIMITED.3. REAL ESTATE TAXES ARE REASSESSED AT A SALE. RULE OF THUMB: UP TO 45% EACH TIME PROPERTY IS SOLD. THIS IS FOCUSED ON BY TELLING THE LANDLORD THAT THE TENANT WILL NOT PAY INCREASED TAXES ATTRIBUTABLE TO THE SALE OF THE BUILDING.4. WHEN IS THE ESCALATION PAYABLE? LUMP SUM IN AUGUST (JULY IS WHEN INCREASE IS DETERMINED), TWO PAYMENTS (SINCE THE LANDLORD MAKES TWO PAYMENTS WHEN PAYING TAXES), OR MONTHLY.*OTHER PROVISIONS OF COMMERCIAL LEASING*

DELIVERY OF POSSESSION - UNDER NEW YORK LAW, THERE IS A STATUTORY PROVISION THAT THE LANDLORD MUST DELIVER THE PREMISES TO THE TENANT AT THE COMMENCEMENT OF THE LEASE. IF NOT, THE TENANT HAS A RIGHT TO BACK OUT. SEE PREVIOUS LECTURE.

ASSIGNMENT & SUBLETTING PROVISION

GENERALLY SPEAKING, THE LANDLORD WANTS TO CONTROL THE PROFITS DERIVED FROM THE PROPERTY. THE TENANT WANTS MAXIMUM FLEXIBILITY. GENERALLY, WITHOUT CONSENT, THE ASSIGNMENT OR SUBLETTING OF THE LEASE IS NOT PERMISSIBLE. THE TENANT AGREES, BUT SAYS PERMISSION MUST BE "REASONABLE". THE LANDLORD WILL THEN DEFINE IT AS "REASONABLE" TO DECLINE THE SUBTENANT:

1. WHEN THE NET WORTH OF THE ASSIGNEE IS NOT SATISFACTORY IN THE JUDGEMENT OF THE LANDLORD, SUCH AS LACK OF

CREDITWORTHINESS, OR COMPARATIVE WORTH TO THE LESSEE.

2. IF THE USE IS NOT COMPARABLE TO THAT OF THE LESSEE.

THE USE CLAUSE IS IMPORTANT BECAUSE IT DOVETAILS WITH THE ASSIGNMENT CLAUSE. THE TENANT WILL WANT A BROAD USE CLAUSE, ALLOWING ALL LEGAL USES. THE LANDLORD WILL WANT A RESTRICTIVE CLAUSE, SUCH AS A LAW OFFICE USE ONLY. CERTAIN USES MAY BE SPECIFICALLY EXCLUDED, SUCH AS

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GOVERNMENT AGENCIES, VOCATIONAL SCHOOLS, EMPLOYMENT AGENCIES, OR MESSENGER SERVICES.

3. PRINCIPALS OF THE ASSIGNEE - MUAMMAR QUADAFFI MAY NOT BE AN ACCEPTABLE PRINCIPAL.

THE DIFFERENCES BETWEEN A SUBLET AND AN ASSIGNMENT:

WHEN YOU TAKE A LEASE YOU HAVE A DIRECT RELATIONSHIP WITH THE LANDLORD CALLED PRIVITY. WHEN YOU SUBLET, YO ARE THE MIDDLEMAN AND THE NEW LANDLORD TO THE SUBLESSEE. WHEN YOU ASSIGN, EVEN THOUGH YOU STEP OUT OF POSITION, YOU ARE STILL LIABLE IF THE ASSIGNEE VIOLATES THE LEASE; YOU CAN BE "LOOKED TO" BY THE LANDLORD TO MAKE GOOD.

A NOVATION IS A TRUE SUBSTITUTION OF PARTIES IN EVERY RESPECT, INCLUDING PRIVITY AND LIABILITY. THE LANDLORD IS SAYING, "TENANT, YOU ARE OFF THE HOOK...I AM HAPPY WITH THE NEW TENANT". THIS IS VERY RARE.

THE ENTIRE PERIOD REMAINING ON THE LEASE IS CONVEYED IN AN ASSIGNMENT. IN A SUBLET, A PORTION OF THAT PERIOD IS CONVEYED.

ANOTHER DIFFERENCE IS THAT A SUBLET IS TYPICALLY FOR A PORTION OF THE DEMISED PREMISES. ASSIGNMENT IS FOR THE WHOLE SPACE.

A LANDLORD WILL SOMETIMES RETAIN THE OPTION TO "RECAPTURE" THE SQUARE FOOTAGE WHEN THERE IS A TENANT WHO WOULD OTHERWISE SELL HIS LEASE. THE BASIS FOR THIS IS THE LANDLORD'S FEELING THAT IF THE TENANT "WANTS OUT", THE LANDLORD SHOULD HAVE THE RIGHT TO ALLOW IT AND TAKE BACK THE LEASE. THE LANDLORD WILL INSERT A CLAUSE LIMITING HIS "REASONABLENESS" TO THE SPECIFIC CLAUSES MENTIONED, AND THE TENANT WILL WISH TO LIMIT THE PERIOD OF TIME FOR RECEIVING THE LANDLORD'S RESPONSE TO THE SUBTENANT. SILENCE WILL BE CONSTRUED AS APPROVAL.

IF THE LANDLORD HAS THE AFFIRMATIVE DUTY TO BE REASONABLE IN CONSENTING TO THE ASSIGNMENT, THEN THE UNREASONABLE LANDLORD MAY BE SUBJECT TO MONETARY DAMAGES. THIS RARELY OCCURS.

IF THE TENANT IS IN A POSITION TO MAKE A PROFIT FROM THE SUBTENANCY, THIS IS A NEGOTIATED ITEM. COULD SAY "ALL REMUNERATION PAID OR PAYABLE TO THE TENANT TO BE SPLIT AT (NEGOTIATED PERCENTAGE) WITH THE LANDLORD".

IF YOU ARE THE TENANT, YOU WILL NOT LIKE THE WORD "PAYABLE" SINCE WHEN THE AMOUNT IS TO BE SPLIT WITH THE LANDLORD THE TENANT WILL HAVE TO PAY THE LANDLORD EVEN THOUGH HE HAS NOT RECEIVED MONIES FROM THE SUBTENANT.

THE RIGHT TO RECAPTURE SHOULD BE LIMITED ONLY TO A POINT WHERE A CERTAIN PERCENTAGE OF THE DEMISED PREMISES FOR A CERTAIN PERIOD OF TIME WAS

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SUBLETTED BEFORE THE RECAPTURE CLAUSE KICKS IN.

UNDER CERTAIN CIRCUMSTANCES, THE RIGHT TO RECAPTURE MAY NOT BE THE SAME AS A NOVATION. WHEN THE LANDLORD RECAPTURES THE SPACE, HE MIGHT BECOME A SUBTENANT OF THE TENANT! IF THIS HAPPENS, THE LANDLORD WILL WISH TO PROTECT THESE INTERESTS FROM MERGER, WHICH WOULD IN COURSE CANCEL THE TENANT'S LIABILITY.

IF THE LANDLORD WAVES THE RIGHT OF RECAPTURE, THEN THE TENANT SHOULD HAVE THE RIGHT TO FIND A SUBTENANT WITHOUT THE LANDLORD'S CONSENT FOR A GIVEN PERIOD OF TIME.

THE LANDLORD WILL TRY TO AVOID THE POSSIBILITY OF DAMAGES BY PLACING A CLAUSE THAT THE TENANTS SOLE REMEDY SHALL BE SPECIFIC PERFORMANCE WHEN THE LANDLORD IS NOT REASONABLE IN CHOOSING THE SUBTENANT. THIS EFFECTIVELY KILLS THE POTENCY OF THE "REASONABLE" CLAUSE AS THE POTENTIAL ASSIGNEE IS OUT OF THE PICTURE BY THE TIME THE COURTS FIND THE LANDLORD TO BE UNREASONABLE.

THE ASSIGNMENT OF STOCK IN A LEASE IS CONSIDERED AN ASSIGNMENT WITH RESPECT TO THE ASSIGNMENT AND SUBLEASE CLAUSE AND MUST BE APPROVED BY THE LANDLORD. THE LEASE COULD BE TERMINATED BY THE LANDLORD IF THE STOCK IS CONVEYED WITHOUT APPROVAL. THE LANDLORD DOES NOT HAVE TO BE "REASONABLE" IN APPROVING AN ASSIGNMENT UNDER THESE CONDITIONS.

A LANDLORD WILL RATIFY THE ASSIGNMENT BY ACTIVELY ACCEPTING A CHECK FOR RENT FROM THE NEW SHAREHOLDER, OR BY, FOR EXAMPLE, CHANGING THE NAME ON THE DIRECTORY TO THAT OF THE NEW SHAREHOLDER.

RULAND AND DUMBPHORS CASE - 100 YEARS AGO IN ENGLAND. ONCE THE LANDLORD HAS WAIVED HIS RIGHT WITH RESPECT TO DENYING CONSENT, THEN FOR THAT SPACE, EVERY TENANT HAS A RIGHT TO ASSIGN. EVEN IF THE LANDLORD CONSENTS TO ONCE CASE, A CLAUSE IS NOW INSERTED INTO THE LEASE STATING THAT LIMITS THE CONSENT TO THE SPECIFIC WAIVER OF CONSENT, SO AS NOT TO INCLUDE THE OTHERS.

THE SUBTENANT CONTRACT ASSIGNS ALL OF THE RIGHTS OF THE TENANT, THE ASSIGNOR, TO THE ASSIGNEE. THE LIABILITIES UNDER THE LEASE ARE ALSO ASSUMED. THE LANDLORD WILL WANT TO SEE THE SUBTENANT PERFORM ON THESE OBLIGATIONS.

THE SUBLESSOR WILL ATTEMPT TO ASSIGN AS MUCH OF THE SUBLESSOR'S OBLIGATIONS TO THE SUBLESSEE. THE SUBLESSOR CAN NOT PASS ALONG MORE THAN HE HAS. THE SUBLESSEE WILL REQUIRE THE SUBLESSOR'S PRIVITY WITH THE LANDLORD TO ENFORCE REPAIRS OR OTHER OBLIGATIONS OF THE LANDLORD TO THE SUBLESSOR. THE SUBLESSEE WILL REQUIRE AN AFFIRMATIVE OBLIGATION ON BEHALF OF THE SUBLESSEE FOR THE SUBLESSOR TO GO TO COURT AGAINST THE LANDLORD TO ESTABLISH PERFORMANCE BY THE LANDLORD THROUGH THE PRIVITY BETWEEN THE SUBLESSOR AND THE LANDLORD. THE PAYMENT OF LEGAL FEES IN THIS EVENT IS THE SUBLESSEE'S RESPONSIBILITY.

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THE SUBLESSEE LOOKS FOR A NON-DISTURBANCE PROVISION FROM THE LANDLORD. IF THE SUBLESSOR DOES NOT PAY THE RENT, THE SUBLESSEE WANTS THE RIGHT TO PAY THE RENT SO AS NOT TO BE EVICTED. IF THIS IS NOT ACCEPTABLE, AN AGREEMENT WITH THE PRIME TENANT CAN BE ESTABLISHED TO DO THE SAME THING; THE DIFFERENCE IS THAT IN THE SECOND CASE NO PRIVITY IS EXTENDED TO THE LANDLORD.

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 TEN7/30/90

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COMMERCIAL LEASING (CONT.)ELECTRICITY AND INSURANCE

ELECTRICITY PROVISION - THE SINGLE MOST COMPLICATED PROVISION IN THE LEASE. THERE ARE 3 DIFFERENT ARRANGEMENTS DEALING WITH THE COST OF ELECTRICITY.

1. DIRECT METERING 2. SUBMETERING 3. RENT INCLUSION

DIRECT METERING - METER IN THE SPACE OF THE TENANT, DIRECT PAYMENT BY TENANT TO UTILITY. AS A RESULT THERE IS A BUILT IN INCENTIVE TO CONSERVE ELECTRICITY.

SUB-METERING - MORE COMMONLY, THERE IS ONE METER FOR THE BUILDING WITH "SUB-METERS" RUNNING INTO THE DIFFERENT SPACES IN THE BUILDING. THE LANDLORD IS BUYING THE ELECTRICITY AT A BULK RATE. THE LEASE MUST ADDRESS WHETHER THE TENANT IS GETTING THE PASSED-ON SAVINGS AT WHOLESALE, OR IS HE PAYING THE MARKED UP RETAIL COST FROM THE LANDLORD. THIS IS NEGOTIABLE.

RENT INCLUSION - ONE METER WITH NO SUBMETERS. THE LANDLORD'S CONSULTANT ESTIMATE WHAT THE INDIVIDUAL TENANTS ELECTRIC USE WILL BE BASED ON EQUIPMENT AND HOURS OF SERVICE OF THE BUSINESS.

THE PROBLEM WITH THIS IS YOU WONT KNOW IF YOU ARE OVERPAYING IF YOU ARE THE TENANT. TYPICALLY, THE CONSULTANT WILL GIVE THE LANDLORD A QUOTE OF, SAY, $2.25 PER S.F. THE LANDLORD MAY ADD A "SAFETY BUFFER" OF 50 CENTS TO RAISE IT TO $2.75 PER S.F. IN ANY GIVEN BUILDING THE RENT MAY VARY CONSIDERABLY FOR EACH TENANT SO THIS MAY VARY CONSIDERABLY FOR EACH TENANT SO THIS MUST BE MONITORED CAREFULLY. $3.00 PER S.F. IS TYPICAL TODAY. THE LANDLORD MAY HAVE THE OPTION TO SWITCH FROM ONE SYSTEM TO ANOTHER. IF MOVING FROM METERING TO RENT INCLUSION, YOU MIGHT HAVE TO PAY FOR THE METERING INSTALLATION. MORE IMPORTANTLY, YOU MUST RECEIVE "REASONABLE NOTICE" FROM THE LANDLORD.

INSURANCE PROVISION - IN MOST LEASE SITUATIONS, THERE WILL BE A GENERAL LIABILITY AND PROPERTY DAMAGE INSURANCE PROVISION REQUIREMENT THAT THE TENANT PROTECT THE LANDLORD. IN ADDITION, THE LANDLORD WILL WANT THE TENANT TO PAY WORKER'S COMPENSATION INSURANCE IN CASE A MECHANIC IS HURT WHILE WORKING IN THE SPACE.

PLATE GLASS INSURANCE - THE TENANT IS RESPONSIBLE FOR BROKEN GLASS IN RETAIL SPACE.

RENTAL INSURANCE - A LANDLORD PROTECTION WHEREBY IF THE TENANT IS UNABLE TO DO BUSINESS HE WILL BE PAID HIS RENT.

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BUSINESS INTERRUPTION INSURANCE - THE TENANT IS COVERED WHEN THERE IS A CASUALTY INT HE SPACE, SO THAT RENT CAN BE PAID.

THE TENANT NAMES THE LANDLORD, MANAGING AGENT AND SOMETIMES THE MORTGAGEE AS CO-INSUREDS. A CERTIFICATE OF ENDORSEMENT SHOULD BE SENT TO THE PARTIES. BE CERTAIN THAT IT IS AN "ENDORSEMENT", AND NOT FOR "INFORMATION PURPOSES ONLY" IF YOU ARE THE LANDLORD. THE APPEARANCE OF CERTIFICATE IS THE SAME, SO BE CAREFUL.

THE AMOUNT OF COVERAGE IS NEGOTIABLE. ALWAYS AGREE ON THE COVERAGE. DO NOT ALLOW IT TO BE OPEN ENDED. YOU WANT TO LOCK IN THE COVERAGE AT ONE TO TWO MILLION IN AN OFFICE SITUATION. RETAIL COVERAGE IS USUALLY HIGHER, SAY 3 MILLION, BECAUSE OF THE RISK OF PROBLEMS WITH TRANSIENTS.

"COMBINED SINGLE LIMIT" IS THE SUM TOTAL OF INSURANCE COVERAGE. AS A TENANT YOU WILL WANT TO DIVIDE A MINIMUM 2 MILLION DOLLAR COVERAGE INTO 1 MILLION BASIC AND 1 MILLION UMBRELLA COVERAGE. BUILD THIS INTO THE LEASE; IT WILL SAVE YOU MONEY.

EVERY LEASE HAS BUILT INTO IT A WAIVER OF SUBROGATION. IT IS A CONCEPT WHEREBY THE INSURANCE COMPANY HAS THE RIGHT TO TAKE OVER FROM THE PARTY TO WHOM THEY ARE MAKING THE PAYMENT AND WHOM THEY ARE INSURING. THIS GIVES THE INSURANCE COMPANY THE RIGHT TO SUE THE PARTY THAT CAUSED THE DAMAGE. THIS WAIVER DISALLOWS THE INSURANCE COMPANY FROM TAKING OVER, SINCE IN ITS ABSENCE, PRIVITY IS NON-EXISTENT.

IF THERE IS A DIFFERENCE IN PREMIUMS RESULTING FROM THE WAIVER OF SUBROGATION, THE PARTY REQUESTING THE WAIVER WILL PAY THE DIFFERENCE. ON THE OTHER HAND, IF A TENANT'S USE (IE. A RESTAURANT) INCREASES THE LANDLORD'S INSURANCE PREMIUM, THE TENANT WILL PAY THE DIFFERENCE.

IF YOU ARE THE TENANT, YOU WILL WANT THE LEASE TO SAY THAT THE LANDLORD WILL LOOK TO THE INSURANCE PROCEEDS FIRST TO PAY FOR DAMAGE BEFORE LOOKING TO THE TENANT.

THE TENANT SHOULD TRY TO LIMIT ITS EXPOSURE FROM THE LANDLORD'S WISH TO MAKE HIM PERSONALLY LIABLE FOR DAMAGE TO PROPERTY OR PERSON'S IN THE RENTED SPACE.

PROPERTY DAMAGE INSURANCE (CASUALTY INSURANCE) - IN A CASUALTY, THE FIRST TWO THINGS THAT HAPPEN UNDER MOST LEASES IS THAT:

1. THE LANDLORD HAS A PERIOD OF TIME TO DECIDE ON MAKING THE REPAIR.

2. THE LANDLORD HAS A CERTAIN PERIOD OF TIME TO MAKE THE REPAIR.

THE LANDLORD WILL WANT TO MAXIMIZE BOTH PERIODS, AND THE TENANT WANTS IT MINIMIZED.

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IF THE LANDLORD DECIDES TO REPAIR, THE TENANT SHOULD BE ENTITLED TO A RENT ABATEMENT FOR THE PERIOD BETWEEN "LOSS OF USE" AND "SUBSTANTIAL COMPLETION" OF REPAIRS.

IN A NET LEASE SITUATION, IT IS IMPERATIVE THAT THE TENANT HAVE BUSINESS INTERRUPTION INSURANCE.

TRIPLE NET LEASE - LANDLORD IS NOT RESPONSIBLE FOR ANYTHING. EVEN THE MORTGAGE PAYMENTS ARE THE TENANTS.

DOUBLE NET LEASE - TENANT PAYS ALL EXCEPT THE MORTGAGE.

NET LEASE - THE TENANT PAYS ALL (100 PERCENT) OF CERTAIN EXPENSES, LIKE TAXES. THE TENANT IS NOT RESPONSIBLE FOR ALL COSTS SUCH AS THE OPERATING EXPENSES OF THE BUILDING. NOT THE SAME CONCEPT AS BEING RESPONSIBLE FOR THE ANNUAL INCREASES IN EXPENSES WITH THE LANDLORD RESPONSIBLE FOR THE BASE AMOUNT, DERIVED FROM THE BASE YEAR.

A MAJOR TENANT (IE. AN ANCHOR STORE) WILL RESERVE THE RIGHT TO TERMINATE THE LEASE IF THE DEMISED PREMISES CAN NOT BE REPAIRED IN A SPECIFIED AMOUNT OF TIME.

TO EVADE THIS ONEROUS CLAUSE, THE LANDLORD MIGHT OFFER ALTERNATIVE SPACE IN THE SHOPPING CENTER.

WHO DOES IT?════════════════╦═══ COVERED IN THE LEASEWHO PAYS FOR IT? ║WHEN WILL IT BE DONE?═══════╝

IF THE TENANT CAN NOT GET A LEASE TERMINATION, IT WILL WANT TO FIRM UP THE THREE ITEMS ABOVE.

IT WILL WANT A RENT ABATEMENT TO COMPENSATE IT FOR WORK THAT IT PERFORMS FOR ITSELF (SELF-HELP) WITH INSURANCE MONEY.

THE PRINTED LEASE WILL HAVE A WAIVER OF SECTION 227 THAT GIVES TENANTS THE RIGHT TO CANCEL THE LEASE WHEN SEVERE DAMAGE TAKES PLACE. THE PARTIES ARE PERMITTED TO WAIVE THIS CLAUSE.

UNDER SECTION 5-321 OF THE GENERAL OBLIGATIONS STATUTE (NYS LAW) THE LANDLORD IS PROHIBITED FROM EXCULPATING ITSELF FROM ITS OWN NEGLIGENCE.

THE LANDLORD CAN NOT HAVE A VALID LEASE CLAUSE IF HE FORCES THE TENANT NOT TO ACCEPT A WAIVER OF THE LANDLORD'S LIABILITY. THE LANDLORD WILL WANT THE CLAUSE ANYWAY BECAUSE IT WILL INSULATE HIM FROM THIRD PARTY CLAIMS IN THE EVENT OF AN ACCIDENT.

REAL ESTATE TAXATION

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*******************************PROPERTY VALUES AND ASSESSMENTS*******************************

THERE IS A DIFFERENCE BETWEEN ASSESSED VALUATION AND ASSESSMENTS. VALUES ARE ASSESSED BASED ON INCOME FROM THE PROPERTY, OR BY COMPARABLES, WHICH IS THE ASSESSMENT OF SIMILAR PROPERTIES IN THE AREA'S RESALE VALUE AND NEW CONSTRUCTION AS A FUNCTION OF RESALE VALUE.

