gold
Given the following information, calculate the going-in capitalization rate for the specific property. First-year NOI: $18,750, Acquisition price: $150,000, Equity Investment: 20%. A. 2.5% B. 12.5% C. 15.6% D. 62.5%
B. 12.5%
Given the following information, calculate the cash down payment required to purchase the specific property. Purchase Price: $500,000, Loan Amount: 80% of purchase price, Up-front financing costs: 2.5% of loan amount. A. $90,000 B. $110,000 C. $136,250 D. $200,000
B. $110,000
Given the following information, calculate the operating expense ratio for this property. Potential gross income: $120,000, Vacancy rate: 9%, Net operating income: $57,900, Operating expenses: $51,300. A. 34% B. 43% C. 47% D. 53%
C. 47%
Given the following information, calculate the net income multiplier for this property. First-year NOI: $18,750, Acquisition price: $150,000, Equity Investment: 20%. A. 0.1 B. 1.6 C. 8.0 D. 12.5
C. 8.0
The loan-to-value ratio measures the percentage of the acquisition price (or current market value) encumbered by debt. To protect their invested capital in the event that property values do fall, commercial mortgage lenders generally require that the senior mortgage not exceed approximately what percentage of the acquisition costs? A. 60% B. 70% C. 80% D. 90%
C. 80%
The yields on commercial mortgages have been approximately 2 percent higher, on average, than the yields on comparable maturity treasury securities over the past 15 years. Often considered the signature risk of commercial mortgage lending, this spread primarily represents: A. Default risk B. Interest rate risk C. Pipeline risk D. Fallout risk
A. Default risk
Suppose the operating agreement of an LLC insists that all investors receive their pro rata share of all cash flows when a property is liquidated from the portfolio. If all 15 investors contributed an equal amount of equity in establishing the LLC, each investor should receive how much from the liquidation of a property valued at $3,500,000. A. $233,333 B. $350,000 C. $3,500,000 D. $52,500,000
A. $233,333
Unlike the debt coverage ratio, the debt yield ratio (DYR) is not affected by the interest rate or amortization period of the loan; the DYR is simply a measure of how large the NOI is relative to the loan amount. Lenders who rely on this ratio are typically willing to accept a minimum DYR of A. 10% B. 20% C. 60% D. 80%
A. 10%
Given the following information, calculate the capitalization rate for the following apartment complex. Number of apartments: 15; Market Rent (per month): $1,000; Vacancy and Collection Loss: 10% of potential gross income; Operating Expenses: 5% of effective gross income; Capital Expenditures: 10% of effective gross income; Acquisition Price: $1,710,000. A. 8.1% B. 9.0% C. 9.5% D. 10.5%
A. 8.1%
In an analogy to the stock market, the net operating income of a property can be viewed as which of the following? A. Annual dividend expected to be produced by the property B. Annual return on the value of the property C. Market value of the property D. Price-earnings ratio of the property
A. Annual dividend expected to be produced by the property
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
A. Both NPV and going-in IRR increase
The choice of ownership form for pooled equity investments depends heavily on federal tax considerations. Which of the following ownership structures suffers from the major disadvantage of double taxation? A. C Corporation B. Subchapter S Corporation C. General Partnership D. Limited Liability Company
A. C Corporation
Profitability ratios, income multipliers, and financial risk ratios can be used to provide a quick assessment of a property's relative value. Which of the following ratios measures the overall income-producing ability of the property? A. Capitalization rate B. Equity dividend rate C. Debt coverage ratio D. Operating expense ratio
A. Capitalization rate
Single year return measures and ratios can be categorized into three groups: profitability ratios, multipliers, and financial ratios. All of the following are considered financial ratios EXCEPT: A. Capitalization ratio B. Operating Expense ratio C. Loan-to-value ratio D. Debt yield ratio
A. Capitalization ratio
Although nonrecourse loans dominate the commercial mortgage lending practices of pension funds, life insurance companies, and commercial mortgage-backed security (CMBS) originators, banks are likely to require some form of a guarantee by the organizer/sponsor of the investment opportunity to make the lender whole in the event the lender suffers a loss on the loan. This protection to the lender is more commonly referred to as a: A. Credit enhancement B. Property externality C. Joint venture D. Mezzanine loan
A. Credit enhancement
While floating rate mortgage loans may offer lower interest rates to borrowers than comparable fixed-payment mortgages, floating-rate loans may increase a lender's exposure to which of the following risks since borrowers may not be able to continue to service the debt if payments on the loan increase significantly? A. Default risk B. Interest rate risk C. Liquidity risk D. Pipeline risk
A. Default risk
Land acquisition, development, and construction loans used by developers differ significantly from the "permanent" mortgages that traditionally are used to finance the purchase of commercial properties. All of the statements listed below are true regarding land acquisition, development, and construction loans EXCEPT: A. Developers can never be held personally liable for such loans B. These loans have floating interest rates tied to short-term interest rate indices C. These loans are interest-only loans. D. These loans can be prepaid at any time without penalty.
