REAL 5090 Final Exam Review

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An investor is considering the purchase of an office complex. Next year's NOI and cash flow is expected to be $1,000,000 and economic forecast of market supply and demand and vacancy levels will continue to be in balance. As a result NOI should increase by 4% each year and the investor believes she should earn 12% total return on the investment. What is the NPV of this investment if the purchase price is $13M?

$-500,000

Consider a property with NOI equal to $40,000, there are $5,000 in capital expenditures, there is $200,000 interest-only loan at 8 percent annual interest, the depreciable cost basis of the residential property is $300,000 and the owners tax bracket is 33%. What is the EATCF?

$14,680

What is the present value of a 10-year lease with monthly rental payments of $2,000 due at the end of each month, if the opportunity cost of capital is 8% with monthly compounding?

$164,843

What is the present value of a 10 year lease with monthly rental payments of $2000 due at the end of each month, if the opportunity cost of capital is 7% (ENAR) with monthly compounding?

$172,253

In the problem above what is the EATCF to the equity investor if the income tax rate is 35%?

$182,500

What is the present value of a property with next year's NOI of $100,000, which will grow at 3% per year and discounted at a rate of 8%

$2,000,000

NOI: 400k last year 1.5% income growth perpetuity 10% discount rate What is the investor willing to pay?

$2,194,594.60

The NOI is $1,000,000, the debt service is $800,000 of which $700,000 is interest, and the depreciation expense is $250,000. What is the BTCF to the equity investor (EBTCF)if there are no capital improvements or reversion items this period?

$200,000

What is the PV of an asset that is worth $5,900 at the end of year 5 using continuously compounding return of 9%

$3762

Purchase price is 850,000 Sale price is 1,142,329 Accumulated depreciation is 174,359 Capital gains tax is 15% Depreciation recapture is 25% What is the after-tax gain?

$379,249.90

What is the PV of an asset with $5900 at the end of year 5 using a continuously compounded rate of return at 9%

$3792

Purchase price is 850,000 Sale price is 1,142,329 Accumulated depreciation is 174,359 Capital gains tax is 15% Depreciation recapture is 25% What is the gain from sale?

$466,688

Purchase price is 850,000 Sale price is 1,142,329 Accumulated depreciation is 174,359 Capital gains tax is 15% Depreciation recapture is 25% What is the book value of the property if the owner did not incur CapEx?

$675,641

A non-residential commercial property which costs $500,000 is considered to have 30% of its total value attributed to land. The annual depreciation expense chargeable against taxable income is

$8,974

Purchase price is 850,000 Sale price is 1,142,329 Accumulated depreciation is 174,359 Capital gains tax is 15% Depreciation recapture is 25% What is the total capital gains tax including depreciation recapture?

$87,439.10

capital gain

( gain on sale - accumulated depreciation) x 15%

Tax formula

(NOI - Interest - Depreciation) x taxrate

increase in capital value

(sales price - purchase price) / purchase price

pre-tax investment multiple

(sum of EBTCFs + BTCF from sale) / equity required

An investor expects annual cash flows from a property as follows: Year 1 / $20,000 Year 2 / $22,000 Year 3 / $30,000 Year 4 / $31,000 Year5 / $40,000 In addition, the investor expects that she can sell the property at the end of the 5th year for 10 times its expected cash flow that year. If the opportunity cost of capital is 10% per year, then what is the net present value (NPV) of a deal in which the investor has to pay $350,000 for the property (in year 0, one year prior to the first cash flow)?

+ $3,282

Assuming riskless debt, if the return risk is +-15% with a 60% LTV, then with a 80% LTV the return risk is:

+-30%

If the NOI on a property is $400,000 on a value of $5M and the loan on the property is at a mortgage constant of 9%, then what is the expected cash-on-cash (Ye) return to the investor if their leverage ratio is 4?

