Investment SAE Test 4

An investor purchases a single lot and constructs a building to the specifications of a prospective long-term tenant. What's this called?

Build to suit. Building to meet the needs of a specific long-term tenant, or a buyer, is known as build to suit.

Which special lease clause stipulates increased rental rates at specific times during the lease term, or requires tenants to pay a proportionate amount of the overall increased utility expense, in addition to their base rent?

Escalation. Because expenses continue to increase to the point that landlords end up with no profit on real estate investments, many current office leases are designed to "pass on" the increase to individual tenants through an escalation clause.

What best describes foreclosure by entry and possession?

Petition to enter, repossession, notice of eviction. A stagnant real estate market occurs when both supply and demand are low.

Cooperative owners are actually called ______.

Shareholders. Unit "owners" are actually shareholders of the cooperative.

For whom does a residential property manager work?

The building owner. The residential property manager works for the building owner, and interacts with the tenants on the owner's behalf.

The idea that money gains or loses value over time describes which concept?

Time value of money. Time impacts money in two ways. Money that just sits there loses value over time. Money that earns interest grows over time.

Darren wants to set up a land trust so that his children could benefit from his real estate investments after he dies. He asked his financial advisor Tom to manage the trust, and Tom agreed. How is the trust created?

When Darren conveys the real estate to Tom. A trust is created when the trustor conveys property to the trustee with instructions for holding and managing it on behalf of the beneficiaries.

In order for an active investor to qualify for a $25,000 deduction, the investor has to have an adjusted gross income of ____________________.

$100,000 or less.

Rufus is once again before a judge for violating fair housing laws. The judge has found Rufus guilty and is imposing the maximum monetary penalty she can for a two-time offender who has committed the second offense within five years of the first, which is __________.

$37,500. The judge may award damages to the victim and impose monetary penalties against the violator for $16,000 for a first offense, up to $37,500 for a second offense within five years, and up to $65,000 for a third violation within seven years.

What percentage of a neighborhood shopping center's gross leasable space does the major tenant lease?

30 to 50. Typically, a neighborhood shopping center has one major tenant that leases approximately 30% to 50% of the center's gross leasable space.

What does "cash-on-cash return" mean?

A comparison of before-tax cash flow to cash invested. Cash-on-cash return is a ratio or percentage. It compares before tax cash flow to cash invested.

What's depreciation?

A decrease in property value. Depreciation is a decrease in property value. This may not equate to an actual loss of value, however, because it relates to perceived building deterioration. Depreciation is used by investors as a tax management tool.

What could be subject to a gift tax?

A gift of $17,000 to your son. You do not have to pay gift tax on amounts you give to political organizations or charities; gifts you give to your spouse; the first $14,000 you give to a person each year; or tuition or medical expenses you pay on behalf of someone else.

Which of the following is a potential ramification to the seller if a short sale is completed?

A short sale can negatively impact the seller's credit, and the lender may seek a deficiency judgment for the amount not repaid. Short sales can negatively impact the seller's credit. It's an alternative to foreclosure, but the borrower may still be liable for the amount not paid if the lender seeks a deficiency judgment.

Which of the following is an example of constructive eviction?

A tenant moves out of the apartment after repeated unsuccessful requests to the landlord to repair the broken water heater. A constructive eviction occurs if a tenant vacates the property because the landlord has failed to uphold the warranty of habitability.

How are LLPs and LLCs taxed?

As partnerships. Both LLPs and LLCs enjoy the same type of taxation as partnerships.

An LOA of 10% means that assessments are _________.

At 10% of value. This simply means the property's level of assessment (LOA) is 10% of value.

Another name for a coupon bond, which is rarely issued anymore, is the _____bond.

Bearer. Coupon bonds were named because the bearer would tear off a coupon and present it at the time of a coupon payment.

Which of the following statements about condominium financing is true?

Because lenders view condos as a slightly higher risk, they usually require a slightly higher down payment. Because condo sales are the first to wane in a down market, and have a higher default rate than single-family detached homes, lenders view them as a slightly higher risk, and therefore require a slightly higher down payment from condo buyers.

Mutual savings banks have limitations on their lending activities, as specified in their ______.

Charter. A mutual savings bank's lending activities are limited by its charter and vary from state to state.

More than half of foreign buyers come from these five countries.

China, Canada, Mexico, India, and the United Kingdom. More than half of foreign buyers come from five countries: China, Canada, Mexico, India, and the United Kingdom.