A. Developers can never be held personally liable for such loans
There are a number of ways in which individual and institutional investors can hold investments in commercial real estate as a part of their portfolio. One way is to purchase and hold the title to the actual commercial property, which gives the owner complete control of the asset. This type of transaction would be considered which of the following? A. Direct investment in private commercial real estate equity B. Indirect investment in private commercial real estate equity C. Direct investment in private commercial real estate debt D. Indirect investment in private commercial real estate debt
A. Direct investment in private commercial real estate equity
Once a loan application is signed, the lender begins a process that typically includes ordering the fee appraisal, the title report, and a number of third party inspection, compliance, and engineering reports in an attempt to make sure the potential borrower did not misrepresent the property in any way in the original loan submission package. This process is more commonly referred to as: A. Due diligence B. Loan submission C. Loan development D. Defeasance
A. Due diligence
Which of the following types of loans is the most common instrument used to finance the acquisition of existing commercial property? A. Fixed-rate balloon mortgage loans B. Floating-rate mortgage loans C. Mezzanine loans D. Construction loans
A. Fixed-rate balloon mortgage loans
In most pooled ownership forms a single partner is empowered to act on behalf of the investors in terms of making property investment decisions. Based on your understanding of the different types of pooled ownership which of the following structures would we expect this issue to be the least prevalent? A. General partnership B. Limited partnership C. C corporation D. Subchapter S corporation
A. General partnership
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.
A. Investment value is based on the expectations of a typical, or average, investor.
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
A. Levered cash flows
Direct investment in private commercial real estate markets is a preferred means of ownership for the largest institutional market participants. Which of the following types of institutions rely on stable income from commercial real estate properties to pay out retirement benefits? A. Pension funds B. Life insurance companies C. Commercial Banks D. Investment Banks
A. Pension funds
Ownership forms for pooled equity investment can differ in terms of how the entity's cash flows are distributed to its investors. Which of the following ownership structures requires cash flows to be allocated to each shareholder in proportion to his or her ownership of the entity, thereby preventing special allocations to multiple classes of investors? A. Subchapter S Corporation B. General Partnership C. Limited Partnership D. Limited Liability Company
A. Subchapter S Corporation
Prior to determining the treatment of capital expenditures in the calculation of NOI, it is important to distinguish these costs from operating expenses. In contrast to operating expenses, capital expenditures: A. add to the market value of the property B. are deductible for tax purposes in the year in which they are paid. C. are necessary to keep the property operating and competitive in its local market. D. may include minor repairs that do not add to the property's useful life.
