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FIN 3070 Exam 2

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1) Estimating the market value of real estate is complicated by the unique characteristics of real estate markets. In contrast to stock markets, real estate markets are characterized by all of the following except A) no two assets are considered perfect substitutes for one another. B) market prices are revealed almost instantaneously to prospective buyers. C) transactions occur infrequently. D) the physical location of the asset being sold plays an important role in the pricing process.

1) Risk is the possibility that actual outcomes will vary from what was expected when the asset was purchased. If investors require a higher rate of return for undertaking more risk, the underlying assumption is that investors are A) risk neutral. B) risk averse. C) risk taking. D) hedging risk.

10) The use of financial leverage when investing in real estate is a double-edged sword. While increased leverage may allow the investor to "purchase" higher expected returns, the "price" of doing so is an increase in which of the following risks? A) liquidity risk B) default risk C) interest rate risk D) pipeline risk

10) You have just had a tenant sign a lease contract that guarantees you payments of $100,000 at the end of each year for the next five years. If you wish to determine the present value of these future cash flows (i.e., the value of this cash flow stream to you today), you would use which of the following time-value-of-money processes? A) compounding B) discounting C) amortizing D) aggregating

11) Most appraisers would say that report writing is one of the most important functions that they perform. Assume that an appraiser is putting together a report for a single-family home. Which of the following reporting options would be the most commonly used in this scenario? A) self-contained appraisal report B) summary appraisal report C) restricted appraisal report D) oral appraisal report

12) Just as it is important for an investor to consider the impact of financial leverage on her return, it is also necessary to account for the effect of income taxes. How would the presence of income taxes impact the levered going-in IRR? A) Income taxes increase the levered going-in-IRR B) Income taxes reduce the levered going-in-IRR C) Income taxes do not affect the going-in-IRR D) Income taxes cause the levered going-in-IRR to become invalid as a measure of return.

13) In discounted cash flow (DCF) analysis, the sale price of the property must be estimated at the end of the expected holding period. The most common method for determining the terminal value of the property is the A) yield capitalization method. B) direct capitalization method. C) repeat-sales approach. D) cost approach.

13) Suppose that a landlord is interested in renting out a two-bedroom apartment for $1,000 a month for the next year. The landlord requires rent to be paid at the beginning of the month, at which point he will deposit the rental check into a local savings account. If the annual interest that the tenant can earn on this account is 5% and interest is compounded monthly, how much will the tenant have in his savings account at the end of the year? A) $12,278.86 B) $12,330.01 C) $13,330.02 D) $15,917.13

13) While there is no specific number of comparables that is required for every appraisal assignment, how many comparable sales are considered adequate as long as the properties are very similar to the subject property? A) one B) three C) five D) ten

15) Assuming that an investor requires a 10% annual yield over the next twelve years, how much would she be willing to pay for the right to receive $20,000 at the end of year 12? A) $6,053.91 B) $6,372.62 C) $62,768.57 D) $136,273.84

16) Adjustments for physical characteristics are intended to capture the dimensions in which a comparable property differs physically from the subject property. If the only physical difference between the subject property and the comparable is that the comparable does not have a fireplace, which of the following adjustments should take place? A) The transaction price of the comparable property should be adjusted downward. B) The transaction price of the comparable property should be adjusted upward. C) The transaction price of the subject property should be adjusted downward. D) The transaction price of the subject property should be adjusted upward.

17) Given the following information, calculate the before-tax equity reversion (BTER): NOI: $89,100; annual debt service: $58,444; net sale proceeds: $974,700; remaining mortgage balance: $631,026. A) $30,656 B) $343,674 C) $572,582 D) $885,600

17) When calculating the net operating income of a property, it is important to identify any expenses that will be incurred in attempts to maintain the property. All of the following would be considered operating expenses except A) property insurance premiums. B) mortgage payments. C) utility expenses. D) property taxes.

18) Suppose an investor is interested in purchasing the following income-producing property at a current market price of $450,000. The prospective buyer has estimated the expected cash flows over the next four years to be as follows: year 1 = $40,000; year 2 = $45,000; year 3 = $50,000; year 4 = $55,000. Assuming that the required rate of return is 12% and the estimated proceeds from selling the property at the end of year 4 is $500,000, what is the NPV of the project? A) $8,829.96 B) $9,889.56 C) $428,113.65 D) $459,889.56

18) The cost approach to valuation assumes the market value of a new building is similar to the cost of constructing it today. Which of the following terms refers to the expenditure required to construct a building of equal utility using modern construction techniques, materials, and design that eliminates outdated aspects of the structure? A) reproduction cost B) replacement cost C) fixed cost D) variable cost

19) Accrued depreciation is the difference between the current market value of a building and the total cost to reproduce it new. One reason for this difference is related to changes in tastes, preferences, technical innovations, or market standards. This is commonly referred to as A) physical deterioration. B) functional obsolescence. C) external obsolescence. D) tax depreciation.

19) Assume that an industrial building can be purchased for $1,500,000 today, is expected to yield cash flows of $80,000 for each of the next five years (with the cash flows occurring at the end of each year), and can be sold at the end of the fifth year for $1,625,000. Calculate the internal rate of return (IRR) for this transaction. A) 3.14% B) 6.78% C) 9.20% D) 10.37%

2) Net operating income is similar to which of the following measures of cash flow in corporate finance? A) dividend yield B) earnings before deductions for interest, depreciation, income taxes, and amortization (EBIDTA) C) price-earnings ratio D) discount rate

2) Since investors prefer to have money now rather than later, money received next week, instead of today, is not worth as much to those receiving it, assuming the magnitude of the cash flow in each period is the same. Therefore an adjustment to the prospective cash flows is required. This process is referred to as A) compounding. B) discounting. C) amortizing. D) hedging.

20) Given the following information, calculate the NPV for this property: initial cash outflow: $200,000; discount rate: 15%; CF for year 1: $25,876; CF for year 2: $23,998; CF for year 3: $23,013; CF for year 4: $22,105; CF for year 5: $144,670. A) -$51,875 B) -$59,657 C) $140,343 D) $295,951

20) Given the following information, calculate the net operating income assuming below-line treatment of capital expenditures: property: 4 office units, contract rents per unit: $2,500 per month; vacancy and collection losses: 15%; operating expenses: $42,000; capital expenditures: 10%. A) $48,000 B) $60,000 C) $95,000 D) $102,000

21) Given the following information, calculate the effective gross income: property: 4 office units, contract rents per unit: $2,500 per month; vacancy and collection losses: 15%; operating expenses: $42,000; capital expenditures: 10%. A) $100,000 B) $102,000 C) $120,000 D) $135,000

23) Given the following expected cash flow stream, determine the NPV of the proposed investment in an income producing property and determine whether or not the investment should be pursued: investment horizon: five years; expected yearly cash flow in each of the next five years: $127,628; expected sale price at end of five years: $1,595,350; opportunity cost of investment 6%; current market price of property: $1,750,000. A) NPV is -$20,246; decision is to invest. B) NPV is -$20,246; decision is not to invest. C) NPV is $249,967; decision is to invest. D) NPV is $249,967; decision is to not invest.

