End of Chapter 6 Questions and Answers

End of Chapter 6 Questions and Answers - End of Chapter 6...

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End of Chapter 6 Questions and Answers 1. What were the primary reasons for over building in the late 1980’s and early 1990’s? Answer: Over supply in the mid 1980’s to mid 1990’s was induced by the additional factors of tax law changes and deregulation of savings associations. Accelerated depreciation rules permitted until the Tax Reform Act of 1986 increased the early year returns possible from tax-sheltered income. At the same time, deregulated federally chartered savings and loan associations were permitted for the first time in 1982 to lend on commercial real estate. Many inexperienced lenders provided such loans far too aggressively. The 1980’s excess supply was supply induced. By contrast the early 2000’s excess supply was demand induced as demand cut back with the economic slow down. 2. Define Class A, B and C space. Name three buildings that fit these definitions in your local market. Answer: Class A: Excellent location and accessibility; high quality structure and management; new or competitive with new buildings; minimum size 100,000 square feet if located in the Central Business District, CBD, or 50,000 square feet if suburban; rent rates in the upper 33% of the total office market range. Separate foyers and security. Example: The AON Building in Chicago Class B: Good location and access; structure showing very little obsolescence or deterioration; minimum size 50,000 square feet (CBD) or 25,000 square feet (Suburban); rent rates in the upper 60% of the market sector's range. Example: The Empire State Building in New York because of age may be a Class B but as it is so famous it may be considered an A. Class B Buildings tend to be buildings that were once built as Class A but are slightly dated. Class C: Buildings generally more than 15 years old, with rent rates in the lower 40% of the market sector's range, in less desirable areas with little if any common space. Example: Almost any older (20 years or more) suburban office building will be Class C. 3. What is the efficiency ratio? Why is it important? Answer: The percentage of total useable space to the total gross space in the building is called the efficiency ratio. It will be a percentage under 100%. The greater the efficiency ratio the higher will be the rental return per square foot of total building. 4. What are the leading causes of real estate cycles? Answer: The nature of real estate like: lumpy supply, long lead times, huge investment and long leases are the basic characteristics that cause cycles because of following reasons:
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Competition and need to anticipate the market. If a developer waited until there was sufficient demand for a new project they would never be able to beat out the competition who will take on the risk of anticipating future demand. There is no choice but to start a project before the demand has fully materialized. The time factor in developing a large durable asset like real estate.
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This note was uploaded on 02/07/2012 for the course FIN 4380 taught by Professor Staff during the Spring '08 term at Texas State.

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End of Chapter 6 Questions and Answers - End of Chapter 6...

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