Real Estate Principles Chapter 17
An implicit cost of direct ownership relative to joint ownership, especially for smaller, less wealthy investors, is
inadequate portfolio diversification
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
Which of the following best describes the type of investors typically most willing to contribute their properties, currently owned in the form of a limited liability company, to an UPREIT?
investors who would face large capital gain taxes if they engaged in a regular taxable sale
An investor's total capital commitment to a real estate private equity fund:
is collected over several years as the fund acquires properties
The majority of outstanding commercial mortgage debt:
is held privately by mortgage investors/lenders
If a REIT complies with a list of conditions on an on-going basis,
it can avoid paying taxes at the entity level
Disadvantage of direct investment for many "smaller" investors include:
less liability to diversify their overall portfolio
Shares of stock in a public, non-listed REIT are generally _________ shares of REITs that trade on a major stock exchange.
less liquid than
A major benefit to a limited partner that invests in commercial real estate through a limited partnership is:
limited liability
The ownership form typically chosen by a local syndication to attract noninstitutional investors is a:
limited liability company
The ownership form typically chosen by a real estate private equity fund is a:
limited partnership
Private equity real estate funds are typically set up as
limited partnerships
A publicly-traded REIT is one that is:
listed on a major stock exchange
A REIT's net asset value is equal to the:
market value of its assets minus the market value of its liabilities
According to Exhibit 17-3, the largest percentage of private commercial real estate equity is owned by:
other investors in institutional properties
The most common investors in commingled real estate funds are:
pension funds
The importance of __________________________ has grown in importance in recent years relative to traditional commercial bank lending
private equity funds that invest in debt
According to Exhibit 17-3, the value of commercial real estate owned by life insurance companies exceeds the value owned by which of the following?
private financial institutions
"Country-club" money raised from equity investors by a sponsor/syndicator is typically used to
purchase institutional-quality properties
Commercial banks and other private financial institutions collectively owned $49 billion in commercial real estate equity in late 2018. The majority of this $49 billion resulted from:
real estate obtained through foreclosure on mortgage loans
Investments in commercial real estate through limited liability companies are considered:
securities
An investor's closest alternative to direct ownership is a:
separate account with an investment manager
The construction of commercial properties is generally financed with ___________ loans.
short-term
According to the text, the chosen form of real estate ownership is driven primarily by a desire for:
single-taxation, limited liability, and special allocations
The Russell 2000 tracks the performance of a portfolio of:
small cap stocks
The emergence and growth of umbrella partnership REITs has been primarily driven by:
tax considerations
Which of the following items typically accounts for the largest portion of the difference between accounting (GAAP) net income and funds from operations (FFO)?
tax depreciation
The primary reason at least two ownership forms are usually associated with commercial real estate investment is:
the desire of the ultimate owner(s) to avoid unlimited personal liability
The primary risk of development and construction lending is:
the developer will fail to complete the project in a timely manner
Limited partnerships have been a popular ownership form for investing in commercial real estate because:
the income their assets generate is typically taxed only once
The market capitalization of an equity REIT's stock is equal to
the number of outstanding shares times the current price of the stock
In a limited partnership, the "principal" is ______________ and the "agent" is ___________________----
the set of limited partners, the general partner
As of June 2019, 31 REITs were included in the S&P 500.
true
The total value of investible commercial real estate is approximately $12.6 trillion.
true
True or False: Foreign investors are often active investors in U.S. commercial real estate.
true
True or False: In a general partnership, each partner is liable for all the actions of, and the debts incurred by, other partners in the conduct of the business of the partnership.
true
True or False: Most equity REITs tend to focus their investments by property type and/or geographic area.
true
True or False: The CMBS market has significantly contributed to the growth of U.S. commercial mortgage market by attracting investment capital from nontraditional mortgage investors.
true
True or false: The ultimate equity investors often create a separate organization to invest in the entity that actually owns the property(s).
true
Assume the following information for a publicly traded REIT: Net (accounting) income: $44,245,000 Gain/losses from infrequent and unusual events: $50,000 Amortization of tenant improvements: $575,000 Amortization of leasing expenses: $133,000 Depreciation (real property): $30,906,000. Calculate the REITs funds from operation (FFO).
$75,809,000
CMBS can be backed by which of the following?
-A pool of commercial mortgages -A single commercial mortgage loan
Important trade-offs involved in the choice between direct ownership versus investing through an intermediary include which of the following?
-Decision making control -Access to talented managers/sponsors -Risk sharing
According to Exhibit 17-3, the value of commercial real estate owned by pension funds exceeds the value owned by which of the following?
-Life insurance companies -Foreign investors -Private financial institutions
Advantages of using a C corporation for investing in commercial real estate include which of the following?
-Limited liability for the obligations of the corporation -Separation of ownership and control
To avoid taxation at the entity (REIT) level, a REIT must do which of the following?
-Make sure that 75% of its gross income is derived from real estate investments -Keep 75% of its assets invested in real estate, cash, or government securities -Have at least 100 shareholders
With regard to taxation,
-REITs are similar to C corporations in that there is separation of ownership and control -REITs are similar to real estate limited liability companies, in that they provide limited liability for all investors -REITs are similar to S corporations, in that they can avoid "double" taxation
The market value of U.S. commercial real estate held by non-real estate corporations is estimated to be $12.5 trillion. Which of the following are examples of non-investible real estate held by non-real estate corporations?