+5%

SLIDES

Private market, debt assets

- Bank loans - Whole Mortgages - Venture Debt

Public market, debt assets

- Bonds - MBS - Money instruments

1031 exchange benefits

- Defer capital gains - Adjust geographic diversity - Modify qualitative characteristics of real estate

Public REITs

- Equity is traded in the public stock exchange - Exempt from corporate income tax - Restricted to real estate investment related activities - Must pay out 90% of earnings in dividends

REIT: 75% of assets must be invested in:

- Equity ownership of real property - Mortgages - Other REIT shares - Government securities and cash

What are the most effective ways for computing one rate of return when investment has many intermediate cash flows?

- Geometric mean - Arithmetic mean - Internal rate of return

OID types

- Hold - Refinance - Reposition or Renovation - Dispose

factors in the actual performance of the property

- Market factors such as rental growth and vacancy - Property expenses such as the level of capital expenditures - Positive and negative externalities such as tax law changes

Cap Rate Factors

- OCC - growth - risk

REIT

- Operating companies that own, develop and manage commercial real estate - Chartered as a corporation or business trust - Revenue must primarily come from real estate investments - Required to distribute at least 90 percent of their taxable income

The cap rate is determined by cap investment supply and demand in the asset market based on the following factors:

- Opportunity cost of capital - Growth expectations in rents - Risk

Examples of disposition

- Outright sale - Installment sale - Section 1031 exchange - Strategic Default

cost basis is equal to:

- Purchase price, adjusted for transaction costs - CAPX - Depreciation

Private market, equity assets

- Real Property - Private firms - Oil & Gas Partnerships

Public REIT advantages

- Removes the management of specific properties - Removes the ability to impact cash flows at the property level, like when to renovate - Creates liquidity - Enhances ownership by small passive investors w/out special expertise or knowledge

REIT: 75% of revenue must come from:

- Rents from real property - Mortgage interest - Gains from sales of real property

Public market, equity assets

- Stocks - Equity - REITsMutual funds

Hold

- The default decision - incremental investment analysis - Implicitly (if not explicitly) compares the opportunity cost of not selling the property - results in equity buildup

1031 exchange disadvantages

- The new replacement property will have a reduced cost basis to depreciate in the new property - The basis is the purchase price of the replacement property minus the gain which was deferred on the sale of the relinquished property as a result of the exchange

Transaction price may deviate from fair market value because

- Transaction price < fair market value because buyer pays cash - Transaction price > fair market value because buyer is urgent to buy property - Transaction price < fair market value because property has high current vacancy

Adjusted Funds from Operations

- aka Funds Available for Distribution - measure that more closely reflected cash flow actually available for external distribution - aggregate EBTCF

asset test

- at least 75% of a REIT's total assets must be real estate, mortgages, cash, or federal government securities - at least 75% of the REIT's yearly gross income must be from real property

income test

- at least 75% of income comes from primarily passive sources like rents and mortgage interest

distribution test

- at least 90% of a REIT's annual taxable net income must be distributed to shareholders as dividends each year

Installment Sale aka Contract for Deed

- disposition in which the seller receives a portion of sales price over multiple periods until the amount owed (purchase price) is paid in full - seller retains legal title to the property until the balance is paid - a form of seller financing - Seller benefit by delaying the recognition of a taxable gain - average is 5 years

REIT Disadvantages

- hard to compare earnings with other corps - very capital intensive - Abnormally high depreciation expenses - GAAP earnings don't present a "fair" or "accurate" measure of REIT earnings

Refinance

- incremental investment analysis - Increases leverage - Refinancing at a lower rate is an added benefit but not necessarily required - Defers taxes on capital gains - Offers diversification benefits if loan proceeds are reinvested in other properties or assets

Reposition/ Renovation

- incremental investment analysis - can increase leverage through additional financing

REIT vertical integration

- land acquisition/ holding - development - ownership - operation (property mgmt.) - tenant services

tax-deferred exchange (section 1031)

