BusFin 3400 Exam #2 Review

(17) The estimated market value of investible commercial real estate is

$14.3 Trillion

(14) FV of a lump sum

(1+r)^n

(14) FV of an annuity

(1+r)^n-1/r

(13) Real Estate transactions do not close at the same time the contract for sale is signed by both parties because

- An inspection must be made -Financing must be arranged -Title must be checked -Documents must be prepared

(12) What do real estate brokers do?

- Bring buyers and sellers together in real estate needs, physically, and emotionally. -Collect commission from sellers for a successful transaction which is usually a percentage of the gross sale price.

(13) In the allocation of expenses at closing, the buyer usually pays for?

- Recording of the deed -Recording of the mortgage -Taxes on any new mortgage -Earnest money deposit

Important trade-offs involved in the choice between direct ownership versus investing through an intermediary include?

-Access to talented managers/sponsors -Decision making control -Risk sharing

(12) List Real Estate brokers duties/responsibilities

-Confidentiality: Never betray confidential information -Obedience: Following instructions of the principal fully -Accounting: Keeping principal informed about financial aspects of assignment -Loyalty: Never subordinating the best interest of principal -Disclosure: Being completely open and honest -Skill and Care: Representing principal as agents

(16) Which of the following statements about the debt yield ratio (DYR) are correct? -A lower DYR indicates lower risk for the lender. -DYR indicates the lender's cash-on-cash return on its invested capital if it took over ownership of the property -DYR is less frequently used when the loan is included in a mortgage-backed security -DYR is not affected by the interest rate or the amortization period of a loan.

-DYR indicates the lender's cash-on-cash return on its invested capital if it took over ownership of the property -DYR is not affected by the interest rate or the amortization period of a loan.

(12) Name and Describe the three types of listing contracts

-Exclusive right of sale: Agent is compensated if anyone finds a buyer -Exclusive agency: Agent is compensated if any agent finds a buyer, but not if the owner does -Open Listing: Agent is compensated only by finding a buyer

(13) What are the steps buyers need to make before closing a real estate transaction

-Have property surveyed for encroachments -Review zoning and private restrictions -Examine closing costs -Order lenders title insurance -Have property inspected

(12) Name the general requirements for licensure

-Minimum age (18) -High School Diploma -Good reputation -Prelicensing education requirement -Pass state licensing exam -Minimum experience for a broker's license

Individuals and institutions that invest directly in private commercial real estate:

-Often do so in order to have more control over investment decisions -Typically form a LP or LLC to limit liability -Often wealthy individuals or families

(13) What are the steps sellers need to make before closing a real estate transaction

-Order owner's title policy -Order termite inspection -Order discontinuation of hazard insurance and utilities

(16) Which of the following options are the main repayment mechanisms used in long-term commercial mortgages? -Partially amortizing loans -Fully amortizing loans -Interest-only loans -Early payment mortgages

-Partially amortizing loans -Fully amortizing loans -Interest-only loans

(13) What are the steps lenders need to make before closing a real estate transaction

-Prepare or obtain a special warranty deed -Prepare mortgage and note -Prepare check from lender to the seller -Prepare Loan Disclosure closing statement -Obtain satisfaction of mortgage from sellers' mortgagee confirming balance

(16) What provisions provide commercial mortgage borrowers the ability to prepay the loan, but at a cost to the borrower?

-Prepayment penalties -Yield-maintenance agreements

(13) Which of the following characteristics are associated with fully amortizing, level-payment mortgages? -The periodic payments are constant over time. -The mortgage interest rate varies over time. -At maturity, the loan balance is non-zero.

-The periodic payments are constant over time.

(12) State three reasons sellers use brokers

-They are effective negotiators between buyer and seller -They are efficient - They already have the relevant knowledge, technology, and skills to complete a transaction -They have access to a complete market - They have established advertising platforms.

(17) What are the THREE characteristics that qualify a REIT?