REAL PROPERTY TAX LAW REQUIRES THAT PROPERTY BE ASSESSED AND VALUED ON AN OBJECTIVE AND FAIR STANDARD.

N.Y.C. TAX ASSESSMENTS

CLASS I PROPERTY.........................1 TO 3 FAMILY HOMESCLASS II PROPERTY........................RESIDENTIAL MULTIPLE DWELLINGS

(APARTMENTS AND COOPS WITH MORE THAN 3 APARTMENTS)

CLASS III PROPERTY.......................OWNED BY A UTILITYCLASS IV PROPERTY........................VACANT LAND OR COMMERCIAL

PROPERTY.

CLASS I, II, AND IV ASSESSED AT 10 PERCENT OF VALUE.CLASS III ASSESSED AT A LITTLE MORE THAN 15 PERCENT OF VALUE.

THE SALE OF A PROPERTY WILL TRIGGER A REASSESSMENT. THE RULE OF IS THAN ANYTHING BUT A PRIVATE HOUSE IS REASSESSED AT 45 PERCENT OF SALES PRICE, PHASED IN OVER 5 YEARS (20 PERCENT PER YEAR). THE CITY CALLS THIS AN "ACTUAL ASSESSMENT" AND A "TRANSITIONAL ASSESSMENT".

IE. A SMALL COMMERCIAL BUILDING WITH A 100,000 DOLLAR ASSESSMENT.

THE BUILDING SOLD FOR 1,000,000 DOLLARS.THE NEW ASSESSMENT IS 450,000 DOLLARS (1 MILLION X 45%)TAXES INSTITUTED AT THE RATE OF 70,000 INCREASE ANNUALLY.

YEAR 0........100KYEAR 1........170KYEAR 2........240KYEAR 3........310KYEAR 4........380KYEAR 5........450K

A HOUSE IS REASSESSED AT 20 PERCENT OF SALES PRICE AS PHASED IN OVER A 5 YEAR PERIOD AT NO GREATER THAN SIX PERCENT PER ANNUM.

TAX EXEMPTION IS COVERED UNDER SECTION 421a OF THE REAL PROPERTY TAX LAW. THE STATUTE WAS PASSED IN 1971 TO PROMOTE HOUSING DEVELOPMENT IN "UNDERUTILIZED AREAS". THE PROGRAM PROVIDES FOR A TEN YEAR EXEMPTION

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FROM INCREASES IN TAXES.

IE. THE BASE YEAR ASSESSMENT IS 100K ON VACANT LAND. YOU DECIDE TO BUILD A BUILDING AT A COST OF 1.1 MILLION DOLLARS.

YEAR ONE AND TWO........IN THE FIRST TWO YEARS YOU HAVE A 100 PERCENT EXEMPTION (PAY ON 100K OF ASSESSED VALUE)

YEAR THREE AND FOUR........IN THE SECOND TWO YEARS YOU HAVE AN 80 PERCENT EXEMPTION (PAY ON 300K OF ASSESSED VALUE)

YEAR FIVE AND SIX........IN THE THIRD TWO YEARS YOU HAVE A 60 PERCENT EXEMPTION (PAY ON 500K OF ASSESSED VALUE)

YEAR SEVEN AND EIGHT........IN THE FOURTH TWO YEARS YOU HAVE A 40 PERCENT EXEMPTION (PAY ON 700K OF ASSESSED VALUE)

YEAR NINE AND TEN........IN THE FIFTH TWO YEARS YOU HAVE A 20 PERCENT EXEMPTION (PAY ON 900K OF ASSESSED VALUE)

YEAR ELEVEN AND INTO THE FUTURE........THERE IS NO LONGER AN EXEMPTION; PAY ON THE FULL ASSESSED VALUE OF 1.1 MILLION.

IF YOU HAVE A PROPERTY THAT IS APPROVED WITH A NON-CONFORMING USE, IS UNDER-UTILIZED, OR VACANT, YOU CAN QUALIFY FOR A 421a TRANSITIONAL EXEMPTION.

THE OTHER AREA THAT COMPLIMENTS THE SECTION 421a IS THE J-51. IT IS THE "FLIP SIDE" OF TAX BENEFITS FOR COMMERCIAL REAL ESTATE AND IS APPLICABLE TO RENOVATIONS AND CONVERSIONS OF RESIDENTIAL BUILDINGS. TO APPLY, YOU MUST END UP WITH A CLASS II BUILDING. YOU HAVE A 12 YEAR EXEMPTION. THE INCREASE IN THE ASSESSMENT IS ON THE BUILDING PORTION ONLY, WHICH IS EXEMPTED FROM INCREASES FOR 12 YEARS; THERE IS NO PHASE OUT. THERE IS AN ABATEMENT FOR THE COST OF THE WORK DONE. THE CITY ESTABLISHES THE REASONABLE COST OF THE WORK AND CREDITS WITH AN ABATEMENT EQUAL TO A PERCENTAGE OF THAT NUMBER.

TAKE A "GUT RENOVATION" STARTING OFF WITH A BASE ASSESSMENT OF 100,000 DOLLARS. COMPLETE RENOVATION IS UNDERGONE, WITH THE ASSESSMENT GOING UP TO 1 MILLION DOLLARS. THE ENTIRE INCREASE OF 900,000 DOLLARS IS ATTRIBUTABLE TO THE BUILDING, AND IS EXEMPT FOR TWELVE YEARS. YOU ONLY PAY TAX ON THE 100,000, THEREFORE. THE CITY DETERMINES THAT THE REASONABLE COST OF THE RENOVATION IS 1 MILLION DOLLARS (CERTIFIED REASONABLE COST (CRC)). THE MAXIMUM ABATEMENT YOU CAN GET IS 90 PERCENT OF THE CRC, WHICH IN THIS CASE IS 900,000 DOLLARS.

YOU CAN NOT USE THE ENTIRE AMOUNT IN A YEAR; YOU CONSUME IT AT 8 1/3 PERCENT PER YEAR OF THE CRC OF 1 MILLION DOLLARS IN THIS CASE. THE ABATEMENT IN YEAR ONE IS 83,000 DOLLARS TO APPLY AGAINST THE TAXABLE

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ASSESSMENT OF 100,000 X 10% = 10,000 DOLLARS. TAXES ARE 10,000 - 83,000 DOLLARS = ZERO DOLLARS (TAXES CANNOT BE LESS THAN ZERO). YOU ROLE OVER THE 73,000 DOLLARS EXTRA TO THE NEXT YEAR, AND SO ON UP TO TWENTY YEARS WHEN THE ROLE OVER IS LOST.

IN YEAR 13, THE 900,000 DOLLAR EXEMPTION DISAPPEARS AND ASSUMING NO INCREASES YOU ARE PAYING 100,000 PER YEAR IN TAX. (1,000,000 X 10%)

BECAUSE YOU CAN NOT USE MORE THAN 8 1/3 PERCENT PER YEAR, YOU CAN ONLY SUBTRACT 83,000 FROM THE 100,000 FOR 17,000 IN TAX DUE. YOU CAN USE THE CARRYOVER, AS MENTIONED ABOVE, FOR UP TO THE 20TH YEAR TO COVER TAXES DUE, SUCH AS IN THE ABOVE EXAMPLE IN THE THIRTEENTH YEAR.

THE EXEMPTION AND ABATEMENT RUN WITH THE LAND, CREATING A BURDEN WITH THE BUYER TO MAKE CERTAIN THAT THE BENEFITS ARE STILL IN PLACE.

MULTIPLE DWELLING LAWINTERIM MULTIPLE DWELLING ACT (IMD)

MANUFACTURING BUILDINGS IN LOWER MANHATTAN WERE TOO OLD FOR MANUFACTURING, SO LOFT DWELLINGS CAME INTO BEING BECAUSE MANY BUSINESSES MOVED OUT OR WENT BUST AND RESIDENTIAL TENANTS PAID AS MUCH OR MORE THEN THE OLD COMMERCIAL TENANT. THE COURTS DECIDED ONCE ENOUGH LOFTS WERE RESIDENTIAL A BUILDING WOULD BE DE FACTO A RESIDENTIAL MULTI-FAMILY DWELLING. THIS WAS NO GOOD BECAUSE OF THE APPEARANCE OF BEING "SOFT" WITH RESPECT TO ENFORCING BUILDING CODES.

SO IN 1980 - 82, THE CITY TRIED TO PASS THE LOFT LAW WHICH WAS SUPPOSED TO BRIDGE THE GAP BETWEEN COMMERCIAL AND RESIDENTIAL USES, ALLOWING THE TENANTS NOT TO HAVE RENTS RAISED TO HIGH END, ALLOWING THE LANDLORD TO MAKE MORE MONEY. IT DID NOT PASS. INSTEAD THE CITY CREATED THE LOFT BOARD. THE CITY PASSED LAW WHICH SAID THAT LANDLORDS MUST FILE I.M.D. PAPERS AND MEET ARTICLE 7B REQUIREMENTS (SOFTY STANDARDS). THE TENANTS ALSO GOT RENT STABILIZATION, HOWEVER THE LANDLORD CAN RECOUP COSTS OF BRINGING THE OLD BUILDING UP TO CODE.

RENT CONTROL - END OF WORLD WAR II - AS SOLDIERS CAME BACK TO THE STATES, THE DEMAND FOR HOUSING WAS GREAT. THE GOVERNMENT DECIDED TO CURB INFLATIONARY PRESSURES ON RENTS TO CONTROL RENT INCREASES IN THE 1940'S THROUGH THE 1960'S. RENT CONTROL COVERED EVERYTHING THAT WAS HOUSING. AS A RESULT VERY LITTLE NEW HOUSING WAS BEING PRODUCED SO THERE WAS A MOVEMENT AWAY FROM RENT CONTROL IN THE 1960'S TO CREATE HOUSING. IN THE LATE 1960'S, BECAUSE MARKET RENTS WERE INCREASING AND TENANTS WERE BEING EVICTED, BUILDINGS WITH SIX OR MORE APARTMENTS HAD THEIR RENTS REGULATED BUT NOT THE EXTENT OF RENT CONTROL. RENT STABILIZATION WAS A COMPROMISE BETWEEN RENT CONTROL AND MARKET RENT.

THE RENT GUIDELINES BOARD WAS ESTABLISHED TO REGULATE RENTS. IT CONSIST OF 2 TENANT, 2 LANDLORD AND 3 AT LARGE REPRESENTATIVES WHO GET TOGETHER ONCE A YEAR TO DECIDE WHAT THE RENT INCREASE SHOULD BE FOR THE FOLLOWING

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YEAR'S LEASES.

EMERGENCY TENANT PROTECTION ACT (ETPA) - MAKES RENT STABILIZATION POSSIBLE.

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.

ARTICLE 7B VS. ARTICLE 7C

ARTICLE 7B IS IN THE BUILDING CODE AND REGULATES SAFETY ISSUES, SUCH AS LIGHT AND AIR, CERTAIN MINIMUM ROOM SIZES, ETC. DEALS WITH RENOVATION, AND IS NOT AS RESTRICTIVE AS THE ADMINISTRATIVE CODE, KEEPING IN MIND THAT RENOVATIONS DO NOT ALLOW THE DEGREE OF CONSTRUCTION FREEDOM THAT NEW CONSTRUCTION ALLOWS, PRACTICALLY SPEAKING.

ARTICLE 7C IS THE LOFT LAW, WHICH REQUIRES NON-RESIDENTIAL BUILDINGS BEING CONVERTED TO RESIDENTIAL USE WITH MORE THAN THREE UNITS TO MEET CERTAIN MINIMUM BUILDING CODES.

ADMINISTRATIVE CODE TITLE 20 - DEMANDS RIGID SET OF REQUIREMENTS REGULATING THE DEVELOPMENT OF RESIDENTIAL DEVELOPMENT.

**************NOTES ON FINAL

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**************6 TO 8 PM, BREAK, 1/2 HOUR WRAP-UP25 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 ACT13 NYCRR PT20 (DEVELOPMENT) 13 NYCRR PT 18 (OCCUPIED)13 NYCRR PT23 (OCCUPIED) 13 NYCRR PT 21 (DEVELOPMENT)

TABLE OF "THE STATUTORY FRAMEWORK OF CONDOS AND COOPS"

CONDOS ARE DESCRIBED BY NEW YORK STATE LAW IN ARTICLE 9B (MARCH 1964). THEY HAVE NO EXISTENCE OUTSIDE OF STATUTORY LAW. CONDOS ARE COMMON THROUGHOUT THE COUNTRY, ALTHOUGH COOPS ARE NOT. THE FIRST CONDO ENABLING ACT IN AMERICA OR ITS PROTECTORATES WAS IN PUERTO RICO IN 1959.

13 NYCRR PT20 (DEVELOPMENT)│ │ ││ │ ││ │ ││ │ └─────────────── PART│ └──────────────────── NEW YORK CODES, RULES AND REGULATIONS (NYCRR)└───────────────────────── TITLE

ALL STATUTES PERTAINING TO DEVELOPMENT OF CONDOS (NEW CONSTRUCTION) ARE FOUND IN PART 20. CONVERSIONS ARE FOUND IN PART 23.

COOPS ARE GOVERNED BY ARTICLE 23A GBL. THIS IS ALSO CALLED THE MARTIN ACT, WHICH IS THE STATUTE FOR COOP REFERENCES.

PART 18 OF THE NYCRR GOVERNS OCCUPIED OR CONVERSION COOPS.

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PART 21 OF THE NYCRR GOVERNS DEVELOPMENT OF COOPS (NEW CONSTRUCTION).PART 22 GOVERNS HOMEOWNERS ASSOCIATIONS.

WHAT ARE SOME OF THE DISTINCTIONS BETWEEN COOPS AND CONDOS?

CONDOMINIUMS:UNIT DEED, IN MANY RESPECTS LIKE A TRUE DEED ON A SINGLE FAMILY HOME. YOU CAN GET A MORTGAGE ON A CONDOMINIUM. THE COLLATERAL FOR PAYING THE MORTGAGE IS THE PROPERTY. THE CONDO CAN NOT HAVE AN UNDERLYING MORTGAGE ON THE ENTIRE BUILDING.

COOPERATIVES:PROPRIETARY LEASE TAKES THE PLACE OF THE DEED; YOU GET A COOP LOAN, NOT A MORTGAGE; THE COLLATERAL IS NOT REAL PROPERTY, BUT IS SHARE OF STOCK AND THE PROPRIETARY LEASE. THE COOP CAN HAVE AN UNDERLYING MORTGAGE ON THE BUILDING.

IN A CONDO VS. A COOP, WITH TWO IDENTICAL UNITS, THE CONDO UNIT SHOULD BE MORE EXPENSIVE THAN THE COOP. HOWEVER, THE CONDO SHOULD HAVE A LOWER MONTHLY PAYMENT BECAUSE THE MAINTENANCE PAYMENT WILL NOT INCLUDE A PAYMENT ON THE UNDERLYING MORTGAGE ON THE COOP FACILITIES.

BECAUSE THE PROPRIETARY LEASE IN A COOP IS SUBORDINATE TO THE MORTGAGE ON THE OVERALL COOP, THE SUBORDINATE LEASE CAN BE WIPED OUT IN A FORECLOSURE. THE BANK TAKING OUT THE COOP LEASE TO AN INDIVIDUAL WOULD THEN HAVE COLLATERAL WITH NO VALUE, AS THE STOCK HAS NO VALUE, AND SINCE THE PROPRIETARY LEASE WAS WIPED OUT. THE BANK HOLDING THE COOP LOAN WOULD THEN TURN TO THE INDIVIDUALS FOR PAYMENT. WHEN SPONSORS OF COOP OFFERINGS HOLD SHARES TO A LARGE PERCENTAGE OF APARTMENTS, AND THE SPONSOR DOES NOT MAKE MAINTENANCE PAYMENTS, THE COOP WILL NOT HAVE MONEY TO PAY THE MORTGAGE.

*********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.

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1. FAIR VALUE METHOD - A CALCULATION BASED ON THE VALUE OF THE APARTMENT AS AGAINST THAT OF THE OTHERS COMBINED. THIS DETERMINATION IS SET BY THE SPONSOR AT THE BEGINNING OF THE CONDO FORMATION, IN THE OFFERING. IT CAN BE CHANGED AND REASSESSED BY A SUPER MAJORITY VOTE OF THE CONDO ASSOCIATION.

2. SQUARE FOOTAGE METHOD - THE SQUARE FOOTAGE OF EACH APARTMENT AS COMPARED TO THAT OF THE AGGREGATE SQUARE FOOTAGE OF THE OTHER APARTMENTS. THIS IS THE LEASE COMMON METHOD.

3. MULTIPLE FACTOR METHOD - ALL FACTORS DEALING WITH VALUE AND MARKETABILITY FOR ONE APARTMENT IS COMPARED WITH THE ENTIRE COMPLEX OF APARTMENTS. THIS IS THE MOST COMMON METHOD.

4. EQUAL PERCENTAGE METHOD - TAKE THE NUMBER OF UNITS, DIVIDE BY 100, AND ARRIVE AT THE PERCENTAGE OF COMMON OWNERSHIP. UNCOMMON METHOD.

COMMON CHARGES

THE CONDOMINIUM IS GOVERNED BY A BOARD OF MANAGERS, WHICH HAS LESS POWER THAN A COOP'S BOARD OF DIRECTORS. THIS IS BECAUSE THE COOP BOARD CAN EFFECTIVELY PREVENT YOU FROM SELLING TO A PROSPECTIVE PURCHASER.

WITH RESPECT TO REAL PROPERTY, THERE IS A CONSTITUTIONAL PROHIBITION AGAINST RESTRAINT ON THE SALE OF REAL PROPERTY. CONDO BOARDS OF MANAGERS THEREFORE CAN NOT RESTRICT SALE BECAUSE CONDOS ARE REAL PROPERTY. CONDOS HAVE A RIGHT-OF-FIRST-REFUSAL TO CONTROL WHO MAY BE THE CONDO OWNERS NEW NEIGHBOR. COOPS MAY PREVENT A PURCHASER FOR ANY REASON OTHER THAN DISCRIMINATORY REASONS.

YOU DO NOT HAVE (SECTION 339-r) A BLANKET MORTGAGE ON A CONDO. YOU DO NOT SEE A CONDO BUILT OR OWNED ON A LEASEHOLD. BY STATUTE THE CONDOMINIUM IS A TYPE OF OWNERSHIP THAT IS AVAILABLE IN FEE ONLY. IT IS NOT AVAILABLE AS A LEASEHOLD, AND CONDOS ARE NOT BUILT ON LAND THAT IS LEASED, WITH THE EXCEPTION OF BATTERY PARK CITY. BATTERY PARK CITY WAS ALLOWED, BY SPECIFIC AMENDMENTS AND STATUTORY ENACTMENTS TO ARTICLE 9B, TO BE A CONDO BUILT UPON A LEASEHOLD OWNED BY NEW YORK CITY.

COOPS TYPICALLY HAVE BLANKET MORTGAGES AND ARE BUILT ON LEASED LAND.

LOLLIPOP CONDOMINIUMS ARE A PHENOMENON THAT ARISES FROM THE STATUTORY RULE THAT YOU CAN NOT HAVE LEASEHOLD CONDOS. THEREFORE THE CONDO MUST BE BUILT, IN PART, ON LAND THAT IS OWNED. THE DEVELOPER WILL SOMETIMES BUY A SMALL PIECE OF LAND IN FEE, AND BUILD UP AND OVER ADJOINING PROPERTIES BY BUYING AIR RIGHTS OVER THOSE BUILDINGS.

ILLUSTRATIVE DIAGRAM ┌──────────────────────────────┐ │ │

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│ │ │ 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 ON A PERCENTAGE BASIS BY THE OWNERS, YET NOT ALL THE OWNERS HAVE RIGHTS TO USE OR OCCUPY THE ELEMENTS. FOR EXAMPLE, ROOF RIGHTS CARVED OUT FOR THE USE OF APARTMENTS ON THE TOP FLOOR; PATIOS; PARKING SPACES EARMARKED FOR A PARTICULAR APARTMENT.

CONDOS CAN BE RESIDENTIAL, INDUSTRIAL, COMMERCIAL OR OFFICE. IT IS A TYPE OF OWNERSHIP, NOT A TYPE OF LAND USE.

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).

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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-LAWS3. 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! YOU MUST DISCLOSE TO THE PUBLIC WHAT THE LAW BELIEVES TO BE RELEVANT TO THE OFFERING.

OFFERING PLAN = PROSPECTUS

THE OFFERING PLAN IS REVIEWED BY THE DEPARTMENT OF LAW OF THE STATE OF NEW YORK (THE ATTORNEY GENERAL), WHOSE RESPONSIBILITY IT IS TO REVIEW AND ACCEPT THE OFFERING PLAN. THE AGENCY DOING THIS WITHIN THE DEPARTMENT IS THE REAL ESTATE FINANCING BUREAU.

THERE ARE TWO TYPES OF OFFERING PLANS:

1. AN EVICTION PLAN2. A NON-EVICTION PLAN

IN ALL CONVERSION CASES YOU EITHER HAVE AN EVICTION OR NON EVICTION PLAN.

EVICTION PLANS - LESS COMMONLY USED. THE MAJORITY OF THE PLANS ARE NON-EVICTION PLANS. YOU NEED A MINIMUM OF 51 PERCENT OF THE TENANTS TO FILE AN EVICTION PLAN AND DECLARE IT "EFFECTIVE".

NON-EVICTION PLANS - 15% OF THE UNITS TO BE SOLD BEFORE BEING DECLARED "EFFECTIVE".

IN AN EVICTION PLAN THE THRESHOLD IS BASED ON TENANTS. IN A NON-EVICTION

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PLAN THE THRESHOLD IS BASED ON UNITS.