-Restaurants owned by fast-food companies -Medical office buildings owned by a hospital -Factories owned by automobile manufacturers
Which of the following are important considerations when choosing an ownership form for real estate investment?
-The ability to share risk with other investors -Federal income tax considerations -The desire to avoid unlimited personal liability
Private REITs can provide investors with which of the following?
-avoidance of double taxation -limited personal liability
Publicly-traded REITs have been described as mutual funds for real estate because they provide:
-investment portfolio diversification -liquidity
The pooling of equity capital by investors to purchase real estate:
-is often referred to as a syndication -takes place among both institutional and noninstitutional investors -is sometimes done with the intent to develop land
The liabilities of life insurance companies can be characterized by which of the following?
-long-term -fairly predictable
Individuals and institutions that invest directly in private commercial real estate:
-often do so in order to have more control over investment decisions -are often wealthy individuals or families -typically form a LP or LLC to limit liability
According to the data presented in Exhibit 17-8, equity REITs have underperformed large cap stocks
-outperformed large cap stocks over the last 10, 15, 20, and 25 years -underperformed large cap stocks over the last 3 years and 5 years
Typical sources of compensation for the GPs of real estate private equity funds set up as limited partnerships include:
-property acquisition fees -carried interest -management fees
Advantages of the general partnership form of ownership include:
-relative ease of creation -the ability to create multiple classes of equity investors
Assume the following information for an equity REIT: Funds from operations, $4,000,000; current stock price price, $40; total shares outstanding, 1,000,000. What is the price-FFO multiple?
10
From the data provided in Exhibit 17-2, the overall "loan-to-value" ratio associated with the $12.6 trillion investible commercial real estate market is:
37.4%
At least ___________ percent of a REIT's gross income must be derived from real estate assets.
75
Approximately _____ percent of REIT shares are owned by institutional investors
80
Which of the following forms of ownership potentially exposes the entity to double taxation?
C corporation
Which of the following is the largest single source of long-term mortgages used by investors to help finance commercial real estate investments?
Commercial banks
On the risk-return spectrum, which of the following private equity fund types tends to invest primarily in "Class A" properties with limited use of leverage?
Core fund
Which of the following financial measures is an attempt by a stock market analyst or a REIT to estimate the total market value of a REIT's underlying assets and liabilities?
Net asset value
On the risk-return spectrum, which of the following fund types generally offers investors the highest expected return?
Opportunistic fund
Paul has put together a real estate investment opportunity and has formed a limited partnership to purchase the property. He will act as the general partner. Which of the following statements are true?
Paul is concerned about personal unlimited liability.
The $12.6 trillion total market value of investible commercial real estate can be broken into four quadrants. Which of the following quadrants currently accounts for the largest proportion of total market value?
Privately-held equity
In which of the following ownership forms is there no separation of ownership and control?
Sole proprietorship
Which of the following items typically accounts for the largest portion of the difference between accounting (GAAP) net income and funds from operations (FFO)?
Tax depreciation
Which of the following statements about general partnerships (GPs) is true?
Taxable income from ownership of properties "flowthrough" to the individual partners
Which of the following are NOT characteristics of a limited liability company?
The managing member assumes unlimited liability
Which of the following choices best describes the investment focus of an equity REIT?
They invest primarily in commercial properties
True or False: The CMBS market has significantly contributed to the growth of the U.S. commercial mortgage market by attracting investment capital from nontraditional mortgage investors.
True
If the per share stock price of a REIT is less than its per share net asset value (NAV), the REIT is said to be selling at:
a discount to net asset value
A syndicate is:
a pooling of equity capital
When an investor in a limited partnership receives a disproportionate share of cash flow distributions from the underlying property, relative to her equity investment, this is referred to as:
a special allocation
Relative to direct ownership, separate accounts allow investors to:
access the expertise of a management company
The capital raised by equity REITs through debt and equity offerings is primarily used to:
acquire properties
A subchapter S corporation:
allows for limited liability for all of its shareholders
Promised payments on "private label" CMBS securities
are not backed by a government agency/entity
Construction loans
are not included as providers of commercial real estate debt in Figure 17-4
The majority of commingled funds
are open-end funds
The primary investment strategies of REITs are to develop or acquire properties directly or:
but or originate mortgage loans
Real estate private equity funds are typically set up as
closed-end funds
The estimated market value of owner-occupied housing in the U.S. is second to ___________ in magnitude.
corporate equities (stocks)
The estimated market value of owner-occupied housing in the U.S. is second to ___________________ in magnitude.
corporate equities (stocks)
Because of the large amounts of capital they have to invest, pension funds have an influence on commercial real estate markets that is ______ to the percentage of properties they own.
disproportionate
A C corporation:
earns income that may be taxed at both the corporate level and investor level
True of False: Life insurance companies are more likely to act as equity investors in commercial real estate than as commercial real estate lenders.
false
True or false: Commercial real estate investors can realize substantial tax benefits, relative to other widely used ownership forms, when investing in REITs.
false
True or false: High net worth families are typically more risk averse in their real estate investments than pension funds.
false
True or false: S corporations require more than 100 shareholders.
false
Investing in a ______ typically has the highest expected return and the highest expected risk for the investor.
full platform operating company