FIRE-305 Ch. 14-19
The equity dividend rate is equal to Multiple choice question. BTCF in year 1 divided by the initial equity investment BTCF in year 1 NOI in year 1 divided by the initial equity investment
BTCF in year 1 divided by the initial equity investment
The tradition in real estate appraisal is to refer to substantial nonrecurring expenses as: Multiple choice question. sale costs reserves deferred operating expenses
reserves
You want to buy a new sports car 5 years from now, and you plan to save $5,800 per year, beginning one year from today. You will deposit your savings in an account that pays 6% interest. How much will you have just after you make the 5th deposit, 5 years from now? Multiple choice question. $32,695 $35,260 $34,657 $36,063
$32,695
Assume the following information: Net operating income: $57,900; Acquisition price: $520,000; Loan amount: $338,000; Annual debt service: $20,000; Up-front financing costs: $10,000. The initial loan-to-value ratio is ______ percent. Multiple choice question. 65.00 63.77 66.28
65.00
Which of the following type of real estate investment is typically considered the most risky? Multiple choice question. Office properties under development Existing apartment properties "Raw" land held for development Existing office properties
"Raw" land held for development
Use the following information: PGI: $600,000; Vacancy and collection losses: $42,000; Operating expenses: $88,000; Capital expenditures: $10,000. Mortgage payments total $206,728 annually. Assume a below-line treatment of capital expenditures. The before-tax cash flow from operations is equal to _____.
$253,272
Use the following information: PGI: $600,000; vacancy and collection losses: $42,000; operating expenses: $88,000; capital expenditures: $10,000. Mortgage payments total $206,728 annually. Assume an above-line treatment of capital expenditures. The before-tax cash flow from operations is equal to _____.
$253,272
Assume you want to purchase a 100,000 square feet office property in downtown Baltimore. You are required by your lender to set aside $0.50 per square foot per year (end of each year) for nonrecurring capital expenditures. Suppose the deposit rate is 2% and compounding frequency is annual. How much would you accumulate by the end of year 5? Multiple choice question. $260,202.01 $215,321.02 $278,163.51 $250,000.00
$260,202.01
An office building has a projected net income of $45,000 per year, and its projected net sales price after five years is $250,000. Considering its risk, you require a 16% annual return on this investment. How much would you be willing to pay for it? Multiple choice question. $237,326.81 $254,521.25 $239,295.12 $266,371.47
$266,371.47
An investor expects to hold a potential property acquisition for 10 years. NOI at the end of year 10 is projected to be $300,000; NOI at the end of year 11 is forecasted to be $310,000. The going-in cap rate is 6.0%; the appropriate going-out cap rate is determined to be 6.7%. The estimate sale price at the end of year 10 (rounded to the nearest dollar) is: Multiple choice question. $5,166,667 $5,000,000 $4,626,866 $4,477,612
$4,626,866
Use the following information: PGI: $600,000; vacancy and collection losses: $42,000; operating expenses: $88,000; capital expenditures: $10,000. Assume an above-line treatment of capital expenditures. Net operating income is equal to $_____.
$460,000
Suppose Howard Realty Group prepaid a 10-year, 6% commercial mortgage loan at the end of three years without penalty. The original loan amount was $500,000. The loan was being amortized with monthly payments and a 30 year amortization schedule. The remaining balance at the end of 3 years was _________________. Multiple choice question. $444,231 $379,985 $480,420 $140,270
$480,420
Mary currently has $5,000. How much will she have after 6 years if she leaves it invested at 5.5% with annual compounding? Multiple choice question. $7,239.89 $6,894.21 $5,911.01 $6,223.22
$6,894.21
An apartment requires an initial investment of $200,000 has a projected net income of $15,000 per year for five years. Its projected net sales price after five years is $300,000. Considering its risk, you require a 14% annual return on investments of this type/risk. What is the NPV of this project? Multiple choice question. $7,766.11 $7,143.35 $7,306.81 $7,452.09
$7,306.81
Assume the following annual cash inflows and outflows: year 0: ($80,000); year 1: $10,000; year 2: $20,000; year 3: $20,000; year 4: $75,000. The net present value (to the nearest dollar) if discounting at 10% is
11872
Assume the following annual cash inflows and outflows: year 0: ($80,000); year 1: $10,000; year 2: $20,000; year 3: $20,000; year 4: $75,000. The net present value (to the nearest dollar) if discounting at 10% is .
