FNBSLW348 Exam 3

treated like a separate building

For tax purposes, a substantial real property improvement (CAPX) made after the initial purchase is:

$218,000

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

an interest-only mortgage

If a mortgage is to mature (i.e. become due) at a certain future time without any reduction in the original principal balance, this is called:

$2,000

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

$270

In 2012 you purchased a small office building for $450,000, which you financed with a $337,500 fixed-rate, 25 year mortgage. Up-front financing costs totaled $6,750. How much of this upfront financing expense could be written off against ordinary income in 2012?

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

Income multipliers:

EBC accounts for additional third party up-front expenses that lender's yield does not account for.

Lender's yield differs from effective borrowing cost (EBC) because:

10.6%

Loan Amount: $100,000 Interest rate: 10 percent annually Term: 15 years, monthly payments What is the effective borrowing cost on the loan if the lender charges 3 points at origination and the loan is prepaid at the end of year 9?

10.5%

Loan Amount: $100,000 Interest rate: 10 percent annually Term: 15 years, monthly payments What is the effective borrowing cost on the loan if the lender charges 3 points at origination and the loan goes to maturity?

20%

A real estate investment is available at an initial cash outlay of $10,000, and is expected to yield cash flows of $3,343.81 per year for five years. The internal rate of return (IRR) is approximately:

$45,000

5 years ago you purchased a small apartment complex for $1 million. You borrowed $700,000 at 7% for 25 years with monthly payments. The original depreciable basis was $750,000 and you have used 27 1/2 years of straight line depreciation over the 5 year holding period. Assume no CAPX have been made since the property was acquired. If you sell the property today for $1,270,000 in a fully taxable sale. Over the entire five-year holding period, how much were your taxes from rental operations reduced by the annual depreciation deductions? Ignore the increased taxes due on sale.

$492,504

5 years ago you purchased a small apartment complex for $1 million. You borrowed $700,000 at 7% for 25 years with monthly payments. The original depreciable basis was $750,000 and you have used 27 1/2 years of straight line depreciation over the 5 year holding period. Assume no CAPX have been made since the property was acquired. If you sell the property today for $1,270,000 in a fully taxable sale. What will be the after-tax equity reversion (cash flow) from the sale?

$63,161

5 years ago you purchased a small apartment complex for $1 million. You borrowed $700,000 at 7% for 25 years with monthly payments. The original depreciable basis was $750,000 and you have used 27 1/2 years of straight line depreciation over the 5 year holding period. Assume no CAPX have been made since the property was acquired. If you sell the property today for $1,270,000 in a fully taxable sale. What will be the taxes due on sale? Assume 6% selling costs, 33% percent ordinary income tax rate, a 15 percent capital gains tax rate, and a 25 percent recapture rate.

9.4%

A mortgage banker is originating a level-payment mortgage with the following terms: Annual interest rate: 9 percent Loan term: 15 years Payment frequency: monthly Loan amount: $160,000 Total up-front financing costs (including discount points): $4,000 Discount points to lender: $2,000 Calculate the annual percentage rate (APR) for Truth-in-Lending purposes

9.2%

A mortgage banker is originating a level-payment mortgage with the following terms: Annual interest rate: 9 percent Loan term: 15 years Payment frequency: monthly Loan amount: $160,000 Total up-front financing costs (including discount points): $4,000 Discount points to lender: $2,000 Calculate the lender's yield with no prepayment.

9.3%

A mortgage banker is originating a level-payment mortgage with the following terms: Annual interest rate: 9 percent Loan term: 15 years Payment frequency: monthly Loan amount: $160,000 Total up-front financing costs (including discount points): $4,000 Discount points to lender: $2,000 Calculate the lender's yield with prepayment is five years.

9.7%

A mortgage banker is originating a level-payment mortgage with the following terms: Annual interest rate: 9 percent Loan term: 15 years Payment frequency: monthly Loan amount: $160,000 Total up-front financing costs (including discount points): $4,000 Discount points to lender: $2,000 Calculate the effective borrowing costs with prepayment in five years.

