final exam real estate

Loan-to-Value Ratio

Mortgage Balance/Acquisition Price

deb service

monthly payment X 12

Which statement is false concerning the limited partnership form of ownership?

The limited partners cannot enjoy tax deduction benefits but the general partners can.

One of the main differences between residential mortgage loans and permanent financing of commercial real estate lies in the allocation of liability in the case of default. In commercial real estate, a special purpose entity is created that shields the actual borrower from personal liability. When a lender cannot lay claim to the personal assets of the defaulted borrower, this type of loan is commonly referred to as a:

non recourse loan

A real estate investment trust generally:

none of the above

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 initial evaluation of the adequacy of an investment's expected cash flows.

With a mezzanine loan:

the borrower's promise to pay is secured by the equity interest in the borrower's limited partnership or limited liability company.

The net present value of an acquisition is equal to:

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 internal rate of return equation incorporates:

initial cash outflow and inflow, and future cash outflows and inflows.

Consider a 30-year, 4 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

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

investment value

The overall capitalization rate calculated on a potential acquisition:

is the reciprocal of the net income multiplier.

Which of these loans is a life insurance company most likely to invest in?

large office building loan (non construction)

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

limited liability companies

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

limited liability company

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

limited partnerships

With regard to double taxation, distributions, and the treatment of the losses, general partnerships are most like:

limited partnerships

Which of these financial firms is the least likely to invest in a large, long-term mortgage loan on a shopping center?

mortgage broker

Debt Coverage Ratio

NOI/Debt Service

debt yield ratio

NOI/Loan Amount

cap rate

NOI/acquisition price

A small 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.

operating expense ratio

Operating Expenses / Effective Gross Income

Present value:

will always equal a project's purchase price when the discount rate is the internal rate of return.

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

bullet loan

As a general rule, using financial leverage:

increases risk to the equity investor.

The acquisition price of a property is $380,000. The loan amount is $285,000. If the property's NOI is expected to be $22,560, operating expenses $12,250, and the annual debt service $19,987, the debt yield ratio (DYR) is approximately equal to:

.079

If the property's NOI is expected to be $22,560 operating expenses $12,250, and the debt service $19,987, the debt coverage ratio (DCR) is approximately equal to:

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

A real estate investment is available at an initial cash outlay of $100,000, and is expected to yield cash flows of $33,438.10 per year for five years. The internal rate of return (IRR) is approximately:

20%

Which of the following is the least true?

After-tax discount rates are greater than discount rates used to value before-tax cash flows.

You are considering purchasing an office building for $2,500,000. You expect the potential gross income (PGI) in the first year to be $450,000; vacancy and collection losses to be 9 percent of PGI; and operating expenses and capital expenditures to be 38 percent and 4 percent, respectively, of effective gross income (EGI). What is the effective gross income multiplier?

6.11

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%

You are considering purchasing an office building for $2,500,000. You expect the potential gross income (PGI) in the first year to be $450,000; vacancy and collection losses to be 9 percent of PGI; and operating expenses and capital expenditures to be 38 percent and 4 percent, respectively, of effective gross income (EGI). What is the implied first-year overall capitalization rate?

9.5%

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

C corporation

The equity dividend rate:

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

examples of operating expenses

administration, repairs and maintenance, taxes, payroll, insurance, utilities

Income multipliers:

are useful as a preliminary analysis tool to weed out obviously unacceptable investment opportunities.

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

both a and b, but not c

Which of these lenders is most likely to provide a construction loan?

commercial bank

Which of the following is not an operating expense associated with income-producing (commercial) property?

debt service

Due-on-sale 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 is by requiring the borrower who prepays to purchase for the lender a set of U.S. Treasury securities whose coupon payments replicate the cash flows the lender will lose as a result of the early retirement of the mortgage. This process is referred to as:

defeasance

The operating expense ratio:

expresses operating expenses as a percent of effective gross income.