A. add to the market value of the 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: A. decline B. increase C. remain the same D. become zero
A. decline
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
A. greater than zero
One measure of the importance of a publicly traded asset class in the U.S. economy can be calculated by multiplying the number of publicly traded shares by the current market price of the stock. The result of this calculation is more commonly referred to as: A. market capitalization B. capitalization rate C. price-earnings ratio D. earnings-per-share ratio
A. market capitalization
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 "bankruptcy remote" 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: A. nonrecourse loan B. mini-perm loan C. partially amortizing loan D. interest-only loan
A. nonrecourse loan
Given the following information, calculate the total amount of annual operating expenses for this income-producing property. Lawn care: $10,000, Property taxes: $24,000, Maintenance: $35,000, Janitorial: $25,000, Security: $32,000, Debt service: $145,000. A. $102,000 B. $126,000 C. $247,000 D. $271,000
B. $126,000
Given the following information, calculate the after tax-cash flow for this property. Debt Service: $45,000; First-year NOI: $91,750; Tax liability: 25% of Before Tax Cash Flow. A. $23,812.50 B. $35,062.50 C. $68,812.50 D. $80,500.00
B. $35,062.50
Given the following information, calculate the loan-to-value ratio of this commercial loan. Estimated net operating income in the first year: $150,000, Debt service in the first year: $100,000, Loan amount: $1,000,000, Purchase price: $1,300,000 A. 0.08 B. 0.77 C. 1.30 D. 1.75
B. 0.77
Given the following information, calculate the loan-to-value ratio for this property. Loan amount: $450,000, Interest rate: 7.5%, Acquisition price: $550,000 A. 0.18 B. 0.82 C. 0.99 D. 1.22
B. 0.82
Given the following information, calculate the debt coverage ratio for this investment. Potential gross income: $120,000, Vacancy rate: 9%, Net operating income: $57,900, Operating expenses: $51,300, Acquisition Price: $520,000, Debt service: $40,000. A. 0.69 B. 1.45 C. 2.73 D. 8.29
B. 1.45
Given the following information, calculate the debt yield ratio on the following commercial property. Estimated Net Operating Income in the first year: $250,000, Loan amount: $2,047,500, Purchase price: $2,730,000 A. 4.8% B. 12.2% C. 68.6 % D. 75.2 %
B. 12.2%
Given the following information, calculate the debt yield ratio on the following commercial property. Estimated Net Operating Income in the first year: $2,500,000, Debt service in the first year: $960,000, Loan amount: $20,000,000, Purchase price: $27,300,000 A. 4.8% B. 12.5% C. 68.6 % D. 75.2 %
B. 12.5%
Up until the market for these instruments collapsed in 2008, which of the following was the fastest-growing source of long-term commercial mortgage funds from 2002-2007? A. Real estate investment trusts (REITs) B. Commercial mortgage backed securities (CMBS) C. Construction loans D. Residential mortgage backed securities (MBS)
B. Commercial mortgage backed securities (CMBS)
If the mortgage loan is going to be packaged with similar loans and then resold to investors as part of a commercial mortgage-backed security, the originating lender may rely more heavily on examining which of the following ratios in order to determine the maximum amount they are willing to lend to the borrower? (Note: This ratio indicates the cash-on-cash return the lender would earn on its invested capital if it had to foreclose on the property immediately after originating the loan) A. Debt coverage ratio B. Debt yield ratio C. Debt service ratio D. Equity dividend ratio
B. Debt yield ratio
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
B. Default risk
In contrast to public markets, private markets are characterized by individually negotiated transactions that take place without the aid of a centralized market. Therefore, private markets will generally have: A. High transaction costs and high liquidity B. High transaction costs and low liquidity C. Low transaction costs and high liquidity D. Low transaction costs and low liquidity
B. High transaction costs and low liquidity
Relative to residential loans, the underwriting process for commercial loans is more complicated. The commercial loan underwriting process focuses first on which of the following? A. Individual borrower's credit quality B. Income producing potential of the collateral property C. Individual borrower's wages D. Individual borrower's personal assets
B. Income producing potential of the collateral property
While balloon mortgage loan payments are typically based on a 30-year amortization schedule, the loan actually matures in either 3, 5, 7, or 10 years. Of the following, which is the primary risk that a lender reduces their exposure to through the relatively short loan term on a balloon mortgage? A. Default risk B. Interest rate risk C. Liquidity risk D. Financial risk
B. Interest rate risk
The key to meaningful valuations in real estate is to use defensible cash flow estimates. All of the following statements are true in regards to generating accurate cash flow estimates EXCEPT: A. Investors should include only those sources of income and expenses that relate directly to the income producing ability of the property. B. Investors should only consider recent events, rather than long-term trends when evaluating revenue and expense items. C. Investors should obtain information about comparable properties whenever possible. D. Investors should take into consideration local zoning, land use, and environmental controls that may impact the future flow of funds.
