Sources of Commerical Debt and Equity Capital

The estimated market value of investible commercial real estate is ____ trillion

$8.8

CMBS can be backed by which of the following:

- A pool of commercial mortgages - A single commercial mortgage loan

Owners of investment properties almost always pool their capital using some form of ownership because allows them to:

- Acess to a larger amount of equity to invest - Share the risk of the investment with others

Important trade-offs involved in the choice between direct ownership versus investing through an intermediary include which of the following:

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

publicly-traded REITs have been described as mutual funds for real estate, in that they provide:

- Investment diversification - Liquidity

To avoid taxation REIT must do which of the following ?

- Keep 75% of its assets invested in real estate, cash, or goverment securities - Have at least 100 shareholders - Make sure that 75% of its gross income is derived from real estate investments

Disadvantages of direct investment for many "smaller" investors include:

- Less ability to diversify their overall portfolio

These characteristics make life insurance companies well suited for investments in commerical real estate markets:

- Low loquidity - High transactions costs

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 - Paul has options to avoid personal unlimited liability

According to Exhibit 17-3, the value of commerical real estate owned by pension funds exceeds the value owned by which of the following?

- Private financial institutions - Life insurance companies

With regard to taxation,

- REITs are similar to S corporations, in that they experience no "double" taxation - REITs are similar to C corporations in that there is separation of ownership and control - REITs are similar to limited liability companies, in that they provide limited liability for all investor

The market of U.S. commercial rela estate held by non-real estate corporations is estimated to exceed $12.5 trillion. Which of the following are examples of noninvestible real estate?

- Restaurant owned by fast-food companies - Medical office builodings owned by a hospital - Factories owned by automobile manufactures

Which of the following statements are accurate?

- Shares of listed REITs are more liquid than direct investments in commerical real estate - Equity REITs tend to focus their investments by property type and/or geographic market

Which of the following are characteristic of a limited liability company

- The non-managing members have limited liability - All investors may participate in management - It is typically cheaper and easier to create thana limited partnership

The poooling of equity capital by investors to purchase real estate

- takes place among both instituional and noninstituional investors - Often referred to as a syndication - Often done with the intent to develop land

The choice of ownership by an investment entity is driven by trade-offs along multiple dimensions:

1. Federal income tax issues 2. Desire to avoid personal liability 3. Management control issues 4. Ability to access debt and additional equity capital 5. Ability to reduce return volatility and sahre the risk of the investment with other investors 6. Ability of investors to dispose of their interests in the organization 7. Ability to distribute cash flows to investors based on percentages that differ from the percentage of equity capital contributed

From the data provided in Exhibit 17-2, the overall "loan-to-value" ratio associated with the $8.8 trillion investible commercial real estate market is:

45.2%

The liabilites of life insurance companies can be characterized by which of the following?

- Long-term - Fairly predictable

S corporations for some investor groups is that they must not have more than ____ shareholders.

75

Commingled Real Estate Funds (CREFs)

A collection of investment capital from various pension funds that are pooled by an investment advisor to purchase commerical real estate properties

Syndicate

A group of persons or legal entities who come together to carry out a particular activity

Limited Liability Company

A hybrid form of ownership that combines the corporate characteristics of limited liability with the tax characteristics of a partnership

A subchapter S coporation

Allows for limited liability for all of its shareholders

Partnership agreement

Details the operation and management of the LP

Equity REITs

Invest in and operate commercial properties

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 REITs underlying assets and liabilities?

Net asset value

FFO =

Net income + Tax depreciation + Amortization of leasing + Amortization of improvements made to tenants' space - Gains from infrequent and unusual events

On the risk-return spectrum, which of the following fund types generally offers investors the highest expected return?

Opportunistic fund

REIT

Real Estate Investment Trust

The ultimate equity investors differ from the chosen ownership form:

True

Disadvantages of a general partnership include:

- Unlimited personal liability - Liable for wronful acts commityed by other partners

When an investor in a limited partnership receives a disproportinate share of cash flow distributions from the underlying property, relative to her equity investment, this is referred to as:

A special allocation

An investor's total capital commitment to a real estate private equity fund is:

Collected over several years as the fund acquires properties

Tenancy in Common (TIC)

Constitutes direct ownership of the property

The emergence and growth of umbrella partnerships 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

Relative to direct ownership, separate accounts allow investors to:

Access the expertsie of a management company

The capital raised by equity REITs through debt and equity offerings is primarily used to:

Acquire properties

The advantages of a limited liability company include:

Allows the limited partners to cap their personal liability to an amount equal to their total investment in the partnership.