1) Must be structured as a corporation or trust 2) Have more than 100 shareholders 3) Pay dividends greater than 90% of REITs taxable income

(14) PV of an annuity

1-[1/(1+r)^n]/r

(13) List the seven requirements for a valid contract for the sale of real estate

1. Competent parties 2. Legal Objective 3. Offer and Acceptance 4. Consideration 5. No defects to mutual assent 6. Written Form 7. Proper description of property

(17) Name the SIX forms of ownership for Pooled Equity Investments

1. General partnership 2. Limited partnerships 3. C Corporation 4. S Corporation 5. Limited Liability Company 6. REITs

(16) List the steps involved in the Loan Application & Approval Process

1. Loan Request package sent by borrower to lender 2. Lender issues quote with loan terms, which includes the loan size and interest rate 3. Borrower either accepts, rejects, for renegotiates lenders quote 4. If terms are agreed to, lender completes loan application, collects the borrowing fee/deposits from borrower, and the borrower signs the application 5. Lender completes the underwriting process; performs formal due diligence; and prepares loan approval by committee 6. Lender agrees to fund the loan; parties prepare for closing

(14) What are the three key determinations of value?

1. Magnitude of expected cash flows 2. Timing of expected cash flows 3. Riskiness of expected cash flows

(13) Name two disadvantages of Standard Form Contracts

1. May treat some issues too lightly 2. Inappropriate uses of form contracts, (i.e residential contract for underdeveloped land)

(13) Name two advantages of Standard Form Contracts

1. Neutral - Not prepared by opposite party 2. Ready-made treatment of details

(16) Name the TWO attractions of a Fixed-Rate Balloon Mortgage for the Lender

1. Reduces interest rate risk 2. Reduces lender's credit risk

(14) What two parts are included when using the internal rate of return as a decision rule?

1. The risk free rate (Rf) 2. The risk premium (RPj)

(14) PV of a lump sum

1/(1+r)^n

(15) Typically, do 30 year or 15 year mortgages have lower interest rates?

15 year mortgages

The most common type of single-family home mortgage loan is?

A fixed-rate, level-payment, fully amortizing loan.

(16) Name one advantage and disadvantage of a Mezzanine Loan

Advantage: Increase expected returns because you are increasing leverage Disadvantage: Higher interest rate than just a singular mortgage loan

(16) Loans often used to provide short-term financing for "transitional" properties

Bridge Loans

-All shareholders have limited liability -Separation of ownership & control -Double taxation

C Corporations

Maxwell Realty Corporation is considering an apartment investment that is expected to produce an after-tax cash flow of $2,000 at the end of year one, $2,025 in year two, $2,050 in year three, $2,075 in year four, and $2,100 in year five. If the company invests $9,500 today, what is the IRR of this investment?

CF0 = -9,500 NEGATIVE IS VERY IMPORTANT CF1 = 2,000 CF2 = 2,025 CF3 = 2,050 CF4 = 2,075 CF5 = 2,100 IRR = 2.57%

(14) Why do future cash flows need to be discounted into present values?

Decisions in real estate involve the commitment of resources over numbers of years

(16) Protects lenders from prepayments in a declining interest rate environment

Defeasance Clause

(15) Monthly principal payments are allowed to exceed the scheduled principal payment for an LPM

Early Payment Mortgage

(15) What are expenses incurred by the borrower but not paid to the lender known as?

Effective Borrowing Costs (EBC)

(13) What is the title of the third party agent tasked with carrying out the closing provisions of a contract?

Escrow Agent

(16) What are floating rate loans, and list one advantage/disadvantage of this financing structure

Floating rate loans have interest rates that can be adjusted monthly based on changes in index rates. One advantage is they reduce the lender's reinvestment risk. One disadvantage is they could increase the default risk if the borrower cannot service the debt payments

(17) -Investors avoid double taxation -All partners can make operating decisions -'Special allocations' -All partners liable for all debts

General Partnership

(13) Write a simple contract containing all seven requirements

I, Tristan Nelson, agree to buy and pay $20,000, and I, Mark LePore, agree to sell the parcel of real estate at 1013 NE Seventh Road in North Platte, Nebraska.