A deed states, "For love and affection, the receipt and sufficiency of which is hereby acknowledged." What does this statement represent in the deed?

Consideration. Consideration (something of value) is required for transfer of this deed. In a traditional sale, the consideration is the purchase price stated in the deed. In deed transfers, "for love and affection" may be the consideration offered.

What principle of value is related to how a change to a portion of a property impacts the value as a whole?

Contribution. The principle of contribution says that a change to a portion of a property impacts the overall value. For example, adding a swimming pool could add to the value for some buyers and detract from the value for others.

Irmgard, the owner of an office building, is interested in renovating her building and changing it into a condo format. What is the change from office building to office condominium known as?

Conversion. When an office building is subdivided into individual, private office ownerships, it's referred to as conversion.

What happens during an abatement period?

Existing properties are charged the usual property tax on the property's pre-improvement value only. One outcome of a tax abatement is that existing properties will pay property tax only on pre-improvement value. Any increase in the assessed value is temporarily halted.

Gabi's been researching commercial property in her area and has decided to invest in a retail space that, although located outside the main shopping area, will offer shoppers a wide variety of name brand goods at discount prices. What type of retail space is Gabi contemplating?

Factory outlet. Traditionally, factory outlets are located outside main shopping areas. Although shoppers have to drive a bit to get to the outlets, they're rewarded with brand name goods at a discount.

Brittany has a small office in a professional building. She has a set monthly lease payment that has been calculated to include maintenance of the common areas in the building, such as the restroom and small kitchen, and all nets, utilities, and janitorial charges for her space. The payment also includes taxes and insurance. The landlord takes these payments and pays the individual expenses himself. What type of lease does Brittany have?

Gross lease. In a gross lease, all expenses related to the property, such as taxes, insurance, and maintenance, are part of the lease payment.

What hazard do mining activities, landfills, or agricultural pesticides contribute to?

Groundwater contamination. Mining activities, landfills, or agricultural pesticides can contribute to groundwater contamination.

When a real estate transaction is financed using a contract for deed, what advice should real estate agents give to their clients?

Have an attorney review the contract. The contract for deed holds risks for the seller, but especially for the buyer. It should be reviewed by an attorney to protect the rights of all parties.

What do investors like to avoid?

High tax liabilities. Investors prefer to steer clear of high tax liabilities. However, investments that bring tax write-offs, long-term appreciation, and positive cash flow earn high marks from savvy investors.

"Effective gross income" most closely means ______.

Income after losses from vacancies and credit losses are deducted from potential gross income. Income minus vacancy loss and credit loss equals effective gross income. It's not net income yet because we haven't accounted for operating expenses.

Why do investors have a special interest in the impact of income taxes?

Income tax is a significant factor in return on investment.

Land doesn't cease to exist, and it's not depreciated or covered by property insurance because of its _________.

Indestructibility. Land is indestructible. This is one of the characteristics of the real estate market that makes it unique.

What statement about converting neighborhood shopping centers to commercial condominiums is true?

It's more profitable for the owner to sell the individual buildings in the center before converting. It's more profitable for the owner to sell the individual buildings in a shopping center (rather than the entire center as a single purchase) to another investor, if the original owner wishes to sell the property before it's converted to condos.

Jane is selling her home to Micah. What must occur for Jane to effect a transfer of title to Micah?

Jane must deliver the deed to Micah. The seller (grantor) must deliver a marketable title. The grantee isn't required to sign.

Private loan companies may place a ______ on the property for which the loan is being taken.

Lien. If the underlying property is being used as collateral to secure the loan, a lien may be placed against the property.

A lender requests an appraisal of a property under foreclosure. What type of value is the lender most likely to be interested in?

Liquidation value. The property probably won't fetch market value, but the appraiser can determine a liquidation value where the sale removes the property from the bank's non-performing assets.

What information is listed on the promissory note?

Loan amount and schedule of repayment. The note must include the terms of repayment, including the amount and schedule.

Rona has given herself a challenge: No vacancy gaps allowed in the office building she manages. As she negotiates the lease agreements with each tenant, she does her best to stagger the lease end dates. What office building property manager's duty is this?

Maintaining tenancy and profitability. Rona is focused on maintaining tenancy and profitability. One way to avoid vacancies is to stagger tenants' lease end dates.

Penelope just finished development of her new office building investment. She's ready to let prospective tenants know that her offices are ready to be let, but she's not sure of the best way to go about it. What should her next step be?

Market the office space. The goal of marketing office space is to attract prospective tenants and maintain their occupancy.

