finance final exam mc
in discounted cash flow analysis, the industry standard for pro forma cash flow projections of investment properties is typically
10 years
the value of a property can be thought of as having two components, a land component and a building component. since the land component of the original cost basis is not depreciable, it is important to understand how much of the property's value is typically attributed to the land for tax purposes. as a general rule, the value of land constitutes what percentage (expressed as a range) of the total value of a commercial property?
10% to 30%
The benefit of being classified as a capital gain is that the income is subject to a tax rate that maxes out at 15%, which may be well below the tax rates associated with depreciation recapture income and ordinary income for a particular investor. In order to qualify for the lower capital gain tax rate, the property being sold must be held for more than
12 months
all taxable income from investment property sales must eventually be classified as either ordinary income, depreciation recapture income, or capital gain income. what is the maximum tax rate that an investor can be charged on depreciation recapture income?
25%
congressional legislations has repeatedly altered the period of time over which rental real estate may be depreciated. currently, residential income producing property (apartments) may be depreciated over no less than
27 1/2 years
since many commercial properties are held by LLC or limited partnerships, it is important to understand the tax consequences at the individual investor level. individuals face different tax rates depending on the level of their taxable income. as of 2016, an individual making between $91,151 and $190,150 would fall into which of the following tax brackets?
28%
limited liability companies (LLCs) and limited partnerships are preferred to corporate ownership structures because these forms of ownership allow investors to obtain limited liability and avoid the double taxation faced by corporations. this tax benefit can be extremely important as the maximum capital gain rate for corporations remains at (as of 2016)
35%
net operating income is similar to which of the following measures of cash flow in corporate finance
EBITDA
in collecting data for nonresidential property analysis, it is helpful to understand the business community that currently exists in the specific area in question. A preliminary approach for ascertaining the number of firms by size, industry, and location is to obtain data from the
US Bureau of the Census: County Business Patterns
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?
Uniform Standards of Professional Appraisal Practice
currently tax law allows investors to take tax credits for the cost of renovating or rehabilitating older or historic structures and for the construction or rehabilitation of qualified low income housing. Which of the following statements regarding tax credits is true?
a $1 tax credit reduces the investors tax liability by $1
According to the bid-rent model, which of the following individuals would be the one least likely to live closest to the central business district (CBD)?
a barista at the local coffee shop who uses a car to commute
The presence of real estate cycles presents a major challenge when forecasting real estate market parameters. If the market value of a residential developer's project exceeds its construction costs, an increase in the supply of units will occur. As the market becomes oversupplied, we would expect which of the following to occur?
a decrease in real rental rates
According to the bid-rent model, which of the following changes in the model's underlying assumptions would most likely result in an increase in rents for properties closest to the central business district (CBD)?
a decrease in the average traveling time of the individual's commute
According to the bid-rent model, which of the following individuals would be the one most likely to live closest to the central business district (CBD)? (Hint: Assume that work locations are located adjacent to each other at the center of the CBD)
a doctor at the city hospital who must walk to work
since most date that we would like to conduct a thorough market analysis is unavailable, a researcher will find it useful to find a data series that will closely represent the variable of interest. we typically refer to this type of variable as
a proxy
in a like-kind exchange, property owners must meet a number of conditions in order to be eligible to take advantage of this tax deferment. one criterion is for the exchange to be between like-kind properties. which of the following exchanges represents an example of an eligible like-kind exchange?
a retail property for an office property, both within the US
An early model of land use is the concentric ring model of urban form developed by E.W. Burgess. Of the following land uses, which would be closest to the downtown area of the central business district (CBD) according to Burgess' model?
a zone of transition that contains warehousing and other industrial land uses between the downtown area and the residential area
the direct ownership of commercial real estate produces cash flows from rental operations and, perhaps, cash flow from an eventual sale of property. since financial leverage and tax considerations play an important part in determining an investor's returns, the measure of investment value most relevant to investors is the present value of
after tax cash flow (ATCF)
Cities such as New York are able to host a variety of complex industries because of the development of specialized resources that support their growth. When specialized resources emerge in response to demand from multiple industries, this is referred to as:
agglomeration economies
According to the bid-rent model, which of the following changes in the model's underlying assumptions would most likely result in a decrease in rents for properties closest to the central business district (CBD)?
an increase in the average traveling time of the individual's commute
when you are evaluating the prospects for a project that is new in your setting and therefore has no actual relevant market performance data, it is most helpful to use which of the following techniques as the basis for your analysis?
analogy
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?
apartments
The location of competitors within a particular land use area may be influenced by whether the types of services and products are convenience activities or comparison activities. Which of the following is an example of a comparison activity?
apparel store
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):
appraisal
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, offices, and retail properties is
between 5% and 15%
within the framework of the bid-rent model, as rents increase with proximity to the central business district, the tendency is for the development to
build upward on lots within the CBS to allow multiple tenants
When cash flows are classified as passive activity income, investors are subject to passive activity loss restrictions. These restrictions imply that passive income losses
can be used to offset positive taxable income from other passive activities
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:
capital expenditures
Most appraisers adhere to an "above-line" treatment of capital expenditures. This implies which of the following?