24) Given the following information, calculate the appropriate going-in cap rate using general constant-growth formula: overall market discount rate, 12%; constant growth rate projection: 3% per year; sale price: $1,950,000; net operating income: $390,000; potential gross income: $520,000. A) 8% B) 9% C) 10% D) 11.5%

25) Given the following information regarding an income producing property, determine the unlevered internal rate of return (IRR): expected holding period: five years; 1st year expected NOI: $89,100; 2nd year expected NOI: $91,773; 3rd year expected NOI: $94,526; 4th year expected NOI: $97,362; 5th year expected NOI: $100,283; debt service in each of the next five years: $58,444; current market value: $885,000; required equity investment: $221,250; net sale proceeds of property at end of year 5: $974,700; remaining mortgage balance at end of year 5: $631,026. A) 10.6% B) 12.2% C) 22.9% D) 33.4%

25) Given the following information, calculate the effective gross income multiplier: sale price: $2,500,000; effective gross income: $340,000; operating expenses: $100,000; capital expenditures: $36,000. A) 0.136 B) 7.35 C) 10.42 D) 12.25

27) Suppose that an appraiser has just completed her analysis using the cost approach to valuation. She has determined that the market value of the subject property is $400,000. If the added value of the site was $80,000 and accrued depreciation amounted to $50,000, what was the reproduction cost of the building? A) $270,000 B) $370,000 C) $430,000 D) $530,000

1) Which of the following measures is considered the fundamental determinant of market value for income-producing properties? A) net operating income B) potential gross income C) operating expenses D) capital expenditures

11) Most appraisers adhere to an "above-line" treatment of capital expenditures. This implies which of the following? A) Capital expenditures are subtracted in the calculation of net operating income. B) Capital expenditures are subtracted from net operating income to obtain a net cash flow measure. C) Capital expenditures are added to net operating income. D) Capital expenditures are excluded from all calculations because they are difficult to estimate.

12) Suppose an investor deposits $2,500 in an interest-bearing account at her local bank. The account pays 2.5% interest compounded annually. If the investor plans on withdrawing the original principal plus accumulated interest at the end of seven years, what is the total amount that she should expect to receive assuming interest rates do not change? A) $2,971.71 B) $2,974.89 C) $3,532.43 D) $11,920.93

14) An investor agreed to sell a warehouse five years from now to the tenant who currently rents the space. The tenant will continue to pay $20,000 rent at the end of each year including year 5 in which he will purchase the building for an additional $150,000. Assuming the investor's required rate of return is 10%, how much is this deal presently worth to the investor who was willing to sell? A) $168,953.93 B) $241, 451.07 C) $363,678.50 D) $1,032,475.67

14) Gross income multiplier analysis assumes that the subject and comparable properties are collecting market rents. Therefore, it is frequently argued that an income multiplier approach to valuation is most appropriate for properties with short-term leases. For which of the following property types, therefore, would we find it most appealing to use a gross-income multiplier in our analysis? A) apartments B) office C) industrial D)retail

15) Favorable mortgage financing may have a significant impact on the transaction price of the particular property. If the comparable property was known to have had favorable financing terms negotiated into the transaction price, which of the following adjustments should take place? (Note: Assume that the comparable property cannot be dropped from the analysis as there are already limited comparable sales transactions.) A) The transaction price of the comparable property should be adjusted downward. B) The transaction price of the comparable property should be adjusted upward. C) The transaction price of the subject property should be adjusted downward. D) The transaction price of the subject property should be adjusted upward.

17) The purchase price of an income-producing property today is $570,000. After analysis of the expected future cash flows, expected sales price, and expected yield, the investor determines that the future cash flows have a present value (PV) of $580,000. Taking into consideration the price of the property today, what is the net present value (NPV) of this investment opportunity, and should the investor take the deal? A) $10,000; Yes B) $10,000; No C) -$10,000; Yes D) -$10,000; No

17) The sequence of adjustments to the transaction price of a comparable property would make no difference if all adjustments were dollar adjustments. However, if percentage adjustments are involved then the sequence does matter. In making adjustments to a comparable property to arrive at a final adjusted sales price, the proper sequence for the following adjustments would be A) financing terms, market conditions, location. B) location, market conditions, financing terms. C) market conditions, location, financing terms. D) location, financing terms, market conditions.

19) Given the following information, calculate the overall capitalization rate: sale price: $950,000; potential gross income: $250,000; vacancy and collection losses: $50,000; and operating expenses: $50,000. A) 15.8% B) 21.1% C) 26.3% D) 36.8%

2) Real estate appraisers generally distinguish among the concepts of market value, investment value, and transaction value. Which of the following statements best describes the concept of market value? A) It is an estimate of the most probable selling price of a property in a competitive market. B) It is the value a particular investor places on a property. C) It is the price we observe when a property is sold. D) It is the maximum amount that a seller would be willing to accept.

2) While the general concepts of investment value and market value are very similar, there is an important distinction between the two. All of the following statements regarding investment value are true except A) investment value is based on the expectations of a typical, or average, investor. B) investment value is a function of estimated cash flows from annual operations. C) investment value takes into consideration estimated proceeds from the sale of the property. D) investment value applies a discount rate to future cash flows.

21) At the conclusion of the traditional sales comparison approach to valuation, the appraiser evaluates and reconciles the final adjusted sale prices into a single value for the subject property. This single value is commonly referred to as A) indicated value. B) investment value. C) transaction value. D) replacement value.

24) Given the following information regarding an income producing property, determine the NPV using levered cash flows in your analysis: required equity investment: $270,000; expected NOI for each of the next five years: $150,000; debt service for each of the next five years: $125,000; expected holding period: five years; required yield on levered cash flows: 15%; expected sale price at end of year 5: $2,000,000; expected cost of sale: $125,000; expected mortgage balance at time of sale: $1,500,000. A) $245.15 B) $270,245.15 C) $419,264.54 D) $1,435,029.64

27) Upon starting his first job after graduation, Jon has completed the necessary paperwork to set up direct deposit of his paycheck into his savings account. After taxes, medical benefits, and retirement account contributions have been taken out of John's gross salary, he is left with a direct deposit of $4,000 at the end of each month. If John started with no other savings in his account, how much will John have in his savings account at the end of 12 months if he is able to earn an annual interest rate of 3%, with interest being compounded monthly? A) $48, 665.53 B) $48,787.19 C) $56,768.12 D) $58,471.16

29) Suppose your personal financial goal is to retire with $1 million in your savings account. How much must you deposit monthly in an account paying 5% a year (with interest being compounded monthly and your deposits occurring at the end of the month), to accumulate $1,000,000 by your 65th birthday if you begin your deposits on your 22nd birthday? (Note: Assume that you started with no savings in the account prior to your first deposit at age 22 and you do not make a deposit on your 65th birthday.) A) $552.13 B) $701.90 C) $21,282.95 D) $186,354.63

3) The process of converting periodic income into a value estimate is referred to as income capitalization. Income capitalization models can generally be categorized as either direct capitalization models or discounted cash flow models. Which of the following statements best describes the direct capitalization method? A) Value estimates are based on a multiple of expected first-year net operating income. B) Appraisers must make explicit forecasts of the property's net operating income for each year of the expected holding period. C) Appraisers must select the appropriate yield at which to discount future cash flows. D) The forecast must include the net income produced by a sale of the property at the end of the expected holding period.