- method to defer all or part of the capital gains on the sale of investment or business property - use tax treatment under section 1031 of the IRS - gain is not reported, no taxes are paid, and the gain is postponed

ownership test

- no five or fewer individuals may own more than 50% of REIT's stock - must be at least 100 different shareholders

Disposition

- occur at the seller's discretion and are directed at harvesting the greatest value possible from the asset - seller sets the method of sale, price, terms of the transaction, and the timing when the property comes to market

Funds from Operations

- substitute for GAAP net income - focus on depreciation - dividends are figured from GAAP net income (not a true REIT income)

An investor is considering the purchase of an office complex. Next year's NOI is expected to be 1M and the economic forecast of market supply, demand, and vacancy levels will continue to be in balance. As a result NOI should increase by a nominal 2 percent each year and the investor believes a 10 percent total return on the investment. What is the NPV of this investment if the purchase price is 13M? What is the NPV?

-$500,000

EXAM 3

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Answer the next 6 questions using the following investment and annual compounding: Property value at the end of 2012: $323,000 Property net rent paid at the end of 2013: $43,000 Property value at the end of 2013: $334,000 Inflation during 2013: 5% What is the real appreciation return?

-1.52%

Property value at end of 2019: $623,000 Property net rent earned at the end of 2019: $73,000 Prop value at end of 2020: $634,000 Inflation during 2020: 4% What is the real appreciation return?

-2.15%

Date / Portfolio Balance / Intermediate CF March 31, 2013 / 1,200,000 / - / April 20, 2013 / - / 100,000 / June 30, 2013 / 1,280,000 / - / What is the quarterly time-weighted investment for the above cash flows? You do not need to annualize the return.

0.159

How much is the typical capital improvement expenditure?

1-2% of property value

REIT tests

1. ownership test 2. asset test 3. income test 4. distribution test

If a nominal rate is 6% and the inflation rate is 4%, what is the true real return?

1.92%

What is the equivalent nominal annual rate (ENAR) if the quarterly return is 2.5%?

10%

End of Year/ Account Balance 2010 / $4,103 2011 / $6,549 2012 / $4,987 What is the geometric average annual return from the end of 2010 to the end of 2012?

10.25%

What is the effective annual rate (EAR) if the quarterly return is 2.5%

10.38%

CF / DATE -100 - 12/31/2012 +10 - 2/28/2013 +100 - 12/31/2013 What is the equivalent annual nominal IRR of the above cash flows?

10.39%

11.16%

Property value at end of 2019: $623,000 Property net rent earned at the end of 2019: $73,000 Prop value at end of 2020: $634,000 Inflation during 2020: 4% What is the real income return?

11.27%

Property value at end of 2019: $623,000 Property net rent earned at the end of 2019: $73,000 Prop value at end of 2020: $634,000 Inflation during 2020: 4% What is the nominal income return?

11.72%

For the following office property, an investor expects the annual NOI for the property will be $1,000,000 and remain flat for the next 3 years. Subsequently, the cash flows will be as below. It is further expected that beginning in year 7 an every year thereafter, NOI will reflect at stable market and grow at 3% per year indefinitely. The investor believes that investors should earn 12% total return on this type of investment. NOI (end of year) 1,000,000 1,000,000 1,000,000 1,200,000 1,250,000 1,300,000 1,339,000 Assuming the investment will be owned for 7 years and then sold, what is the value of the property today?

12,069,903

12.68%

You are applying a multi-year DCF analysis to evaluate an investment property with some long-term leases. You observe that other properties with similar lease structure and risk have been selling at cap rates around 11% (based on NOI with no capital reserve). You believe these other properties typically face capital expenditures on the order of 1% of property value per year in the long run, and that given such expenditures their net cash flows and values would reasonably be expected to grow in the long run at about 3% per year. What discount rate should be apply to your subject property in your DCF valuation?

13%

Property value at end of 2019: $623,000 Property net rent earned at the end of 2019: $73,000 Prop value at end of 2020: $634,000 Inflation during 2020: 4% What is the nominal total return?