$744,717

A retail shopping center is purchased for $2.1 million. During the next four years, the property appreciates at 4 percent per year. At the time of purchase, the property is financed with a 75 percent loan-to-value ratio for 30 years at 8 percent (annual) with monthly amortization. At the end of year 4, the property is sold with 8 percent selling expenses. What is the before-tax equity reversion?

No, the NPV is -$148,867.

An income-producing property is priced at $600,000 and is expected to generate the following after-tax cash flows: Year 1: $42,000; Year 2: $44,000; Year 3: $45,000; Year 4: $50,000; and Year 5: $650,000. Would an investor with a required after-tax rate of return of 15 percent be wise to invest at the current price?

$250,000

An investment opportunity having a market price of $1,000,000 is available. You could obtain a $750,000, 25-year mortgage loan requiring equal monthly payments with interest at 7.0 percent. The following operating results are expected during the first year. Effective gross income $200,000 Less operating expenses and CAPX $100,000 Net operating income $100,000 For the first year only, determine the: Equity Investment

1.57

An investment opportunity having a market price of $1,000,000 is available. You could obtain a $750,000, 25-year mortgage loan requiring equal monthly payments with interest at 7.0 percent. The following operating results are expected during the first year. Effective gross income $200,000 Less operating expenses and CAPX $100,000 Net operating income $100,000 For the first year only, determine the: Debt coverage ratio

5.0

An investment opportunity having a market price of $1,000,000 is available. You could obtain a $750,000, 25-year mortgage loan requiring equal monthly payments with interest at 7.0 percent. The following operating results are expected during the first year. Effective gross income $200,000 Less operating expenses and CAPX $100,000 Net operating income $100,000 For the first year only, determine the: Gross income multiplier

$173,732

An office building is purchased with the following projected cash flows: NOI is expected to be $130,000 in year 1 with 5 percent annual increases. The purchase price of the property is $720,000. 100% equity financing is used to purchase the property The property is sold at the end of year 4 for $860,000 with selling costs of 4 percent. The required unlevered rate of return is 14 percent. Calculate the unlevered net present value (NPV).

increases risk to the equity investor

As a general rule, using financial leverage:

1.19

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?

Mortgage A

Assume that you have purchased a home and can qualify for a $200,000 loan. You have narrowed your mortgage search to the following two options: Mortgage A Loan term: 30 years Annual interest rate: 6 percent Monthly payments Up-front financing costs: $5,000 Discount points: 3 Mortgage B Loan term: 15-years Annual interest rate: 5.5 percent Monthly payments Up-front financing costs: $7,000 Discount points: 3 Based on the effective borrowing cost, which loan would you choose?

7.5%

Assume the following for a one-year rate adjustable rate mortgage loan that is tied to the one-year Treasury rate: Loan amount: $150,000 Annual rate cap: 2% Life-of-loan cap: 5% Margin : 2.75% First-year contract rate: 5.50% One-year Treasury rate at end of year 1: 5.25% One-year Treasury rate at end of year 2: 5.50% Loan term in years: 30 Given these assumptions, calculate the following: Year 2 contract rate?

$-9,126

Black Acres Apartment, Inc needs to compute taxable income (TI) for the preceding year and wants your assistance. The effective gross income (EGI) was $52,000; operating expenses were $19,000; $2,000 was put into a fund for future replacement of stoves and refrigerators; debt service was $26,662, of which $25,126 was interest; and the deprecation deduction was $17,000. Compute the taxable income from operations:

$200,000

Calculate the original loan size of a fixed-payment mortgage if the monthly payment is $1,581.59, the annual interest is 5.0%, and the original loan term is 15 years.

$133,315

Compute the after-tax cash flow from the sale of the following nonresidential property. purchase price $450,000 with a $360,000 loan and no upfront financing costs. The market value of the property increased to $510,000 over the two year holding period and there will be 3% selling costs of the sales price on sale. The investor is in the 35% tax bracket while capital gains will be taxed at 15%. The balance on the loan at the time of the sale is $354,276. Land is comprised of 15%of the initial purchase price with the remaining 85% depreciated using straight line depreciation over 39 years. $30,000 in capx has been incurred since purchase. For simplicity add capx to the tax basis for depreciation purposes. You don't have to depreciate separately.