30) A property owner has set up a contract in which he agrees to sell a warehouse five years from now to the tenant who currently leases the space. The tenant has agreed to continue to pay $20,000 in rent at the end of each year, including year 5, at which time he will purchase the building for an additional $1,500,000. Assuming the required rate of return on a similar investment is 10% (annual), how much is this deal presently worth to the original owner of the property? A) $1,007,197.20 B) $1,014,779.29 C) $2,281,452.80 D) $2,293,663.00

30) Suppose that an appraiser has come to the following conclusions in evaluating the subject property. Due to the dramatic shift in the perceived safety of the neighborhood, values of any residential properties in the area of the subject property have fallen by $10,000, on average. Due to the subject property's age, physical deterioration to the building accounts for an estimate of $50,000 in lost value. An evaluation of the floor plan reveals that it is quite obsolete relative to current homebuyer preferences. This has a detrimental effect on the value of the property that is estimated to be approximately $15,000. Based on your understanding of adjustments related to accrued depreciation, which of the following pertains to the adjustment for external obsolescence? A) $10,000 B) $15,000 C) $50,000 D) $75,000

32) Given the following information, determine the value of having an additional 500 square feet of living space. Assume that the comparable properties are similar in all other attributes besides those listed in the table below. Comparable 1 2 3 4 Time Sold Today 1 yr ago Today Today Bathrooms 1 1 2 2 Size (sq. ft) 3500 3000 3500 3000 Sale Price 150,000 140,000 160,000 156,000 A) $4,000 B) $6,000 C) $10,000 D) $16,000

32) Suppose an investor is interested in purchasing the following income-producing property at a current market price of $490,000. The prospective buyer has estimated the expected cash flows over the next four years to be as follows: year 1 = $48,000; year 2 = $49,440; year 3 = $50,923; year 4 = $52,451. Assuming that the required rate of return is 14% and the estimated proceeds from selling the property at the end of year 4 is $560,000, what is the NPV of the project? A) -$12,860.53 B) $145,574.52 C) $331,564.96 D) $477,139.47

34) Suppose an investor has the opportunity to make an investment that promises to pay her $100,000 five years from now. How much should this investor be willing to pay today for this investment opportunity if she could otherwise invest her money in an interest-bearing account that yields 5% (annual) and compounds interest on a monthly basis? A) $77,920.54 B) $78,352.62 C) $97,942.46 D) $432,947.67

4) It is common for investors in real estate to use mortgage debt to help finance capital investment. The use of debt can have a profound impact on the expected cash flows for a particular property. Which of the following terms refers to cash flows that represent the property's income after subtracting any payments due to the lender? A) levered cash flows B) unlevered cash flows C) discounted cash flows D) compounded cash flows

4) With compound interest, the investor earns interest on the principal amount invested plus interest on accumulated interest. Which of the following compounding frequencies would yield the investor the greatest ending balance assuming all else is equal? A) daily B) monthly C) quarterly D) annually

5) Assuming all else the same, the ________ of an annuity due will be ________ that of an ordinary annuity. A)future value; greater than B) present value; equal to C) future value; less than D) present value; less than

5) Net present value (NPV) is interpreted using the following decision rule: The investor will purchase the property as long as the NPV is A) greater than zero. B) equal to zero. C) less than zero. D) equal to the opportunity cost of investment.

5) Real estate professionals have long supported strict standards of ethics and practice. Followed by all states and federal regulatory agencies, which of the following imposes ethical obligations and minimum standards that must be followed by all real estate professionals providing formal estimates of market value? A) Uniform Standards of Professional Appraisal Practice (USPAP) B) Multiple Listing Services (MLS) C) Department of Housing and Urban Development (HUD) D) Office of Federal Housing Enterprise Oversight (OFHEO)

6) Changes in the discount rate used to complete net present value analysis can have a significant impact on the estimated value of the investment and therefore affect the overall investment decision. As the required internal rate of return (IRR) increases, the net present value will A) decline. B) increase. C) remain the same. D) become zero.

6) The internal rate of return (IRR) and the net present value (NPV) are tools that are widely used in real estate investment and finance decision making. An investor would most likely pursue an investment if which of the following circumstances was true? A) The going-in IRR exceeds the investor's required rate of return. B) The going-in IRR is less than the investor's required rate of return. C) The going-in IRR exceeds the NPV. D) The going-in IRR is less than the NPV.

8) It may be appropriate for a real estate professional to use different approaches for estimating the market value of a property depending upon the particular property type and use. Which of the following approaches would be most applicable when considering the valuation of retail office space (i.e., which approach would receive the most weight in the valuation process)? A) income approach B) sales comparison approach C) cost approach D) investment approach

8) The Real Estate Research Corporation (RERC) regularly surveys a sample of institutional investors and managers in order to gain insight into the required returns and risk adjustments used by industry professionals when making real estate acquisitions. Most of the properties that RERC examines are large, relatively new, located in major metropolitan areas, and fully or substantially leased. These classifications of properties are commonly referred to as A) investment grade properties. B) speculative grade properties. C) net-lease properties. D) industrial properties.

9) The use of financial leverage in purchasing an income-producing property can affect the amount of cash required at acquisition, the net cash flows from rental operations, the net cash flows from the eventual sale of the property, and the ultimate return on invested equity. Assuming the going-in IRR is greater than the effective borrowing cost, if an investor increases his leverage rate, say from 75% to 80%, we would expect which of the following to occur? A) Both NPV and going-in IRR increase. B) NPV decreases, while going-in IRR increases. C) NPV increases, while going-in IRR decreases. D) Both NPV and going-in IRR decrease.

29) Let's assume that we are about to appraise a house using the cost approach. The home was originally constructed in the early 1900s and is one of the last of its kind in this area. The cost of constructing an exact replica of this residence is estimated to be $350,000. On our trip to the actual property, we notice that this is the only residential unit located on this particular road. Based on the current usage of adjacent real estate, we estimate that the property would be worth an additional $25,000 in its highest and best use. However, due to the dramatic shift in the perceived safety of the neighborhood, values of any remaining residential properties in the area have fallen by $20,000. Due to the home's age, we also notice that there has been a significant amount of physical deterioration to the building, amounting to an estimate of $50,000 in lost value. Since the home was built over 100 years ago, the floor plan is quite obsolete relative to current preferences. This has a detrimental effect on the value of the property that is estimated to be approximately $15,000. Given this information, determine the appraised value of the home using the cost approach. A) $265,000 B) $290,000 C) $350,000 D) $460,000

30) Analysis of a subject property's pro forma reveals that its fifth-year net operating income (NOI) is projected to be $100,282 (you can assume that this cash flow occurs at the end of the year). If you estimate the projected rental growth rate for the property to be 3% per year and the going-out capitalization rate in year 5 to be 10%, determine the net sale proceeds the current owner of the property would receive if he were to sell the property at the end of year 5 and incur selling expenses that amounted to $58,300. A) $944,520.00 B) $974,610.00 C) $1,002,820.00 D) $1,032,910.00