FOR EVICTION AND NON-EVICTION PLANS, NO MORE THAN 10 PERCENT OF THE APARTMENTS CAN BE OWNED BY THE SPONSOR.

THE PROCESS:

1. THE SPONSOR PUTS TOGETHER OFFERING PLAN - THE OFFERING PLAN STATES CLEARLY THAT IT IS PRELIMINARY, AND IS SUBJECT TO APPROVAL FROM THE ATTORNEY GENERAL. THIS PLAN IS CALLED A "RED HERRING", AFTER THE RED LETTERING ON THE FRONT OF THE PRELIMINARY OFFERING DECLARING ITS "UNAPPROVED" STATUS.

2. THE ATTORNEY GENERAL REVIEWS THE PLAN, DEFICIENCIES MUST BE TOLD TO LANDLORD BY THE SIXTH MONTH, THOUGH NOT BEFORE 4 MONTHS.

3. AFTER COMMENTS ARE ADDRESSED, THE PLAN IS ACCEPTED FOR FILING AND BECOMES A "BLACK BOOK", IN THAT THE RED WRITING STATING ITS PREVIOUS PRELIMINARY STATUS IS REMOVED, AND REPLACED WITH FINAL PRINT IN BLACK. APARTMENTS MAY THEN BE SOLD.

WHEN YOU HAVE AN EVICTION PLAN YOU NEED TO TAKE INTO ACCOUNT TWO GROUPS OF PEOPLE WHO 1) CAN NOT BE EVICTED AND 2) CAN NOT BE COUNTED IN THE 51 PERCENT.

THOSE WHO CAN NOT BE EVICTED:

AN ELIGIBLE SENIOR CITIZEN (62 YEARS OLD AND OLDER) CAN NOT BE EVICTED UNDER AN EVICTION PLAN. THIS AGE IS AT FILING IN NEW YORK CITY, AND AT ACCEPTANCE OF FILING ELSEWHERE IN THE STATE.

SENIOR CITIZENS STATUS IS ONLY GERMANE TO AN EVICTION PLAN FILING, NOT A NON-EVICTION PLAN.

A HANDICAPPED PERSON CAN NOT BE EVICTED. HANDICAPPED STATUS IS GERMANE ONLY TO EVICTION PLANS. "HANDICAPPED" MEANS ONE WHO SUFFERS AN IMPAIRMENT FROM A MEDICAL, PHYSIOLOGICAL, OR PSYCHOLOGICAL HANDICAP THAT IS PERMANENT, RESULTS IN AN INABILITY TO KEEP GAINFUL EMPLOYMENT, AND WHICH IS PROVABLE BY MEDICAL ENQUIRY.

WITHIN 60 DAYS, A HANDICAPPED PERSON AND A SENIOR CITIZEN MUST ELECT NOT TO PURCHASE, AND NOTIFY THE SPONSOR THAT THEY ELECT NOT TO PURCHASE UNDER THE EVICTION PLAN, IN ORDER TO STAY.

AFTER 3 YEARS MINIMUM FROM THE PLANS DECLARATION OF EFFECTIVENESS, A TENANT UNDER AN EVICTION PLAN CAN BE REMOVED FROM HIS APARTMENT.

ONCE THE PLAN IS FILED, YOU CAN, AND EVEN MUST, AMEND THE PLAN FROM TIME TO TIME. YOU CAN AMEND A PLAN FROM AN EVICTION PLAN TO A NON-EVICTION PLAN IF YOU ARE NOT SELLING ENOUGH APARTMENTS, AND YOUR CONCERN IS THAT

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YOU WILL NOT REACH THE THRESHOLD.

UNDER A NON-EVICTION PLAN, THE 15 PERCENT OF UNITS PURCHASED CAN BE PURCHASED BY OUTSIDE PURCHASERS. THE OUTSIDE PURCHASERS MUST, HOWEVER, INTEND TO OCCUPY THE APARTMENTS, NOT USING THEM FOR INVESTMENT PURPOSES.

THE FIRST PART OF THE OFFERING PLAN IS CALLED "SPECIAL RISK". THIS SECTION IS INTENDED TO HIGHLIGHT AREAS OF CONCERN THAT THE ATTORNEY GENERAL FEELS THE PUBLIC SHOULD KNOW ABOUT, SUCH AS THE FINANCING WHICH MATURES IN A PERIOD OF 5 YEARS OR LESS. ANOTHER SPECIAL RISK IS A BUILDING WHICH PAYS A MODEST TAX BILL, YET DUE TO J-51 EXPIRATION, WILL RESULT IN AN INCREASE IN REAL ESTATE TAXES 5 TO 10 YEARS AFTER THE TENANTS' PURCHASE.

ANOTHER SECTION INCLUDES SCHEDULE A, WHICH IS THE PRICE SCHEDULE, NEGOTIABLE TO THE EXTENT THAT TENANTS UNDER THE PLAN WORK AS A GROUP. THE LAW GIVES TENANTS AN EXCLUSIVE PERIOD OF 90 DAYS TO PURCHASE AN APARTMENT. THE SPONSOR CAN NEGOTIATE WITH THE TENANTS AS A GROUP ON PRICE PER SHARE, YET THEY CAN NOT OFFER SPECIAL DEALS TO INDIVIDUAL TENANTS.

SHARE ALLOCATION IN A COOP MUST REFLECT A REASONABLE RELATIONSHIP TO MARKET VALUE, AS CERTIFIED BY A REAL ESTATE EXPERT. YOU CAN CONSIDER ALL THE AMENITIES OF ONE APARTMENT RELATIVE TO ANOTHER WITH RESPECT TO VALUE.

SCHEDULE A WILL ALSO HAVE A PERCENTAGE OF THE MORTGAGE THAT EACH APARTMENT IS RESPONSIBLE FOR. ADDITIONALLY, ANNUAL AND MONTHLY MAINTENANCE FOR THE BUYER OF THE APARTMENT WILL BE CITED, AS WELL AS A COLUMN STATING THE TAX DEDUCTION FOR EACH APARTMENT BASED ON INTEREST PAYABLE ON THE UNDERLYING MORTGAGE, REAL ESTATE TAXES ON THE BUILDING, AND INTEREST PAYABLE ON THE COOP SHAREHOLDERS LOAN. ALL THREE OF THESE ITEMS ARE DEDUCTIBLE UNDER SECTION 216 OF THE I.R.C.

SECTION 216 ALSO SETS FORTH THE LIMITS TO A COOP'S QUALIFICATION. AT LEAST 80 PERCENT OF INCOME TO THE COOP MUST COME FROM MAINTENANCE BY THE TENANT SHAREHOLDERS; UP TO 20 PERCENT OF INCOME MAY COME FROM THE AGGREGATE OF OTHER SOURCES.

FOR EXAMPLE: IF A COMMERCIAL TENANT PAYS THE COOP 3K PER MONTH, AND THE INCOME TO THE COOP IS 10K, THEN THE 3K IS MORE THAN 20 PERCENT AND THE DEDUCTIONS FOR THAT YEAR WOULD BE ENTIRELY DISALLOWED. SECTION 216 DEDUCTIONS ARE QUALIFIED FOR ON AN ANNUAL BASIS. IT IS ALL OR NOTHING, AND YOU CAN NOT GET A PORTION OF THE DEDUCTION IF THE TEST OF 80 PERCENT IS FAILED EVEN BY A POINT.

SCHEDULE B IS THE COOP OR CONDO BUDGET. THE BUDGET IS THE SCHEDULE THAT LETS THE BUYER KNOW HOW MUCH IT WILL COST TO RUN THE BUILDING, FROM YEAR TO YEAR. IT DOES NOT PROJECT BEYOND THE PRESENT YEAR.

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OTHER ELEMENTS OF THE OFFERING:

ENGINEER'S REPORT - EXTENSIVE AND DETAILED, YET BIASED IN FAVOR OF THE SPONSOR. IT IS A REPORT ON THE CONDITION OF THE BUILDING. OFTEN THE TENANTS WILL GET THERE OWN ENGINEER FOR A SECOND OPINION.

RELATIONSHIP BETWEEN SHARE VALUE AND MARKET VALUE.

ATTORNEY'S OPINION AS TO THE DEDUCTIBILITY OF THE ITEMS MENTIONED BEFORE.

THE RIGHTS OF RENT STABILIZED TENANTS STATED AND SET FORTH.

AS-BUILT DRAWINGS (FOR CONDO ONLY)

THE TERMS OF THE UNDERLYING MORTGAGE MUST BE DISCLOSED, INCLUDING THE POSSIBILITY OF A WRAPAROUND MORTGAGE OR A DIRECT 2ND MORTGAGE. BE CONCERNED ABOUT A DUE ON SALE CONVERSION IN THE MORTGAGE.... OFTEN IT WILL BE DUE ON SALE EXCEPT FOR A SALE TO A COOP, BUT LOOK TO BE CERTAIN.THE TERMS OF A LOAN FROM A SPONSOR TO THE BUYER WOULD BE SET FORTH IN A SEPARATE SECTION OF THE PLAN.

THE RESERVE FUND IS ANOTHER IMPORTANT AREA. THE SPONSOR MUST LEAVE, WITH THE COOP, AT LEAST 3 PERCENT OF THE TOTAL INSIDER SALES PRICE (IN NEW YORK CITY). THE RESERVE FUND IS PURSUANT TO THE RESERVE FUND LAW, WHICH DIRECTS MONEY TO CAPITAL IMPROVEMENT.

THE SPONSOR IS REQUIRED TO SUBMIT AN AMENDMENT TO THE OFFERING ONCE A YEAR TO KEEP THE PLAN ACTIVE AND UP-TO-DATE. THE SPONSOR DOES THIS UNTIL ALL UNSOLD SHARES ARE SOLD.OFTEN THE SPONSOR WILL CARVE OUT SPECIAL EXCEPTIONS FOR HIMSELF. UP TO FIVE YEARS FROM THE EFFECTIVENESS DECLARATION, THE SPONSOR MAY HOLD A CONTROLLING INTEREST OF THE BOARD, AFTER WHICH HE MUST SELL THE INTEREST. "THE SPONSOR WILL NOT HAVE TO GET COOP APPROVAL FOR SALES" IS A COMMON INTEREST CARVED OUT FOR THE SPONSOR.

THE SPONSOR WILL PROTECT THEMSELVES FROM A 60 PERCENT TENANT MAJORITY BY DISALLOWING, FOR EXAMPLE, TENANTS TO DO AN EXPENSIVE REDEAUX OF THE BUILDING.

COOPERATIVE AND CONDOMINIUM ABUSE PREVENTION ACT - FEDERAL LEGISLATION: WHERE A SPONSOR CARVES OUT A VALUABLE PORTION OF A COOP, SAY A LAUNDRY ROOM, IF THE SPACE IS USED EXCLUSIVELY BY SHAREHOLDERS, THE LEASE CAN BE DISAVOWED BY THE TENANTS.

END OF THE COURSE

ASSET MANAGEMENT IN REAL ESTATE NOTES

PROFESSOR JOHN FRANKWINTER 1991

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ASSET MANAGEMENTPROFESSOR JOHN FRANK

CLASS ONE1/22/91

THREE BOOKS:

1. CORPORATE REAL ESTATE HANDBOOK2. MANAGERIAL REAL ESTATE3. 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 WELL2. OPERATE WELL3. 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. MATERIALS2. LABOR3. OCCUPANCY COSTS

NATIONWIDE, 25 PERCENT OF CORPORATE ASSETS ARE IN REAL ESTATE.

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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

* GOOD SUPERVISORY ABILITIES* SENSITIVE AND SKILLED IN DEALINGS WITH PEOPLE* TOUGH - KNOWS WHEN TO SAY "NO"* GOOD ORGANIZATIONAL ABILITIES, PAYS ATTENTION TO DETAIL* EDUCATION: SOME COLLEGE; MECHANICAL KNOWLEDGE AND/OR SKILLS* CREATIVE PROBLEM SOLVER* FORWARD-LOOKING; MARKETING ATTRIBUTES; COGNIZANT OF DEMOGRAPHIC TRENDS* REALIST

DEVELOPER

* CREATIVITY* MONEY* SALESMAN / PROMOTER* RISK ASSESSOR* OPTIMIST* ABILITY TO PLEASE A VARIETY OF CONSTITUENCIES

AN ASSET MANAGER'S ROLE IS BETWEEN THE DEVELOPER AND PROPERTY MANAGER. HE COMES IN AFTER THE PROJECT HAS BEEN DEVELOPED. HE MAY NOT HAVE ALL OF THE DEVELOPER'S CREATIVITY, YET HE MAY BE ASKED TO REPOSITION THE PROPERTY AND MANAGE IT WITH THE SAME SKILLS AS THE PROPERTY MANAGER.

MAXIMS

"DON'T DO WORK WITH SOMEONE THAT HASN'T FAILED AT LEAST THREE

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TIMES". SOURCE UNKNOWN.

THE DEVELOPER'S CREDO:

A DOLLAR BORROWED IS A DOLLAR EARNED.A DOLLAR REFINANCED IS A DOLLAR SAVED.A DOLLAR REPAID IS A DOLLAR LOST FOREVER.

SOURCE UNKNOWN.

THERE ARE THREE FUNCTIONS OF MANAGEMENT (POSSIBLY FOUR)

1. DEVELOPMENT OF STRATEGY 2. MANAGEMENT CONTROL 3. OPERATIONS(4). TRANSACTION

THE OUTLOOK ON MANAGEMENT OF REAL ESTATE ASSETS DIFFERS BETWEEN THE DEVELOPER'S STAFF (THE SERVICE SUPPLIER) AND THE CORPORATE REAL ESTATE MANAGEMENT'S STAFF (THE CUSTOMER).

VENTURE │ CORPORATE REAL ESTATE MANAGEMENT

PORTFOLIO MANAGEMENT │CORPORATE PORTFOLIO STRATEGIES(NATIONAL) │ LINES OF BUSINESS (L.O.B.) AND

│ STRATEGIC BUSINESS UNIT (S.B.U.) │ FACILITY REQUIREMENTS

│ASSET MANAGEMENT │ASSET MANAGER(REGIONAL) │ SUBPORTFOLIOS (4 TO 6) │ BETWEEN 10 TO SEVERAL │ HUNDRED PROPERTIES │ │ │PROPERTY MANAGERS │FACILITIES MANAGEMENT

A STRATEGIC BUSINESS UNIT IS A BUSINESS UNIT THAT HAS A LOGICAL CONNECTION WITH OTHER BUSINESS UNITS IN A CONGLOMERATE. AN EXAMPLE OF A STRATEGIC BUSINESS UNIT WOULD BE SEVERAL SOFT DRINK COMPANIES OWNED BY A LARGE FOOD CONGLOMERATE. A BUSINESS UNIT GENERAL MANAGER WOULD OVERSEE OPERATIONS IN THE STRATEGIC BUSINESS UNIT, COMBINING AND CONDENSING SUPPORT SERVICES THAT WOULD OTHERWISE BE REDUNDANT IF THE SMALL COMPANIES FORMING THE UNIT WERE UNDER SINGLE AND SEPARATE OWNERSHIPS.

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EACH STRATEGIC BUSINESS UNIT MAY HAVE, FOR EXAMPLE, A MANUFACTURING, SALES, RESEARCH AND DEVELOPMENT, FINANCE AND HUMAN RESOURCES FUNCTION. IN LARGE CORPORATE CONGLOMERATES, THERE MAY BE DOZENS OF STRATEGIC BUSINESS UNITS FORMING THE FUNCTIONAL CORPORATE STRUCTURE.

A LINE OF BUSINESS IN A STRATEGIC BUSINESS UNIT MIGHT BE, FOR EXAMPLE, LIFE INSURANCE, WHOLE LIFE INSURANCE, PENSION FUNDS, ETC.

HOMEWORK: BETWEEN SERVICE SUPPLIER AND CUSTOMER IN THE ABOVE TABLE THERE IS AN OVERLAP AREA THAT IS A CONCERN BOTH OF THE PROPERTY MANAGER AND THE FACILITIES MANAGER. SPEND 15 MINUTES IN "FREE ASSOCIATION" ON THE NATURE OF THESE OVERLAPS. FOR EXAMPLE, THE PROPERTY MANAGER WOULD BE INTERESTED IN SUPPLYING THE TELEPHONE LINE CHANNELIZATION IN HIS BUILDING SO THAT THE ASSET MANAGER COULD CONCERN HIMSELF WITH HIS "TENANT IMPROVEMENTS". THIS MAY CONCERN THE BAUD RATE OF THE TELEPHONE LINES, THE NUMBER OF LINES, ETC. THIS IS NOT THE CONCERN OF THE PROPERTY MANAGER BECAUSE IT IS A TENANT IMPROVEMENT.

END OF CLASS ONE

CLASS TWO1/29/91

ASPECTS OF MANAGEMENTVENTURE CORPORATE R.E.

════════════════════════════════════════════════════════════════════════STRATEGIC MANAGEMENT PORTFOLIO CORPORATE STRATEGY

structure of businesssensing marketpositioningpromoting

MANAGEMENT CONTROL ASSET MANAGEMENT CORPORATE ASSET MGT.managing the asset

OPERATIONAL PROPERTY MANAGEMENT FACILITIES MGT.carrying out the

strategy

SEE CHAPTER FOUR (DOWNS) FOR "MANAGEMENT PLAN FOUR PROPERTY". THE MANAGEMENT PLAN IS THE BENCHMARK FROM WHICH YOU CONTROL A PROPERTY MANAGER.

HISTORY OF ASSET MANAGEMENT:

AFTER THE FIRST WORLD WAR, EXPANSION FOLLOWING THE RECESSION IN AGRICULTURE DUE TO EXPANDING INDUSTRIAL STRENGTH THROUGH 1929, THE STOCK

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MARKET CRASH. THE INCREASE OF CAPITAL EXPENDITURE LED TO INCREASED 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.

EIGHT ROLES OF ASSET MANAGEMENT FUNCTION (ACCORDING TO KATELEY)

1. ACQUISITION

2. PROPERTY MANAGEMENT

3. PERFORMANCE MONITORING

4. RETENANTING AND RENOVATION

5. PERIPHERAL DEVELOPMENT

6. REFINANCING

7. RESTRUCTURING OWNERSHIP

8. DISPOSITION

THIS IS AN EXPANDED FORM OF THE FOLLOWING MAIN INGREDIENTS OF ASSET MANAGEMENT:

1. PLAN

2. ACQUIRE

3. MAINTAIN STEWARDSHIP (STEPS 2 THROUGH 7 ABOVE)

4. DISPOSE

"THE VALUE OF THE INPUT (LABOR, FINANCING COSTS, EQUITY) MUST BE LESS THAN THE VALUE CREATED OVER TIME IN ORDER TO TURN A PROFIT".

ACCORDING TO NOURSE, THE ABOVE INGREDIENTS ARE REFORMULATED AS FOLLOWS:

1. PLAN CAPACITY - PLACING NEEDS FOR THE FUTURE AND DEVELOPING A PLAN TO PROVIDE THE NEEDED FACILITIES.

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2. SITE SELECTION - INCLUDES THE FINANCIAL STRUCTURE

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".

CORPORATIONS OPERATE ON A VARIANT OF THE CLOSED CONTROL CYCLE.THE CYCLE CAN BE UNDERSTOOD THROUGH ANALYZING A MATRIX.

POLICYPROCEDURE EXECUTION MONITORACQUISITION O XOSTRATEGIC MANAGEMENT XMANAGEMENT CONTROL XOPERATIONS O X O

X = CENTRALIZED MANAGEMENTO = 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 YEARSTHERE IS THE OPERATIONS PLANNING AND BUDGETING CYCLE, " " " EVERY YEAR.

THE OPERATIONS PLANNING AND BUDGETING CYCLE HAS TWO COMPONENTS:

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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 │├─────────────────────────────────────────────────────────┤│TYPE OF FACILITY, S.F., OUTSOURCING │├─────────────────────────────────────────────────────────┤│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

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THE BUSINESS CYCLE.

THE UPCOMING PROJECT:STEPS TO THE ASSET MANAGEMENT PLAN

1. SCAN THE ENVIRONMENT: LOOK AT THE DEMOGRAPHICS, BUSINESS AND INDUSTRY, COMPETITION, ABSORPTION

2. ANALYZED THE ALTERNATIVES FOR RETENANTING AND REDEVELOPMENT. SEE KATELEY MANAGEMENT CYCLE.

3. DEVELOP A SERIES OF ALTERNATIVE STRATEGIES: PORTFOLIO STRATEGY, INVESTMENT CRITERIA.

4. MAKE RECOMMENDATION TO CLIENT : TRANSLATE THE RECOMMENDATION INTO AN OPERATING BUDGET ( INCOME AND EXPENSE, AND CAPITAL BUDGETS) FOR THE PROPERTY.

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 THREE2/5/91

REAL ESTATE HAS TWO HALVES:

1. WHAT YOU WANT TO DO2. 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, R.E. PORTFOLIO STRATEGY

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║ STRATEGY (4%) ║──────┬───────┐╠══════════════════════════════╣ LINK─┘ ├───POLICY (GOALS,║ MANAGEMENT CONTROL (16%) ╟──────────────┘ OBJECTIVES, & ║ ╟──────┬───────┐ MISSION OF THE A.M.)╠══════════════════════════════╣ │ │ ║ ║ LINK─┴┐ │ ║ OPERATIONS (80%) ║ │ ├───PROCEDURES (PLANNED║ ║ │ │ ACTION)║ ║ │ │║ ╟───────┴──────┘║ ║║ ║╚══════════════════════════════╝DIAGRAM OF THE MAKE-UP OF THE ROLE OF ASSET MANAGER

THE KEY IS TO MAKE THE POLICIES AND PROCEDURES CORRESPOND TO THE CLIENT'S PROFIT OBJECTIVES.