B. Investors should only consider recent events, rather than long-term trends when evaluating revenue and expense items.
There are two major types of REITs: Equity REITs and Mortgage REITs. Each differs in terms of what they invest in. Which of the following choices best describes the investment focus of an Equity REIT? A. Invests a significant percentage of their assets in both properties and mortgages B. Invests primarily in and operates commercial properties C. Purchases mortgage obligations D. Purchases ownership interests in shares of pension funds and life insurance companies
B. Invests primarily in and operates commercial properties
Different financing requirements usually are involved in the various phases of a property's life. Which of the following types of loans is used to finance improvements to the land, such as sewers, streets and utilities? A. Land acquisition loans B. Land development loans C. Construction loans D. Bridge loans
B. Land development loans
In recent years, which of the following pooled ownership structures are used by private funds that are trying to attract capital from very high net worth and institutional investors? A. General partnership B. Limited partnership C. C corporation D. Limited liability company
B. Limited partnership
Which of the following terms refers to a written agreement that binds the lender to make a loan to the borrower provided the borrower satisfies the terms and conditions of the agreement? A. Loan application B. Loan commitment C. Loan underwriting D. Loan document
B. Loan commitment
There are a number of alternatives when it comes to the capital structure for acquisitions of commercial real estate. Through which of the following lending relationships does the lender have the right to foreclose on the equity of the borrower's company in the case of default? A. Second mortgage loan B. Mezzanine loan C. Mini-perm loan D. Construction loan
B. Mezzanine loan
Which of the following measures, equal to the estimated total market value of a REITs underlying assets, allows investors to compare the value of a publicly traded security to the value of the properties that it holds in the private market? A. Net income B. Net asset value C. Funds from operations D. Effective gross income
B. Net asset value
When investing in commercial real estate through an intermediary, it is important to consider whether the fund has a finite or infinite life. By having a finite life, the fund manager is forced to eventually dispose of the assets and return the investors' capital. With which of the following fund structures do you expect the issues associated with finite life to be least prevalent? A. Closed-end commingled real estate fund B. Open-end commingled real estate fund C. Real estate private equity fund D. Public, non-traded REIT
B. Open-end commingled real estate fund
The $6.5 trillion total market value of commercial real estate can be broken into four quadrants. Which of the following sectors of the commercial real estate market currently accounts for the largest proportion of market value? A. Public equity B. Privately held equity C. Publicly traded mortgage debt D. Privately held mortgage debt
B. Privately held equity
A commercial real estate loan may take 90 days from the signing of the purchase and sale contract until loan closing. Therefore, there is the possibility for interest rates to fluctuate during this period. In some cases, the lender may offer the borrower the opportunity to "lock in" the interest rate on the loan. To protect against exposure to rate increases during this period, the borrower is often willing to pay a nonrefundable fee as part of what is more commonly known as a: A. Lockout provision B. Rate lock agreement C. Floating rate agreement D. Yield maintenance provision
B. Rate lock agreement
In contrast to residential mortgage loans, most fixed-rate commercial mortgages do not allow borrowers to freely prepay the principal on their loan. Which of the following prepayment penalties ties the penalty that borrowers pay to how far interest rates have declined since origination? A. Lockout provisions B. Yield-maintenance agreements C. Defeasance D. Curtailment
B. Yield-maintenance agreements
In calculating the net operating income (NOI) of a property, the "above-line" treatment of capital expenditures implies: A. capital expenditures are excluded from the calculation of NOI. B. capital expenditures are included in the calculation of NOI. C. capital expenditures are set equal to NOI. D. capital expenditures are divided by NOI.