31) A comparable property sold four months ago for $287,000. If the appropriate adjustment for market conditions is -0.50% per month (without compounding), what would be the adjusted price of the comparable property assuming all else is the same between the two properties? A) $269,780.00 B) $281,260.00 C) $285,565.00 D) $292,740.00

32) Given the following expected cash flow stream, determine the NPV of the investment opportunity: investment horizon: three years; end of first year NOI estimate: $886,464; end of second year NOI estimate: $913,058; end of third year NOI estimate: $940,450; price at which the property is expected to be sold at the end of year 3: $5,000,000; current market price of the property: $6,200,000; discount rate: 9%. A) -$321,010.66 B) -$28,451 C) +$28,451 D) +$321,010.66

33) Given the following information, determine the value of having an additional bedroom. Assume that the comparable properties are similar in all other attributes besides those listed in the table below. Comparable 1 2 3 4 Time Sold Today 1 yr ago Today Today Bathrooms 2 2 2 2 Size (sq. ft) 3 3 4 3 Sale Price 375,000 365,000 380,000 367,500 A) $2,500 B) $5,000 C) $7,500 D) $10,000

33) Using the following information, determine the net operating income (NOI) for the first year of operations of the subject property using "above-line" treatment of capital expenditures. Subject Property Number of apartments 15 Market rent per month 1000 Vacancy and collection losses 10% of PGI Operating Expenses 5% of EGI Capital Expenditures 10% of EGI A) $135,000 B) $137,700 C) $153,900 D) $162,000

34) Suppose that we observe two comparable properties that have each sold twice within the past four years. Property A sold 24 months ago for $500,000 and Property B sold 48 months ago for $575,000. If the two properties were sold today at $425,000 and $465,000, respectively, estimate the change in market conditions (percentage change in price) per month, assuming we equally weight the two properties in our analysis. A) -0.56% B) -0.51% C) 0.61% D) 0.68%

35) Suppose that an income-producing property is expected to yield cash flows for the owner of $150,000 in each of the next five years, with cash flows being received at the end of each period. If the opportunity cost of investment is 8% annually and the property can be sold for $1,250,000 at the end of the fifth year, determine the value of the property today. A) $304,704.00 B) $1,449,635.50 C) $1,481,143.98 D) $2,000,000.00

38) Given the following information, determine the final appraisal value of the subject property. Market Conditions: -0.50%/month Lot size: $25,000/acre Effective Age (years): $1,000/year Living Area (sq. ft): $45.00/sq. ft Bath: $1,250/bath Bedrooms: $3,000/bedroom Subject Property Comparable Time Sold Today 4 months ago Lot size (acres) 0.83 0.80 Effective age (yrs) 8 7 Living area (sq. ft) 2,197 2,383 Bath 3.5 3.5 Bedrooms 4 4 Sale Price - $287,000 A) $271,140 B) $272,640 C) $284,120 D) $289,380

4) The starting point in calculating net operating income is the total annual income the property would produce assuming 100% occupancy and no collection losses. This is commonly referred to as A) effective gross income. B) potential gross income. C) operating expenses. D) capital expenditures.

4) While it is often sufficient to rely on informal methods of estimating the market value of real estate assets, the complexity and large dollar value of many real estate decisions dictate that formal estimates based on methodical collection and analysis of relevant market data should be utilized. The unbiased written estimate of the market value of a property is commonly referred to as a(n) A) arm's-length transaction. B) appraisal. C) property adjustment. D) reconciliation.

6) One complication that appraisers may face is the variety of lease types that may be available for a particular property type. Which of the following statements best describes a graduated or step-up lease? A) The monthly rent remains fixed over the entire lease term. B) The lease establishes a schedule of rental rate increases over the term of the lease. C) Rental rate increases are indexed to the general rate of inflation. D) Rental rates are a function of the sales of the tenant's business.

7) The internal rate of return (IRR) on a proposed investment is the discount rate that makes the net present value of the investment A) greater than zero. B) equal to zero. C) less than zero. D) greater than the opportunity cost of not investing.

7) The rate that is used to discount expected future cash flows can be thought of as the return the investor is forgoing on an alternative investment of equal risk. In this framework, the discount rate is being thought of as which of the following? A) net present value B) opportunity cost C) closing cost D) future value

7) While there are several conventional approaches used to estimate the market value of real estate, which of the following is typically considered the most reliable approach? A) income approach B) sales comparison approach C) cost approach D) investment approach

8) The expected costs to make replacements, alterations, or improvements to a building that materially prolong its life and increase its value is referred to as A) operating expenses. B) capital expenditures. C) vacancy losses. D) collection losses.

10) Several techniques can be used to obtain an indication of land value. The cost approach to valuation would most likely be used for which of the following properties? A) one-family residential property B) retail office space C) education facility D) high-rise apartments

11) An important piece of criteria for investors to consider when deciding between real estate investment opportunities and investing in stocks or bonds is the effect of income taxes on their return. For most investors, the effective tax rate on commercial real estate is A) greater than the effective tax rate on a stock or bond investment. B) equal to the effective tax rate on a stock or bond investment. C) less than the effective tax rate on a stock or bond investment. D) cannot be compared across asset classes.

12) The going-in cap rate, or overall capitalization rate, is a measure of the relationship between a property's current income stream and its price or value. Which of the following statements regarding cap rates is true? A) It is a measure of total return since it accounts for future cash flows from operations and expected appreciation (depreciation) in the market value of the property. B) It is a discount rate that can be applied to future cash flows. C) It is analogous to the dividend yield on a common stock. D) It is the projected rate at which prices will appreciate in the future.

14) Many investors use mortgage debt to help finance capital investment for income-producing real estate. In doing so, the owner will receive income as long as the property produces enough income to cover all operating and capital expenditures, the mortgage payment, and all state and federal income taxes. Therefore, the owner's claim is commonly referred to as a A) primary claim. B) joint claim. C) residual claim. D) superior claim.

15) When using discounted cash flow analysis for valuation, the appraiser must estimate the sale price at the end of the expected holding period. This price (assuming selling expenses have yet to be accounted for) is referred to as the property's A) net sale proceeds. B) selling expenses. C) terminal value. D) current market value.