Separate Accounts

An investment manager acting on behalf of multiple clients holds each client's assets in a separate account rather than as part of a commingled fund to permit customized investments for each client

Umbrella Partnership REIT (UPREIT)

An organizational structure in which a publicly traded REIT owns a fractional interest in an operating partnership, which in turn, owns all or part of individual property partnerships.

General Partnership

An ownership form characterized by multiple owners, unlimited liability for each equity holder, and flow through taxation of both taxable income and cash distributions

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

C corporation

S Corporation

Corporate ownership structure that is a federal tax election made with the unanimous consent of the shareholders. Possesses the same limited liability benefits for its shareholders as do C corporations but it is not a separate taxable entity.

If the per share stock price of a REIT is less than its per share net assest value (NAV), the REIT is said to be selling at:

Discount to net asset value

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:

Earn income that may be taxed at both the corporate and individual income

A C corporation

Earns income that may be taxed at both the corporate and individual level

Net Assest Value (NAV)

Estimated total market value of a REIT's underlying assests, less mortgages and other debt

High net worth families are typically more risk averse in their real estate investments than pension funds

False

Many individual investors who invest in commercial real estate do so through commingled real estate funds

False

Some have characterized LP's as "super passsthrough entities"

False

True/False: Commercial real estate investors realize substantial tax benefits, relative to other widely used ownership forms, when invesing in REITs

False

Investing in a ____ has the highest expected return and the highest expected risk for the investor

Full platform operating company

The majority of outstanding commercial mortage debt is:

Held privately by mortgage investors/lenders

The majority of outstanding commerical mortgage debt is:

Held privately by mortgage investors/lenders

The disadvantages of a limited liability company include:

In exchange for limited personal liability, the limited partners give up day-to-day control of the partnership and are prohibited from participating in management or policy making.

Which of the following investor groups has increased their percentage ownership of a typical REIT?

Institutional

Core funds

Invest in high-quality properties that typically have strong leases in place and are located in major metropolitan areas

Securitized investments

Investment instruments that pool investment assets, enabling investors to purchase a share in the pool of assets.

Full platform operating company

Investment strategy that involves starting or acquiring and then operating a real estate company.

Value-added funds

Investments might include a building with some lease-up risk or the need for moderate renovation and repositioning

If a REIT complies with a list of conditions on an on-going basis

It can avoid paying taxes at the entity level

A major benefit of 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

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

Limited Partnership

Partnership in which only one party assumes unlimited liability in exchange for control of all decision making. Limited partners enjoy liability to the extent of their equity contributions. All parties involved benefit from flow-trough income and taxation.

The most common investors in commingled real estate funds are:

Pension funds

The value of commercial real estate owned by life insurance companies exceeds the value owned by ____

Private financial institutions

Mortgage REITs

Purchase mortgage obligations and thus become, effectively, real estate lenders

Real Estate Owned (REO)

Real estate obtained by the financial instituion as a result of borrower default and foreclosure

Pension funds

Retirement savings accounts that now represent a major source of equity capital in commercial real estate markets.

Investment in commercial real estate through limited liability companies are considered:

Securities

The construction of commerical properties is generally financed with ____ loans

Short-term

In a limited liability partnership, the general partner, is often referred as the

Syndicator or sponsor

Which of the following is not an important consideration when choosing an ownership form for real estate investment?

The desire to distibute cash flows based on the percentage of equity capital contributed by each investor

The disadvantages of a C company include:

The income from the underlying property or properties may be taxed twice.

Opportunistic funds

Their investments may have a heavier development component and often involve riskier property types and locations

Real estate private equity funds

These funds have a finite life, 7-10 years, with an option for the fund manager or sponsor to extend the life by an additional year or two.

Which of the following choices best describes the investment focus of an equity REIT?

They invest primarily in commercial properties

The advatanges of a general partnership include:

Treated as conduits for tax purposes; taxable income and losses flow through to the individual partners who pay the tax. Thus, investors who own commercial real estate do not face "double taxation," where the entity that owns the real estate pays tax first, followed by a second tax obligation at the investor level.

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

For this reason, real estate general partnerships are fairly ____, and those that do exist tend to have only a few partners.

Uncommon

the use of S corporations by real estate investment sponsors is ____ since the advent of limited liability companies.

Uncommon

C Corporation

corporate ownership structure that provides limited liability, but suffers from double taxation and does not enable losses to flow through to investors for current use