capital expenditures are subtracted in the calculation of net operating income
when an investment appreciates in value during the investment holding period, the appreciation is generally taxed at which of the following rates?
capital gain tax rates
a new residential development will face competition from other new developments, other builders, and sales of existing homes. to determine if demand in the market segment will be sufficient to justify proceeding with the project, a developer would be most interested in estimating a
capture rate
Providers of convenience activities find it profit-maximizing to disperse over the region of potential customers to the point where each establishment is equidistant from another and is separated by the minimum distance that allows sufficient customers to support each establishment. The resulting pattern of establishment locations is referred to as:
central place pattern
Because a city's output capacities change slowly over time, it is important to understand the supply side (long-run) factors affecting urban growth. Which of the following would NOT be considered a supply-side factor that impacts a city's economic growth?
city's export activity
Six suburban office buildings have been constructed along six consecutive blocks in Roseland, New Jersey. This is an example of:
clustering
A city's economic base can be viewed in terms of a multiplier process, in which the money that is brought in through export activities is then respent within the city. Which of the following economic activities is the least likely to be considered a high-impact or high-multiplier economic base activity?
computer assembly
in contrast to conventional market analysis, the story approach to market research starts with an analysis of
conditions in the property-specific market
Professor James Graaskamp often asserted that when one buys real estate, what one is buying is a set of assumptions about the future. Therefore, it is not surprising that the beginning point of the market research process is to:
construct a market-defining story
Johnson Builders is in the new residential construction business. They built a house that sat empty for 6 months after its completion. This type of property would be categorized as a
dealer property
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
decline
under certain circumstances, investors are permitted to reduce the amount of the taxable income that they report by an amount that is intended to reflect the wear and tear of an asset over time. This is commonly referred to as
depreciation
A city's potential for growth or its susceptibility to decline is determined by a set of economic activities that the city provides for the world beyond its boundaries. Economists refer to this set of activities as a city's
economic base
the IRR on a proposed investment is the discount rate that makes the NPV of the investment
equal to zero
computer software systems that enable one to manipulate and "map" information with great flexibility and speed are referred to as
geographical information systems (GIS)
NPV is interpreted using the following decision rule: the investor will purchase the property as long as the NPV is
greater than zero
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:
gross income multiplier
a fishing company was formed in Juneau, Alaska. Over the next decade, a canning plant, a processing plant, and a boat repair facility also opened in Juneau. This is an example of
industry economies of scale
most research oriented universities have many different colleges, each with separate administrations, students, curricula, and facilities. however, the university continues to exist as a total unit because of
industry economies of scale
the growth of the motion picture industry in LA, the petrochemical industry in Houston, and the software industry in Silicon Valley are all examples of how the growth of an industry within a city can create cost advantages for future growth. Economists refer to this phenomenon as
industry economies of scale
distinguishing between the four categories of real estate for federal tax purposes can be misleading at times. which of the following categories included properties that are held primarily for capital appreciation?
investment property
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
investment value is based on the expectations of a typical, or average, investor
survey research has been applied to real estate markets at many levels. despite its frequent application, analysts must be cautious with survey use because
it can be fraught with abortive errors
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?
it is an estimate of the most probable selling price of a property in a competitive market
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?
it is analogous to the dividend yield on a common stock
based on your understanding of the effect of agglomeration economies in real estate, you would expect institutional investors to most favor real estate investments in which of the following areas?
large urban markets
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?
levered cash flows
The potentially large amount of taxes due on sale of commercial property has caused investors and policy makers to seek ways to defer taxes on the disposition of a property. A popular option has become for investors to swap one eligible property for another in order to avoid or defer capital gains taxes. Which of the following methods for deferring taxes does this describe?
like-kind exchange
The demand for access between land uses is considered the "gravity" that holds a city together. These relationships between land uses are commonly referred to as:
linkages
operating expenses can be divided into two categories: variable and fixed expenses. which of the following best exemplifies a fixed expense?
local property taxes
Homeowners receive preferential tax treatment under current federal income tax laws. The benefits that homeowners receive from this treatment include all of the following EXCEPT:
losses on sale of a personal residence can be deducted from federal taxable income
in contrast to base activities, local economic activities (or secondary activities) serve the local business and households that are recirculating the income derived through the city's economic base. In other words, we can distinguish local economic activities from export activities by thinking about whether or not the activity brings money into the city from outside sources. Which of the following activities is NOT an example of land use for local economic activity?