16) Assume that an individual puts $10,000 into a savings account that pays 3% interest, with interest being compounded monthly. The individual plans to withdraw the balance in five years to buy a car. If he does not make any further deposits over this period, how much will the individual be able to put towards his purchase? A) $10,125.63 B) $11,592.74 C) $11,616.17 D) $58,916.03

16) Given the following information, calculate the estimated terminal value of the property at the end of its holding period: going-out cap rate: 9%; estimated holding period: five years; NOI for year 5: $100,500; NOI for year 6: $102,000. A) $1,113,333 B) $1,116,667 C) $1,133,333 D) $1,166,667

19) Given the following information, calculate the going-out cap rate: estimated holding period: five years; NOI for year 1: $120,000; NOI for year 5: $150,000; NOI for year 6: $155,250; expected sale price at end of year 5: $1,350,000. A) 8.9% B) 11.1% C) 11.5% D) 11.9%

20) Which of the following would be categorized as a cause of external obsolescence? A) lack of adequate insulation B) deterioration of indoor carpets C) increased traffic flow due to more intensive use in the local area D) outdated fixtures

21) An investor originally paid $22,000 for a vacant lot twelve years ago. If the investor is able to sell the lot today for $62,000, what would his annual rate of return be on this investment (rounded to the nearest percent)? A) 5% B) 7% C) 9% D) 11%

22) An investor just purchased an office building for $100,000. He knows for certain that he can sell the building for $110,000 in five years. Approximately how much does he need to charge in annual rent in order to achieve a 15% annual return on the deal (rounded to the nearest hundred dollars)? A) $2,500 B) $8,000 C) $13,500 D) $20,500

22) In using transaction data to determine the current value of the subject property, it is important to recognize that general market conditions may have changed since a particular transaction occurred. Property A sold 18 months ago for $235,000 and Property B sold 12 months ago for $215,000. If the two properties are priced today at $239,500 and $222,300, respectively, what is the average monthly rate of increase that can be used to adjust comparable prices for changes in market conditions? A) 0.09% B) 0.17% C) 0.19% D) 0.32%

23) A comparable property sold 15 months ago for $105,000. If the appropriate adjustment for market conditions is 0.25% per month (without compounding), what would be the adjusted price of the comparable property? A) $105,262.50 B) $105,393.80 C) $108,937.50 D) $144,375

23) Given the following information, calculate the appropriate going-in cap rate using mortgage-equity rate analysis; mortgage financing, 75%; typical debt financing cap rate: 10%; sale price: $1,950,000; before tax cash flow (BTCF): $390,000. A) 9.6% B) 10% C) 12.5% D) 13.6%

23) Suppose a bank decides to make a mortgage loan to an individual so that she may purchase a home. The homeowner will pay the bank $1,500 per month in mortgage payments for the next thirty years. The bank will collect the mortgage payments at the end of the month. What is this promised stream of cash flows worth to the bank today if they could reinvest the monthly income at an annualized rate of 5% for the entire investment horizon? A) $23,058.68 B) $99,658.27 C) $279,422.43 D) $1,248,387.95

24) Given the following information, determine the value of having an additional bathroom. Assume that the comparable properties are similar in all other attributes besides those listed in the table below. Comparable 1 2 3 4 Time Sold Today 1 yr ago Today Today Bathrooms 1 1 2 2 Size (sq. ft) 3500 3000 3500 3000 Sale Price 150,000 140,000 160,000 156,000 A) $4,000 B) $6,000 C) $10,000 D) $16,000

26) Given the following information regarding an income-producing property, determine the internal rate of return (IRR) using levered cash flows: expected holding period: five years; 1st year expected NOI: $89,100; 2nd year expected NOI: $91,773; 3rd year expected NOI: $94,526; 4th year expected NOI: $97,362; 5th year expected NOI: $100,283; debt service in each of the next five years: $58,444; current market value: $885,000; required equity investment: $221,250; net sale proceeds of property at end of year 5: $974,700; remaining MORTGAGE BALANCE at end of year 5: $631,026. A) 10.6% B) 12.2% C) 22.9% D) 33.4%

26) Suppose that an industrial building can be purchased today for $2,500,000. If it is expected to produce cash flows of $180,000 for each of the next five years (assume CFs are received at the end of each year) and can be sold at the end of the fifth year for $2,800,000, what is the internal rate of return (IRR) on this investment? A) 0.09% B) 4.57% C) 9.20% D) 10.37%

26) Suppose that we observe two comparable properties that have each sold twice within the past two years. Property A sold 24 months ago for $350,000 and Property B sold 18 months ago for $325,000. If the two properties were sold today at $375,000 and $340,000, respectively, estimate the change in market conditions (percentage change in price) per month, assuming we equally weight the two properties in our analysis. A) 0.19% B) 0.24% C) 0.28% D) 0.33%

26) Three highly similar and competitive income-producing properties within two blocks of the subject property have sold this month. All three offer essentially the same amenities and services as the subject property. The sale prices and estimated first-year NOI for each of the comparable properties are as follows: Comparable Sale Price NOI1 A $500,000 $55,000 B $420,000 $50,400 C $475,000 $53,400 Using the information provided, calculate the overall capitalization rate by direct market extraction assuming each property is equally comparable to the subject. A) 11.0% B) 11.2% C) 11.4% D) 12.0%

27) Given the following information regarding an income producing property, determine the after-tax net present value (NPV): expected holding period: five years; 1st year expected BTCF: $30,656; 2nd year EXpected BTCF: $33,329; 3rd year expected BTCF: $36,082; 4th year expected BTCF: $38,918; 5th year expected BTCF: $41,839; 1st year expected tax liability: $7,645; 2nd year expected tax liability: $8,658; 3rd year expected tax liability: $9,708; 4th year expected tax liability: $10,798; 5th year expected tax liability: $6,951; estimated before tax equity reversion at end of year 5: $343,674; expected taxes due on sale at end of year 5: $32,032; required equity investment: $241,163; after-tax opportunity cost: 11.2%. A) -$40,858 B) -$91,785 C) $40,858 D) $91,785

27) Suppose that you are attempting to value an income-producing property using the direct capitalization approach. Using data from comparable properties, you have determined the overall capitalization rate to be 11.44%. If the projected first-year net operating income (NOI) for the subject property is $44,500, what is the indicated value of the subject using direct capitalization? A) $49,590.80 B) $50,225.73 C) $388,986.00 D) $509,080.00

28) Assume you have been hired to appraise a local hospital. Your best estimate of the reproduction (or replacement) cost of the building is $3,700,000. However, upon evaluating the use of land in the local area, you have deemed the value of the site to be worth an additional $800,000. If the building has depreciated by $500,000 over its lifetime and there are no further depreciation losses due to external or functional obsolescence, what is the indicated value of the hospital using the cost approach? A) $2,400,000 B) $3,700,000 C) $4,000,000 D) $4,500,000

28) Given the following information regarding an income-producing property, determine the after tax internal rate of return (IRR): expected holding period: five years; 1st year expected BTCF: $30,656; 2nd year expected BTCF: $33,329; 3rd year expected BTCF: $36,082; 4th year expected BTCF: $38,918; 5th year expected BTCF: $41,839; 1st year expected tax liability: $7,645; 2nd year expected tax liability: $8,658; 3rd year expected tax liability: $9,708; 4th year expected tax liability: $10,798; 5th year expected tax liability: $6,951; estimated before tax equity reversion at end of year 5: $343,674; expected taxes due on sale at end of year 5: $32,032; required equity investment: $241,163 A) 11.2% B) 13.3% C) 15.4% D) 20.3%

29) Suppose an industrial building can be purchased for $2,500,000 and is expected to yield cash flows of $180,000 in each of the next five years. (Note: assume payments are made at end of year.) If the building can be sold at the end of the fifth year for $2,800,000, calculate the IRR for this investment over the five-year holding period. A) 0.09% B) 4.57% C) 9.20% D) 10.37%

3) In discounted cash flow analysis, the industry standard for pro forma cash flow projections of investment properties is typically A) 3 years. B) 5 years. C) 10 years. D) 15 years.