13.48%

End of Year —> Account balance 2019 —> $4153 2020 —> $6589 2021 —> $5605 What is the continuous compounding annual return from end of 2019 to end of 2021?

14.99%

End of Year—> Account balance 2019 —> $4153 2020 —> $6589 2021 —> $5605 What is the geometric average annual return from the end of 2019 to end of 2021?

16.17%

An equity investor wants a higher rate of return than the overall expected return of 9 percent during the holding period of a strip center. Since the current return to debt is 4 percent, what return will the investor earn is she takes on debt at a 60 percent LTV?

16.5%

An equity investor wants a higher rate of return than the overall expected return of 9% during the holding period of a strip center. Since the current return to debt is 4%, what return will the investor earn if she takes on a debt at 60% LTV?

16.5%

16.72%

What is the annual blended IRR of the following cash flows using nominal conversion from monthly to annual (i.e., x 12)? -100M purchase price +1M rental income from vintage leases at the end of each of the next 6 months +1.1M rental income from new leases at the end of the next 1.5 years (18 months) +110M reversion price at the end of the 2 year period (i.e., 24 month total holding period)

17.09%

End of Year/ Account Balance 2010 / $4,103 2011 / $6,549 2012 / $4,987 What is the arithmetic average annual return from the end of 2010 to the end of 2012?

17.88%

Risk premium of assets is expected to be 4.5%, but portfolio manager desires a higher risk premium of 9%. If debt is riskless, how much debt (in the form of leverage ratio) must manager use to earn higher rate?

End of Year—> Account balance 2019 —> $4153 2020 —> $6589 2021 —> $5605 What is arithmetic average annual return from end of 2019 to end of 2021?

21.86%

Consider a property with expected future net cash flows of $25,000 per year at the end of the next 5 years. After that, the operating cash flow will step up 20%, to $30,000, for the following 5 years. If the owner expects to sell the property at the end of the 10th year at a price of 10 times the net cash flow at that time, what is the value of the property if the required return is 12%?

248,075

depreciation recapture rate

25%

Portfolio Balance / Intermediate Cash Flows March 31, 2021 / $1,400,000 / - / April 30, 2021 / - / $125,000 September 30, 2021 / $1,480,000 / - / What is the ENAR using the time weighted investment technique for the above cash flows?

4.95% ** will not be on exam

If the Loan-to-Value ratio is 80%, what is the leverage ratio?

A potential investor in a property desires a 14% return but the long-run return of this type of property is expected to be 9% during the holding period. IF the return to debt is observed in the market as 4%, what LTV will obtain the investor his desired return?

50%

Investor desires 14% return, long-run expectation for property is 9% during holding period. What LTV will obtain the investor his desired return?

50%

On average, REITs pay out ____ of FFO in dividends

73% (recently it has been a bit less)

What is the Equivalent Nominal Annual Rate (ENAR) if the quarterly return is 2%?

8.00%

What is the Effective Annual Rate (EAR) if the quarterly return is 2%?

8.24%

For the following office property, an investor expects the annual NOI for the property will be $1,000,000 and remain flat for the next 3 years. Subsequently, the cash flows will be as below. It is further expected that beginning in year 7 an every year thereafter, NOI will reflect at stable market and grow at 3% per year indefinitely. The investor believes that investors should earn 12% total return on this type of investment. NOI (end of year) 1,000,000 1,000,000 1,000,000 1,200,000 1,250,000 1,300,000 1,339,000 What cap rate should be found in the market for similar properties?

End of Year/ Account Balance 2010 / $4,103 2011 / $6,549 2012 / $4,987 What is the continuously-compounded annual return from the end of 2010 to the end of 2012?

9.76%

If the downtown Athens market for student housing is in equilibrium the day before, what will happen to short term property prices in the asset market when The Mark opens all of its units if demand stays constant in the space market?