manufacturing center
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:
market prices are revealed almost instantaneously to prospective buyers
real estate market research is an important process used by analysts to facilitate a better understanding of a property's future profit potential. All of the following statements regarding market research are true except
market research consists of a series of facts that fails to consider the role of investor behavior in the decision-making process
Preferences of households can vary with time, prosperity, and context. The nuances in the preferences or needs of market subgroups are commonly referred to as:
market segmentation
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 is the ______ that he or she would be willing to pay for a particular property, while the seller's investment value is the ______ minimum that he or she would be willing to accept
maximum; minimum
the most common definition of a city used for government data collection and reporting, identified as a single labor market area centered around a city with a population of at least 50,000 people, is referred to as a
metropolitan statistical area
understanding the revenue-generating ability of the core export activities of a local area has important implications on the market value of real estate. when the income that these activities generate is respent within the community on other local goods and services, the community is benefiting through a
multiplier process
which of the following measures is considered the fundamental determinant of market value for income-producing properties
net operating income
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:
no financial limits are considered when determining the property's best use
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 ways EXCEPT
only with DCF must the investor use a defensible cash flow estimate that incorporates appropriate measures of income and expenses
Certain costs associated with a property's upkeep as well as the manner in which it was financed can be depreciated and therefore have a beneficial impact on the tax paid by the investor in a particular year. Which of the following cash outflows is deductible for income tax purposes in the year in which they are made?
operating expenses
there are three main types of income subject to federal taxation. which of the following types of income includes income generated from rental real estate and investment?
passive activity income
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
potential gross income (PGI)
when using discounted cash flows analysis for valuation, an appraiser will prepare a cash flow forecast, often referred to as a
pro forma
In the initial round of market analysis, analysts will attempt to provide key numbers that characterize the current condition and trend in the market. For rental retail space, the key market parameters in question would most likely include all of the following EXCEPT
projected sales rates
an important effect of agglomeration economies on real estate is its impact upon market risk. based on your understanding of this relation, which of the following statements is true
properties located in a city with more advanced developmetn of agglomeration economies will carry less risk and therefore suffer a smaller price decline during an economic downturn
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:
property values have decreased
a popular adage in real estate is that property value is all about "location, location, location." However, for most property types in nonresidential realms, nonlocational requirements are equally or even more important. all of the following are examples of nonlocational factors except
proximity to modes of public transportation
a tool used by real estate analysts to relate a consumer's activities, interests, opinions, and values to a consumer's demographics is referred to as
psychographics
which of these is most likely to be regarded as a capital expenditure rather than an operating expense?
roof replacement
the tax treatment of real estate holdings that are classified as trade or business property and are held for more than one year is more commonly referred to as which if the following sections of the tax code?
section 1231
which of the following models of urban form is characterized by radial corridors or wedges representing the pattern of residential land use in relation to the location of the central business district (CBD)?
sector model
Sharon purchased a new photocopier for her business. According to her accountant, she can deduct 1/7th of its original cost each year for the next seven years from her taxable income. This depreciation method is commonly referred to as
straight line method
within some types of land use, business location may be determined by the type of services or products that are offered to consumers. based on your understanding of the differences between comparison and convenience activities, which of the following providers would operate in the convenience activity space?
supermarket
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:
terminal value
Since most data for a given market study is not readily available, analysts must be creative in their use of data that they are able to obtain. The primary source for detailed household demographic information is
the US Bureau of the Census
development of subdivisions, apartments, offices, or other commercial structures can have a lead time of two years or more. in general, the longer the construction lead time,
the greater the amplitude of real estate cycles
US tax law is designed to raise revenues for the operations of the federal government and to promote certain socially desirable real estate-related activities. Tax legislation is combined into a single section of the federal statutory law commonly referred to as
the internal revenue code
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?
the lease establishes a schedule of rental rate increases over the term of the lease
The magnitude of an economic base multiplier depends upon the amount of money that "leaks" out through expenditures outside of the city limits. The economic multiplier tends to be higher with each of the following EXCEPT
the less isolated the city is from other cities
While predicting real estate cycles is difficult, a key indicator used to evaluate where a property is within the cycle is
the number of building permits issued
in the Elysian Forest example, the planned unit development was destined to be an unsuccessful venture from its inception because
the target market was a nontraditional segment that relied heavily on a small portion of the local University City populatopm
in the Palm Grove Office Complex example, the project was destined to be an ill-fated venture from its inception for all of the following reasons except
the zoning laws of the University City ultimately prevented the project's developers from starting the construction process
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
three to five years
Suppose a taxpayer owns an apartment complex. Under U.S. tax law, in what category would this property be classified?
trade or business property
for purpose of federal income taxes, real property is classified into four categories. With which of the following types of real estate is the investor able to reduce his taxable income to reflect the wear and tear of a property over time?
trade or business property
a planned unit development (PUD) is a residential development that differs from traditional residential subdivisions in all of the following ways except it
typically has larger individual lots with extensive side-yards on the property
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 an operating expense except
utility expenses
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?
value estimates are based on a multiple of expected first-year net operating income
in constructing a market-defining story, it is helpful to answer a series of fundamental questions around which analysis can be built. which of the following question is designed to identify the target market?
who are the customers