3) In real estate markets, a transaction occurs only when the investment value of the buyer exceeds the investment value of the seller. The buyer's investment value is the ________ that he or she would be willing to pay for a particular property, while the seller's investment value is the ________ that he or she would be willing to accept. A) minimum; minimum B) minimum; maximum C) maximum; minimum D) maximum; maximum

3) When discussing time-value-of-money it is necessary to understand some key terminology. Which of the following terms refers to a fixed amount of money paid or received at the end of every recurring period (i.e., a series of equal lump sums)? A) future value B) present value C) ordinary annuity D) annuity due

30) Determine the net present value (NPV) of an investment decision to purchase a property for $90,000 that will generate annual cash flows of $10,000 per year for eight years and sell for $80,000 at the end of the eight-year holding period, if the appropriate discount rate is 10%? (Note: assume payments are made at end of year.) A) -$2,475 B) - $609 C) + $609 D) +$2,475

31) Four highly similar and competitive income-producing properties located in close proximity to the subject property have sold this month. All four offer essentially the same amenities and services as the subject property. The sale prices and estimated first-year NOI for each of the comparable properties are as follows: Comparable Sale Price NOI1 A $1,450,000 $155,000 B $1,100,000 $135,400 C $1,250,000 $143,400 D $1,500,000 $169,000 Using the information provided, calculate the overall capitalization rate by direct market extraction assuming each property is equally comparable to the subject. A) 11.0% B) 11.2% C) 11.4% D) 12.0% Using the information provided, calculate the overall capitalization rate by direct market extraction assuming each property is equally comparable to the subject.

31) Given the following expected cash flow stream, determine the IRR of the proposed investment in an income-producing property and determine whether or not the investment should be pursued using IRR as your decision-making criteria: investment horizon: five years; expected yearly cash flow in each of the next five years: $127,628; expected sale price at end of five years: $1,595,350; required return on equity: 5%; current market price of property: $1,750,000 A) IRR is 4.92%; decision is to invest. B) IRR is 4.92%; decision is to not invest. C) IRR is 5.72%; decision is to invest. D) IRR is 5.72%; decision is to not invest.

31) Suppose you own a house that you are renting out to a group of college students for the 10-month academic year. You are charging $1,000 per month in rent. You will collect the first rent payment today and then on the first of the month each month thereafter. What is the value of this investment opportunity to you today if you could reinvest your income at an annualized rate of 6%? A) $9,677.77 B) $9,730.41 C) $9,779.06 D) $11,677.03

32) Using the following information, determine the net operating income (NOI) for the first year of operations of the subject property assuming "below-line" treatment of capital expenditures. Subject Property Number of apartments 15 Market rent per month 1000 Vacancy and collection losses 10% of PGI Operating Expenses 5% of EGI Capital Expenditures 10% of EGI A) $135,000 B) $137,700 C) $153,900 D) $162,000

33) Suppose an investor deposits $5,000 in an interest-bearing account at her local bank. The account pays 2.5% (annual) with interest compounded monthly. If the investor plans on withdrawing the original principal plus accumulated interest at the end of ten years, what is the total amount that she should expect to receive assuming interest rates do not change? A) $5,105.15 B) $6,400.42 C) $6,418.46 D) $96,790.75

34) Suppose that you are attempting to value an income-producing property using the direct capitalization approach. Using data from comparable properties, you have determined the overall capitalization rate to be 7.5%. If the projected first-year net operating income (NOI) for the subject property is $135,500, what is the indicated value of the subject using direct capitalization? A) $144,985.00 B) $150,555.56 C) $1,806,666.67 D) $9,033,333.33

35) Suppose that an appraiser has just completed her analysis using the cost approach to valuation. She has determined that the reproduction cost of the subject property is $370,000. If the added value of the site was $80,000 and accrued depreciation amounted to $50,000, what was the estimated value of the building using the cost approach? A) $320,000 B) $370,000 C) $400,000 D) $500,000

36) Given the following information, what adjustment would need to be made to account for the lot size difference between the subject property and comparable property? Market Conditions: -0.50%/month Lot size: $25,000/acre Effective Age (years): $1,000/year Living Area (sq. ft): $45.00/sq. ft Bath: $1,250/bath Bedrooms: $3,000/bedroom Subject Property Comparable Time Sold Today 4 months ago Lot size (acres) 0.83 0.80 Effective age (yrs) 8 7 Living area (sq. ft) 2,197 2,383 Bath 3.5 3.5 Bedrooms 4 4 Sale Price - $287,000 A) The price of the subject property must be adjusted upward by $750. B) The price of the subject property must be adjusted downward by $750. C) The price of the comparable property must be adjusted upward by $750. D) The price of the comparable property must be adjusted downward by $750.

5) The distinction between market rent and contract rent is important due to differences in lease terms. Office, retail, and industrial tenants most commonly occupy their space under leases that run A) one year or less. B) one to three years. C) three to five years. D) ten years or more.

6) As part of the data analysis step in the appraisal process, it is necessary to consider the highest and best use of the property in question. In regards to determining highest and best use, all of the following statements are true except A) the proposed property use must be legally permissible. B) it must be physically possible for the property to be used in the manner specified. C) no financial limits are considered when determining the property's best use. D) the property use must provide the greatest benefit to the owner.

7) In calculating net operating income, vacancy losses must be subtracted from the gross income collected. The normal range for vacancy and collection losses for apartment, office, and retail properties is A) between 0% and 1%. B) between 1% and 5%. C) between 5% and 15%. D) between 15% and 20%.

8) While net present value (NPV) and internal rate of return (IRR) analysis both may be used as investment decision criteria, there are some limitations to the IRR method that make its use as an investment criterion problematic in certain situations. All of the following are limitations of the IRR method except A) IRR calculations assume that cash flows are reinvested at the IRR, rather than at the actual rate that investors expected to earn on reinvested cash flows. B) with the IRR decision criterion, multiple solutions may exist for investments where the sign of the cash flows changes more than once over the expected holding period. C) the IRR methodology cannot be used to make comparisons across different investment opportunities. D) the use of IRR as a decision criterion will not necessarily result in wealth maximization for the investor.

9) Operating expenses can be divided into two categories: variable and fixed expenses. Which of the following best exemplifies a fixed expense? A) utilities B) property management C) local property taxes D) trash removal

1) To overcome the potential shortcomings of single-year decision-making metrics, many investors in real estate also perform multiyear discounted cash flow (DCF) valuation. DCF valuation differs from the single-year ratio analysis in all of the following waysexcept A) only with DCF must the investor estimate an appropriate investment horizon accounting for how long she will hold the property. B) only with DCF must the investor select the appropriate yield at which to discount all expected future cash flows. C) only with DCF must the investor make explicit forecasts of the property's net operating income for each year in the expected holding period. D) only with DCF must the investor use a defensible cash flow estimate that incorporates appropriate measures of income and expenses.

