REAL 5350 - Chapters 17-18

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 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

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

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

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

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

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 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 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 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%

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)

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

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

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

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

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

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

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 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

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

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

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

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 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

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 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

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

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%

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%

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