A short-run decrease in property asset prices

In the absence of foresight among asset market participants, a growth in the demand for real estate assets in the capital market - holding demand in the space usage market constant - will produce which of the following short-run effects?

A short-run increase in property asset prices

What is NOT a mistake made in DCF application

Accepting NPV projects equal to Zero

What of the following is NOT an example of a mistake made in DCF application?

Accepting NPV projects equal to zero

An investor can evaluate a REIT by 2 methods. one is a stream of cash flows. What is the other?

As a collection of assets

Which of the following is the principal of the negative feedback mechanism within real estate system?

Asset market regulating flow of capital to developer

What is a negative feedback mechanism within real estate system?

Asset market regulating flow of capital to developers

The difference between the NOI and PBTCF is

Capital improvements

IRR is a different measure than the going-in rate (OAR). Yet they often turn out to being close to the same magnitude. How does this happen?

Capital improvements and real depreciation are approximately equal to growth in rent

Why is it a challenge to determine one rate of return for an income producing property after the property is sold?

Cash flows occur daily and the purchase and sale amount are large in comparison

Which is not a course of action an owner can take while owning a property

Conduct an ipo

Which of the following is the least effective for compounding a multi-period return (i.e., one rate of an investment that extends over multiple periods and uneven intermediate cash flows)?

Continuous compounding using natural log

Which of the following is the least effective for computing one rate of return when the investment has many intermediate cash flows?

Continuous compounding using natural log

Which of the following is the best method to compute the return on raw land when there are no intermediate cash flows between the purchase and sale of the property?

Continuous compounding/natural log

If prop market values are high enough in the asset market, which industry will subsequently consider the construction cost and land to increase the real estate stock?

Development industry

If property market values are high enough in the asset market, which industry will subsequently consider the construction cost and land to increase in the real estate stock?

Development industry

cash-on-cash return

EBTCF (given year) / equity required

EATCF

EBTCF - Tax

A benefit of depreciation is that a taxpaying owner can take an income in the current year and thus convert current income taxed at a higher rate taxed at 15% (as long as the property is held for more than a year)

FALSE

Property management should not be itemized in the proforma statement if the property owner manages the property themselves

FALSE

REITS are challenged to differentiating themselves from other reits and branding is an effective technique

FALSE

The asset market is segmented similar to the space market

FALSE

If the seller in a 1031 exchange receives additional cash to even out the value of the 2 exchanged properties, the cash is taxed at marginal cash rates

FALSE (capital gains tax rates)

An advantage of an installment sale is that the seller receives the cash flows later, and it is better to defer benefits due to TVM

FALSE (dollar today > dollar tomorrow)

An owner will only refinance a current holding if interest rates decrease

FALSE (might want to pull out equity)

Capitalization rates are dampening mechanisms that tend to make the Real Estate System self-regulating and inhibit it from spiraling out of control.

FALSE (negative feedback loops)

A primary residence is a good candidate for a 1031-exchange

FALSE (only business or investment properties)

Inflation is a measure of dispersion around an expected return

FALSE (risk)

Inflation is a measure of the dispersion around an expected return.

FALSE (risk)

Risk of total, growth, and income returns are directly proportional to LTV

FALSE (they are proportional to LR)

Adjusted Funds from Operations equation

FFO - Recurring capital improvement expenditures <adjust for straight line rents> - Amortization of debt principle

Expected return is inversely related to the price an investor pays for the property fundamentally because

Future CFs of a property are independent of the price you pay today

Funds from Operations equation

GAAP NOI + Real property depreciation expense + Preferred stock dividends - Net gains from property sales

Which of the following time weighted returns reflect compounding of returns, and this better represents the average growth rate period during the overall time span to reflect relation between the amount of beginning and ending amounts of capital?

Geometric mean

Which of the following time-weighted returns reflects compounding of returns and thus better represents the average growth rate per period during the overall time span to as to reflect the relation between the amount of beginning and ending amounts of capital?