WHAT IS THE OBJECTIVE OF AN ASSET MANAGER WORKING FOR THE WORKOUT DEPARTMENT OF AN INVESTMENT BANK AS OPPOSED TO THAT OF A MAJOR DEVELOPER? THE OBJECTIVES ARE DIFFERENT FOR DIFFERENT CLIENT-TYPES.

METHOD OF ANALYZING ANY BUSINESS, AS APPLIED TO REAL ESTATE MANAGEMENT.

1. LOOK AT THE MARKET FOR THE SERVICE (ENVIRONMENT). PERTAINS NOT ONLY TO THE PURCHASING MARKET, BUT THE NATURE OF THE MARKET FROM A LEGAL, REGULATORY AND OTHER POINTS OF VIEW. DEFINE THE REGION.- NUMBER OF COMPETITORS- TRENDS IN USE OF MANAGEMENT SERVICES- NEW CONSTRUCTION (TARGET MARKET)- ABSORPTION FROM THE POINT OF VIEW OF SUCCESS IN ACCOMPLISHING THE

CLIENTS OBJECTIVES- FEES, PROCUREMENT PRACTICES, CONTRACTS.

2. DEFINE STRATEGIC ALTERNATIVES- FRANCHISING- PURCHASE OF EXISTING PRACTICE.

3. EVALUATE ALTERNATIVES- QUALITATIVE CRITERIA (NON-FINANCIAL CRITERIA)- QUANTITATIVE CRITERIA (NUMBERS, FINANCIALLY ORIENTED CRITERIA)

4. REFINE ALTERNATIVES - TIME PHASED ACTION PLAN- BALANCE SHEET- INCOME SHEET

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- BUDGET SHEET

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 FOUR2/19/91

WAYS OF IDENTIFYING LOANS IN DANGER OF BECOMING DELINQUENT

1. NON PAYMENT OF INTEREST AND/OR PRINCIPAL2. DOLLAR EXPOSURE3. 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)

* OWNER RELATIONS AND RECORD KEEPING* INDEMNIFICATION OF MANAGER* REPORTING DATES* COMPENSATION* RESPONSIBILITIES

THE FUNCTION OF A MANAGEMENT CONTRACT IS TO ADDRESS THE FOLLOWING:

1. IDENTIFIES OWNER AND PREMISES2. AGREEMENT TO MANAGE PROPERTY, MONTHLY STATEMENT OF RECEIPT, REMITTAL OF PROCEEDS AS PER AGREEMENT.3. IF RENTS DO NOT COVER EXPENSES, OWNER WILL ADVANCE FUNDS TO COVER

OPERATIONS.4. FIDELITY BOND5. OWNER AGREES TO GIVE MANAGER RIGHT TO ADVERTISE PROPERTY AND TO SIGN

313

LEASES FOR A SPECIFIED NUMBER OF YEARS.6. TERMINATE TENANCY7. SIGN AND SERVE NOTICES8. REIMBURSEMENT OF EXPENSES9. SUE FOR AND RECOVER RENT10. HIRE PROFESSIONALS AND WORKERS TO OPERATE BUSINESS11. HANDLE SECURITY DEPOSITS ON AN OWNER'S BEHALF12. X% PAYMENT ON LEASES OR RENT13. POWERS SPECIFICALLY WITHHELD FROM MANAGER.14. TERMINATION AND CANCELLATION OF AGREEMENT15. ARBITRATION.

SEE PAGE 109, DOWNS, MONTHLY STATEMENT

TYPICAL MONTHLY STATEMENT FORMAT:

RENT ROLL TENANT MONIES COLLECTED PROPERTY A ONE X

TWO YTHREE Z

PROPERTY B ONE XTWO YTHREE Z

TOTAL RENT COLLECTED ABC─┐ │

┌─────────────────────────────────────────────────────────┘│ \/ ....FEEDS BACK TO BALANCE SHEET.....└INCOME STATEMENT> BALANCE SHEET> CASH FLOW STATEMENT> ACCTS. . │PAYABLE/DISTRIBUTIONS> REVENUE─┬──────────────────────────────┘

> EXPENSE─┘

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-APRILACCOUNTS RECEIVABLE - AGED TRIAL BALANCE

DAYS 0-5 5-10 10-30 30<A,1 B,2

A IS PROPERTY# IS TENANT

THERE ARE THREE PARTS TO A MANAGEMENT AGREEMENT:

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1. CONTRACT2. MANAGEMENT PLAN3. 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. OVERVIEW2. REVENUES3. PROPOSED ACTION (PHYSICAL AND FINANCIAL)

ANALOGY:IN A FACTORY YOU HAVE:MANAGEMENT > FOREMEN > WORKERSIN 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 FIVE2/26/91

10 MINUTE PRESENTATION NEXT WEEK ON PROJECT, DUE AT THE BEGINNING OF CLASS.

GUEST SPEAKER: STEVE COWAN, COOPERS AND LYBRANDTOPIC: HOW A DEAL IS CONSTRUCTED

*************ADVERTISING FOR PROPERTIES:

5 METHODS:BANNERSDIRECT MAILRADIO ADSNEWSPAPER ADST.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.

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TYPICAL CORPORATE STRUCTURE (COMMITTEE)

┌────────── CHIEF OF OPERATIONS───────┐│ ─┴─ │ │C.R.E H.R. C.I.O.C.F.OC.R.E. = CHIEF OF REAL ESTATEH.R. = HUMAN RELATIONSC.I.O. = CHIEF INFORMATION OFFICERC.F.O. = CHIEF FINANCIAL OFFICER

SEE DOWNS CHAPTER 8, TENANT RELATIONS

MARKETING AND SIGNING OF ARRAY OF TENANT CREDIT &┌─┐ LEASING ┌─┐ LEASE ┌─┐SERVICES ┌─┐COLLECTION├─┼───────────────────┼─┼────────────────┼─┼───────────────┼─┼───────>└─┘ └─┘ └─┘ └┬┘ DUE DATE, TRIGGER FOR VARIOUS TIME LINE OF TENANT RELATIONS LEVELS OF TREATMENT

END OF CLASS FIVE

CLASS SIX3/5/91

CLASS PRESENTATIONS TODAY, NO LECTUREEND OF CLASS SIX

CLASS SEVEN3/19/91

TOPIC: CREATION OF SHAREHOLDER WEALTH

REAL ESTATE, OTHER THAN THE PRODUCT OF A CORPORATION, IS THE SINGLE MOST IMPORTANT ELEMENT OF A CORPORATION'S ASSET VALUE.

REVENUE 100COST OF PRODUCT 60* GROSS MARGIN40SALARIES 10OVERHEAD 20#

10TAXES 5 NET INCOME 5

* 40 PERCENT PURCHASED MATERIALS

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7 TO 8 PERCENT LABOR 12 TO 13 PERCENT OVERHEAD, MUCH OF WHICH IS OPERATION COST FOR BUILDINGS, DEPRECIATION, ETC.# SELLING, GENERAL AND ADMINISTRATIVE OVERHEAD

THREE ROLES FOR A REAL ESTATE ASSET MANAGER IN A CORPORATION

1. FACILITIES MANAGER2. ASSET MANAGER3. ENTREPRENEURIAL

THERE ARE TWO TYPES OF CORPORATE ORGANIZATIONS; A FUNCTIONAL ORGANIZATION AND A BUSINESS UNIT (MULTI DIVISIONAL ORGANIZATION).

CHIEF EXECUTIVE OFFICER───┐ │ ┌─LEGAL CHIEF OPERATIONS OFFICER──┼───┼─ACCOUNTING AND FINANCE │ │FUNCTIONAL ORGANIZATION───┘ └─HUMAN RESOURCES│├─── 1. MARKETING AND SALES 1 THROUGH 4 ARE "COST CENTERS"├──── 2. MANUFACTURING (ALSO CALLED "PERFORMANCE CENTER")├──── 3. DISTRIBUTION└──── 4. RESEARCH AND DEVELOPMENT"SALES"IS THE SHORT TERM EXECUTION OF LONG TERM STRATEGY."MANUFACTURING" IS WHAT YOU DO AFTER YOU "SELL"."RESEARCH AND DEVELOPMENT" IS WHAT YOU DO BEFORE YOU CAN SELL OR MANUFACTURE.

FUNCTIONAL ORGANIZATIONS ARE USED FOR SMALLER BUSINESS. MOST REAL ESTATE DEVELOPERS HAVE FUNCTIONAL ORGANIZATIONS.

CHIEF EXECUTIVE OFFICER ───┐ │ ┌─LEGAL CHIEF OPERATIONS OFFICER ──┼─┬─┼─ACCOUNTING AND FINANCE │ │ │MULTI DIVISIONAL ORGANIZATION───┘ │ └─HUMAN RESOURCES ┌────MATRIX│ │ └──┐│ ┌BUSINESS│UNIT MANG'R │ │ APPROVES├── REGION──┘ ┌─────┼─────┐ │ └─── CHIEF OF REAL ESTATE│---ACTIONS>-|

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├── REGION STORE STORE STORE │ |└── REGION └──HIRES AND FIRES>─REAL ESTATE MANAGER-|

A MATRIX IS A CONNECTION BETWEEN DIFFERENT MANAGEMENT LEVELS. IN THE MULTI-DIVISIONAL ORGANIZATION, THE CORPORATE REAL ESTATE OFFICER MAY OVERSEE AND APPROVE DIVISIONAL DECISIONS OF REAL ESTATE MANAGERS HIRED BY BUSINESS UNIT MANAGERS. THIS ASSURES THAT BUSINESSES WITHIN VARIOUS REGIONS ARE WORKING TOWARD THE OVERALL CORPORATE GOALS OF THE CORPORATION. THE C.R.E.O. ACTS MUCH LIKE A CONDUCTOR WHILE THE INDIVIDUAL REAL ESTATE MANAGERS ARE LIKE MUSICIANS. THE INDIVIDUAL REAL ESTATE MANAGERS PLAY THEIR SCORE WHILE THE C.R.E.O. MAKES CERTAIN THAT THE RESULTS OF THESE EFFORTS ARE NOT DISSONANT WITH THE OVERALL SYMPHONY OF STRATEGY.

STRATEGY >>>> STRUCTURE >>>> MANAGEMENT PROCEDURE >>>>v ^^^ v ^^^ v <<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<v

STRATEGY DRIVES THE STRUCTURE OF THE ORGANIZATION, WHICH IN TURN DEFINES MANAGEMENT PROCEDURES. MANAGEMENT PROCEDURES ARE THEN EVALUATED AND STRATEGY REFORMULATED AS THE PROCESS CYCLES OVER AND AGAIN.

"HOW THINGS ARE DONE"

1. POLICIES2. PROCEDURES3. PRACTICES

THESE DETERMINE THE QUALITY OF ACTIONS BY THE CORPORATION.QUESTIONS SUCH AS "WHERE DO WE BUY OUR FACILITIES" AND "WHICH FACILITIES DO WE BUY" AND "HOW MUCH DO WE PAY FOR IT AND HOW MUCH DO WE BUY" ARE ALL ANSWERED WITHIN THE FRAMEWORK CONSTRUCTED BY THE CORPORATION'S POLICIES, PROCEDURES AND PRACTICES.

HOW DO YOU DECIDE WHETHER TO ACQUIRE PROPERTY IN THE CORPORATE REAL ESTATE WORLD?

THE FOLLOWING MODEL IS AN EXAMPLE OF HOW THE DECISION IS MADE │ oTOTAL COSTC │ + o o O │ + o┌┬┬┬┐┌o─FIXED COSTS │ +└┼┼┴┴┘ T │ ┌ │+ + + FREIGHT COST │ ┌──┘ └──────────────────GRIDDED AREA IS "SAVINGS" │ ┌──┘

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└───┴─────────────────────────────────── 0 1 2 3 4 5 6 # OF WAREHOUSES

EXPLANATION OF ABOVE: AS THE NUMBER OF WAREHOUSES INCREASES, FIXED COSTS INCREASE. HOWEVER, THE COST OF FREIGHT DELIVERY DECREASES SINCE THE WAREHOUSES ARE BETTER POSITIONED RELATIVE TO THE CUSTOMER. THE GRIDDED AREA REPRESENTS THE MAXIMIZED PROFIT POTENTIAL CAUSED BY THE SAVINGS IN FREIGHT COSTS THAT EXCEED THE FIXED COSTS BORN BY UTILIZING MORE WAREHOUSES.AS A CORPORATE REAL ESTATE EXECUTIVE, YOU ARE CONCERNED ABOUT THE COST OF OCCUPANCY, AS WELL AS THE COST OF OPERATION WITH RESPECT TO FREIGHT, FOR EXAMPLE.

AS A DEVELOPER / INVESTOR, OPERATIONS COSTS AND YOUR LESSEE'S BUSINESS IS NOT YOUR CONCERN AS LONG AS HE IS A GOOD CREDIT RISK.

CORPORATE PLANNING CALENDAR

(THIS YEAR) (NEXT YEAR)PLANNING YEAR ACTION YEAR JULY, AUGUST, SEPTEMBERON THE "BUSINESS UNIT MANAGER"LEVEL. STRATEGIC PLAN (5 TO 6 YR)AND OPERATING PLAN (1 YEAR) AREDETERMINED V VPLANT LEVEL: OPERATING BUDGETFOR YEAR ONE OF STRATEGIC PLAN V VCAPITAL BUDGET V VFINALIZE OPERATING PLAN, CAPITAL AND OPERATING BUDGETS

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

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CLASS EIGHT3/26/91

PAGE 29 -NOURSE TEXT:EXPECT TO SEE QUESTION ON THIS CHART ON THE EXAMINATIONROLE 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. A TYPICAL BREAKDOWN MIGHT BE AS FOLLOWS:

PRESIDENT - 250 SF.EXEC. COMMITTEE - 190 S.F.V.P.- 180 S.F.DEPARTMENT HEADS - 150 S.F.KEY PUNCHER - 60 S.F.

ALL EMPLOYEES AND THEIR SPACE NEEDS SHOULD BE ADDED UP. THE AVERAGE SQUARE FOOTAGE PER PERSON SHOULD NOT, IN THIS INSTANCE, BE MORE THAN 135 SQUARE FEET PER EMPLOYEE. OFTEN, DUAL SHIFTS WILL HELP TO INCREASE

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THE SQUARE FOOTAGE USEABLE BY EMPLOYEE PER SHIFT, ALTHOUGH DUAL SHIFTS HAS IMPLICATIONS FOR EFFICIENCY.

THE PROFESSION CHARGED WITH DETERMINING THE SIZE OF FACILITIES IS CALLED FACILITIES MANAGEMENT.

WHEN EXAMINING AN EXISTING SITUATION TO DETERMINE IF THE SPACE ALLOCATIONS ARE ADEQUATE OR SUPERFLUOUS, IT PAYS TO MAKE A RANDOM SAMPLING OF SPACES TO SEE HOW MUCH THEY ARE USED. FOR EXAMPLE, "THE COFFEE ROOM IS USED BY 53 EMPLOYEES PER DAY, FOR AN AVERAGE OF 3 MINUTES EACH. NEVER ARE THERE MORE THAN 2 EMPLOYEES AT A TIME, ACCORDING TO OBSERVATIONS CONDUCTED ON SITE."

YOU NEED TO MAKE AN ESTIMATE OF VOLUME INCREASES IN POLICY HOLDERS, OR WIDGET PRODUCTION, ETC. IN ORDER TO BACK INTO GROWTH ESTIMATES FOR THE PROPOSED FACILITY. THESE ESTIMATES WILL ENABLE YOU TO PLAN FOR FUTURE SPACE BY DETERMINING THE NUMBERS AND TYPES OF EMPLOYEES, AND THEREFORE THE SQUARE FOOTAGE REQUIRED.

DO A SURVEY - WHO IS ON THE FLOOR ON THE DATE SAMPLE? WHAT DOES EACH PERSON ON THE FLOOR DO? HOW MUCH SPACE SHOULD EACH PERSON HAVE TO PERFORM THEIR JOB?

ie.

DEPARTMENT # EMPLS. STD. S.F./ ACTUAL S.F. INDEX OF ACTIVITY VOLUME MAIL 22 3700/3500 # OF MAIL PCS. 95FIRST PROC.CONF. ROOMKEY ENTRYSUPERVISOR

│

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│-800000│< RENTABLE/USEABLE S.F.│ ! #│-700000│ *│ ! *│ #│-600000 ! *││ ! # *││-500000 *│ ! #│ *│ 0│-400000 X X = STANDARD│ 0 = ACTUAL│ * = LOW EXPECTATION # = EXPECTATION ! =HIGH EXPECTATION│└───────/91──────────/92─────────/93──────────/94─────────────────────────

CHART OF SPACE REQUIREMENT GROWTH

END OF CLASS EIGHT

CLASS NINE4/2/91

BUSINESSES OFFER PRODUCTS. THESE PRODUCTS WILL GENERALLY GO THROUGH FOUR DISTINCT PHASES IN ITS MARKETABLE LIFETIME.

THE FIRST PHASE IS "SELLING THE CONCEPT", AND HAS A CHARACTERISTIC FEATURE ONLY A SLIGHT INCREASE IN BUSINESS VALUE OVER TIME.

THE SECOND PHASE IS "THE CONCEPT IS SOLD". THIS IS THE PERIOD WHERE EVERYONE IS JUMPING ON THE BANDWAGON TO BUY YOUR CONCEPT. THIS IS A PERIOD OF STEEP GROWTH IN THE VALUE OF THE BUSINESS.

THE THIRD PHASE IS WHEN THE "MONEY ROLES IN", YET GROWTH IS DECELERATING AND DECREASING.

THE LAST PHASE IS "THE POINT OF DIMINISHING RETURNS". AT THIS STAGE IN A PRODUCT, THE EXPENSE OF DELIVERING THE PRODUCT NO LONGER OFFERS AN ADEQUATE RETURN. THIS IS WHEN THE BUSINESS OR PRODUCTS STARTS ITS PHASE-OUT.

322

│ │ │ X X │ ││ │ │ │ X ││ │ X │ ││ │ │ │ ││ │ │ │ X ││ │ │ │ ││ │ │ │ ││ │ X │ │ X││ │ │ │ ││ │ │ │ ││ │ │ │ ││ │ │ │ ││ │ │ │ ││ │ X │ │ ││ │ │ │ ││ │ │ │ ││ X│ │ │ ││ X │ │ │ ││X │ │ │ │└────────────────┴──────────────────┴────────────────┴─────────────────┘PHASE ONE PHASE TWO PHASE THREE PHASE FOUR

= =+ = =│ │ = =│ = │ = = 0───────────────────────────────────────────────────────────────=────────│ = = │ =│ = =│=-CASH FLOW DIAGRAM - SHOWS NEGATIVE AND POSITIVE CASH FLOWS BY PHASE

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DIAGRAM OF A REAL ESTATE INVESTMENT CASH FLOW

+ -│ -│ X│ X - _│ X _│ X - _0}-──────────-1──────-2──────X────-3────-4──-5───-6──-7─── ──-8─│}_- X - _│} _- X - _│} _ -- X - _│} X_ - - _│X _ ] _ │ _ ] _- ]

X = INFLATION GAIN (ECONOMIC APPRECIATION)} = TRANSACTION COST- = CASH FLOW_ = NET INCOME] = DEPRECIATION

CASH FLOW BREAKS EVEN BETWEEN YEAR FIVE AND SIXACCRUED NET INCOME BREAKS EVEN BETWEEN YEAR SEVEN AND EIGHT, WHICH IS THE POINT OF DIMINISHING RETURNS, AND IS WHY MANY REITS SELL AT THIS STAGE IN A PROPERTY'S LIFESPAN.

IN LOCATING A FACILITY, AMONGST THE CONSIDERATIONS ARE:

THE COST OF UTILITIESTHE COST OF RAW MATERIALSLABOR COSTSACCESS TO TRANSPORTATIONTAX RATES

END OF CLASS EIGHT

CLASS NINE4/9/91

GUEST SPEAKER: BILL ANTHONY, TEXANOF COOPERS AND LYBRAND

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ON: WORKOUTS AND "DOG" ECONOMIES

ZOMBIE INSTITUTIONS ARE THOSE THAT HAVE A NON PERFORMING PROPERTY, YET CANNOT MAKE A DECISION AS TO HOW TO DEAL WITH OR DISPOSE OF IT.

ORGANIZATION OF CORPORATE REAL ESTATE DEPARTMENT:

THE PORTFOLIOS OF CORPORATE CLIENTS ARE STATIC, AND ASSET MANAGEMENT ROLES RESEMBLE MOST THAT OF A PROPERTY MANAGER, DUE TO THE GOALS OF THE CORPORATION RATHER THAN THE CONTRASTING STRATEGY OF REAL ESTATE INVESTORS.

VIEW CORPORATE REAL ESTATE AS A VERTICAL INTEGRATION COMPANY.

IE. SUBSIDIARY WILL DEVELOP AND OWN SITES THAT WILL BE LEASED TO FRANCHISES (PROFIT CENTER)

SUBSIDIARY OWNING SITES FOR LEASING TO OTHER SUBSIDIARIES.

AT&T - 195 BROADWAY

STRATEGY - BE CORPORATE LANDLORD FOR PROPERTIES OWNED BY AT&T IN THE METRO NEW YORK AREA.

GENERAL DEPARTMENTS│ │ADMINISTRATIVE SERVICES ORGANIZATION├────┘ ├─195 BROADWAY│ ├─LIMOUSINES│ └─EXECUTIVE AIR FORCE├──── LEGAL └──┬─ BELL LABS ├─ CONTROLLER └─────┬─ LONG LINES

├──NEW YORK TELEPHONE ├─ WESTERN ELECTRIC └─ ETC.