10) Which of these is most likely to be regarded as a capital expenditure rather than an operating expense? A) property taxes B) trash removal C) insurance payments D) roof replacement

11) Which of the following terms refers to a fixed amount of money paid or received at the beginning of every recurring period (i.e., a series of equal lump sums)? A) future value B) present value C) ordinary annuity D) annuity due

12) Real estate appraisal is often considered "more art than science," since identifying truly comparable properties is a subjective process. Therefore, it is essential that a comparable property transaction at least meets the requirement that it was fairly negotiated under typical market conditions. Which of the following types of transactions would be most appropriate for use in the sales comparison approach to valuation? A) commingled business transactions B) low-interest financing programs C) real estate auctions D) arm's-length transactions

13) For smaller income-producing properties, appraisers may use the ratio of a property's selling price to its effective gross income. This is an example of a A) net operating income. B) going-out cap rate. C) going-in cap rate. D) gross income multiplier.

14) When employing the sales comparison approach, appraisers must consider numerous adjustments to convert each comparable sale transaction into an approximation of the subject property. Adjustments are divided into two groups: transactional adjustments and property adjustments. All of the following are transactional adjustments except A) financing terms. B) market conditions. C) conditions of sale. D) location.

15) Based on your understanding of the differences between levered and unlevered cash flows, which of the following is an example of a levered cash flow? A) net operating income B) net sale proceeds C) sale price D) before-tax cash flow

16) When using discounted cash flow analysis for valuation, an appraiser will prepare a cash flow forecast, often referred to as a A) restricted appraisal report. B) net operating income statement. C) direct market extraction. D) pro forma.

18) Given the following information, calculate the appropriate after-tax discount rate: tax rate on comparable risk investment: 35%; investor's before-tax opportunity cost: 12%; capitalization rate: 8%. A) 2.8% B) 4.2% C) 5.2% D) 7.8%

18) The cap rate is an important metric that investors use to analyze the state of commercial real estate markets. When interpreting cap rate movements, an increase in cap rates over time would indicate that A) the discount rate used in TVM (time value of money) calculations has increased. B) the discount rate used in TVM (time value of money) calculations has decreased. C) property values have increased. D) property values have decreased.

20) Assume that a piece of land is currently valued at $50,000. If this piece of land is expected to appreciate at an annual rate of 5% per year for the next twenty years, how much will the land be worth twenty years from now? A) $100,898.99 B) $112,633.09 C) $123,860.81 D) $132,664.89

21) Suppose you purchased an income-producing property for $95,000 five years ago. In year 1, you were able to negotiate a lease that paid $10,000 per year at the end of each year. If you are able to sell the property at the end of year 5 for $100,000 (after receiving our final lease payment), what was the internal rate of return (IRR) on this investment? A) -18.18% B) 1.03% C) 9.57% D) 11.37%

22) A client has requested advice on a potential investment opportunity involving an income-producing property. She would like you to determine the internal rate of return of the investment opportunity based on the following information: expected holding period: years; end of first year NOI estimate: $113,900; NOI estimates in subsequent years will grow by 5% per year; price at which the property is expected to be sold at the end of year 5: $1,615,205.22; current market price of the property: $1,475,667.71. A) -15.30% B) 8.60% C) 9.86% D) 10.00%

22) Given the following information, calculate the effective gross income multiplier: sale price: $950,000; potential gross income: $250,000; vacancy and collection losses: 15%; and miscellaneous income: $50,000. A) 0.36 B) 0.30 C) 2.8 D) 3.6

24) Suppose you have found a tenant who wishes to rent out your vacation home for the next twelve months. You are charging $800 per month in rent. You will collect the first rent payment today and then on the first of the month each month thereafter. What is the value of this investment opportunity to you today if you could reinvest your income at an annual rate of 3% with interest compounded on a monthly basis? A) $7,963.20 B) $8,202.10 C) $9,445.80 D) $9,469.42

25) Given the following information, determine the value of having an additional bedroom. Assume that the comparable properties are similar in all other attributes besides those listed in the table below. Comparable 1 2 3 4 Time Sold Today 1 yr ago Today Today Bathrooms 2 2 2 3 Size (sq. ft) 4 5 5 5 Sale Price 250,000 265,000 275,000 270,000 A) $5,000 B) $15,000 C) $20,000 D) $25,000

25) Suppose that a property can generate cash flows of $10,000 per year for eight years and can sell for $80,000 at the end of the investment period. Assuming a discount rate of 10%, what is the present value of this property? (Assume end of period cash flows in your calculation.) A) $117,320 B) $160,000 C) $133,349 D) $90,670

28) Suppose that an income-producing property is expected to yield cash flows for the owner of $10,000 in each of the next five years, with cash flows being received at the end of each period. If the opportunity cost of investment is 12% annually and the property can be sold for $100,000 at the end of the fifth year, determine the value of the property today. A) $36, 047.76 B) $56,742.69 C) $83,333.33 D) $92,790.45

28) Suppose you are starting a PhD program with only $1,000 in your savings account. The university has agreed to waive your tuition, cover all of your living expenses, and pay you an additional stipend of $2,000 at the beginning of each month, as long as you teach one course per semester over the course of five years. If your savings account is able to earn 5.5% per year for the five years that you will be in this program, how much will you have accumulated in your savings account by the end of the program if interest is compounded on a monthly basis? A) $136,445.94 B) $137,708.75 C) $139, 077.35 D) $139,708.76

29) Suppose that examination of a pro forma reveals that the fifth-year net operating income (NOI) for an income-producing property that you are analyzing is $138,446 (you can assume that this cash flow occurs at the end of the year). If you estimate the projected rental growth rate for the property to be 5% per year, determine the projected sale price of the property at the end of year 5 if the going-out capitalization rate is 9%. A) $988,900.00 B) $1,465,037.00 C) $1,538,289.00 D) $1,615,203.00

35) Suppose an investor is interested in purchasing the following income-producing property at a current market price of $2,500,000. The prospective buyer has estimated the expected cash flows over the next four years to be as follows: year 1 = $100,000; year 2 = $150,000; year 3 = $200,000; year 4 = $250,000. If the estimated proceeds from selling the property at the end of year 4 is $3,000,000, what is the internal rate of return (IRR) of the project? A) -33.93% B) 5.72% C) 8.99% D) 10.99%

36) Suppose a bank decides to make a mortgage loan to an individual for the purchase of a home. The homeowner will pay the bank $1,500 per month in mortgage payments for the next thirty years. The bank will collect the mortgage payments at the end of the month. If the borrower does not default on the loan, how much money will the bank have accumulated if they could reinvest the monthly income at an annualized rate of 5% for the entire investment horizon? A) $23,058.68 B) $99,658.27 C) $279,422.43 D) $1,248,387.95

36) Suppose that examination of a pro forma reveals that the fifth-year net operating income (NOI) for an income-producing property that you are analyzing is $913,058 (you can assume that this cash flow occurs at the end of the year). If you estimate the projected rental growth rate for the property to be 3% per year, determine the projected sale price of the property at the end of year 5 if the going-out capitalization rate is 8%. A) $1,603,600 B) $2,350,159 C) $11,413,225 D) $11,755,622

37) Given the following information, what adjustment would need to be made to account for the living area difference between the subject property and comparable property? Market Conditions: -0.50%/month Lot size: $25,000/acre Effective Age (years): $1,000/year Living Area (sq. ft): $45.00/sq. ft Bath: $1,250/bath Bedrooms: $3,000/bedroom Subject Property Comparable Time Sold Today 4 months ago Lot size (acres) 0.83 0.80 Effective age (yrs) 8 7 Living area (sq. ft) 2,197 2,383 Bath 3.5 3.5 Bedrooms 4 4 Sale Price - $287,000 A) The price of the subject property must be adjusted upward by $8,370. B) The price of the subject property must be adjusted downward by $8,370. C) The price of the comparable property must be adjusted upward by $8,370. D) The price of the comparable property must be adjusted downward by $8,370.

