Real Estate Principles Final Exam

An interest-only balloon mortgage loan is commonly referred to as a(n):

Bullet loan

The asset manager is generally NOT responsible for:

Making maintenance decisions

What financial firm is least likely to invest in a large, long-term mortgage loan on a simple shopping center?

Mortgage broker

When the tenant pays a base rent plus some or all of the operating expenses of a property, the result is a

Net lease

Both the owner and the manager may be better off if property management compensation were based on a percentage of the property's:

Net operating income

When a property is sold for less than its remaining book value, its depreciation (wear and tear) was:

Underestimated

What is the IRR, assuming an industrial building can be purchased for $250,000 and is expected to yield cash flows of $18,000 for each of the next five years and be sold at the end of the fifth year for $280,000?

9.20%

A contractual relationship in which an individual must act in the best interests of a principal when dealing with a third party is termed:

An agency relationship

For non-real estate corporations, which of following is not a potential advantage of a real estate sale-leaseback?

The firm benefits from property appreciation that occurs after the sale-leaseback.

What term best describes the maximum price a buyer is willing to pay for a property?

The investment value

With an expense stop clause:

The landlord is responsible for operating expenses up to a specified level, above which increase in operating expenses become the obligation of the tenant based on the tenant's leasable square footage.

If an investor is a "dealer" with respect to certain real estate, that real estate is classified (by the IRS) as being held:

For sale to others

The typical anchor tenant in a neighborhood shopping center is a:

Grocery store

In shopping center leases, rents are typically quoted on the basis of what type of area occupied by the tenant?

Gross leasable area.

Which of these is not typically a responsibility of a property manager?

Income tax analysis

As a general rule, using financial leverage

Increases risk to the equity investor

The IRR equation incorporates

Initial cash outflow and inflow, and future cash in/out flow

Consider a 30-year, 7 percent, fixed rate, fully amortizing mortgage with a yield maintenance provision. Relative to this mortgage, a 10-year balloon mortgage with the same interest rate and yield maintenance provisions will primarily reduce the lender's:

Interest rate risk

Which of the following statements is most accurate?

Joint ventures decrease the amount of equity capital the developer/borrower must invest in the project

Small to medium size real estate syndicates that development or acquire property in a local market are most typically organized as

LLC

Special allocations of income or loss are available if the form of ownership is a(n)...

LLC

what loan is a life insurance company most likely to invest in?

Large office building loan (non construction)

Which of the following forms of ownership involve both limited and unlimited liability?

Limited partnerships

With regard to double taxation, distribution and the treatment of the losses, general partnerships are most like what?

Limited partnerships

For tax purposes, a substantial real property improvement made after the initial purpose is:

Treated like a separate building

Demolition of an existing property on an urban site will likely occur:

When the site value, assuming a new use, exceeds the value of the site under its existing use, plus the cost of demolition

Present value:

Will always equal a projects purchase price when the discount rate is in the IRR

With a mezzanine loan

the borrows promise to pay is secured by the equity interest in the borrowers limited partnership or LLC

The net present value of an acquisition is equal to what?

the present value of expected future cash flows, less the initial cash outlay

The purchase price that will yield an investor the lowest acceptable rate of return is

the property's investment value to that investor

The overall capitalization rate calculated on potential acquisition

is the reciprocal of the income multiplier

Existing leases:

Must be considered more carefully when valuing a multi-tenant office building than valuing an apartment complex.

Which of the following best describes the taxation of gain and losses from the sale of Section 1231 assets?

Net gains are taxed as capital gains; net losses are taxed as ordinary income.

The tenant is responsible for paying property taxes and insurance in a:

Net-net lease.

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: $50,000; and Year 5: $650,000. Would an investor with a required after-tax rate of return of 15 percent be wise to invest at the current price?