REFLECTS THE THEORETICAL CONFLICT THAT YOU ARE SUPPORTING A LINE OF BUSINESS AS A REAL ESTATE EXECUTIVE. WHEN COSTS ARE AVERAGED OUT TO SHOW NO NET GAIN, IT'S HARD TO SHOW THE VALUE OF THE REAL ESTATE ROLE, WHICH IS AN ISSUE SINCE YOUR BONUS DEPENDS ON IT!

END OF CLASS NINE

CLASS TENAPRIL 16, 1991

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GUEST SPEAKER:ART KARLINHOW 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 STRUCTURE: 75:25 IN FAVOR OF THE OWNER UNTIL COST RECUPERATED

75:25 IN FAVOR OF BUYER/DEVELOPER UNTIL MONEY RECUPERATED50:50 THEREAFTER

"NEVER SAY "ASKING", OR "FOR SALE". ONLY RENT AT A PRICE THAT'S FAIR.

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 ELEVENAPRIL 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

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TO OFFER THE OTHER, AND WHAT YOU CAN DO IF THE PROBLEM IS NOT THE DEBTOR BUT THE PROPERTY, IS CENTRAL TO HOW THE WORKOUT WILL FIND ITS WAY TO REALITY.

BARGAINING POSITION DIAGRAM: WHAT THE OTHER GUY IS CONCERNED WITH. │ │ │

│ 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?

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OPERATIONAL - DO THEY HAVE AN IN HOUSE PROPERTY MANAGER OR A SWEETHEART ARRANGEMENT WITH A PROPERTY MANAGER THAT CAN TAKE YOUR PLACE?

WHAT THE BANK WANTS TO KNOW ABOUT YOU:

STRATEGIC - WHAT IS YOUR PORTFOLIO? IS PROPERTY GENERATING CASH THAT IS BEING SIPHONED OFF INTO ANOTHER BUILDING? IE. A TENANT IN ONE STABLE BUILDING IS MOVED TO YOUR NEW BUILDING, AT THE LENDING INSTITUTION'S (FOR THE STABILIZED BUILDING) RISK.

PROPERTY MANAGEMENT CAPABILITY, ASSET MANAGEMENT CAPABILITY, AUTHORITY OF ASSET MANAGERS WITHIN COMPANY, ENVIRONMENTALISM ISSUES IN PROPERTY, FINANCIAL WORTH IN CASE THE BANK HAS TO FORECLOSE AND GET A DEFICIENCY JUDGMENT. ARE YOU LIQUID (NO CASH FLOW) OR INSOLVENT (MORE LIABILITIES THAN YOU CAN COVER).

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/

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DEVELOPERASSET MANAGER ────────────────────────────────┘ NEGOTIATION BORDER├──── PROPERTY MANAGER└──── STAFF

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 ║ ║ S ║ ║ T ║ ║ T ║ ║ R ║ ║ R ║ ║ A ║ S T R A T E G Y ║ A ║ ║ T ║ ║ T ║ ║ E ║ ║ E ║ ║ G ║ ║ G ║ ║ Y ║ ║ Y ║ ╟──────────_╬════════════════════════════════════╬_────────╢ ║ M ║ ║ M ║ ║ A ║ ║ A ║ ║ N ║ ║ N ║ ║ A ║ ║ A ║ ║ G ║ M A N A G E M E N T ║ G ║ ║ E ║ ║ E ║ ║ M ║ ║ M ║ ║ E ║ ║ E ║ ║ N ║ ║ N ║ ╟────T──────_════════════════════════════════════╬_──T─────╢ ║ ║ ║ ║ ║ OPERA- ║ ║ OPERA- ║

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║ TIONAL ║ ║ TIONAL ║ ║ ║ ║ ║ ║ ║ O P E R A T I O N A L ║ ║ ╚╦══════════╩╦═══════════════════════════════════╩═════╦═══╝ ╔══════╝ ╚═{ COMMON KNOWLEDGE OF R.E.} ║ ╚═ {CORPORATE REAL ESTATE} {ASSET MANAGER}═╝ HURDLE RATES CONSTRUCTION ISSUES

LOCATION INVESTORSEFFICIENCY OCCUPANCY

PROCEDURES

THE CORPORATE REAL ESTATE EXECUTIVE AND THE DEVELOPER'S ASSET MANAGER HAVE THEIR OWN SPECIFIC CONCERNS, YET THEY SHARE AN OVERARCHING BODY OF KNOWLEDGE IN THE STRATEGIC, MANAGEMENT AND OPERATIONAL AREAS OF REAL ESTATE THEORY. THEIR SPECIFIC CONCERNS LEAD TO A DISTINCT AND SPECIALIZED BODY OF KNOWLEDGE THAT IS USED FOR THEIR DIFFERENT CIRCUMSTANCES, DIFFERING STRATEGIES, AND DIFFERING OBJECTIVES.

FINAL EXAMINATION NEXT WEEK

END OF CLASS ELEVENEND OF COURSE

ADVANCED SPECIAL PROJECT PROFESSORS KUHN AND ROSAN

WINTER 1991

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ADVANCED SPECIAL PROJECT1/28/91CLASS ONE

PROFESSOR JAMES KUHN26 E. 64TH ST. SUITE 400212 308-4400SECRETARY, LORETTA

IN BUSINESS SINCE 1972, RIGHT BEFORE THE WORST RECESSION IN NEW YORK CITY HISTORY. 30 PERCENT VACANCY.

1972 TO 1977, WORKED WITH METLIFE DOING WORKOUTS, FORECLOSURES, ASSET MANAGEMENT, ETC. "YOU LEARN THE MOST WHEN THINGS ARE BAD".

*******************GROUND RULES*******************

DEPENDING ON THE SITE AND THE BUILDING, YOU MAY BUILD OFFICE OR RESIDENTIAL. IT MUST BE WITHIN THE FRAMEWORK OF THE ZONING CODE.

YOUR GRADE WILL BE GOOD IF:

1. YOUR FACTS ARE CORRECT2. YOUR ASSUMPTIONS ARE CORRECT

THE PROJECT DOES NOT NEED TO "PENCIL OUT". IN THE REAL WORLD, THE RECONNAISSANCE UNDERGONE BEFORE MAKING AN OFFER FOR A PROJECT DOES NOT PENCIL OUT EITHER.

UNLESS NOTED OTHERWISE, YOU MAY ASSUME THAT THE PROPERTY HAS NO RENT CONTROLLED TENANTS. YOU MAY TEAR THE BUILDING DOWN IF YOU TAKE CARE OF ASBESTOS, OR OTHER SUCH ISSUES.

YOU CAN TRY TO INCREASE YIELD BY ACQUIRING OTHER SITES IF YOU CAN CONVINCE THE PROFESSOR OF YOUR REASONS.

ONCE YOU HAVE THE SITE AND PRICE, YOU ARE "MARRIED" TO THE SITE AND PRICE. ONCE YOU HAVE THE PROJECT YOU WILL BE DESIGNATED THREE MENTORS. EACH STUDENT WILL HAVE A LEASING, FINANCING AND CONSTRUCTION MENTOR. THERE ARE EIGHT TEAMS OF MENTORS, EACH WITH THREE MEMBERS.

AS SOON AS YOU GET THE SITE YOU WILL START YOUR PLAN. AS SOON AS POSSIBLE, SEE YOUR CONSTRUCTION MENTOR. DO NOT EXPECT HIM TO DO THE PROJECT FOR YOU. HE WILL, HOWEVER, HELP YOU DECIDE THE "WHAT", "HOW MUCH" AND "HOW" OF YOUR PROJECT.

THE GRADE CONSISTS OF AN ORAL EXAM (40%) AND THE FINAL PROJECT (60%). SOMETIME AROUND MAY 5TH, CONTACT YOUR CONSTRUCTION MENTOR. HE WILL

329

ARRANGE TO SEE YOU.

CRITERIA FOR OUTLINE AT ORAL PRESENTATION

ZONING ANALYSISPHYSICAL CHARACTERISTICS OF THE BUILDINGHARD AND SOFT COSTS / BUDGETPRO FORMA INCOME AND EXPENSERENT COMPS AND STACKING PLANFINANCING OR JOINT VENTURE STRUCTURE

PROJECT DUE THE LAST DAY OF CLASS, MAY 13TH.

TWO COPIES, ONE TO MENTOR AND ONE TO KUHN.

IF YOU ARE GOING TO HAVE IRR'S AND DCF'S IN YOUR ANALYSIS, DEMONSTRATE THAT YOU CAN WEATHER THE DOWNTURNS WITH CASH FLOW PROJECTIONS.

"IT DOESN'T MATTER WHAT YOU PUT INTO YOUR COMPUTER IF YOU CAN'T AFFORD THE DOWNTIME, WHICH IS DURING THE CONSTRUCTION AND LEASE UP PHASES, AND IN AN UNPREDICTABLY POOR ECONOMY AND MARKET."

"YOU CAN'T CONTROL WHAT THE MARKET IS GOING TO BE SEVEN YEARS DOWN THE LINE WHEN THE PROJECT BEGINS CONSTRUCTION. YOU DON'T KNOW THE INTEREST RATE, AND YOU CAN'T STOP THE COMPETITION FROM OVERBUILDING. REAL ESTATE IS A TOUGH BUSINESS."

"NEW BUILDINGS ARE EASIER THAN REHABS BECAUSE YOU DO NOT HAVE TO WORRY ABOUT WHAT YOU WILL FIND WHEN YOU TEAR DOWN THE WALLS."

END OF CLASS ONE

CLASS TWO2/4/91

NEXT WEEK, THE BIDDING ON THE PROJECTS WILL BEGIN.

BIDDING WILL TAKE PLACE IN 500,000 DOLLAR INCREMENTS ON PROPERTIES PLACED RANDOMLY ON THE BOARDS. ONCE A BID IS WON, A SECOND PERSON MAY WIN THE SITE FOR 500,000 DOLLARS ABOVE THE PROPERTY'S WINNING BID.

THE SECOND BIDDER MAY POTENTIALLY BID 500,000 DOLLARS MORE THAN THE MAXIMUM ALLOWED IF THE WINNING BID IS AT THE MAXIMUM.

GUEST SPEAKER: MICHAEL PARLEY, ZONING EXPERT

CITY OF NEW YORK ZONING MAPS:

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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 NOT-FOR-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 TWO NUMBERS REPRESENT THE INTENSITY AND "DIRTINESS" OF THE ZONE.

C1 & C2, FOR EXAMPLE, IS A NEIGHBORHOOD RETAILER ON THE GROUND FLOOR.C5 IS A CENTRAL BUSINESS DISTRICT. THE "5" IS A DIRTIER ZONE THAN THE 1 OR 2.

M1-1 IS LIGHT MANUFACTURING. THE SECOND "1" INDICATES THE INTENSITY OF USE IN FLOOR TO AREA RATIO.

M1-5 IS MORE INTENSE THAN M1-1.

M3 IS HEAVY INDUSTRY.

SECTION 81-00 IS THE SECTION DEALING WITH THE SPECIAL MIDTOWN ZONING DISTRICT.

MIDTOWN IS RECOGNIZED BY MOST AS EAST OF 3RD, WEST OF 8TH, AND NORTH OF 30TH AND SOUTH OF 60TH.

STREET WALL REGULATION- SOME BUILDINGS HAVE TO BE BUILT WITHIN 10 FEET OR ON THE STREET LINE TO EFFECTUATE FACADE CONTINUITY ON THE STREET.

ZONING LOT- LAND ZONED IN FEE, OR SEVERAL PLOTS MERGED BY DIFFERENT OWNERS AND PUT UNDER ONE APPLICATION.

LOOK UP DISTRICT DESIGNATION AND THE USES PERMITTED. IF, FOR EXAMPLE, C5-3, FAR IN MIDTOWN IS "15". IT CAN ABE ENHANCED BY THE USE OF BONUSES (IN LOCATIONS, USUALLY, WHERE FAR IS GREATER THAN TEN). PLAZAS AND SUBWAY IMPROVEMENTS ADD FAR.

WHAT KINDS OF FLOORS DO YOU WANT? WILL THE SETBACK ANALYSIS SHOW THAT THEY ARE POSSIBLE?

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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: DOUG DIERCKSEN, TURNER CONSTRUCTION.

CONSTRUCTION IS ONE OF THE CRITICAL PARTS OF A SUCCESSFUL REAL ESTATE PROJECT. THE "TEAM" IS VERY IMPORTANT.

IN THE EARLY DEVELOPMENT PROCESS, YOU NEED A CONSTRUCTION MANAGER TO KEEP ON TRACK.

DISADVANTAGE OF LUMP SUM CONTRACT (AKA, FIXED PRICE CONTRACT)NO CHANGES WITHOUT ADDITIONAL FEES, THE VALUE OF WHICH MAY BE

DISPUTED, AND WHICH COULD EASILY LEAD TO AN ADVERSARIAL RELATIONSHIP BETWEEN THE DEVELOPER AND THE CONTRACTOR.

GUARANTEED MAXIMUM PRICE - BASED ON A GIVEN SET OF DRAWINGS AT A CERTAIN DEGREE OF COMPLETION (65 PERCENT TO 80 PERCENT), THE COST WILL BE SO AND SO.

COST PLUS - SELF EXPLANATORY - LEAST ADVERSARIAL.

RENOVATIONS ARE NOT LUMP SUM DUE TO CONSTANT CHANGES.

IN THE 60'S TO 70'S LOTS OF ASBESTOS USED FOR FIRE PROOFING. PREVIOUSLY, IT WAS ONLY USED FOR PIPE COVERINGS.

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.

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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 THREE2/25/91

GUEST SPEAKER: ARCHITECT, EGGERS GROUP, RICK MORRISGUEST SPEAKER: ARCHITECT, EGGERS GROUP, HANNY HASSAN

╔══════════════════╗ ╔═══════════════╗║ ║ ║ ║║ FINANCE MENTOR ╠════════════════════════╣ DESIGN ║║ ║ ║ MENTOR ║╚══════════╦═══════╝ ║ ║ ║ ╚═══╦═══════════╝ ║ ╔═════════════════════╗ ║ ║ ║ ║ ║ ║ ║ MARKETING AND ║ ║ ╚═════╣ LEASING MENTOR ╠════════╝ ║ ║ ╚═════════════════════╝

THE MENTOR CYCLE

THE SKY EXPOSURE CURVE IS NOT THE SAME AS A SKY EXPOSURE PLANE. UNLIKE THE PLANE, A CURVE MAY NOT BE INTRUDED UPON BY THE PROPOSED BUILDING.

┌**──┐ ┌────**│ **┤ │ └** │ *│ │ └** │ *** │ └**│ │** │ └**│ │ ** │ └**│ └──** │ └*│ │ │ ││ │ │ ││ │ │ │└────────┘ └──────────┘SKY EXPOSURE PLANE SKY EXPOSURE CURVE AS IN C5-2 ZONING AS IN C5-3 ZONING* =THE PLANE * = THE CURVE

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- =THE BUILDING - = THE BUILDING

FOR MIDTOWN DISTRICT

SKY EXPOSURE CURVES - 3 CHARTS DESIGNATED BY STREET WIDTHS

60' WIDE STREET IS A NARROW STREET75' WIDE STREET IS A MEDIUM STREET100' WIDE STREET IS A WIDE STREET

THERE IS A MEASUREMENT IN FEET, X, THAT IS THE MAXIMUM HEIGHT OF THE FIRST TIER OF THE BUILDING ALONG THE BUILDING'S FRONT. FROM THAT POINT SKYWARD, THE SKY EXPOSURE CURVE BEGINS.

FOR A NARROW STREET, THE X IS 90 FEET, AND FOR A WIDE STREET IT IS 150 FEET. YOU CAN PENETRATE THE CURVE TO A LIMITED DEGREE USING THE "THIRD RULE". YOU DIVIDE THE FACE OF THE BLOCKFRONT SITE INTO THIRDS, AND THE AREA YOU INTRUDE INTO THE SKY EXPOSURE CURVE MUST BE EQUALED BY THE AREA PULLED AWAY FROM THE CURVE. A CORNER BLOCK LOT IS DIVIDED BY TWO, NOT THREE, AND THE SAME CONCEPTS APPLY. THE SKY EXPOSURE CURVE WILL SUGGEST A DIFFERING REGULATORY CROSS-SECTIONS FOR THE BUILDING AT VARYING HEIGHTS FROM THE GROUND. AT EACH REGULATORY CROSS SECTION, THE AREA INTRUDING INTO THE PORTION OF AIR SPACE BETWEEN THE SETBACK FROM THE PROPERTY LINE AND THE PROPERTY LINE ITSELF MUST BE EQUALED IN SQUARE FOOTAGE BY A PENETRATION INTO THE PERMITTED LOCATION FOR THE BUILDING. IN ANY CASE, THE BUILDING MAY NOT PENETRATE BEYOND THE SETBACK EXPOSURE LINE BY MORE THAN HALF THE DISTANCE TO THE PROPERTY LINE. FOR EXAMPLE, IF THE SETBACK AT 210 FEET HIGH IS 54 FEET, THE BUILDING MAY PENETRATE INTO THE SETBACK BY NO MORE THAN 27 FEET.

ELEVATORS - RULE OF THUMB: 40,000 S.F. PER ELEVATOR. FACTORS RELATING TO ELEVATOR SERVICE ARE WHETHER THERE ARE SINGLE OR MULTIPLE TENANTS, AND THE HEIGHT OF THE BUILDING.

ELECTRICITY - 9 TO 10 WATTS PER S.F. OLD BUILDINGS GENERALLY HAVE 6 WATTS PER S.F.

THE CONSTRUCTION OF FLOORS SHOULD ACCOMMODATE A NINE FOOT CEILING TO CEILING HEIGHT.

STAIRS - YOU CAN'T HAVE MORE THAN 12 FEET OF RISE IN A SINGLE RUN OF STAIRS ACCORDING TO THE CODE. TO INCREASE TO MORE THAN 12 FEET, YOU HAVE TO HAVE AN INTERCEDING LANDING AREA. THIS CAUSES THE PERCENTAGE OF LEASABLE AREA TO BE REDUCED AS MORE OF THE BUILDING IS USED IN PROVIDING THE STAIRCASE.

DESIGN ISSUES

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* THE RELATIONSHIP TO THE SURROUNDING BUILDINGS* CHOICE OF MATERIALS AND FINISHES* LOCATION IN BLOCK

MIDBLOCKCORNER BLOCKFULL BLOCK FRONT

* CORE LOCATION FOR BUILDING

CORE LOCATION DIAGRAMS

│ │ ┌─────┬1─┬──────┐ ┌──┬──────┤ ┌──────┐│ ├──┤ │ │X │ │ │ ┌─┐ ││ └2─┘ │ ├──┘ │ │ │X│ ││ │ │ │ │ └─┘ ││ │ │ │ │ │└───────────────┘ ────┴─────────┘ ────┴──────┴──BLOCKFRONT W/ 2 CORNERBLOCK MIDBLOCKLOCATIONS FOR CORE

METHODS OF INCREASING FAR

ARCADE - PEDESTRIAN SPACE: 3 S.F. PER S.F. OF ARCADE.

MUST HAVE DEPTH OF TEN FEET, SPACING BETWEEN COLUMNS OF 20 FEET MINIMUM AND A MINIMUM AREA IN TOTAL.

SUBWAY ENTRANCE IMPROVEMENT - 2 S.F. FOR EACH S.F. OF IMPROVEMENT AREA.

GETTING A BONUS TAKES 8 TO 12 MONTHS. THE LACK OF ASSURANCE ON THE RESULTS MAKES MOST DEVELOPERS PLAN AS-OF-RIGHT BUILDINGS.

NO CLASS NEXT WEEK, PRESIDENT'S DAY.

END OF CLASS THREE

CLASS FOUR2/25/91

C. KONDYLIS, MANHATTAN RESIDENTIAL TOWER ARCHITECT, GUEST SPEAKER

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ELEMENTS OF FINE DESIGN IN RESIDENTIAL TOWERS:

* DAYLIGHT IN THE CORRIDORS (BONUSABLE)* ELEVATOR VISIBLE FROM THE STREET* CORNER LIVING ROOM* WRAP-AROUND GLASS, WIDE VIEW, LOTS OF LIGHT* SMALL NUMBER OF APARTMENTS PER FLOOR* TUB IN POWDER ROOM AND IN FLEXIBILITY FOR ALLOWING THE DEN TO BE

CONVERTED TO AN ADDITIONAL BEDROOM* FEELING OF SPACIOUSNESS BY PLACING DINING AREA ADJACENT TO LIVING AREA* ADEQUATE CLOSET SPACE* MAXIMIZE SELLABLE AREA (85% MINIMUM), WITH AS LITTLE SPACE AS PRACTICAL

TAKEN UP BY ELEVATORS, STAIRCASES, HALLWAYS, ETC.* VIEWS, HIGH FLOOR = PREMIUMS* "JUNIOR 4" - ALLOWS CONVERSION OF DINING ROOM TO A NURSERY* BAY WINDOW* BALCONY

AMENITIES (CONTINUED)

* LANDSCAPING AND PLAZA* SWIMMING AND HEALTH CLUB* FOYERS, GALLERIES, DENS (PREWAR FEATURES)* TERRACES / DECKS / VERANDAS

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

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BUILDING) FOR A MARKETING PRESENTATION ON "450 LEXINGTON".

END OF CLASS FOUR

CLASS FIVE 3/4/91

MARKETING PRESENTATION FOR "450 LEXINGTON" TAKES UP THE FIRST 3/4 OF THE CLASS. THE REST OF THE CLASS WAS A SHORT LECTURE ON LEASING.

ISSUES:

WHO IS SIGNING THE LEASE? YOU USED TO ASK ALL PARTNERS OF THE ASSIGNEE COMPANY TO SIGN THE LEASE. NOT SO ANYMORE. YOU DID THIS TO GUARANTEE THAT IF THE COMPANY FOLDS, YOU HAVE RECOURSE TO THE COMPANY'S PARTNERS.

