Real Estate Chapter 17 - Sources of Commercial Debt and Equity Capital

The total value of investible commercial real estate is approximately $ ___

12.6

Which of the following is the better measure of the net cash flow a REIT has available to distribute to shareholders as dividends?

Funds from operations

Which of the following best describes the type of investors typically most willing to contribute their properties, currently owned in the form of a limited liability company, to an UPREIT?

Investors who would face large capital gain taxes if they engaged in a regular taxable sale

In which of the following ownership forms is there no separation of ownership and control?

Sole proprietorship

A subchapter S corporation:

allows for limited liability for all of its shareholders

A major benefit to a limited partner that invests in commercial real estate through a limited partnership is:

limited liability

The ownership form typically chosen by a local syndication to attract noninstitutional investors is a:

limited liability company

According to Exhibit 17-3, the largest percentage of private commercial real estate equity is owned by:

other investors in institutional properties

Typical sources of compensation for the GPs of real estate private equity funds set up as limited partnerships include:

property acquisition fees management fees carried interest

The primary risk of development and construction lending is:

the developer will fail to complete the project in a timely manner

Limited partnerships have been a popular ownership form for investing in commercial real estate because:

the income their assets generate is typically taxed only once

Construction loans

are not included as providers of commercial real estate debt in Figure 17-4

A publicly-traded REIT is one that is:

listed on a major stock exchange

A REIT's net asset value is equal to the:

market value of its assets minus the market value of its liabilities

The importance of __________________________ has grown in importance in recent years relative to traditional commercial bank lending

private equity funds that invest in debt

Investments in commercial real estate through limited liability companies are considered:

securities

True or false: Many individual investors who invest in commercial real estate do so through commingled real estate funds.

False

True or false: S corporations require more than 100 shareholders.

False

Which of the following ownership forms is generally used for small, local investments that are marketed to higher income, but non-institutional investors?

Limited liability company

Advantages of using a C corporation for investing in commercial real estate include which of the following?

Separation of ownership and control Limited liability for the obligations of the corporation

Advantages of the general partnership form of ownership include:

the ability to create multiple classes of equity investors relative ease of creation

According to Exhibit 17-3, the value of commercial real estate owned by pension funds exceeds the value owned by which of the following?

Life insurance companies Private financial institutions Foreign investors

Which of the following financial measures is an attempt by a stock market analyst or a REIT to estimate the total market value of a REIT's underlying assets and liabilities?

Net asset value

An investor's closest alternative to direct ownership is a:

separate account with an investment manager

The construction of commercial properties is generally financed with ______ loans.

short-term

According to the text, the chosen form of real estate ownership is driven primarily by a desire for:

single-taxation, limited liability, and special allocations

The Russell 2000 tracks the performance of a portfolio of:

small cap stocks

The emergence and growth of umbrella partnership REITs has been primarily driven by:

tax considerations

Assume the following information for a publicly-traded REIT: Net (accounting) income: $44,245,000; Gain/losses from infrequent and unusual events: $50,000; Amortization of tenant improvements: $575,000; Amortization of leasing expenses: $133,000; Depreciation (real property): $30,906,000. Calculate the REIT's funds from operation (FFO).

$75,809,000

As of June 2019, ____ REITS were included in the S&P 500.

31

At least ____ percent of a REIT's gross income must be derived from real estate assets.

75

Approximately _____ percent of REIT shares are owned by institutional investors

80

Which of the following forms of ownership potentially exposes the entity to double taxation?

C corporation

Important trade-offs involved in the choice between direct ownership versus investing through an intermediary include which of the following?

Decision making control Risk sharing Access to talented managers/sponsors

The market value of U.S. commercial real estate held by non-real estate corporations is estimated to be $12.5 trillion. Which of the following are examples of non-investible real estate held by non-real estate corporations?

Factories owned by automobile manufacturers Medical office buildings owned by a hospital Restaurants owned by fast-food companies

True or false: Commercial real estate investors can realize substantial tax benefits, relative to other widely used ownership forms, when investing in REITs.

False

True or false: Life insurance companies are more likely to act as equity investors in commercial real estate than as commercial real estate lenders

False

Which of the following are important considerations when choosing an ownership form for real estate investment?