11872
Assume the following annual cash inflows and outflows: year 0: ($80,000); year 1: $10,000; year 2: $20,000; year 3: $20,000; year 4: $75,000. The internal rate of return on this investment is _____ percent. Round off the answer to two decimal places.
14.93
The average annual return for the S&P 500 since its inception in 1928 through 2014 is approximately 10%. assume a person invested $1.00 in S&P 500 Index in the end of 1928. It would have grown to $ in the end of 2014 (Round your answer to the nearest cent).
3628.87
Assume the following information: Net operating income: $41,600; Acquisition price: $520,000; Loan amount: $390,000; Annual debt service: $20,000; Up-front financing costs: $10,000. The debt coverage ratio is: Multiple choice question. 1.39 1.33 2.08 0.48
41600/20000 = 2.08
Assume the following information for a 30-year, $180,000 ARM loan: margin: 3% (300 basis points); index rate at the beginning of year 2: 3%; initial interest (teaser rate): 4.5%; periodic cap: 1%. Assume that the periodic cap applies to the teaser rate. What is the contract interest rate at the beginning of year 2? Multiple choice question. 6.0% 5.5% 4.5% 4.0%
5.5%
The ______ ARM has become the most popular ARM product in recent years. Multiple choice question. 3/1 1/1 7/1 5/1
5/1
Assume an industrial building can be purchased for $1,500,000 today. The investment is expected to yield cash flows of $80,000 for each of the next five years (with the cash flows occurring at the end of each year), and can be sold at the end of the fifth year for $1,625,000. Calculate the internal rate of return (IRR) on this investment. Multiple choice question. 9.20% 3.14% 10.37% 6.78%
6.78%
For a $300,000 loan at a 12% annual interest rate with a 30-year amortization period, how many discount points would the lender have to charge to increase the lenders' yield to 13%? Assume monthly payments and no prepayment of the mortgage by the borrower prior to maturity. Multiple choice question. 7.01 7.51 7.29 6.95
7.01
A shopping mall is acquired at a price of $20,000,000 and financed with a blend of equity and debt financing. Specifically, 60% of the acquisition price is finance by an interest-only first mortgage with an interest rate of 3%. The remaining 40% is financed by the equity investor. The property is expected to generate an annual NOI of $1,500,000. Assume the investor has the option to obtain a mezzanine loan with an interest rate of 10% and a loan amount that is equal to 25% of the acquisition price. The remaining 15% of the acquisition price is financed with equity. What is the increase in the investor's expected return on equity in the first year? Multiple choice question. 7.25% 7.08% 7.12% 6.90%
7.08%
You are contemplating a commercial real estate investment. You believe your before-tax, levered, risk-adjusted opportunity cost of investing in this opportunity is 12%. If you believe the effective tax rate you will pay on this investment is 37%, what is the appropriate after-tax discount rate? Multiple choice question. 12.0% 16.4% 7.6% 4.4%
7.6%
You are contemplating a commercial real estate investment. You believe your before-tax, levered, risk-adjusted opportunity cost of investing in this opportunity is 12%. If you believe the effective tax rate you will pay on this investment is 37%, what is the appropriate after-tax discount rate? Multiple choice question. 12.0% 4.4% 7.6% 16.4%
7.6%
Use the following information: acquisition price $4,132,000; effective gross income: $558,000; operating expenses: $167,400; capital expenditures: $60,000. Assume a below-line treatment of capital expenditures. The going-in capitalization rate is equal to _____ percent. (Round your answer to two decimal places.)
9.45%
True or false: When a property is sold before the loan term ends, commercial mortgages do not allow transfer of the mortgage liability from the original borrower to the buyer of the property without the approval of the lender.
true
True or false: Although the use of financial leverage will usually increase an investments' expected rate of return on equity, it may also increase its risk.
true
True or false: Decisions based on net present value (NPV) will always be consistent with wealth maximization.
true
True or false: Expected federal income taxes generally reduce the net cash flows realized by the investor(s) from annual operations.
true
True or false: Foreign investors are often active investors in U.S. commercial real estate.
true
True or false: The debt coverage ratio is defined as net operating income divided by debt service.
true
True or false: The ultimate equity investors often create a separate organization to invest in the entity that actually owns the property(s).