Gloria is renting a cottage from Edward when she lands a job in Canada. She still has six months left on her lease, but Edward tells her he usually has no problem renting the cottage and releases her with no penalty. What type of lease termination is this?

Mutual agreement. Mutual agreement is what happens when a landlord and tenant mutually agree to terminate a lease agreement before the lease expiration.

What is generally a commercial property manager's responsibility, but not a residential property manager's responsibility?

Negotiating leases. Residential leases rarely involve negotiations. Therefore, this is more likely a commercial property manager's responsibility.

Land doesn't just cease to exist, a characteristic called ____________________. This is one reason that long-term, complex financing arrangements can be used.

Permanence. Land is indestructible. Permanence is one of the characteristics of the real estate market that makes it unique.

Mortgage bankers are mostly ______ enterprises.

Private. Mortgage bankers are mostly private enterprises. They don't operate like commercial banks or mortgage brokers, and most are entrepreneurs.

Roger is interested in converting his office building into office condominiums. He's had the building renovated, and filed the appropriate paperwork. What else does Roger need to do as part of the conversion process?

Promote the sale of the condominium offices. Roger needs to work on getting the individual office condo spaces sold and the sales contracts closed.

______ taxes are a reliable source of income for the state because they are difficult to conceal, their value tends to remain steady, and people tend to pay them

Property. Property values generally remain steady. Because people don't want to risk losing their home, they are highly likely to pay their property taxes. Also, because property taxes are connected to tangible property, they are very difficult to conceal.

What's an easy way to remember the relationship between capitalization rate and risk?

Rate and risk go together. Rate and risk—the two Rs—go together. When capitalization rate is low, so is risk. When capitalization rate is high, so is risk. Value, on the other hand, goes the opposite direction of cap rate and risk. Lower risk investments are valued higher than high risk investments.

Cheng is selling his property to Jericho. What's the best method Jericho can use to ensure his interest in the property?

Record the deed in his name. Recording provides constructive notice of Jericho's purchase. Failure to record makes it possible for others to record interests in the future. Title insurance protects Jericho from claims from the past, but the title search limits that concern.

Which investment cycle is an investor in when there is depreciated basis and tax-deferral through 1031 exchanges?

Reversion. This is the reversion investment cycle.

What is a recommended strategy for staying up to date with trends in the real estate market?

Review reliable Internet sources for market updates.

Melanie is a buyer who has agreed to purchase Stan's property using a contract for deed. Who holds legal title to the property during the term of the loan?

Stan. When a contract for the sale of land is executed, equitable title passes to the buyer and the seller holds legal title. When the conditions on the sale contract have been met, legal title passes to the buyer.

Which type of business risk is insurable?

Static. Dynamic risks are those business risks that cannot be lessened with insurance. Static risks are those where the effect can be lessened with insurance, such as accident liability, theft, and fire.

How is net operating income calculated?

Subtract operating expenses from effective gross income. Net operating income is effective gross income, minus operating expenses.

What is true about the current trends in cooperatives?

The co-op corporation must spend most of its fees on upkeep and upgrades. New rules require that at least 90% or more of the expenses of the cooperative corporation be paid or incurred for the purchase, construction, management, maintenance, or care of the corporation's property.

What should all commercial leases contain?

The lease agreement start and end dates. All commercial leases should contain the lease agreement start and end dates.

Which organization is responsible for reviewing site plans for new developments?

The local planning board or department reviews site plans to determine the proposed development's impact on the community—physical, social, and economic.

The capitalization process uses a capitalization rate, which is based on what?

The performance of comparable properties. The capitalization rate is based on the performance of comparable properties. It's the expected rate of return on an investment and can be calculated using the formula of: NOI ÷ V = R, or net operating income ÷ value = rate.

When Edmund died he left several properties to his heirs. He owned a grocery store and a campground outright, and a strip mall which was held in a living trust. Which of the properties, if any, did NOT have to go through the probate process after his death?

The strip mall didn't have to. Properties owned in a trust do NOT have to go through probate. For this reason, trusts are commonly used in estate planning.

Why are some business owners attracted to strip store buildings?

Their stores are easily accessible to local community members. Strip stores buildings are usually built on commercially zoned, neighborhood lots, along the busiest streets in the community, which makes them readily accessible to customers in the area.

Quentin is a victim of fair housing discrimination who is seeking redress in federal court. What is the limit on the amount of punitive damages he may be awarded?