No, the NPV is -$148,867

A real estate investment trust generally:

None of the above

Taxable income from the rental of actively managed depreciable real estate is classified as

Passive income

A lease in which the tenant pays a rent based in part on the sales of the tenant's business is known as a:

Percentage lease

Using financial leverage on a real estate investment can be for the purpose of all of the following except:

Reduction of financial risk for the leveraged investment

Ratio analysis

Serves as an individual evaluation of the adequacy of an investments expected cash flow

The following are necessary for a lease to be valid, except:

Tenant's contact phone number, or address, in the event of an emergency.

Which of the following statements regarding tenant improvements (TIs) is the least true in the context of commercial real estate leases?

Tenants can generally negotiate higher TIs for existing space than for space in a newly developed project.

If the investor is in the 33 percent income tax bracket, how much tax will a tax credit of $2,000 save the investor in taxes?

$2,000

Given the following information, what is the required equity down payment? • Acquisition price: $800,000 • Loan-to-value ratio: 75% • Total up-front financing costs: 3%

$218,000

In 2012 you purchase a small office building for $450,000, which you financed with a $337,000 fixed-rate mortgage. Up-front financing costs total $6,750. How much of this upfront financing expense could be written off against ordinary income in 2012?

$270.00

The acquisition price of a property is $380000 The loan amount is 285000 If the property's NOI is expected to be 22,560, operating expenses 12, 250 and the annual debt service 19987 the debt yield ratio is appox. equal to:

.079 or 7.9%

The acquisition price of a property is 380000, the loan investment is $285,000. If the property's NOI is expected to be $22,560, operating expenses $12,250, and the annual debt service is $19,987, the debt coverage ratio (DCR) is what?

1.13

Assume a retail shopping center can be purchased for $5.5 million. The center's first year NOI is expected to be $489,500. A $4,000,000 loan has been requested. The loan carries a 9.25 percent fixed contract rate, amortized monthly over 25 years with a 7-year term. What will be the property's (annual) debt coverage ratio in the first year of operations?

1.19

Under current federal income tax law, what is the shortest cost recovery period available to investors purchasing residential rental property?

15 years

A real estate investment is available at an initial cash outlay of $10,000 and is expected to yield cash flows of $3,343.81/year for five years. the internal rate of return is approximately what?

20%

What is the effective gross income multiplier

6.11

What percent of the rental income from residential property must be derived from the leasing of units occupied by tenants as housing?

80%

What is the implied first year overall capitalization rate

9.5%

The requirement of a real estate property manager to act in the best interests of the landlord when dealing with a tenant is termed:

A fiduciary responsibility

Lease provisions that grant the tenant the right, but not the obligation, to do something generally result in:

A higher base rent

Remodeling and rehabilitation:

Are expected to add value to the property if undetaken

Income Multipliers

Are useful as a preliminary analysis tool to weed out obviously unaccepted investment opportunities

As a tenant, you wish to turn over all rights and responsibilities of your unexpired lease term to a new tenant. By doing so, you are:

Assigning your leasehold interest

Which of these ratios is an indicator of the financial risk for an income property?

Both A and B, but not C; debt coverage and loan to value ratio

Double taxation of the income produced by the underlying properties is most likely to occur if the commercial properties are held in the form of a:

C corporation

The Institute of Real Estate Management (IREM) awards which of the following designations?

CPM

what lender is most likely to provide a construction loan?

Commercial bank

Which of the following is not an operating expense associated with income producing property?

Debt service

Due-on-sales clauses are included in commercial mortgages primarily to protect lenders from:

Default risk

Commercial mortgage borrowers may decide to prepay the principal on their loan even if they face prepayment penalties. One way that lenders protect themselves from prepayments in such circumstances

Defeasance

The equity dividend rate

Expressed before- tax cash flow as a percent of the required equity capital investment

The operating expense ratio:

Expresses operating expenses as a percent of effective gross income

Net passive activity losses can be used to offset dividend income from a real estate stock.

False

Limited partnerships can't enjoy tax deduction benefits, but the general partners can (T/F)

False Pg. 480

After the tax discount rates are greater than discount rates used to value before tax cash flows (T/F)

False Pg. 520