LEASE OBLIGATIONS FROM THE LESSEE'S PARTNERS ARE RESISTED BY THE LESSEE COMPANY. YOU WILL USUALLY GET THE PARTNERSHIP ENTITY TO SIGN ON, BUT NO LONGER THE PARTNERS IN THE PARTNERSHIP ENTITY.

ON THE COUNTERSIDE IS WHEN THE TENANT SAYS "THE PAST LANDLORDS HAVE GONE BROKE. IF I SIGN THE LEASE, HOW WILL I KNOW THE TENANT WORK WILL BE COMPLETED AND THE BUILDING DELIVERED?

OMNIBUS AGREEMENT - THE BANKS "BLESS" THE TAKING OF MONEY FROM CASH FLOW TO PAY COMMISSIONS, ETC.

TENANTS FEAR THAT TAXES WILL INCREASE ON A SALE, AND BE PASSED ON TO THEM. HOW ARE THEY PROTECTED FROM THIS. NOW ANSWER. LANDLORDS DO NOT WANT TO SIGN AWAY THE RIGHT TO SELL THEIR PROPERTY.

SUBTENANTING - IN COMPETITIVE MARKETS, TENANTS WILL SEEK CAPS TO INCREASES. THOSE WHO DO THIS WILL MANY TIMES GO BROKE. FUEL COSTS, INSURANCE, TAXES, ETC. ARE MAJOR CONCERNS.

REPLACEMENT VS. REPAIR - ARE REPLACEMENT COSTS PASSED THROUGH TO TENANTS AS REPAIRS? OVER ONE YEAR, MAYBE? OVER SEVERAL YEARS? NOT AT ALL?

ISSUE: BELOW MARKET RENT SPACE SUBTENANTED, WHO GETS THE PROFIT; THE TENANT? THE LANDLORD? USUALLY SPLIT FIFTY/FIFTY.

PARTIAL SUBLET FOR A SPECIFIC PERIOD OF TIME IS A NEGOTIABLE ISSUE, IF:1. THERE IS NO PROFIT.2. IF RENTER IS NOT IN DEFAULT

SUBLETTING TO OTHER TENANTS IN THE BUILDING IS USUALLY A "NO NO" WITH LANDLORDS. THEY DO NOT WANT TO COMPETE WITH OTHERS IN THEIR OWN BUILDING FOR SPACE. THE RULE IS "THERE ARE NEVER LONG TERM LEASES", EVEN WHEN THEY ARE, IN ACTUALITY, LONG TERM LEASES. THE REASON FOR THIS RULE IS THAT SHRINKING, BANKRUPTCY, MOVING, ETC. IS ALWAYS POSSIBLE, AND EVEN

337

PROBABLE OVER A LONG PERIOD OF TIME. GENERALLY, A TENANT WILL NEVER LIVE OUT A LONG TERM LEASE. WHEN THEY GET OUT OF THE LEASE, YOU HAVE ANOTHER CHANCE TO MAKE MONEY ON THE LEASE IF THE MARKET IS GOOD. IN A BAD MARKET, YOU DO NOT HAVE TO ALLOW THE SUBTENANCY.

YOU DO NOT WANT THE TENANT TO ADVERTISE HIS SPACE IN THE PRESS FOR A SUBLEASE.

FIRE - IF AN ENGINEER SAYS THE SPACE CAN BE REBUILT IN 9 MONTHS, THE TENANT CAN'T BACK OUT OF THE LEASE. WHAT HAPPENS IF THE ENGINEER SAYS THAT THE RECONSTRUCTION WILL LESS THAN NINE MONTHS, BUT IT TAKES MORE TIME? THE LEASE WILL SAY THAT THE TENANT CAN'T BACK OUT ONCE CONSTRUCTION BEGINS.

A NEW BUILDING IS EASY TO DESIGN EFFICIENTLY. WITH 350 MILLION SQUARE FEET IN NEW YORK, CON ED HAS LITTLE ABILITY TO GIVE OLDER BUILDINGS THE POWER THEY NEED FOR TODAY'S POWER HUNGRY TENANTS. NEW BUILDINGS ARE GENERALLY GRANTED ALL THE POWER THEY NEED.

COLUMN SPACING SO CLOSE TOGETHER IN MANY BUILDINGS THAT YOU CAN'T LAY OUT THE SPACES EFFECTIVELY.

END OF CLASS FIVECLASS SIX3/18/91

GUEST SPEAKER: NEIL LYNCH34 YEARS WITH PORT AUTHORITY OF N.Y. & N.J.PRESENTLY WITH SILVERSTEIN PROPERTIES

TOPIC: 7 WORLD TRADE CENTER

SILVERSTEIN DOES NOT OWN IT, HE ONLY BOUGHT AIR RIGHTS.39 YEAR LEASE WITH 3 20 YEAR OPTIONS AT MARKET RATE = 99 YEARS

"A LESSON THAT PUBLIC AND PRIVATE SECTORS CAN WORK TOGETHER FOR A BETTER PRODUCT THAN EITHER CAN ACHIEVE INDIVIDUALLY".

END OF CLASS SIX

NOTE: CLASSES SIX THROUGH THE END OF THE COURSE WERE FIELD VISITS, WITH MOST OF THE LECTURE CONTENT BEING ANECDOTAL. THEREFORE, NOTES WERE NOT TAKEN FOR THE REMAINDER OF THE COURSE.

ADVICE FOR SITE SELECTION OF PROJECTS.

* USE AVERAGE EFFECTIVE RENT OF 38 DOLLARS PER SQUARE FOOT.

* TRY TO BUY AVENUE PROPERTIES RATHER THAN STREET PROPERTIES.

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ATTEMPT TO GET PROPERTIES IN THE PARK AVENUE AREA, OR NORTH OF 48TH STREET IN THE VICINITY OF MADISON AND FIFTH AVENUES.

* FIGURE TAX AT ROUGHLY 20 PERCENT OF GROSS RENT

* FIGURE OPERATING EXPENSES AT ROUGHLY $7.50 PER S.F.

* FIGURE AN ESCALATION OF ROUGHLY 2 PERCENT PER YEAR.

* USE A CAP RATE OF NO LOWER THAN 8 TO 8.5 PERCENT.

* PROJECT INCOMES OUT NO FURTHER THAN 7 TO 10 YEARS.

* ESTIMATE CONSTRUCTION COSTS (SOFT AND HARD) AT ROUGHLY 320 DOLLARS PER SQUARE FOOT, INCLUDING 45 DOLLARS FOR TENANT IMPROVEMENTS.

END OF DEGREE

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TABLE OF CONTENTS

"ABLE" 248"RATIONALLY SUPPORT"............................................92"READY, WILLING, AND ABLE".....................................247"SUBSTANTIALLY ADVANCE".........................................92"TIME IS OF THE ESSENCE".......................................254"WILLING" 24714TH AMENDMENT..................................................8980/20 FINANCING................................................206ABANDONMENT 16ABSORPTION 25, 26, 75, 76, 79, 148-150, 159, 173, 208, 212, 216,

309, 311ABSTRACTS 185ACCELERATED COST REDUCTION SYSTEM...........................45, 60ACCELERATED DEPRECIATION...............................60, 68, 213ACCELERATED PAYMENT............................................123ACCELERATION186, 216, 271ACCOUNTING FOR CONSTRUCTION.....................................38ACCOUNTING FOR HOLDING COSTS....................................34ACCOUNTING FOR LEASING TRANSACTIONS.............................19ACCOUNTING ISSUES OF SYNDICATION................................43ACCOUNTS RECEIVABLE....................6, 9, 23, 27, 221, 224, 313ACCRUAL 6, 7, 11, 13-15, 18, 24, 25, 34, 39, 42ACCRUAL ACCOUNTING......................................15, 18, 39ACCRUAL METHOD...........................7, 11, 13, 14, 24, 25, 34ACCRUED EXPENSES................................................28ACCUMULATED DEPRECIATION ACCOUNT................................17ACQUIRING PROPERTY THROUGH THE SALE LEASEBACK...................47ACQUISITION COST................................................26ACRS 45, 60ACTIVE INCOME...................................................59ACTUAL ASSESSMENT..............................................292ACTUARIAL MORTGAGE SECURITY....................................235ADDITIONAL RENT.............................37, 276, 277, 280, 281ADJUSTABLE RATE MORTGAGE..................................207, 273ADJUSTED BASIS.44, 52, 54, 55, 59, 62, 67, 128, 132, 213, 216, 231,

252, 273ADJUSTMENT (APPORTIONMENT) SCHEDULE............................259ADMINISTRATIVE APPEAL..........................................104ADMINISTRATIVE CODE TITLE 20...................................295ADMINISTRATIVE DETERMINATION...................................100ADVANCES TO OFFICERS............................................27ADVERSE POSSESSION.............................................244AESTHETIC UNIQUENESS...........................................102AFFIDAVIT OF ENTITLEMENT.......................................248AFFIRMATIVE COVENANTS..........................................186AFFIRMATIVE INSURANCE OF CONTIGUITY............................242AGGLOMERATION..................................................142AGRIBUSINESS163, 165

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ALLOCATION OF CAPITALIZED COSTS TO COMPONENTS OF A PROJECT......35ALLOCATION OF INCOME TO PARTNERS.................................2ALLOCATION OF RENT UP COSTS.....................................36ALLOCATION OF THE COST OF AMENITIES.............................35ALLOWANCE ACCOUNT...............................................16ALTERATIONS 18, 276, 282ALTERNATIVE MINIMUM TAX.................................45, 60, 68AMENITIES 35, 79, 80, 97, 301, 314, 335ANACONDA CLAUSE................................................274ANNUAL PERCENTAGE RATE.........................................273APPLICATION 25, 62, 64, 73, 93-96, 101, 105, 144, 175, 204, 206,

265, 330APPORTIONMENT.........................................25, 251, 259APPRAISALS 13, 32, 68, 69, 111, 194, 196, 205, 228APPROACH 36, 77, 112, 180, 228ARBITRARY AND CAPRICIOUS........................................99ARCHITECTURAL UNIQUENESS.......................................102ARTICLE 23 A295ARTICLE 23A GBL................................................296ARTICLE 31B 257ARTICLE 78 99ARTICLE 7B 294, 295ARTICLE 7c 243, 295ARTICLE 9B 295, 297, 298AS-OF-RIGHT 90, 95, 96, 99, 334ASSEMBLY PLANT........................................146-149, 178ASSET ACCOUNT...................................................25ASSET MANAGEMENT.......................303, 305-311, 323, 325, 328ASSET MANAGEMENT PLAN..........................................309ASSET MANAGER.................304-306, 308-310, 313, 315, 326, 327ASSET SECURITIZATION...........................................233ASSETS 2-6, 16-19, 24, 27, 38, 40, 43, 45, 56-58, 130, 174,

187, 193, 202, 221, 225, 226, 233, 241, 253, 258, 265, 275, 303-305,

309, 318ASSIGNMENT 48, 70, 90, 106, 228, 230, 241, 267, 268, 270, 280,

285-288ASSIGNMENT & SUBLETTING PROVISION..............................285ASSIGNMENT LEASE...............................................241ASSIGNMENTS 48, 105, 288, 294AT RISK RULES...........................................58, 59, 62AT-RISK RULES...................................................62ATLANTA 147, 150, 151, 168, 176, 215ATTORNEY-IN-FACT..........................................259, 260ATTORNMENT PROVISION...........................................279AUTHORITY 118, 275, 276, 310, 325, 337AUTHORIZED STOCK................................................30AVERAGE EQUITY RETURN..........................................126AXIAL GROWTH81BALANCE SHEET.....................20, 24, 28, 40, 45, 206, 311-313

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BALLOON LOAN228BALLOON PAYMENT...........................................230, 274BAND OF INVESTMENT METHOD......................................197BANKABLE COMMITMENT............................................231BANKRUPTCY 73, 153, 187, 325, 336BARGAIN AND SALE DEED WITHOUT COVENANTS...................252, 263BASE INDUSTRY...................................................81BASE RENT 208, 209, 276, 281, 284BASE YEAR 281-285, 290, 292BASIC FINANCIAL FEASIBILITY MODEL...............................82BASIS 2, 3, 5, 6, 8, 12, 15, 17, 19-21, 35, 36, 44-46,

52-56, 58, 59, 62-64, 66, 67, 70, 71, 73, 106, 109, 117, 128, 136, 157,

168, 183, 191, 194, 195, 197, 207, 211, 213, 218, 219, 222, 224, 230, 231, 236, 241, 276, 281, 286, 298, 301

BASIS POINTS109, 128, 207, 219, 222, 224, 231, 236BASIS RULES 55, 58BEGINNING OF CONSTRUCTION.......................................39BENEFICIARY 118, 176, 263BENEFITS OF SYNDICATION4, 19, 21, 31, 32, 41, 65, 97, 105, 153, 176,

177, 180, 226, 282, 283, 293BINDER 247, 261BLACK ACRES 244BLACK BOOK 300BLUE BOOK 66BLUMBERG FORM..................................................275BOARD OF MANAGERS1, 89, 90, 93-95, 98-100, 104, 271, 275, 278, 283, 297BOOK VALUE OF ASSET.............................................44BOOT 72BOSTON 140, 143, 144, 160, 169, 170, 178, 179BOUND 11, 245, 261BREAK BULK WAREHOUSING.........................................163BREAK EVEN ANALYSIS........................................29, 227BRIDGE FINANCING...............................................225BROKER 15, 33, 79, 240, 246-248, 254, 260, 272, 282BUILDING COSTS 4, 8, 15, 17, 18, 22, 24-27, 37, 38, 43, 45, 60, 67,

69, 79, 80, 86-92, 96, 97-101, 103-105, 108, 110-113, 124, 128-130, 133, 146, 159-161, 167, 170, 178, 180, 183, 184,

195, 197, 211-213, 216, 220, 224, 227, 229, 232, 235, 238-242, 248, 251, 261, 268-270, 277, 279, 281-285, 289,

290, 292, 293, 294-296, 298, 301, 302, 306, 310, 313, 325, 328-333, 335, 336

BULK VARIANCE...................................................99BULK WAREHOUSING...............................................163BULLET LOAN 228BUNDLE OF RIGHTS..........................................111, 244BUSINESS FAILURE RISK1, 2, 5-7, 10, 27, 31, 32, 38, 39, 52, 56, 65,

69, 72, 81, 87, 101, 130, 142, 143, 145, 149, 154, 163, 165-167, 169, 170, 181, 207, 213, 216, 221, 232, 236, 252, 253, 258, 276, 289, 290, 295, 298, 303, 305-307, 309, 311,

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312, 315-317, 320, 323, 328-330BUY AND SELL AGREEMENT.........................................227BUYER'S INITIAL INVESTMENT...................................11-13C CORPORATION.............................3, 5, 51, 57, 58, 63, 69CAM 82, 130CAMPBELL CASE...............................................53, 63CAP 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 CONTRACT218CAP RATE 30, 32, 44, 107, 114, 116, 118, 129, 137, 163, 195,

198, 204, 214, 218, 232, 337

CAP RATES 130, 198CAPITAL 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, 318CAPITAL ASSET PRICING MODEL....................................318CAPITAL BUDGET.......................................194, 308, 317CAPITAL GAINS OR LOSS...........................................55CAPITAL IN EXCESS OF PAR....................................28, 30CAPITAL LEASE..........................6, 18-20, 22-25, 43, 46, 47CAPITAL MARKET.................................................233CAPITAL STOCK...................................................28CAPITALIZATION CRITERIA..................................19, 21-23CAPITALIZATION METHOD..................................30, 44, 115CAPITALIZATION OF INTEREST......................................26CAPITALIZATION RATE...............................26, 30, 114, 203CAPITALIZE 22, 25, 34, 41, 43, 65, 108, 118CAPITALIZED STATEMENT............................................9CAPITALIZING24CAPTURE RATE75, 76, 85CARRYING LOAN-UP COSTS......2, 3, 16, 20-22, 34, 49, 196, 212, 306CASH 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................................................194CASH FLOW MORTGAGE.............................................237CASH METHOD 7, 42CASH ON CASH ..................................................200CASUALTY INSURANCE...................................289, 290, 295CEILING PRICE..................................................326CENSUS TRACT85CENTRAL MANUFACTURING DISTRICT FORMULA (CMD)...................113CENTRALIZATION........................................80, 141, 142

343

CERCLA 269CERTIFICATE BY THE ATTORNEY-IN-FACT............................259CERTIFICATE OF ENDORSEMENT.....................................289CERTIFICATE OF REDUCTION.......................................250CERTIFIED FINANCIAL STATEMENT................................8, 44CERTIFIED PUBLIC ACCOUNTANTS.....................................7CERTIFIED REASONABLE COST (CRC)................................293CERTIFIED RENT ROLE............................................269CERTIFIED SURVEY...............................................242CHAIN OF PRODUCTION ...........................................146CHANGE IN MATERIAL CONDITIONS CLAUSE...........................231CHANGES IN USE..................................................16CHAPTER 11 68, 187CHAPTER 13 30, 187, 324, 326CHAPTER 7 32, 34, 187CHARITABLE CONTRIBUTIONS........................................68CHATTEL MORTGAGE...............................................268CHICAGO 130, 131, 159, 161, 175, 177CLA 114CLAIMANT 255CLEAN STATEMENT..................................................8CLEARING THE TITLE........................................240, 254CLOSED CONTROL CYCLE...........................................308CLOSELY HELD C CORPORATION......................................69CLOSING 11, 117, 196, 206, 235, 240, 246, 247, 249, 251-260,

262, 265, 267-270, 273

CMA 1CMD 113COLLAR CONTRACT................................................218COLLATERAL ASSIGNMENT OF RENTS.................................268COLLATERAL SECURITY............................................228COLLATERALIZED MORTGAGE OBLIGATION.............................234COLLECTION LOSS ALLOWANCE......................................114COMBINED N.Y.S. TRANSFER TAX AFFIDAVIT...2, 111, 140, 259, 289, 297COMMERCIAL PROPERTY...................................60, 207, 248COMMISSIONS 6, 33, 59, 135, 136, 198, 204, 214, 238, 246, 247,

281, 282, 336

COMMITMENT 11, 13, 14, 32, 37, 46, 206, 227, 230-232, 240, 265-267,

271, 272COMMITMENT FEES.................................................37COMMON AREA MAINTENANCE....................................82, 130COMMON AREA MAINTENANCE (CAM)..................................130COMMON CHARGES.................................................297COMMON ELEMENTS......................................245, 297, 298COMMON INTEREST...........................................297, 302COMMON LAW 49, 242, 277COMMON LAW SYSTEM...............................................49

344

COMMON STOCK1, 28, 30, 129COMMUNITY ANALYSIS..............................................76COMMUNITY BOARD...............................93, 95, 97, 100, 101COMMUNITY BOARDS.......................................93, 94, 101COMMUNITY CENTERS...............................................83COMPARABLES 228, 291COMPILATION REPORT...........................................8, 44COMPLETED CONTRACT METHOD........................7, 12, 38, 39, 42COMPLETION BONDS................................................38COMPLETION RISK................................................232COMPLIANCE ACCOUNTING........................................1, 42COMPOUNDING 106, 110, 126-128, 189-191COMPUTATION OF DEPRECIATION.....................................44COMPUTATION OF GAIN OR LOSS.....................................55CONCENTRATION...................................141, 142, 155, 156CONCENTRATION FACTOR......................................155, 156CONCENTRIC GROWTH...............................................81CONCEPT OF CAPITALIZATION.......................................25CONDEMNATION73, 91, 109, 111, 186CONDITIONAL NEGATIVE DECLARATION............................96, 98CONDOMINIUMS AND COOPERATIVES..................................295CONDUIT 5, 23, 43, 51, 326CONFERENCE COMMITTEE EXPLANATIONS...............................66CONSOLIDATION AGREEMENT...................................267, 271CONSTANT 20, 21, 115-117, 121, 128, 192, 193, 199, 200, 228,

229, 331CONSTRUCTION BUDGET............................................195CONSTRUCTION LOAN....37, 47, 107, 125, 183, 186, 196, 227, 228, 232CONSTRUCTION MORTGAGE.......................................40, 46CONSUMER'S PRICE INDEX ESCALATION (CPI)........................283CONSUMMATION OF SALE........................................11, 12CONTINUING INVESTMENT CRITERIA..............................13, 14CONTINUING INVESTMENT CRITERIA FOR ACCRUAL METHOD...............13CONTRACT PERIOD7, 11, 12, 38, 39, 42, 71, 129, 136, 185-187, 211, 218,

223, 232, 240, 242, 244-251, 253-258, 267, 269, 271, 272, 276, 280, 287, 294, 312, 313, 331

CONTROL ACCOUNTING...........................................1, 42CONVERTIBLE MORTGAGE...........................................239COOPERATIVE AND CONDOMINIUM ABUSE PREVENTION ACT...............302CORE & SHELL195CORPORATE JOINT VENTURES.........................................3CORPORATE STANDARD OF LIVING...................................318CORPORATION 3, 5, 6, 24, 25, 28, 30, 38, 41, 43, 51-54, 56-58,

63-67, 69, 92, 100, 188, 211, 236, 241, 249, 252, 253, 268, 271,

275, 314-316, 323, 324, 326CORPORATION NEGATIVES............................................5CORPORATION POSITIVES............................................5CORRECTION DEED...........................................245, 269COST APPROACH..................................................112