9) If all appraisal methods are appropriate for use in valuing a particular property, there is a clear order of preference that real estate professionals adhere to. Which of the following depicts the preferred order, with the most preferable approach being listed first and the least preferable listed last? A) sales comparison approach, cost approach, income approach B) income approach, sales comparison approach, cost approach C) cost approach, income approach, sales comparison approach D) sales comparison approach, income approach, cost approach

9) Uncertainty of cash flows can vary significantly across property types. Which of the following property types is often considered to have the most uncertain expected cash flows? A) multifamily B) industrial C) office D) hospitality

2. An overall capitalization rate (Ro) is divided into which type of income or cash flow to obtain an indicated market value? a. NOI b. EGI c. BTCF d. ATCF e. PGI

5. An appraiser estimates that a property will produce NOI of $25,000, the Yo is 11 percent, and the growth rate is 2.0 percent. What is the estimated property value? a. $277,778 b. $227,273 c. $323,762 d. $243,762 e. $231,580

9. A comparable property sold six months ago for $150,000. The adjustments for the various elements of comparison have been calculated as follows: Location: -5 percent Market conditions: +8 percent Physical characteristics: +$12,500 Financing terms: -$2,600 Conditions of sale: 0 Property rights conveyed: 0 Use: None Nonrealty items: -$3,000 Making the adjustments in the order suggested in Exhibit 7-6, what is the comparable's final adjusted sale price? a. $160,732. b. $164,400. c. $169,600. d. $162,500. e. $163,232.

Assume the market value of the subject site (land only) is $120,000. You estimate that the cost to construct the improvements to the subject property would be $428,000 today. In addition, you estimate that accrued depreciation on the subject is $60,000. What is the indicated value of the subject using the cost approach? a) 488,000 b) 498,000 c) 608,000 d) 368,000

You have just completed the appraisal of an office building and have concluded that the market value of the property is $2,500,000. You expect potential gross income (PGI) in the first year of operations to be $450,000; vacancy and collection losses to be 9 percent of PGI; operating expenses to be 38 percent of effective gross income (EGI); and capital expenditures to be 4 percent of EGI. 9. What is the implied going-in capitalization rate? a. 9.5 percent b. 10.0 percent c. 10.5 percent d. 11.0 percent e. 16.4 percent

1. The final price for each comparable property reached after all adjustments have been made is termed the: a. Final estimate of value. b. Final adjusted sale price. c. Market value. d. Weighted price.

5. To reflect a change in market conditions between the date on which a comparable property sold and the date of appraisal of a subject property, an adjustment must be made for which of the following? a. Conditions of sale. b. Market conditions. c. Location. d. Financing terms. e. None of the above.

6. If a comparable property sells for $1,200,000 and the effective gross income of the property is $12,000 per month, the effective gross income multiplier (EGIM) is: a. 0.12 b. 8.33 c. 100 d. 0.01 e. 10

6. Under the Cost Approach to appraisal, the estimated expenditure required to construct a building with equal utility as the one being appraised is termed the ________. a. Reproduction cost b. Replacement cost c. Normal sale price d. Market-adjusted normal sale price

7. Which of the following statements regarding capitalization rates on commercial real estate investments is the most correct? a. Cap rates vary inversely with the perceived risk of the investment. b. Cap rates vary positively with the perceived risk of the investment. c. Cap rates tend to decrease when yields on long-term Treasury securities increase. d. Cap rates tend to increase when the expected growth rate in net rental income increases.

A property comparable to the single-family home you are appraising sold three months ago for $450,700. You have determined that the adjustments required for differences in the comparable and subject property are as follows: Transaction characteristics Property rights conveyed None Financing terms None Conditions of sale None Expenditures immed. after purchase +$3,000 Market conditions +0.5% /month, not compounded Property characteristics Location +3% Physical characteristics: -5% Economics characteristics N.A. Use None Non-realty components found -5000 in comparable Make the adjustments in the order suggested by Exhibit 7-6,what is the final adjusted sale price of the comparable? a. $455,605. b. $445,605. c. $432,286. d. $455,638.

You have just completed the appraisal of an office building and have concluded that the market value of the property is $2,500,000. You expect potential gross income (PGI) in the first year of operations to be $450,000; vacancy and collection losses to be 9 percent of PGI; operating expenses to be 38 percent of effective gross income (EGI); and capital expenditures to be 4 percent of EGI. 10. What is the effective gross income multiplier (EGIM)? a. 5.56 b. 6.11 c. 10.53 d. 16.38 e. 18.00

4. Estimate capital expenditures a. generally reflect ongoing (recurring) expenditures on the property. b. are generally easier to forecast than operating expenses. c. are subtracted to compute NOI in an above-line treatment. d. are subtracted to compute NOI in an below-line treatment.

1. Which of the following expenses is not an operating expense? a. Utilities. b. Property taxes. c. Management. d. Mortgage Payment. e. Advertising.

2. Which of the following is not included in accrued depreciation when applying the cost approach to valuation? a. Physical obsolescence. b. Functional obsolescence. c. External obsolescence. d. Tax depreciation.

3. In the sales comparison approach, the value obtained after reconciliation of the final adjusted sale prices from the comparable sales is termed the: a. Adjusted price. b. Final adjusted sale price. c. Market value. d. Indicated opinion of value.

4. A new house in good condition that has a poor floor plan would suffer from which type of accrued depreciation? a. Short-lived curable physical deterioration. b. Long-lived incurable physical deterioration. c. Curable functional obsolescence. d. Incurable functional obsolescence. e. External obsolescence.

7. You find two properties that have sold twice within the last two years. Property A sold 22 months ago for $98,500; it sold last week for $108,000. Property B sold 20 months ago for $105,000; it sold two weeks ago for $113,500. Assuming no compounding, what is the average monthly rate of change in sale prices? a. 0.40%. b. 4.20%. c. 5.04%. d 0.42%.

8. A comparable property sold 10 months ago for $98,500. If the appropriate adjustment for market conditions is 0.30% per month (with compounding), what would be the adjusted price of the comparable property? a. $95,504. b. $101,455. c. $95,545. d. $101,495.

3. Which of the following types of properties probably would not be appropriate for income capitalization? a. Apartment building. b. Shopping center. c. Farm. d. Warehouse. e. Public school.

8. The methodology of appraisal differs from that of investment analysis primarily regarding: a. Use of DCF analysis. b. Use of direct capitalization. c. Length of holding period analyzed. d. Type of debt assumed in the analysis. e. Point of view.

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