$64,545

Consider a $75,000 mortgage loan with an annual interest rate of 4%. The loan term is 7 years, but monthly payments will be based on a 30-year amortization schedule. What will be the required balloon payment at the end of the loan term?

$300,000

Consider a 20-year loan with a monthly payment of $1,897.95 and an annual interest rate of 4.5 percent. What was the original loan size?

$92,513.56

For a loan of $100,000, at 4 percent annual interest for 30 years, find the balance at the end of 4 years assuming monthly payments.

-In excess of zero means a project is expected to yield a rate of return in excess of the discount rate employed. -Will always equal a project's purchase price when the discount rate is the internal rate of return.

Net Present value:

$87,871

On a level-payment loan with 12 years (144 payments) remaining, at an interest rate of 9 percent, and with a payment of $1,000, the current balance is:

8.7%

On the following loan, what is the best estimate of the effective borrowing cost if the loan is prepaid six years after origination? Loan: $100,000 Interest rate: 7 percent Term: 180 months Up-front costs: 7 percent of loan amount

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

Ratio analysis:

passive income

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

fixed-payment, fully amortized mortgage

The dominant loan type originated by most financial institutions is the:

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

The net present value of an acquisition is equal to:

Expresses operating expenses as a percent of effective gross income.

The operating expense ratio:

The property's investment value to that investor.

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

18.5%

Using the "CFj" key of your financial calculator determine the IRR of the following series of annual cash flows: CF0= -$31,400; CF1 = $3,292; CF2 = $3,567; CF3 = $3,850; CF4 = $4,141; and CF5 = $50,659.

9.2%

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?

investment value

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

underestimated

When a property is sold for less than its adjusted basis, its depreciation (wear and tear) was:

debt service

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

increase the rate of return investors earn on their invested equity.

Why might a commercial real estate investor borrow to help finance an investment even if she could afford to pay 100 percent cash? (which is most correct)

($10,246)

With a purchase price of $350,000, a small warehouse provides for an initial before-tax cash flow of $30,000, which grows by 6 percent per year. If the before-tax equity reversion after four years equals $90,000, and an initial equity investment of $175,000 is required. If the required going-in levered rate of return on the project is 10 percent, should the warehouse be purchased? NPV?

9.5%

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?

6.11

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?

1.63

You are considering the purchase of a quadruplex apartment building. Effective gross income (EGI) during the first year of operations is expected to be $33,600 ($700 per month per unit). First-year operating expenses are expected to be $13,440 (at 40 percent of EGI). Ignore capital expenditures. The purchase price of the quadruplex is $200,000. The acquisition will be financed with $60,000 in equity and a $140,000 standard fixed-rate mortgage. The interest rate on the debt financing is eight percent and the loan term is 30 years. Assume, for simplicity, that payments will be made annually and that there are no up-front financing costs. What is the debt coverage ratio?

$125,029

You are considering the purchase of an apartment complex. The following assumptions are made: The purchase price is $1,000,000. Potential gross income (PGI) for the first year of operations is projected to be $171,000. PGI is expected to increase at 4 percent per year. No vacancies are expected. Operating expenses are estimated at 35 percent of effective gross income. Ignore capital expenditures. The market value of the investment is expected to increase 4 percent per year. Selling expenses will be 4 percent. The holding period is 4 years. The appropriate unlevered rate of return to discount projected NOIs and the projected NSP is 12 percent. The required levered rate of return is 14 percent. 70 percent of the acquisition price can be borrowed with a 30-year, monthly payment mortgage. The annual interest rate on the mortgage will be 8.0 percent. Financing costs will equal 2 percent of the loan amount. There are no prepayment penalties. Calculate net operating income (NOI) for each of the four years. What is NOI year 4?