B. capital expenditures are included in the calculation of NOI.
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
B. equal to zero
An alternative vehicle for financing commercial property involves having the lender acquire an ownership (equity) interest in the property by supplying a portion of the required equity capital in addition to providing the permanent debt financing. This type of financing arrangement is commonly referred to as a(n): A. installment sale B. joint venture C. land sale-leaseback D. complete sale-leaseback
B. joint venture
In order to better understand a borrower's probability of default, lenders have a number of tools at their disposal. The ratio that measures the percentage of the price (or value) of a property that is encumbered by the first mortgage is referred to as the: A. debt coverage ratio (DCR) B. loan-to-value ratio (LTV) C. break-even ratio (BER) D. price-earnings ratio (PE)
B. loan-to-value ratio (LTV)
The syndication agreement generally creates a principal/agent relationship in which the syndicator (agent) is empowered to act on behalf of the investors (principals). In most principal/agent relationships, there is the concern that the agent will act in the agent's best interest, not in the best interests of the principal. This issue is more commonly referred to as: A. adverse selection B. moral hazard C. dual agency D. signaling
B. moral hazard
As of 2011, nearly 88% of private commercial real estate equity was owned by "noninstitutional investors." Which of the following investor categories represents the most common form of noninstitutional ownership? A. Pension funds B. Sole proprietorship C. "local" syndications and private equity funds D. Life insurance companies
C. "local" syndications and private equity funds
Assume you have taken out a balloon mortgage loan for $2,500,000 to finance the purchase of a commercial property. The loan has a term of 5 years, but amortizes over 25 years. Calculate the balloon payment at maturity (Year 5) if the interest rate on this loan is 4.5%. A. $5,637.99 B. $13, 895.82 C. $2,196,447.59 D. $2,495,479.19
C. $2,196,447.59
If the lender has agreed to offer you a loan with a loan-to-value ratio of 85%, what is the size of the loan if the purchase price of the home is $500,000? A. $75,000 B. $400,000 C. $425,000 D. $588,235
C. $425,000
Suppose you plan to put a 20% down payment on a house and obtain a mortgage loan that is less than the size limit on conforming loans ($417,000) to finance the remainder of the purchase. Based on your understanding of the loan-to-value ratio, what is the maximum price that you could pay for a home with these restrictions in mind? A. $333,600 B. $500,400 C. $521,250 D. $2,085,000
C. $521,250
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
C. 10 years
Given the following information, calculate the effective gross income multiplier for the specific investment. Effective gross income: $49,500, First-year NOI: $18,750, Acquisition price: $520,000, Equity Investment: 20%. A. 0.036 B. 0.095 C. 10.5 D. 27.7
C. 10.5
Given the following information, calculate the equity dividend rate for this investment. First-year NOI: $18,750, Before-tax cash flow: $11,440, Acquisition price: $520,000, Equity Investment: 20%. A. 2.2% B. 3.6% C. 11.0% D. 18.02%
C. 11.0%
Suppose you are considering the purchase of an apartment building that has 12 units that can be rented out at $1,050 per month. You have estimated operating expenses and expected vacancy and collection losses for the first year to be $35,700 and $30,240, respectively. You also have estimated that you will be able to generate an additional $3,840 in the first year from garage rentals on the property. If the expected purchase price of the property is $1,100,000 and you are planning on making a 10% down payment, calculate the debt yield ratio. A. 8.10% B. 8.61% C. 9.00% D. 12.05%
C. 9.00%
Given the following information, calculate the price-FFO multiple for the following REIT. Net income: $1,200,000, Gain/losses from infrequent and unusual events: $0, Amortization of tenant improvements: $120,000, Amortization of leasing expenses: $75,000, Depreciation (real property): $2,675,000. Stock Price: $40; Market Capitalization: $40,000,000 A. 0.10 B. 4.07 C. 9.83 D. 393.12
C. 9.83
In determining a property's before-tax cash flow from operations (BTCF) and net operating income (NOI), it is important to understand how each accounts for the use of financial leverage in its calculation. Which of the following statements is true in regards to how these two measures account for the use of financial leverage? A. BTCF and NOI are both levered cash flows B. BTCF is an unlevered cash flow, while NOI is a levered cash flow C. BTCF is a levered cash flow, while NOI is an unlevered cash flow D. BTCF and NOI are both unlevered cash flows
C. BTCF is a levered cash flow, while NOI is an unlevered cash flow
The going-in capitalization rate can vary significantly by property quality. Which of the following classes of properties within a particular property type would be expected to have the highest cap rates? A. Class A properties B. Class B properties C. Class C properties D. Cap rates would be equal across all classes within the same property type
C. Class C properties
If mortgage rates decline significantly, 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: A. Lockout B. Yield-maintenance C. Defeasance D. Curtailment
C. Defeasance
Helpful in assessing the risk of lending to investors for particular projects, which of the following calculations measures the income-producing ability of the property to meet operating and financial obligations? A. Profitability ratios B. Income multipliers C. Financial risk ratios D. Income tax multipliers
C. Financial risk ratios
Since most real estate assets are depreciable, using accounting income to measure a REIT's cash flow may actually understate the funds that are available to distribute to investors as dividends. Therefore, REITs utilize a measure that adds back depreciation and amortization expenses, more commonly referred to as: A. Net income B. Net asset value C. Funds from operations D. Effective gross income
C. Funds from operations
The choice of ownership form for pooled equity investments can also depend on the desire to avoid personal liability. Which of the following ownership structures suffers from the major disadvantage of unlimited liability for all investors? A. C Corporation B. Subchapter S Corporation C. General Partnership D. Limited Partnership
C. General Partnership
The use of a mezzanine loan in the purchase of a commercial property has all of the following impacts on the borrower EXCEPT: A. Allows the borrower to increase their financial leverage in the purchase of the property B. Increases the borrower's expected first year return on equity C. Mitigates the risk of financing for the borrower D. Requires the borrower to pledge an equity interest in their company (e.g., LLC) as collateral for the loan rather than pledging the property.
