MCM MRE flashcards
MCM MRE · Build recall with a focused review session.
32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Net operating income
- Effective gross income minus operating expenses. It excludes debt service, income taxes, depreciation, and capital expenditures, and is the basis for cap rate valuation.
- Capitalization rate
- A ratio of a property's net operating income to its price or value. It converts one year of income into an indication of value and reflects risk and growth expectations.
- Debt service coverage ratio
- Net operating income divided by annual debt service. Lenders use it to measure the property's ability to cover loan payments, often requiring 1.20 to 1.35.
- Cash-on-cash return
- Before-tax cash flow divided by the equity invested. It measures the annual return on the investor's out-of-pocket equity rather than on total property value.
- Gross income multiplier
- Sale price divided by gross income. It is a quick comparative valuation metric derived from market sales and applied to the subject's gross income.
- Internal rate of return
- The discount rate that makes the net present value of all project cash flows equal zero. A project is acceptable when IRR exceeds the required return.
- Positive leverage
- Occurs when the property's cap rate exceeds the mortgage constant, so borrowed funds magnify the return on equity. Negative leverage occurs when the reverse holds.
- Break-even occupancy
- The occupancy level at which operating expenses plus debt service exactly equal income, producing zero cash flow. Computed as total obligations divided by potential gross income.
- Sales comparison approach
- A valuation method that adjusts prices of comparable sales for differences from the subject. Adjust the comparable toward the subject, never the subject toward the comparable.
- Cost approach
- Value equals replacement or reproduction cost new, minus accrued depreciation, plus land value. It is most reliable for new or special-purpose properties with few comparables.
- Accrued depreciation sources
- The three causes of value loss in the cost approach are physical deterioration, functional obsolescence, and external or economic obsolescence.
- Highest and best use
- The use that is legally permissible, physically possible, financially feasible, and maximally productive. It must be tested before applying any valuation approach.
- Effective age
- An estimate of a building's age based on its condition and modernization rather than its chronological age. It is used to measure depreciation in the cost approach.
- Direct capitalization
- A valuation method that divides a single year's net operating income by a market-derived cap rate to indicate value. It assumes stable income.
- Statute of frauds
- A legal rule requiring real estate contracts to be in writing and signed by the party to be charged. It prevents enforcement of oral land agreements.
- General warranty deed
- A deed containing the broadest seller covenants, including seisin, quiet enjoyment, freedom from encumbrances, further assurances, and warranty forever.
- Quitclaim deed
- A deed that conveys only whatever interest the grantor may hold, with no warranties of title. The grantee bears the risk of title defects.
- Easement appurtenant
- An easement that benefits a dominant parcel and burdens a servient parcel. It runs with the land and transfers automatically with the dominant property.
- Adverse possession
- A doctrine granting title to someone whose use of another's land is actual, open, notorious, exclusive, hostile, and continuous for the statutory period.
- Race-notice recording statute
- A recording law protecting a subsequent purchaser who records first and takes without notice of a prior unrecorded interest. It combines race and notice protections.
- Specific performance
- A court remedy compelling a breaching party to complete the contract. It is common in real estate because land is treated as unique and money damages are inadequate.
- Mechanic's lien
- A statutory lien securing payment for labor or materials improving real property. It generally attaches from the start of work rather than the filing date.
- Guaranteed maximum price
- A construction contract where the contractor's price cannot exceed a stated cap. Cost savings above the cap are sometimes shared between owner and contractor.
- Residual land value
- Completed project value minus construction and soft costs minus the developer's required profit. It indicates the maximum price supportable for the land.
- Critical path method
- A scheduling technique identifying the longest sequence of dependent tasks. Delay on the critical path directly delays project completion.
- Loan-to-cost ratio
- The construction loan amount divided by total development cost. Unlike loan-to-value, it uses total project cost rather than stabilized appraised value.
- Derived demand
- Demand for real estate space arising from demand for the goods and services produced in that space. It links property demand to the broader economy.
- Market rent versus contract rent
- Market rent is what a property would command in the open market; contract rent is the amount actually stated in the existing lease.
- Natural vacancy rate
- The structural vacancy level normal for a market given frictions and tenant turnover. Vacancy above it signals oversupply and tends to depress rents.
- Real estate cycle phases
- Markets move through recovery, expansion, hyper-supply, and recession. New construction typically peaks near the hyper-supply phase before oversupply emerges.
- Expense stop
- A lease provision setting a base amount of operating expenses; the tenant pays its pro rata share of expenses above that stop.
- CAM reconciliation
- An annual comparison of estimated versus actual common area maintenance charges, resulting in a tenant charge for shortfalls or a credit for overpayments.