Geometric mean

If risk in the asset market increases, what happens to cap rates?

Greater risk means lower prices and higher cap rates

1031 exchange qualifying properties

Investment property or properties owned for use in a business

Why do transaction prices deviate from expected market values?

Investment value of buyer is greater than market value and the transaction price increases

What group provides demand in the asset market?

Investors

What will happen to cap rates if the growth in future net rents is expected to decrease?

Investors will pay less per dollar of current net income, so cap rates increase

Which of the following is NOT a method to record real depreciation?

Itemized amount as an operating expense

What group provides supply in the space market?

Landlords

Which statement is true ex ante?

Leverage normally increases the buyer's total return (including appreciation) if the buyer pays market value for the property

In CRE, properties can occasionally offer positive NPVs. Which of the following is not a reason for these infrequent deals, using market values and not investment values?

Market participants do not know the FMV with perfect certainty (i.e., the price is subjective within a small range)

The capitalization rate is determined by capital investments supply and demand in the asset market based on all the following factors except:

Market segmentation

debt coverage ratio

NOI (given year) / Debt Service (given year)

PBTCF

NOI - CAPX

taxable income

NOI - depreciation - annual interest

Which of the following is not one of the three ways to express the total return?

Net present value

An income-producing property is priced at 600,000 and is expected to generate the following after-tax cash flows: Year 1: 42,000; Year 2: 44,000; Year 3: 45,000; Year 4 and 5: 50,000. The property is expected to be sold at the end of Year 5 for 640,000. WOuld an investor with a required rate of return equal to 15 percent be wise to invest in the property?

No, NPV is negative

What group provides supply in the asset market?

Owners selling

EBTCF

PBTCF - Annual Debt Service

If demand increases in the space market which causes a shift in the demand function, what will happen to prices of that property type in the capital market in the short term?

Prices increase

Which of the following is FALSE?

Proformas match the expected holding period even if the holding period is for a short period of time such as 2-3 years (should be 10yrs)

A project with a very large positive NPV should cause concern. Which of the following is not a source of the illusion of a big positive NPV?

Property management costs are estimated and included in the proforma even though the owner is managing the property themselves

We observed in the market in August 2007 the nationwide cap rate was 6.44%. Inflation was 3%, which netted out to zero due to capital expenditures and depreciation. At the same time, the risk-free rate was 4.67% and the risk premium was 4%. Thus, the two methods to compute the return do not equal. What happened?

Property prices are too high causing the cap rate to be too low

Which of the following is NOT an operating expense?

Real deprecation

Which of the following is NOT an operating expense?

Real depreciation

What are the following ways to express total return?

Risk premium + risk free rate Income and growth Real returns + inflation

before tax equity reversion

Sale price - sales costs - mortgage balance

Real estate markets experience booms and busts because

Significant time can be required to build new supply to meet new demand and vice versa if demand decreases

Real Estate markets experience booms and busts because:

Significant time is required to build new supply to meet demand and vise versa if demand decreases

Real estate market experience booms and bust because

Significant time is required to build new supply to meet new demand and vice versa

REITS are most closely correlated with which of the following asset types

Small value companies

What is the cash-on-yield to the equity investor if the cap rate is 7.5% and mortgage loans are available at 5% mortgage constant? Assume that the owners borrows 75% LTV.

Some other amount

Property value at end of 2019: $623,000 Property net rent earned at the end of 2019: $73,000 Prop value at end of 2020: $634,000 Inflation during 2020: 4% What is the nominal appreciation return?

Some other amount (1.77%)

Property value at end of 2019: $623,000 Property net rent earned at the end of 2019: $73,000 Prop value at end of 2020: $634,000 Inflation during 2020: 4% What is the real total return?

Some other amount (9.12%)

A higher discount rate is recommended for unsigned future leases because they are riskier than vintage leases.