C. Mitigates the risk of financing for the borrower
Real estate private equity funds can focus investment on anything from "Class A" real estate to redevelopment in the urban center. On the risk-return spectrum, which of the following private equity fund categories tends to have a heavier development component and often involves investment in riskier property types and locations? A. Core B. Value Added C. Opportunistic D. Full platform
C. Opportunistic
Section 1031 of the Internal Revenue Code permits investors to defer some or all of the taxable gain that would ordinarily be due on the sale of a property if they exchange for "like-kind" property. In order to avoid income taxes, many investors attempted to make use of this tax code when disposing of commercial real estate assets. This led to the reemergence of which of the following forms of ownership in commercial real estate? A. General Partnership B. Limited Liability Company C. Tenancy-in-common D. Limited Partnership
C. Tenancy-in-common
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.
C. The IRR methodology cannot be used to make comparisons across different investment opportunities.
Some commercial mortgages have adjustable, or floating, interest rates. The index rate to which the contract rate is tied is typically which of the following for commercial mortgages? A. The yield on a constant maturity Treasury security of the same term B. The cost of funds index (COFI) C. The London Interbank Offer Rate (LIBOR) D. The interest rate on a comparable maturity level-payment mortgage
C. The London Interbank Offer Rate (LIBOR)
The use of financial leverage by real estate investors can be a double-edged sword. All of the following statements regarding the use of financial leverage by real estate investors are true EXCEPT: A. The use of financial leverage by real estate investors mitigates the impact that limited financial resources would otherwise have on their pursuit of investment opportunities. B. The use of financial leverage by real estate investors will increase the internal rate of return (IRR) on equity as long as the cost of borrowing is less than the unlevered IRR. C. The use of financial leverage reduces the real estate investor's exposure to default risk. D. The use of financial leverage by real estate investors makes the realized return on equity more sensitive to changes in rental rates and resale values.
C. The use of financial leverage reduces the real estate investor's exposure to default risk.
The estimated market value of investible commercial real estate in the United States at the end of 2011 was approximately $6.5 trillion. In terms of market size, which of the following asset categories is most closely related to commercial real estate? A. Owner-occupied housing B. Corporate equities C. U.S. Treasury securities D. Municipal securities
C. U.S. Treasury securities
If the per share stock price of a REIT is greater than its per share net asset value (NAV), the REIT is said to be selling at: A. par value B. a discount C. a premium D. an auction
C. a premium
Prospective borrowers often submit loan requests directly to lenders. However, commercial loan requests can also be submitted through another channel in which a permanent lender agrees to purchase loans or consider loan requests from a mortgage banker or broker. This type of business relationship is more commonly referred to as a(n): A. installment sale B. joint venture C. correspondent relationship D. sale-leaseback
C. correspondent relationship
In making single-asset real estate investment decisions, the first pass often involves calculating a series of returns, ratios, and multipliers. Which of the following is often cited as a limitation associated with this type of analysis? A. they are difficult to calculate B. they are complex to understand C. they fail to incorporate cash flows beyond the first year of the analysis D. they are rarely used by industry professionals
C. they fail to incorporate cash flows beyond the first year of the analysis
In recent years, lenders have been unwilling to relieve borrowers from personal liability in the event of fraud, environmental problems, or unpaid property tax obligations. Therefore, some lenders include a clause that pierces the single-purpose borrowing entity to hold the actual borrower liable in such instances. This clause is commonly referred to as a: A. habendum clause B. lockout provision C. defeasance D. "bad boy carve-out" clause
D. "bad boy carve-out" clause
Given the following information, calculate the funds from operation (FFO). Net income: $1,200,000, Gain/losses from infrequent and unusual events: $0, Amortization of tenant improvements: $120,000, Amortization of leasing expenses: $75,000, Depreciation (real property): $2,675,000. A. $195,000 B. $1,395,000 C. $2,870,000 D. $4,070,000
D. $4,070,000
Given the following information, calculate the debt coverage ratio of this commercial loan. Estimated net operating income (NOI) in the first year: $150,000, Debt service in the first year: $100,000, Loan amount: $1,000,000, Purchase price: $1,300,000 A. 0.15 B. 0.67 C. 1.30 D. 1.50