(15) A mortgage loan that is interest only for its full term and then must be refinanced or paid off in full

Interest-only mortgage

(17) An entity that arranges investments in commercial real estate and then sells claims on those investments to the ultimate, capital providing, investors is often referred to as a(n)

Intermediary

(17) -Permit all owners to participate in management -Limited liability -A 'super passthrough' entity

Limited Liability Companies

(17) -TWO types of partners: general & limited -"Principal-Agent" is created which give up control of management -"Flow-through" tax treatment

Limited Partnership

(16) Loan to Value Ratio

Loan Amount/Appraised Value

(16) A mortgage clause or provision prohibiting prepayment of the mortgage for a specified period of time after origination.

Lockout Provision

(14) Mark the following investments as either (1) Low Risk, (2) Medium Risk, or (3) High Risk -Net Leased to AA tenant -Apartments -Offices -Land -Hospitality -Restaraunts -AAA Mortgage Bonds

Low: Net Leased to AA tenant, AAA mortgage bonds Medium: Apartments & Offices High: Hospitality, Restaurants, Land

(16) DYR formula

NOI/Loan Amount

(16) Debt coverage ratio

NOI1/Annual Debt Service

(14) When using the NPV as a decision rule, what indicates that the property should be purchased? -NVP>0 -NPV=0 -NPV<0

NPV>0

(16) Increased leverage will increase estimated NPV when...?

Opportunity cost of equity capital (discount rate) exceeds borrowing cost (EBC)

(15) Require periodic payments of principal, as well as interest, but are not paid off completely over the loan's term to maturity

Partially Amortizing Mortgages

(18) Effective Gross Income (EGI)

Potential Gross Income -Vacancy and Collection Losses (10% of PGI) +Miscellaneous Income

-Not taxed if they satisfy a set of restrictive covenants -Shareholders receive limited liability protection -Structured as a corporation or trust

REITs

(16) When mortgage lenders have access to other borrower assets in situations where the foreclosure sale price is less than the total amount owed the lender, we commonly refer to this type of loan as a

Recourse loan

(16) Lockout provisions/clauses in commercial mortgage _________ the lenders' _________.

Reduce, Reinvestment risk

(17) -Limited liability for shareholders -Pay no taxes; taxable income is passed through to shareholders -Special allocations are not allowed

S Corporations

(12) Differentiate between the two levels of licensure

Salesperson - Must work for a broker Broker - Can operate own brokerage agency

(13) Contracts conveying an interest in real property generally must be in writing to be enforceable as required by the

Statute of Frauds

(16) Mezzanine loans are similar to second mortgages, EXCEPT

Such loans are not secured by a lien on the property, instead they are secured by a lien against the equity interest in the borrower's company

(12) Explain how commission rates are determined

The amount of the commission is calculated as a percentage of the total lease value, also called total consideration.

(16) Some investors obtain more than one loan when acquiring properties, thereby substituting more debt financing for equity financing. A traditional second mortgage is secured by:

The borrower's pledge of the property as collateral

(13) What do sections 1-9 include in a form contract?

The first part of a form contract (1-9) are concerned with items to be negotiated, such as price, date of closing, etc. Also include items that characterize the property such as the description and zoning

(13) What do sections 10-18 include in a form contract?

The second part of a form contract (10-18) include the "Standards for Real Estate Transactions" which are inspections & examinations, disclosures, maintenance, etc.

True or False? In "Below Line" treatment of capital expenditures, capital expenditures are still subtracted from PGI when solving for Net cash flow.

True

(13) In states where the dominant practice in closings is by escrow, entities that can conduct escrow closings are likely to include:

banks and thrifts licensed escrow agents title companies insurance companies