TRUE

A higher discount rate is recommended for unsigned future leases because they are riskier than existing leases

TRUE

Although there are similarities, disposition of a property is not simply the opposite of acquiring a property.

TRUE

EATCF is specific to the investor and current tax rates. Thus, the appropriate method to value property, cash flows, and discount rates is to ignore the EATCF and opportunity costs of capital

TRUE

If an investor decides to do nothing and holds a property for another year, the investor builds further equity, which represents funds that the investor can place in another investment property if the current property is sold

TRUE

Much of value of CRE investments are derived from earning potential after leases expire

TRUE

Operating cash flows are reversion cash flows are the two types of cash flows that are determined in a typical pro forma

TRUE

Resale value is fundamental in determining the future earning potential

TRUE

Since 1978, NOI as measured by NCREIF has not kept up with CPI (Exhibit 11.2). Put differently, the income growth in commercial real estate often does not meet, much less exceed, inflation.

TRUE

Since 1978, NOI is measure by NCREIF has not kept up with CPI. Put differently, the income in commercial real estate often does not meet, much less exceed, inflation.

TRUE

The IRR assumes that intermediate cash flows will be invested at the same rate as the computed IRR

TRUE

When considering whether or not to renovate, the owner considers the difference or net cash flows from holding the property with capital expenditures occurring in the future versus renovating

TRUE

When deciding where to place available funds, investors consider the risk and return trade off of real estate against the similar trade offs of other assets

TRUE

When deciding where to place available funds, investors consider the risk and return trade- off of real estate against the similar trade-offs for other assets.

TRUE

When deciding where to place available funds, investors consider the risk and return trade-off of real estate against the similar trade-offs of other assets

TRUE

With the exception of disposition, on-going investment decisions are incremental investment decisions

TRUE

Zero NPV projects are not only OK, they are expected because astute investors of large class-A type property will come to basically the same market value and neither side will want to accept a negative NPV project.

TRUE

Zero-NPV projects are not only OK, they are expected because astute investors of large class-A type property will come to basically the same market value and neither side will want to accept a negative NPV project.

TRUE

Which of the following is an example of a capital expenditure?

Tenant improvements

What group provides demand in the space market?

Tenants

The difference between NOI and the EBTCF is

The Debt Service and CapEx

Why can we compare multiple properties with very different cash flows using DCF and NPV?

The discount rate account for unique risk of each property

Assuming you have enough money for one, but not both, which of the following investments is best assuming a 9% discount rate and a holding period of one year? The first is an investment of 20M that earns 11% for the year. The second is an investment of 7M that earns 14% for the year.

The first because the NPV is higher

The expected return on an investment property is inversely related to the price an investor pays for the property fundamentally because

The future cash flows the property can generate are independent of the price you pay for the property today

The expected return for a property is inversely related to the price an investor pays for the property fundamentally because:

The future cash flows the property generate are independent of the price you pay for the property today.

Normally, what relation should be most common between the expected "going-in" and expected "going-out" cap rate? Put differently, what is cap rate creep?

The going-out cap rate should be at least as high as the going-in rate

Transaction prices are expected to settle into a range that is close to the market values. Which of the following is an economic reason why transaction prices may deviation markedly from the expected market values?

The investment value of the buyer is greater than the market value and the transaction prices increase

What is wrong with the following statement: Only a fool would invest in real estate without financing most of the purchase with a mortgage; borrowing allows an investor to increase your expected return by using other people's money.

The statement ignores the effect of borrowing on the investor's risk

What is wrong with the following statement: Only a fool would invest in real estate without financing most of the purchase with a mortgage, borrowing allows an investor to to increase your expected return by using other peoples money

The statement ignores the effect of borrowing on the investors risk

What does it mean for a REIT to be vertically integrated

They own properties plus develop land and manage properties

investors continuously assess the viability of their investment

True

Which of the following is not true regarding underwriting haircuts?

Underwriting haircuts provide transparency and realism based on sound empirics and theory

Which of the following is NOT true regarding Vacancy Allowance?