D. 1.50
Given the following information, calculate the price-FFO multiple for the following REIT. Funds from Operation: $4,000,000; Stock Price: $40; Shares Outstanding: 1,000,000 A. 0.10 B. 0.25 C. 4.00 D. 10.00
D. 10.00
The measure of cash flow most relevant to investors in income-producing real estate is the after-tax cash flow (ATCF) from property operations. Therefore, it is important to know that the maximum federal income tax rate on individuals as of 2012 is: A. 25% B. 30% C. 33% D. 35%
D. 35%
There are a set of restrictive conditions that REITs must satisfy on an ongoing basis in order to maintain their special tax status. All of the following statements regarding the main restrictions are true EXCEPT: A. At least 100 investors must own a REIT's shares B. No five investors can own more than 50 percent of a REIT's shares C. At least 75 percent of the value of a REIT's assets must consist of real estate assets D. A REIT must distribute at least 75% of its taxable income to shareholders in the form of dividends.
D. A REIT must distribute at least 75% of its taxable income to shareholders in the form of dividends.
Though difficult to accurately measure, the market value of U.S. real estate held by non-real estate corporations is estimated to exceed $10 trillion. All of the following are examples of noninvestible commercial real estate EXCEPT: A. Medical office buildings owned by the hospital B. Branch offices owned by the bank C. Plant and equipment owned by steel corporations D. Assembly plant building owned by a group of investors as part of an LLC
D. Assembly plant building owned by a group of investors as part of an LLC
An interest-only balloon mortgage loan is commonly referred to as a(n): A. Mini-perm loan B. Mezzanine loan C. Land acquisition loan D. Bullet loan
D. Bullet loan
Of the $3.2 trillion in outstanding mortgage debt in the U.S., approximately 714% is privately held by institutional and individual investors. Which of the following institutions is the largest single source of private mortgage funds? A. Savings institutions B. Life insurance companies C. Government Sponsored Enterprises D. Commercial banks
D. Commercial banks
In recent years, a number of pooled ownership structures have emerged that have changed the analysis of ownership form selection for many investors. Which of the following ownership structures is generally used for small, local investments that are marketed to accredited, but non-institutional investors? A. General partnership B. Limited partnership C. C corporation D. Limited liability company
D. Limited liability company
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: 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 estimates that incorporates appropriate measures of income and expenses.
D. Only with DCF must the investor use a defensible cash flow estimates that incorporates appropriate measures of income and expenses.
When fund managers collect contributions from multiple sources and "commingle" them to purchase properties, this is referred to as the use of commingled real estate funds. Which of the following institutional investors utilize commingled real estate funds for approximately one-half of their investments in real estate? A. Investment banks B. Life insurance companies C. Real estate advisory firms D. Pension funds
D. Pension funds
In most small to medium private real estate deals, syndicators play important roles within the origination, operation, and completion phases of a real estate syndicate's life. All of the following are responsibilities of the syndicator in the operation phase of a syndicate's life EXCEPT: A. Manage the syndication B. Manage properties C. Raise additional investment capital if required D. Prepare the properties for sale
D. Prepare the properties for sale
All of the following are responsibilities of the syndicator in the origination phase of a syndicate's life EXCEPT: A. Develop the concept for the syndication B. Organize the legal entity C. Acquire or obtain control of the real estate D. Raise additional investment capital
D. Raise additional investment capital
At the end of 2011, commercial banks and other financial institutions collectively owned $51 billion in commercial real estate equity. The vast majority of these holding are the result of which of the following types of investment by these institutions? A. Direct equity investment through private market purchases B. Indirect investment through real estate securities C. Commingled real estate funds D. Real estate obtained as a result of borrower default and foreclosure.
D. Real estate obtained as a result of borrower default and foreclosure.
Most real estate investment trusts (REITs) are actively managed operating companies that typically focus their investments either by property type or geographic market. Which of the following commercial property types represents the largest proportion of REIT market value? A. Apartments B. Office C. Industrial D. Retail
D. Retail