Federal income tax considerations The desire to avoid unlimited personal liability The ability to share risk with other investors

buy or originate mortgage loans

Have at least 100 shareholders Keep 75% of its assets invested in real estate, cash, or government securities Make sure that 75% of its gross income is derived from real estate investments

On the risk-return spectrum, which of the following fund types generally offers investors the highest expected return?

Opportunistic fund

On the risk-return spectrum, which of the following private equity fund types tends to invest primarily in "Class A" properties with limited use of leverage?

Opportunistic fund

According to Exhibit 17-3, the value of commercial real estate owned by life insurance companies exceeds the value owned by which of the following?

Private financial institutions

With regard to taxation,

REITs are similar to S corporations, in that they can avoid "double" taxation REITs are similar to C corporations in that there is separation of ownership and control REITs are similar to real estate limited liability companies, in that they provide limited liability for all investors

Which of the following items typically accounts for the largest portion of the difference between accounting (GAAP) net income and funds from operations (FFO)?

Tax depreciation

Which of the following statements about general partnerships (GPs) is true? Taxable income from ownership of properties "flowthrough" to the individual partners Investors face the potential of double taxation The % of cash flow a partner receives from the underlying properties must be equal to the % of equity capital provided by the partner to the GP

Taxable income from ownership of properties "flowthrough" to the individual partners

Which of the following are NOT characteristics of a limited liability company?

The managing member assumes unlimited liability

Which of the following choices best describes the investment focus of an equity REIT?

They invest primarily in commercial properties

True or false: Limited liability companies are thought by some to be "super passthrough entities."

True

Relative to direct ownership, separate accounts allow investors to:

access the expertise of a management company

The capital raised by equity REITs through debt and equity offerings is primarily used to:

acquire properties

Individuals and institutions that invest directly in private commercial real estate:

are often wealthy individuals or families often do so in order to have more control over investment decisions typically form a LP or LLC to limit liability

The primary investment strategies of REITs are to develop or acquire properties directly or:

buy or originate mortgage loans

Real estate private equity funds are typically set up as

closed-end funds

The estimated market value of owner-occupied housing in the U.S. is second to ___________ in magnitude.

corporate equities (stocks)

Because of the large amounts of capital they have to invest, pension funds have an influence on commercial real estate markets that is ______ to the percentage of properties they own.

disproportionate

A C corporation:

earns income that may be taxed at both the corporate level and investor level

An implicit cost of direct ownership relative to joint ownership, especially for smaller, less wealthy investors, is

inadequate portfolio diversification

An entity that arranges investments in commercial real estate and then sells claims on those investments to the ultimate, capital providing, investors is often referred to as a(n):

intermediary

The majority of outstanding commercial mortgage debt:

is held privately by mortgage investors/lenders

The pooling of equity capital by investors to purchase real estate:

is often referred to as a syndication takes place among both institutional and noninstitutional investors is sometimes done with the intent to develop land

The pooling of equity capital by investors to purchase real estate:

is sometimes done with the intent to develop land takes place among both institutional and noninstitutional investors is often referred to as a syndication

If a REIT complies with a list of conditions on an on-going basis,

it can avoid paying taxes at the entity level

Disadvantages of direct investment for many "smaller" investors include:

less ability to diversify their overall portfolio

The ownership form typically chosen by a real estate private equity fund is a:

limited partnership

Publicly-traded REITs have been described as mutual funds for real estate because they provide:

liquidity investment portfolio diversification

The most common investors in commingled real estate funds are:

pension funds

Typical sources of compensation for the GPs of real estate private equity funds set up as limited partnerships include:

property acquisition fees carried interest management fees

"Country-club" money raised from equity investors by a sponsor/syndicator is typically used to

purchase institutional-quality properties

According to the data presented in Exhibit 17-8, equity REITs have underperformed large cap stocks

underperformed large cap stocks over the last 3 years and 5 years outperformed large cap stocks over the last 10, 15, 20, and 25 years

The market capitalization of an equity REIT's stock is equal to

the number of outstanding shares times the current price of the stock

In a limited partnership, the "principal" is ______________ and the "agent" is ___________________----

the set of limited partners, the general partner