Vacancy will tend to decrease over time as the building ages

Why is NPV better than IRR?

Wealth maximization principle

Should they buy if the final negotiated list price is $12M?

Yes, the NPV is 69,903

Which of the following is not a problem with inflating both the numerator and denominator of the right-hand side ratios in the DCF analysis?

a) If the discount rate is unrealistically high, investors think they will receive a higher total return than can be reasonably expected. b) An unrealistic expected total return can cause an incorrect allocation of scarce capital between alternative investments c) Inflation of the numbers can undermine the credibility of the DCF analysis and potentially render it useless d) All of the above are problems*

Exhibit 11-7 shows that the result of subtracting OAR from IRR is a positive amount of 150-300bps. What are some potential reasons for IRR-OAR>0?

a) Investors assuming too low of capital improvement b) More inflation or growth in rents c) Less real depreciation in building d) all of the above*

benefits of the 1031 exchange include

a) adjust geographic diversity b) exchange different cash flows characteristics c) diversification d) all of the above*

What is an advantage to public-REIT investing?

a) diversification b) liquidity c) relatively small investment requirements d) all of the above*

The 90 percent dividend payout by REITS is NOT an overwhelming constraint for most funds because

a) fund managers invest funds as soon as possible b) REITS have difficulty with economies of scale c) REITS are vertically integrated d) pension funds invest in a small percentage in reits e) none of the above* (dividends are figured from GAAP net income, which isn't their real income)

Which of the following is not a method of disposition?

a) installment sale b) outright, all cash sale c) section 1031 exchange d) strategic default e) all the above are disposition methods*

depreciation recapture

accumulated depreciation x 25%

CAPX ____ to the value of the properties

adds

equity investors' ___________ are reduced by the amount of depreciation on an annual basis

after-tax ordinary incomes

A 1031 exchange offers which of the following benefits

allows a taxpaying owner to sell property and replace it with like-kind replacement property without incurring income taxes

risk premium approach

bond - yield curve + Rp

transaction costs

brokerage fees, certain legal fees, sales costs

cap rate approach

cap rate - CAPX + interest - depreciation

total capital gains tax

capital gain + depreciation recapture

Net Sale Price - cost basis

capital gain from owning the property

Chain-linked meaning

computing returns on returns

Vertical integration

concept of a single firm controlling several linked stages in the production process

When solving for the present value given the future value, the problem is one of:

discounting

Which one of the following is not 1 of the 4 tests that REITS must meet to retain their status?

dividend test

Income growth in CRE often (does/does not) meet, much less exceed inflation

does not

Measuring ex ante returns is the same as measuring which of the following?

expected

The risk-free rate compensates investors for which of the following?

for the time value of money

after-tax gain

gain on sale - (total capital gains tax) gain on sale - (capital gain + depreciation recapture)

Which of the following time-weighted returns reflect compounding of returns, and thus better represents the average growth rate per period during overall time span to reflect the relation between the amount of beginning and ending amounts of capital?

geometric mean

profit ratio

gross profit / contract price

net sales price

gross sales price - selling expenses

Which of the following is not a true statement concerning installment sale?

instead of paying tax in the current year, the equity the owner has in the property is carried over as equity in a different acquired property

Repayment of mortgage principal (is/ is not deductible)

is not

land (is/is not) depreciable

is not

Which of the following is not a REIT management strategy?

lower dividend payments (strategies include

adjusted basis (book value)

original cost basis - accumulated depreciation + CAPX

Measuring ex post returns is the same as measuring which of the following?

past/ historical

added margin

projected/ current occupancy - break even occupancy

original cost basis

purchase price

Depreciation _______ the cost basis

reduces

largest percentage of the REIT amount

regional malls (other retail is 2nd)

Depreciation recapture

repayment of income tax not paid during ownership

Equity buildup

represents funds that the investor can place in another investment if the current property is sold

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