345

COST BASIS 3, 15, 17, 195COST METHOD 1, 2, 217COST OF OCCUPANCY RATIO........................................131COST PLUS 157, 331COST RECOVERY METHOD............................................14COURT TESTIMONY................................................129COVENANT OF SEIZIN...................................252, 263, 270COVERAGE 82, 116, 128, 188, 228, 289CPA 1, 7, 8, 61CRC 293CREATOR 118CREDIT ANALYSIS...........................................224, 226CREDIT ENHANCEMENT.............................................236CREDIT LINE MORTGAGE CERTIFICATE...............................257CUMULATIVE PREFERENTIAL RETURN.................................223CUOMO TAX 253, 257CURRENT ASSETS..............................................27, 38CURRENT COUPON.................................................203CURRENT LIABILITIES.............................................27DALLAS 130, 160, 161, 168-170, 174-176DATE OF SALE68DCF 116, 124, 329DEALERS IN REAL ESTATE..........................................56DEBENTURE 203DEBT CAPACITY..................................................228DEBT CAPITAL6, 41DEBT COVERAGE RATIO.............................................82DEBT SERVICE COVERAGE.....................................116, 228DEBT SERVICE RATIO.............................................192DECISION TREE OF PROFIT RECOGNITION.11, 28, 89, 94, 95, 97-99, 102,

104, 162, 183, 226, 279, 317, 318, 322, 325DECLINING BALANCE............................................9, 44DEDUCTION OF INTEREST...........................................63DEDUCTIONS 47, 54, 60, 63-66, 301DEED 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..............................................270DEFEASANCE 187DEFERMENT OR AMORTIZEMENT OF PROFIT ON A SALE LEASEBACK.........46DEFERRED DEVELOPMENT AND MORTGAGE COST.........21, 27, 36, 46, 127DEFICIENCY JUDGMENT............................................325DEFICIT ACCUMULATED DURING DEVELOPMENT STAGE....................28DELIVERY OF POSSESSION OF THE SPACE101, 197, 255, 263, 279, 285, 317DEMISED PREMISES.....................................277, 286, 290DEMISING WALL..................................................277DEPOSIT ON PROPERTY.............................................38DEPRECIATION3, 8-10, 17, 18, 25, 29, 31, 32, 43-45, 47, 49, 54-56,

346

58, 60, 65, 67, 68, 73, 111-113, 192, 193, 213, 214, 216, 238,

282, 315, 322DETERMINING PROPER METHOD OF PROFIT RECOGNITION.................11DETERMINING SALES VALUE.........................................13DEVELOPMENT PLANNING CYCLE.....................................308DEVELOPMENT STAGE COMPANY.......................................27DEVELOPMENT TEAM...............................................210DIRECT ACQUISITION COSTS........................................33DIRECT CAPITALIZATION METHOD...................................115DIRECT FINANCING LEASE..................................20, 21, 23DIRECT METERING................................................288DISAGGREGATION..................................................77DISCOUNT RATE13, 20, 109, 124, 127, 131, 133, 135, 137, 138, 188, 197,

203-207, 216, 217, 218, 222DISCOUNTED CASH FLOW.........................32, 53, 116, 117, 204DISCOUNTED CASH FLOW (DCF).....................................116DISCOUNTING 129, 133, 189DISCRETIONARY RELIEF........................................95, 96DISINTERMEDIATION.........................................224, 225DISPLAY 146, 147, 192DISPOSITION 15, 35, 53, 55, 56, 60, 62, 63, 66, 71, 303, 307DISTRIBUTION43, 80, 146-150, 180, 187, 313, 315DISTRIBUTION PLANTS............................................150DIVERSIFICATION..................................168-170, 219, 312DIVISION OF LABOR..................10, 69, 140, 141, 243, 303, 326DOCTRINE OF INDEPENDENT COVENANTS..............................277DONATIONS VALUE.................................................53DORMANT MORTGAGE...............................................267DOUBLE DECLINING BALANCE.....................................9, 44DOUBLE NET LEASE...............................................290DOWNZONING 90DRAGNET CLAUSE.................................................274DUCK TEST 19DUE ON SALE CLAUSE...................................230, 266, 272E.P.S. 27EARNINGS PER SHARE.............2, 11, 15, 27, 28, 30, 58, 221, 303EASEMENT 92, 185, 244ECONOMIC RECOVERY TAX ACT3, 8, 9, 16, 18, 19, 22, 25, 44, 45, 60, 76,

77, 79, 81, 86, 90, 92, 96, 139, 140, 142-144, 146, 156-158, 163, 168-170, 173, 174, 176, 180, 184, 230, 232, 322

EFFECTIVE GROSS INCOME (EGI)...................................114EGI 114ELECTION TO CHANGE TO AN S CORPORATION.................51, 70, 187ELECTRICITY PROVISION..........................................288ELLWOOD FORMULA...........................................115, 116ELLWOOD FORMULA (FAN GRAPH)....................................116EMERGENCY REPAIR LIEN..........................................251EMERGENCY TENANT PROTECTION ACT (ETPA).........................294ENCUMBRANCE 248, 254, 258

347

ENGINEER'S REPORT..............................................302ENTITY 3-6, 10, 26, 27, 29, 43, 53, 57, 64, 65, 68-70, 106,

185, 258, 274, 276, 335

ENVIRONMENTAL ASSESSMENT FORM..................................100ENVIRONMENTAL REVIEW..................................98, 100, 101ENVIRONMENTAL REVIEW PROCESS....................................98EQUAL PERCENTAGE METHOD........................................297EQUITY 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, 325EQUITY DIVIDEND................................................115EQUITY INTEREST..................................................3EQUITY KICKER LOAN.............................................237EQUITY METHOD.................................................1, 2EQUITY METHOD OF ACCOUNTING......................................1EQUITY OF REDEMPTION...........................................187ERTA 45ESCALATIONS 18, 194, 276, 281, 282, 285, 287ESCROW PROVISION RIDER.........................................255ESTIMATED LIFE SPAN..............................................8ESTIMATED USEFUL LIFE....................................8, 10, 21ESTOPPEL CERTIFICATE............................250, 269, 270, 288ETHICS IN REAL ESTATE..........................................118EUCLID V. AMBLER........................................89, 95, 97EVALUATION 31, 33, 156, 197, 203, 204, 216, 217, 226, 237EVICTION PLAN....................................185, 241, 299-301EXCEPTIONS 3, 8, 9, 31, 44, 51, 73, 90, 247, 252, 258, 260, 302EXCHANGE OF LIKE-KIND PROPERTY 3, 11, 53, 64, 72, 73, 115, 126, 141,

160, 211, 219EXCLUSIVE AGENCY LISTING.......................................247EXCLUSIVE RIGHT TO SELL........................................247EXCULPATION CLAUSE...................................265, 271, 272EXCULPATORY 37, 241, 265, 271, 272, 275EXCULPATORY PROVISIONS.........................................241EXISTING STRUCTURE12, 14, 24, 33, 48, 75, 76, 79, 96, 97, 163, 183,

241, 249, 250, 278, 306, 311, 319EXPENSE STOPS.............................................194, 208EXPENSED AS INCURRED ................................24, 27, 33-35EXPENSES 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, 200-203, 205, 206, 208, 209, 213, 214, 215, 218, 227-229,

235, 251, 252, 277, 278, 281, 282, 290, 312, 337EXPENSING 24, 45EXTERNALITIES...................................................77FABRICATION 81, 146-148FACILITIES MANAGEMENT.....................................305, 319FAIR MARKET VALUE...............................15, 20, 35, 36, 53

348

FAIR MARKET VALUE METHOD........................................36FAIR PRACTICES ACT.............................................204FAIR VALUE 19, 22, 35, 46, 297FAIR VALUE METHOD..............................................297FANNIE MAE 205, 233FAR 89, 92, 104, 108, 112, 130, 151, 172, 194, 202, 266,

270, 330, 334, 335FASB 1, 3, 11, 13, 15, 17, 18, 20, 26, 30, 32, 34, 38, 42,

46, 47, 51FASB 66 3, 11, 13, 20, 32FEDERAL FUNDS RATE.............................................222FEDERAL HOME LOAN BANK BOND INDEX..............................207FEDERAL RESERVE REGULATION Q...................................205FEDERAL RESERVE REGULATION THREE...............................206FEE SIMPLE INTEREST ...........................................111FEE-SIMPLE 111, 185FEE-SIMPLE ABSOLUTE ESTATE.....................................185FHLMC 205FIFTH AMENDMENT.................................................91FINANCIAL ACCOUNTING ........................1, 17, 18, 24, 29, 30FINANCIAL ANALYSIS..............................183, 184, 204, 226FINANCIAL INTERMEDIARIES..................................221, 222FINANCIAL PROJECTIONS..........................................194FINANCIAL REPORTING.........................................11, 44FINANCIAL STATEMENT...................7, 8, 10, 16, 24, 38, 40, 44FINANCIAL STATEMENTS...............1, 2, 7, 8, 10, 29, 30, 44, 186FINANCING EXPENDITURES..........................................24FINANCING REVENUE...............................................24FINANCING STATEMENT.......................................266, 268FINANCING THE DEVELOPMENT.......................................36FIRPTA 69, 259FIVE P'S OF CREDIT ANALYSIS....................................226FIXED 25, 29, 38, 123, 200-202, 205, 211, 212, 218, 219,

224, 225, 230, 231, 251, 273, 303, 317, 331

FIXED AND VARIABLE EXPENSES.....................................29FIXED ASSET 25, 38FIXED CORPORATE FACILITY.......................................303FIXED OPERATING EXPENSES.......................................200FIXED PRICE CONTRACT...........................................331FIXED RATE MORTGAGE.......................................230, 273FIXTURES 195, 244, 254, 268, 270FLEX SPACE 148, 207FLOATING RATE MORTGAGE.....................177, 219, 225, 230, 231FLOOD CERTIFICATION............................................269FNMA 205FORCE MAJEURE..................................................232FORECLOSURE 72, 73, 125, 187, 195, 237, 248, 265, 266, 269-271,

274, 296FOREIGN INVESTORS REAL PROPERTY TAX ACT........................259

349

FOREIGN INVESTORS REPORTING TAX ACT (FIRPTA)....................69FORGIVENESS OF DEBT.............................................73FORMING A CONDO OR COOP........................................299FORMULA FOR PROFIT RECOGNITION (P.O.C. METHOD)..................39FORMULA FOR TAXABLE GAIN OR LOSS................................55FORMULA FOR TAXABLE INCOME.....................................213FOUR UNITIES264FRANK RUSSEL REPORT............................................129FREDDIE MAC 205, 233FREE & CLEAR EVALUATION........................................197FREE AND CLEAR RETURN...........................185, 199, 250, 263FREEHOLD ESTATE................................................185FULL ACCRUAL METHOD.........................................11, 25FULL CONSOLIDATION METHOD........................................2FUNCTIONAL CORPORATE STRUCTURE.................................305FUNCTIONAL ORGANIZATION........................................315FUNCTIONS OF MANAGEMENT........................................305FUNDING COMPANY................................................273FUTURE VALUE122, 124-126, 128, 183, 188, 189FUTURE WORTH118, 127, 128GAAP 1, 2, 7, 8, 17, 27, 34, 42-44GAME THEORY 324GENERAL AND ADMINISTRATIVE COSTS...............................197GENERAL LIABILITY AND PROPERTY DAMAGE INSURANCE PROVISION......289GENERAL PARTNER..................................4, 5, 15, 64, 274GENERAL PARTNERSHIP..............................................4GENERAL PARTNERSHIP NEGATIVES....................................4GENERAL PARTNERSHIP POSITIVES....................................4GENERAL RULE2, 3, 14, 34, 68, 250GENERAL WARRANTEE DEED.........................................185GIM 114GINNIE MAE 233, 234GOING CONCERN...................................................27GOLDMAN-DELORENZO..............................................125GOOD AND MARKETABLE TITLE.......................113, 185, 252, 263GRANTEE 185, 263GRANTOR 100, 185, 263GREEN BOOK 93GROSS INCOME MULTIPLIER (GIM)..................................114GROSS LEASE 82GROSS PROFIT RATIO..............................................71GROSS VOLUME OF EXPECTANCY......................................85GROUND LEASE111, 275, 279GUARANTEED INVESTMENT CONTRACT (GIC)...........................223GUARANTEED MAXIMUM PRICE.......................................331HARD COSTS 195, 196HARDSHIP 99, 104HAWAIIAN TECHNIQUE.............................................110HAZARD INSURANCE / CONDEMNATION CLAUSE.........................186HEDGE 212, 225

350

HI-CUBE SPACE..................................................163HIGHEST AND BEST USE....................76, 78, 111, 129, 168, 176HOTEL/MOTEL 207HOW TO OWN PROPERTY..............................................3HOWARD GELBTUCH...........................................113, 129HUGH KELLY'S THEORY............................................110IMPROVEMENT COST...............................................213IMPUTED INTEREST...............................23, 31, 43, 71, 203INCLUSIONARY HOUSING BONUS......................................97INCOME 2-11, 15, 20-22, 24, 26, 27, 29-32, 37-39, 42-44, 46,

48, 49, 51, 53, 54, 57, 58-60, 62-66, 68, 69, 71, 73, 75, 78, 79,

82, 84, 85, 87, 97, 106, 107, 112, 114, 115, 118, 121, 123, 132, 134, 136, 142, 143, 151, 157, 159, 162, 163, 165, 166,

177, 189, 191-194, 196, 198, 200-209, 212-215, 217, 219, 220, 227, 233, 237, 270, 272, 284, 291, 301, 308, 309, 311,

312, 315, 322, 329INCOME AND EXPENSE BUDGET......................................308INCOME APPROACH................................................112INCOME RATIO205INCOME STATEMENT...........................9, 24, 39, 42, 220, 312INDICATED VALUE...........................................108, 112INDIRECT ACQUISITION COSTS.....................21, 33, 34, 37, 196INDUSTRIAL 37, 82, 86, 105, 113, 130, 131, 142, 144-148, 150,

157, 168, 170, 172, 173, 178, 181, 207, 298, 306, 323

INDUSTRIAL / COMMERCIAL INCENTIVE PROGRAM......................105INDUSTRIAL PROPERTY...................................144-146, 150INITIAL CAP RATE...............................................218INITIAL CAPITAL CONTRIBUTIONS....................................3INITIAL INVESTMENT...........................................11-13INITIAL INVESTMENT CRITERIA.....................................12INSOLVENCY 73INSOLVENT 73, 74, 325INSPECTION REPORTS.............................................259INSTALLMENT METHOD................................7, 14, 42, 70-72INSTALLMENT SALE................................................70INSTITUTIONAL .................................................208INSURANCE PROVISION............................................289INTEREST COSTS CAPITALIZATION1-5, 7, 13-16, 20, 23, 25-27, 29-32, 34,

37, 40, 41, 43, 46, 47, 55-59, 63, 64, 66, 68, 70-72, 80, 92, 104, 106, 109-111, 115, 116, 118-125, 127, 128, 143,

153, 157, 167, 174, 179, 181, 186-192, 195, 196, 199, 200, 203, 205, 206, 207, 212, 213, 216, 218, 219, 222-225, 227, 228, 230, 231, 234, 235, 236-238, 241, 244, 248, 250, 252, 255, 263-268, 270, 271, 273-275, 278, 279, 288, 297, 301,

302, 311, 318, 329INTERIM MULTIPLE DWELLING ACT (IMD)............................293INTERNAL OVERHEAD5, 33, 34, 42, 48, 49, 60, 78, 99, 115-117, 127, 134,

138, 141, 157, 158, 174, 183, 190, 191, 206, 223, 226, 326

351

INTERPLEADER255INVENTORY 7, 15, 25-27, 42, 56, 68, 71, 72, 76, 79, 150, 154,

160, 162, 163, 221

INVESTING EXPENDITURES..........................................24INVESTING REVENUE...............................................24INVESTMENT ANALYSIS......................75, 77, 78, 184, 204, 207INVESTMENT ENTITIES.............................................53INVESTMENT VALUE..........................................195, 217ISSUED AND OUTSTANDING..........................................30J-51 104, 105, 293, 294, 301J-51 PROGRAM105JOB GROWTH 143, 148-150, 163JOINT CONTROL....................................................2JOINT TENANT264JOINT VENTURE................................1-3, 41, 43, 223, 329JUDICIAL REVIEW.................................................49K-1 4, 5, 58, 63-65KANSAS CITY 164, 165, 177L.B.O. 324LABOR THEORY OF VALUE..........................................141LAND AND ACQUISITION COSTS9, 15, 22, 33, 45, 82, 107, 108, 111, 185,

195, 216, 243, 282, 303LAND ASSETS 19LANDAUER MOMENTUM INDEX..............................143, 154, 181LANDMARK 89, 91, 92, 96, 97, 101, 102, 202, 331LANDMARKS COMMISSION..........................91, 92, 97, 101, 102LATE FEES CLAUSE...............................................272LEAD AGENCY 100LEASE 6, 10, 18-26, 32, 36, 43, 46, 47, 75, 80, 82, 92, 108,

109, 111, 124, 128, 129, 130, 132, 133, 135, 136, 185, 194, 196, 208, 214, 217, 220, 225, 227, 229, 236, 237, 241, 248, 262, 269,

275-281, 284-291, 294-297, 302, 314, 329, 335-337LEASE ANALYSIS.......................................132, 135, 136LEASE BY LEASE ANALYSIS........................................136LEASE PROVISIONS INVOLVING REAL ESTATE..........................22LEASE-UP RESERVE..........................................196, 225LEASED FEE 111, 125LEASEHOLD 18, 29, 108, 109, 111, 125, 135, 185, 220, 244, 274,

275, 278, 279, 297, 298

LEASEHOLD ESTATE..........................................109, 185LEASEHOLD INTEREST........................................244, 274LEASING 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.................................................246LESSOR ACCOUNTING.......................................20, 22, 23LETTER OF COMMITMENT......................................240, 267

352

LEVERAGE 124, 126, 127, 199-201LEVERAGED BUY OUT..............................................324LEVERAGED LEASE..............................................19-21

LIABILITY 2-6, 19, 24, 27, 28, 37, 40, 45, 47, 52-54, 188, 265, 267,

269, 272, 275, 286, 289, 291LIBOR 218, 219, 222, 225, 228, 230, 231LIBOR OPTION222LICENSE 185, 244, 275, 276LIEN 12, 14, 38, 186, 232, 233, 237, 248, 250, 251, 253,

254, 264, 266, 273, 274, 275, 279, 284

LIEN PRIORITY..................................................266LIEN THEORY STATE..............................................264LIEN THEORY STATES........................................264, 275LIEN WAIVERS186LIKE-KIND EXCHANGE..............................................73LIMITED COMMON ELEMENTS........................................298LIMITED PARTNER...............................................4, 5LIMITED PARTNERSHIP NEGATIVES....................................4LIMITED PARTNERSHIP POSITIVES ...................................4LIMITING CONDITIONS OF AN APPRAISAL.........79, 113, 179, 219, 286LINE OF BUSINESS..........................................305, 323LIQUID 27, 233, 325LIQUIDATION VALUE..............................................217LOAN APPLICATIONS..............................................265LOAN BALANCE125-128LOAN RATIO 116, 128LOAN REVIEW PACKAGE............................................228LOAN TO VALUE (LTV)............................................266LOAN TO VALUE RATIO.............................225, 227, 228, 235LOCATION QUOTIENT72, 79, 81, 86-88, 92, 93, 105, 109, 111, 129, 139,

141, 144, 147-150, 156, 157, 158, 271, 327, 333, 334LOCUS SIGILLI..................................................271LOFT LAW 293, 295LOLLIPOP CONDOMINIUMS..........................................298LONDON INTERBANK OFFERING RATE ................................222LONG RANGE STRATEGY............................................304LONG TERM ASSET.................................................40LONG TERM LIABILITY.............................................28LONG TERM LOSS OR GAIN..........................................57LOOK BACK INTERNAL RATE OF RETURN..............................223LOS ANGELES 81, 160, 170, 172, 173, 179LOSS FACTOR 276LOT LINE WINDOWS...............................................335LUMP SUM CONTRACT.........................................285, 331MACROECONOMICS.................................................157MACRS 45, 60

353

MADSEN'S RULE.............................................117, 135MAJOR CAPITAL IMPROVEMENT INCREASE.............................103MANAGEMENT AGREEMENT......................................312, 313MANAGEMENT CONTROL...............................305, 306, 308-310MANAGEMENT DISCUSSION OF OPERATIONS............................313MANAGERIAL ACCOUNTING.............................2, 1, 29, 31, 42MANHATTAN 97, 110, 113, 152, 153, 155, 156, 216, 293, 334MANSION TAX 257, 259MARKET ANALYSIS................................75, 76, 78, 86, 215MARKET APPROACH................................................112MARKET VALUE RIDER.............................................258MARKETABILITY ..............................................76, 78MARKETABILITY ANALYSIS..........................................76MASTER LIMITED PARTNERSHIP.....................................226MATCHING PRINCIPLE................................7, 8, 25, 31, 57MATERIAL 10, 25, 231, 240, 253, 268, 272, 274MATRIX 159, 162, 308, 311, 316MAXIMUM BASE RENTAL FORM (MBR).................................103MAXIMUM LOAN FORMULA......................................188, 193McGAFFNEY PROCESS...............................................85McKINNEY'S, CONSOLIDATED LAW EDITION...........................243MEANS COST ESTIMATES...........................................195MEDIUM OF EXCHANGE.............................................141MEDIUM STREET..................................................332MEMORANDUM OF THE CONTRACT.....................................253MERCHANT BUILDER ..............................................197METE 245MIAMI 153, 154MICRO ANALYSIS.................................................156MICROECONOMICS.................................................157MINI-PERM FINANCING............................................225MINNEAPOLIS 131, 159, 160, 164MINOR PORTION...................................................46MODEL 82, 162, 194, 317, 318MODIFIED ACCELERATED COST REDUCTION SYSTEM..................45, 60MONETARY DEFAULT...........................143, 178, 270, 274, 286MONTREAL 152MORTGAGE PAYMENT14, 15, 23, 27, 32, 37, 40, 46, 47, 52, 53, 59, 62,