Yes $70,150

You are considering the purchase of an apartment complex. The following assumptions are made: The purchase price is $1,000,000. Potential gross income (PGI) for the first year of operations is projected to be $171,000. PGI is expected to increase at 4 percent per year. No vacancies are expected. Operating expenses are estimated at 35 percent of effective gross income. Ignore capital expenditures. The market value of the investment is expected to increase 4 percent per year. Selling expenses will be 4 percent. The holding period is 4 years. The appropriate unlevered rate of return to discount projected NOIs and the projected NSP is 12 percent. The required levered rate of return is 14 percent. 70 percent of the acquisition price can be borrowed with a 30-year, monthly payment mortgage. The annual interest rate on the mortgage will be 8.0 percent. Financing costs will equal 2 percent of the loan amount. There are no prepayment penalties. Calculate the net present value of this investment, assuming no mortgage debt. Should you purchase? Why?

$1,123,065

You are considering the purchase of an apartment complex. The following assumptions are made: The purchase price is $1,000,000. Potential gross income (PGI) for the first year of operations is projected to be $171,000. PGI is expected to increase at 4 percent per year. No vacancies are expected. Operating expenses are estimated at 35 percent of effective gross income. Ignore capital expenditures. The market value of the investment is expected to increase 4 percent per year. Selling expenses will be 4 percent. The holding period is 4 years. The appropriate unlevered rate of return to discount projected NOIs and the projected NSP is 12 percent. The required levered rate of return is 14 percent. 70 percent of the acquisition price can be borrowed with a 30-year, monthly payment mortgage. The annual interest rate on the mortgage will be 8.0 percent. Financing costs will equal 2 percent of the loan amount. There are no prepayment penalties. Calculate the net sale proceeds from the sale of the property.

1.8

You are considering the purchase of an apartment complex. The following assumptions are made: The purchase price is $1,000,000. Potential gross income (PGI) for the first year of operations is projected to be $171,000. PGI is expected to increase at 4 percent per year. No vacancies are expected. Operating expenses are estimated at 35 percent of effective gross income. Ignore capital expenditures. The market value of the investment is expected to increase 4 percent per year. Selling expenses will be 4 percent. The holding period is 4 years. The appropriate unlevered rate of return to discount projected NOIs and the projected NSP is 12 percent. The required levered rate of return is 14 percent. 70 percent of the acquisition price can be borrowed with a 30-year, monthly payment mortgage. The annual interest rate on the mortgage will be 8.0 percent. Financing costs will equal 2 percent of the loan amount. There are no prepayment penalties. What is the DCR?

$289,000

You are considering the purchase of an office building for $1.5 million today. Your expectations include the following: first-year potential gross income of $340,000; vacancy and collection losses equal to 15 percent of potential gross income; operating expenses equal to 40 percent of effective gross income and capital expenditures equal 5 percent of EGI. You expect to sell the property five years after it is purchased. You estimate that the market value of the property will increase four percent a year after it is purchased and you expect to incur selling expenses equal to 6 percent of the estimated future selling price. What is estimated effective gross income (EGI) for the first year of operations?

$158,950

You are considering the purchase of an office building for $1.5 million today. Your expectations include the following: first-year potential gross income of $340,000; vacancy and collection losses equal to 15 percent of potential gross income; operating expenses equal to 40 percent of effective gross income and capital expenditures equal 5 percent of EGI. You expect to sell the property five years after it is purchased. You estimate that the market value of the property will increase four percent a year after it is purchased and you expect to incur selling expenses equal to 6 percent of the estimated future selling price. What is estimated net operating income (NOI) for the first year of operations?

10.6%

You are considering the purchase of an office building for $1.5 million today. Your expectations include the following: first-year potential gross income of $340,000; vacancy and collection losses equal to 15 percent of potential gross income; operating expenses equal to 40 percent of effective gross income and capital expenditures equal 5 percent of EGI. You expect to sell the property five years after it is purchased. You estimate that the market value of the property will increase four percent a year after it is purchased and you expect to incur selling expenses equal to 6 percent of the estimated future selling price. What is the estimated going-in cap rate (Ro) using NOI for the first year of operations?