There is no limit. In federal court, there is no limit to the amount of punitive damages that may be awarded to a victim of fair housing discrimination. The court may also issue injunctions.

What statement is true regarding developers who plan to allow FHA financing in their subdivisions?

They must follow the FHA's minimum building standards. Developers who plan to allow FHA financing in their subdivisions must follow FHA's minimum building standards. The primary difference between general building codes and the FHA's minimum property standards relate to the durability of a dwelling's fixtures.

Monica and Daniel Nicks have applied and been approved for a mortgage loan. Who will provide them the money for the loan?

Tina Mathers, a mortgage banker. The mortgage banker, Tina Mathers, will provide them with the money for their mortgage loan.

What ADA title is concerned with the accessibility of public accommodations?

Title III. Title III prohibits discrimination on the basis of disability in the activities of places of public accommodations. It also requires that any newly constructed or altered places of public accommodation, including office buildings, comply with the ADA Standards for architecture.

What is the trustee's role when a deed of trust is used to secure property for a loan?

To hold legal title to the property on behalf of the beneficiary until the loan is repaid

What formula is used to calculate an office building's non-productive space?

Total square footage x percentage of non-productive space = non-productive space. Non-productive space is calculated by multiplying the total square footage by the efficiency rate.

When would ancillary probate proceedings be required?

When the deceased owned property in another state. The appropriate disposition of a deceased person's assets requires probate proceedings. If the deceased owned property in another state, ancillary probate proceedings are required.

Which of the following statements about non-compete clauses and neighborhood shopping center leases is true?

With a non-compete clause, the property manager or landlord agrees not to lease to a business that competes with the current tenant. Within neighborhood shopping center leases, it's not uncommon to see non-compete clauses, in which the property manager or landlord agrees not to impact the current tenant's business by leasing to a competitor.

Xavier and Juanita Jenkins want to make a few improvements to their leased apartment. The couple would like to rip up the carpet in the living room and have the hardwood floors underneath restored. What statement about the improvements is true?

Xavier and Juanita need to get the landlord's permission before they make any improvements to the property. If tenants want to make alterations, they must first get the landlord's permission.

What's the average length of a community shopping center lease for a major tenant?

15 to 20 years. Major tenants in community shopping centers typically agree to lease terms that range from 15 to 20 years, while local tenants' leases may only run for five years.

In addition to the two anchor tenants, how many tenants does a community shopping center normally have?

15 to 40. Community shopping centers are home to anywhere from 15 to 40 stores, and serve a trade area of approximately three to six miles.

Steven put down $10,000 toward a property's purchase price, financed the rest, and now has a cash flow of $2,800 after repairs and debt service. What's his ROI?

28%. Return on investment or ROI = cash flow ÷ cash investment. $2,800 ÷ $10,000 = 28%.

The element of a deed that signifies the grantor's intention to transfer title to the grantee is the ______.

Act of conveyance. This is the act of conveyance, which "conveys" the intention to transfer title.

Marcie bought a duplex, lived in one half, and rented out the other half. This is an example of what type of investing?

Buy and hold. This is buy and hold, which is a long-term, active form of investing. Although Marcie lives in one half, she is still an active investor in the duplex.

In addition to analyzing local economic data and evaluating community acceptance, the community and neighborhood market analysis should take into consideration the ________________ and whether it's sufficient enough to support the proposed development.

Infrastructure. Infrastructure includes parking and access to utilities and public transportation.

When they don't want to sell just yet, investors in single lots can sometimes gain value by _______________.

Leasing. By leasing their single lot, investors can sometimes gain value.

Percy is losing his house because he can't make his payments. He owes more than it's worth and just wants to get out from under it. He decides to put it on the market and hope for the best. Percy will likely sell his home through ______.

Short sale. With a short sale, the borrower sells the home, walks away with nothing (except likely a deficiency judgement), and the lender accepts less than is owed.

With a triple net lease, the tenant pays _______ separately from the base rent.

Taxes, insurance, and maintenance. In a triple net lease, the tenant pays for taxes, insurance, and maintenance. Here's a way to help you remember: The first letter of each expense spells out TIM.

Two essential elements of a deed are ______.

Signature of the grantor and habendum clause. Only the grantor's signature is required, not the grantee's. The habendum clause is required only if the deed is conveying less than a fee simple estate.

Changes in the national market may have little (or significantly delayed) impact on local markets. This is because the real estate market is ____________.

Slow to respond. The real estate market is slow to respond. It's not centralized, and therefore changes at a national level may take a long time to be seen at a local level.