66, 67, 71, 73, 103, 111, 124, 125, 127, 128, 134, 143, 174, 186-188, 192-194, 198-200, 202, 203, 205, 207,

219-223, 227, 230, 232, 234-239, 244, 245, 248-250, 252, 256, 257, 258, 264-275, 278-280, 290, 296, 297, 301, 302

MORTGAGES PAYABLE, CURRENT......................................28MULTIPLE LISTING SERVICES.47, 80, 81, 161, 175, 237, 242, 247, 259,

291, 293, 297, 333MULTIPLIER EFFECT..............................................222NARROW STREET.............................................332, 333NATURALISTIC FALLACY...........................................180NEGATIVE COVENANTS51, 96, 98-100, 133, 186, 191, 199, 200, 268, 273, 321NEIGHBORHOOD CENTERS............................................83

354

NET INCOME 2, 6, 37, 58, 59, 106, 107, 165, 192, 193, 213, 214, 315, 322

NET LEASE 82, 236, 290NET OPERATING INCOME29, 30, 44, 82, 114, 118, 123, 134, 157, 200, 201,

215NET OPERATING INCOME (NOI).............................30, 82, 114NET REALIZABLE VALUE.............................15-17, 25, 33, 34NET REALIZABLE VALUE ALLOWANCE..................................25NET SALES PROCEEDS.............................................213NO-PAR VALUE STOCK..............................................28NOI 30, 31, 44, 82, 108, 111, 113-118, 122, 128, 129, 133,

134, 137, 198, 199, 201, 204, 209, 214, 218, 220, 228, 237, 238

NOLLAN V. STATE OF CALIFORNIA COASTAL COMMISSION................92NON RECOURSE DEBT...............................................62NON-CLAIMEE 255NON-DISCRETIONARY APPROVAL......................................95NON-DISTURBANCE AGREEMENT......................................279NON-EVICTION PLAN.....................................241, 299-301NON-POSSESSORY RIGHTS..........................................185NON-RECOURSE DEBT...................................58, 59, 66, 73NON-RECOURSE LOAN..........................................66, 265NON-TAXABLE TRANSACTIONS........................................70NOTARIZATION271NOTE 4, 12, 15, 27, 40, 71, 86, 106, 127, 149, 155, 161,

187, 208, 232, 236, 249, 253, 265-268, 272, 275, 337

NOTES RECEIVABLE............................................27, 40NOVATION 241, 286OAR 116, 117, 121, 124, 128OCCUPATIONAL RATIO........................................148, 149OCCUPATIONAL RESIDUAL..........................................155OCR 114OFFERING PLAN...........111, 126, 222, 223, 241, 274, 297, 299-302OMNIBUS AGREEMENT..............................................336OOPS AFFIDAVIT.................................................269OPEN LISTING247OPEN MARKET OPERATION..........................................222OPERATING EXPENDITURES..........................................24OPERATING EXPENSES9, 29, 31, 82, 192, 198, 200, 202, 205, 208, 209,

215, 218, 228, 229, 281, 282, 290, 337OPERATING LEASE..................................18-23, 36, 43, 46OPERATING LEVERAGE.............................................200OPERATING PLAN.......................................304, 309, 317OPERATING REVENUE...............................................24OPERATIONS PLANNING AND BUDGETING CYCLE........................308OPPORTUNITY COST...............................................188ORDINARY GAINS OR LOSS...................................24, 55-58ORIGINAL BASIS....................21-23, 25, 55, 67, 213, 257, 277OTHER ASSETS27, 38, 45, 221, 265, 275

355

OVERAGE 157, 208OVERALL CAPITALIZATION RATE (OCR)..............................114OVERALL RATE (OAR).............................................116OVERFLOW EFFECT................................................142OVERHEAD 29, 33, 34, 140, 197, 282, 315OWNERSHIP 3, 4, 6, 11, 12, 14, 19, 22, 43, 55, 64, 72, 111, 185,

188, 244, 264, 297, 298, 307

PACIFIC RIM 171-173PAID IN SURPLUS.............................................28, 30PAR VALUE 28, 30PARTICIPATIONS............................................225, 237PARTNERSHIP 3-6, 10, 15, 41-43, 51-54, 58, 64-66, 69, 72, 188,

226, 253, 274, 335

PARTNERSHIP VS. S CORPORATION...................................52PASS THROUGH SECURITIES...................................233, 234PASSIVE INCOME.......................................3, 42, 59, 60PASSIVE LOSS AND AT RISK RULES..................................62PASSIVE LOSS RULES...........................55, 59, 62-64, 69, 73PASSIVE LOSSES...........................3, 41, 42, 58, 60, 64, 68PASSIVE PARTNER..................................................1PAYMENT BONDS...................................................38PAYMENT TO INCOME RATIO........................................205PAYOFF LETTER.............................................240, 256PENN CENTRAL V. NEW YORK CITY...................................92PENNSYLVANIA COAL V. MAHAN......................................92PENNY FOR PENNY................................................283PERCENTAGE OF COMPLETION METHOD..................7, 15, 38, 39, 42PERCENTAGE RENT...........................................194, 208PERFORMING NON-PERFORMING LOAN.................................311PERIOD OF INTEREST CAPITALIZATION...............................26PERMANENT LOAN.....................................13, 14, 37, 230PERSONAL PROPERTY4, 5, 31, 37, 38, 52, 55, 56, 58, 65, 68, 70, 72, 80,

132, 188, 213, 216, 254, 265, 270PHASE IN RULES..................................................60PHASE ONE REPORT...............................................272PITTSBURGH 144, 145, 178PLANNING COMMISSION.33, 60, 89, 90, 93-95, 100, 101, 159, 184, 213,

232, 303, 308, 309, 317PLATE GLASS INSURANCE..........................................289PLEDGE AGREEMENT ..............................................268POCKET PART 261POINT IN TIME..........................51, 113, 167, 180, 272, 299POINT SYSTEM206POINTS 29, 37, 41, 97, 109, 117, 128, 137, 140, 159, 170,

206, 207, 213, 219, 222, 224, 231, 236, 242, 265, 283, 284, 311

POPULATION CENTROID............................................146PORTER'S WAGE INCREASES.........................194, 276, 281, 283

356

POSITIVE LEVERAGE...............21, 64, 96, 98, 178, 199, 200, 321POSSESSORY RIGHTS..............................................185POWER OF ATTORNEY.....................................49, 259, 260PRE-CERTIFICATION...............................................93PREACQUISITION..............................................32, 33PREFERRED RETURN...............................................223PREMIUM 65, 107, 109, 159, 197, 205, 252, 258, 272, 290PREPAYMENT 186, 187, 225, 230, 234, 256, 266, 271-273, 281PREPAYMENT CLAUSE..............................................266PREPAYMENT PENALTY CLAUSE......................................272PRESENT VALUE13, 19-22, 32, 40, 44, 46, 78, 109, 122, 124, 128, 129,

133, 134, 183, 187, 188-190, 193, 194, 198, 204, 225, 236, 237, 239, 326

PRESENT WORTH..............................118, 124, 127, 188, 217PRIMARY DATA77, 184PRIME OPTION222PRINCIPAL AND INTEREST CLAUSE..................................186PRISONER'S DILEMMA.............................................324PRIVATE ACTIVITY BONDS..........................................68PRIVATE PLACEMENT.........................................241, 274PRIVATE PLACEMENT MEMORANDUM...................................274PRIVITY 286, 287, 290PRO FORMA 191-193, 210, 329PRO-RATED 17, 278PROFIT CENTER..................................................323PROFIT RECOGNITION..................................11, 14, 20, 39PROJECT LOAN AGREEMENT.........................................232PROPENSITY TO SPEND.............................................85PROPORTIONATE CONSOLIDATION METHOD...............................2PROPOSITION U..................................................172PROPRIETARY LEASE..............................................296PROPRIETORSHIP...................................................3PROPRIETORSHIP NEGATIVES.........................................3PROPRIETORSHIP POSITIVES.........................................3PROSPECTUS 194, 241, 274, 299PUBLICLY TRADED PARTNERSHIP (PTP)..........................64, 202PURCHASE MONEY MORTGAGE13, 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 229QUALIFICATIONS FOR INSOLVENCY...................................73QUALIFIED NON-RECOURSE DEBT.................................66, 73QUALIFYING ASSET................................................26QUIET TITLE ACTION.............................................244QUIT-CLAIM DEED................................................241QUITCLAIM DEED.......................................185, 252, 263QUIZ 121, 133, 147R&D BALANCE 148RANKING SYSTEM.................................................162RATIFY 287

357

REAL ESTATE ESCALATIONS....................................18, 281REAL ESTATE INVESTMENT TRUSTS........................202, 221, 226REAL ESTATE SETTLEMENT AND PROCEDURES ACT (RESPA)..............206REAL ESTATE TAX ESCALATION.....................................284REAL ESTATE TAXATION ..........................................291REAL PROPERTY.17, 56, 62, 65, 66, 71, 105, 139, 183, 186, 216, 242,

248, 253, 258, 259, 261, 274, 291, 292, 295-298REALIZED GAIN .................................48, 70-73, 174, 257REASSESSMENT292, 304REBNY FORM 275RECAPTURE 286RECOGNITION OF GAIN OR LOSS.....................................67RECOGNIZED GAIN.............................................70, 71RECONCILIATION APPROACH........................................112RECORD OF SALE..................................................34RECORDING CHARGE...............................................268RECORDING OF ASSETS AND LIABILITIES WITH A CAPITAL LEASE........19RECREATIONAL207RED HERRING 300REDEMPTION 187REDLINING 206REDUCED PROFIT METHOD...........................................14REFINANCING 123, 195, 208, 228, 237, 307

REGIONAL ECONOMICS36, 76, 83, 130, 139, 152, 160, 168, 174, 175, 205, 207, 305

REGULAR TAX 68REGULATORY ACCOUNTING...........................................10REHABILITATION.........................................36, 69, 146REILLY'S LAW84REIT 202, 203RELATIVE FAIR MARKET VALUE35, 36, 117, 129, 132, 144, 148, 150, 170,

178, 198, 236, 244, 278, 301, 317RENT CONTROL103, 183, 294RENT CONTROLLED APARTMENT......................................103RENT GUIDELINES BOARD.....................................103, 294RENT INCLUSION.......................................276, 288, 289RENT REGULATION...........................................102, 241RENT STABILIZATION....................................91, 103, 294RENT STABILIZATION ASSOCIATION.................................103RENT STABILIZED APARTMENT......................................103RENT UP DEFICIT................................................196RENTABLE SQUARE FOOTAGE....................208, 220, 276, 281, 320RENTAL INSURANCE...............................................289REPORTS 3, 20, 93, 131, 139, 143, 184, 243, 259, 261, 262REPRESENTATION........................101, 149, 248, 272, 279, 288REQUIREMENT OF LAW CLAUSE......................................278RESEARCH AND DEVELOPMENT32, 48, 61, 84, 131, 140, 143, 145-149, 156,

171, 184, 185, 207, 260-262, 305, 315RESERVE FUND302

358

RESERVE FUND LAW...............................................302RESIDENTIAL PROPERTY..................................60, 207, 273RESIDUAL VALUE8, 9, 20, 21, 108, 139, 155, 156, 166, 174, 195, 198,

214, 223, 224, 237RESPA 206, 259, 269RESTORATION PROVISION..........................................277RETAIL LEASE208RETAIL MATRIX.............................................159, 162RETAINAGE 232RETAINED EARNINGS.......................................21, 28, 30RETURN ON EQUITY (ROE).........................................193REVENUE 3, 5-7, 10, 11, 18, 24, 29, 31, 33, 35, 36, 39, 42,

48, 49, 51, 60, 153, 163, 200, 201, 206, 217, 315

REVENUE BILLS...................................................49REVENUE RECOGNITION ............................................10REVENUE RULING..................................................51REVERSE MORTGAGE...............................................274REVERSION 78, 117, 118, 134, 137, 194, 217REVIEW REPORT ...............................................8, 44ROLL-UP 226ROLLOVER MORTGAGE.........................................202, 274RULAND AND DUMBPHORS CASE.................................287, 294RULE 2, 3, 7, 11, 14, 34, 49, 55, 68, 71, 75, 92, 110, 117,

124, 126, 137, 194, 196, 250, 285, 292, 298, 333, 336

RULE OF 70'S110, 126RULE OF 72'S110, 124, 126S CORPORATION..................3, 51, 52, 54, 58, 63, 65, 188, 268SAFETY BUFFER.............................................195, 289SALARY 6, 10, 56, 57, 59, 65SALE LEASEBACK..................................25, 37, 46, 47, 61SALE OF A PERSONAL RESIDENCE....................................70SALE/LEASEBACK...............................................30-32SALES TYPE LEASE........................................20, 23, 25SALES VALUE 12, 13, 35, 36SALES-TYPE LEASE................................................20SALVAGE VALUE................................................8, 44SATISFACTION267, 268SCHEDULE B 57, 258, 259, 283, 301, 302SEAWALL V. N.Y.C................................................92SECOND MORTGAGE..............................14, 46, 125, 237, 273SECONDARY DATA.............................................77, 184SECONDARY MORTGAGE MARKET.................................205, 265SECTION 103172, 73SECTION 103373SECTION 108 73SECTION 123156, 64SECTION 1231 ASSET..............................................56SECTION 179 17, 65

359

SECTION 216 62, 301SECTION 216 OF THE I.R.C.......................................301SECTION 223 F..................................................295SECTION 227 291, 295SECTION 255 267, 280SECTION 263 62SECTION 267 58SECTION 275 280SECTION 339-i..................................................297SECTION 339-r..................................................297SECTION 339n299SECTION 339p299SECTION 339u299SECTION 339v299SECTION 351 53SECTION 352 eee................................................295SECTION 352 eeee...............................................295SECTION 38 65SECTION 39E - COMMON ELEMENTS..................................298SECTION 421a97, 105, 292, 293SECTION 421a OF THE REAL PROPERTY TAX LAW......................292SECTION 421b105SECTION 465 66SECTION 469 63SECTION 5-321 OF THE GENERAL OBLIGATIONS STATUTE...............291SECTION 72-21...................................................98SECTION 721 53SECTION 73-00...................................................99SECTOR GROWTH..............................................81, 148

SECURITY AGREEMENT....10, 15, 18, 29, 161, 179, 186, 202, 227, 228, 233-236, 244, 265, 266, 268, 288, 312

SEGMENTATION77, 159SELLING BROKER.................................................246SERIAL ZERO COUPON BOND........................................203SERVICES 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, 323SETBACK EXPOSURE LINE..........................................333SETUP 197, 198SHARE ALLOCATION...............................................301SHAREHOLDERS' EQUITY............................................28SHELL CORPORATION..............................................275SHEPHERDING 243, 261SHORT INTEREST.................................................270SIC CODES 79, 82, 164SIGMOID CURVE..............................................166-169SINKING FUND120, 121, 128SKY EXPOSURE CURVE........................................332, 333

360

SMART BUILDING.................................................159SMOKE DETECTOR AFFIDAVIT.......................................259SOCIAL UNIQUENESS..............................................102SOFT COSTS 196, 329SPECIAL DISTRICTS..........................................96, 329SPECIAL PERMIT..............................................90, 99SPECIAL RISK301SPECIAL WARRANTEE DEED.........................................185SPECIFIC 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, 167SPREADS 197, 224SQUARE FOOTAGE...35, 75, 132, 276, 281-283, 286, 297, 319, 333, 335SQUARE FOOTAGE METHOD......................................35, 297STAND-BY COMMITMENT............................................227STANDARD OCCUPATION CLASSIFICATION.42, 82, 149, 195, 225, 228, 230,

235, 266, 278, 291, 318, 320STATE SALE TAX.................................................249STATE TRANSFER TAX........................................253, 257STATED VALUE30STATEMENT OF CASH FLOWS.........................................24STATUTE 49, 185, 186, 240, 242, 261, 268, 291, 292, 296-298STATUTE OF FRAUDS....................................185, 186, 240STATUTORY LAW...................................242, 243, 248, 295STRAIGHT LINE METHOD8, 18, 20, 21, 44, 46, 52, 68, 109, 170, 281, 313STRATEGIC BUSINESS UNIT........................................305STRATEGIC MANAGEMENT......................................306, 308STRATEGIC PLANNING CYCLE.......................................308SUBLEASES AND TERMINATIONS..................................22, 47SUBLET CAPITAL LEASE............................................25SUBLET LEASE241SUBMETERING 288SUBORDINATION CLAUSE......................................273, 279SUBORDINATION PROVISION........................................278SUBSTANTIALLY ALL.......................................19, 46, 47SUBSTANTIALLY COMPLETE PROJECT (DEFINITION).....................36SUM OF THE YEARS DIGITS..........................................9SUMMARY PROCEEDINGS............................................276SUPER REGIONAL CENTERS..........................................83SURETY BOND PROVIDERS..........................................236SURVEY INSPECTION.........................................245, 256SURVEY UPDATE..................................................242SURVIVAL AGREEMENT.............................................259SWAP UNWIND 230SYD 9, 44SYNDICATION 15, 40, 41, 43, 274TAKE-OUT LOAN..........................46, 183, 227, 228, 231, 232TAKEOUT COMMITMENT..............................................37TAKINGS 92, 94

361

TAX ACCOUNTING......................................10, 17, 18, 45TAX ADVANTAGE OF A SALE LEASEBACK...............................47TAX CASE EVOLUTION..............................................50TAX COURT 50TAX EXEMPT INTEREST.............................................68TAX REFORM ACT OF 1986.........................................213TAXABLE EVENT..........................................55, 74, 237TAXABLE GAIN53, 55, 213, 214TAXATION AND DEPRECIATION40, 45, 48, 49, 61, 63, 105, 111, 216, 291TAXES & INSURANCE CLAUSE.......................................186TAXPAYERS 68TENANCY BY THE ENTIRETY........................................264TENANT IMPROVEMENTS36, 118, 135, 136, 195, 198, 209, 214, 277, 306, 337TENANT IN COMMON TRANSFERENCE..................................264TENANT INTEREST................................................275TENANTS BY THE ENTIRETIES......................................264TENANTS WITH THE RIGHT OF SURVIVORSHIP.........................264TERMINAL CAP RATE.........................................198, 218THE "C" CORPORATION..............................................5THE "S" CORPORATION..........................................5, 64THE CONCEPTUAL BASIS FOR LEASING ACCOUNTING.....................19THE CONSTRUCTION PROCESS........................................46THE DEFINITION OF A CAPITAL LEASE...............................43THEORY OF SECTORAL SUCCESSION..................................142THEORY OF URBANIZATION.........................................140THIRD RULE 333THREE TO FIVE YEAR PLAN...................................210, 304TIME HORIZON194, 238TIME VALUE OF MONEY....................................31, 40, 188TITLE INSURANCE..............................24, 38, 185, 206, 240TITLE SEARCH33, 38, 185, 254, 256, 258TITLE THEORY STATES............................................264TORRENS STATE..................................................258TRADE AREA 84, 85, 159TRADE AREA ANALYSIS............................................159TRANCHE 237TRANSFER TAX CLAUSE12, 19, 22, 53, 55, 56, 67, 91, 92, 96, 160, 173,

250, 252, 253, 256, 257, 259, 330, 331TRANSITIONAL ASSESSMENT........................................292TRI-PARTY BUY AND SELL AGREEMENT...............................227TRIPLE NET LEASE..........................................236, 290TRUST 32, 64, 85, 118, 145, 183, 187, 215, 264TRUSTEE 118, 187TRUTH IN LENDING ACT......................................206, 269UCC1 266, 268ULURP 93-96, 101UNADJUSTED BASIS................................................54UNDERWRITING202, 226UNDIVIDED INTERESTS..............................................3UNIFORM CAPITALIZATION RULES....................................25

362

UNIFORM COMMERCIAL CODE FORM ONE...............................266UNIFORM CONDOMINIUM ACT........................................298UNIFORM LAND USE REVIEW PROCEDURE (ULURP).......................93UNINSURABLE 251, 270UNIT OF MEASUREMENT............................................106UNITS 35, 103, 105, 191, 200, 216, 217, 219, 241, 272, 274,

295-297, 300, 301, 305

UNITY OF PROPERTY..............................................264UNMARKETABLE251UPZONING 90URBAN ANALYSIS..................................................76URBAN SPECIALIZATION...........................................141USE VARIANCE99USEABLE SQUARE FOOTAGE.........................................276VA 114, 205VACANCY ALLOWANCE (VA).........................................114VACANCY RATES....................................76, 145, 148, 159VALID CONTRACT FOR REAL ESTATE.................................249VALUATION 15, 104, 184, 215-217, 291VALUATION ISSUES...........................................15, 184VARIABLE 29, 37, 180, 195, 200-202, 205, 225, 230, 273VERTICAL INTEGRATION COMPANY...................................323VESTING RIGHTS..................................................96VIFGAGE 125VIOLATIONS CLAUSE.........................................251, 256VULTURE FUNDS..................................................130W-2 3, 5WAIVER OF SUBROGATION..........................................290WAREHOUSING 86, 87, 146-148, 150, 163, 173, 178WARRANT 136, 241, 272, 283WARRANTEE DEED.......................................185, 241, 263WASHINGTON D.C............................................130, 179WEIGHTED AVERAGE MATURITY (WAM)............................26, 234WIDE STREET 332, 333WINDOWS GUARD NOTICE ..........................................259WITNESS 271WORK LETTER 195WORKER'S COMPENSATION INSURANCE................................289WRAPAROUND MORTGAGE...................................14, 268, 302YIELD MAINTENANCE FORMULA.......................186, 225, 266, 272ZERO COUPON 203ZERO-SUM GAME.............................................159, 324ZONING LOT 96, 330, 331ZONING RESOLUTIONS.............................................100