true
True or false: The use of single-year ratios in investment decision making requires fewer assumptions than the use of discounted cash flow models.
true
Which of the following statements about Fannie Mae and Freddie Mac are NOT true? Multiple choice question. A pan to take Freddie and Fannie private has been approved by the U.S. Congress Freddie and Fannie are no longer active participants in the multifamily mortgage market. Freddie and Fannie remain in the conservatoship of the federal government
A pan to take Freddie and Fannie private has been approved by the U.S. Congress
CMBS can be backed by which of the following? Multiple select question. A pool of commercial mortgages A single commercial mortgage loan A pool of home loans
A pool of commercial mortgages A single commercial mortgage loan
Which of the following items are typically included in the lender's due diligence of the loan application? Multiple select question. A request for environmental reports A careful examination of the in-place leases An analysis of the property's income-generating ability The collection of an application fee
A request for environmental reports A careful examination of the in-place leases An analysis of the property's income-generating ability
Which of the following is/are generally true? Multiple select question. Buyer are generally not willing to pay more than market value Investment value is the basis for economic transactions Sellers are generally not willing to accept an offer that is less than market value Transaction prices never exceed the seller's investment value
Buyer are generally not willing to pay more than market value Investment value is the basis for economic transactions Sellers are generally not willing to accept an offer that is less than market value
Which of the following descriptions of a correspondent relationship is correct? Multiple select question. Commercial mortgage brokers charge a fee for their service. A correspondent relationship requires borrowers to directly submit loan requests to lenders. The mortgage brokerage fee is typically paid by the lender. Mortgage brokers help to mitigate the information asymmetry between borrowers and lenders.
Commercial mortgage brokers charge a fee for their service. Mortgage brokers help to mitigate the information asymmetry between borrowers and lenders.
Which of the following statements about defeasance clauses are correct? Multiple choice question. With defeasance clauses, a borrower who prepays must purchase a set of municipal bonds for the lender. A defeasance clause is typically less costly to borrowers than a yield-maintenance agreement. Defeasance clauses eliminate the borrower's interest savings associated with mortgage prepayment. Defeasance clauses prohibit borrowers from prepaying.
Defeasance clauses eliminate the borrower's interest savings associated with mortgage prepayment.
All else equal, how does the presence of income taxes impact the levered going-in IRR? Multiple choice question. Income taxes reduce the levered going-in IRR Income taxes do not affect the levered going-in IRR Income taxes increase the levered going-in IRR
Income taxes reduce the levered going-in IRR
Which of the following features describe the promissory note used in commercial mortgage financing? Multiple select question. It is used to create a legal debt. It presents in detail the lender's obligations. It makes the loan recourse. It is usually quite lengthy.
It is used to create a legal debt. It is usually quite lengthy.
Which of the following type of loan is used to finance improvements to the land, such as sewers, streets, and utilities? Multiple choice question. Land development loan Mini-perm loan Construction loan Land acquisition loan
Land development loan
Which of the following are characteristics of a participation loan? Multiple select question. The interest rate is generally lower than alternative commercial mortgages. Lender usually provides a smaller loan amount. Lender usually provides a larger loan amount, which is often attractive to borrowers. Lender receives a specified portion of a property's cash flows.
Lender usually provides a larger loan amount, which is often attractive to borrowers. Lender receives a specified portion of a property's cash flows.
It is common for investors in commercial real estate to use mortgage debt to help finance property acquisitions. The use of debt can have a profound impact on the expected cash flows received by the investor 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? Multiple choice question. Unlevered cash flows Levered cash flows Discounted cash flows Compounded cash flows
Levered cash flows
According to Exhibit 17-3, the value of commercial real estate owned by pension funds exceeds the value owned by which of the following? Multiple select question. Other investors in instititional-quality properties Life insurance companies Foreign investors Private financial institutions
Life insurance companies Foreign investors Private financial institutions
Advantages of using a C corporation for investing in commercial real estate include which of the following? Multiple select question. Limited liability for the obligations of the corporation Separation of ownership and control The avoidance of double taxation
Limited liability for the obligations of the corporation Separation of ownership and control
Private REITs can provide investors with which of the following? Multiple select question. Limited personal liability Avoidance of double taxation Liquidity similar to public, listed REITs
Limited personal liability Avoidance of double taxation
The calculation of the debt yield ratio is affected by which of the following? Multiple select question. Amortization period of the loan size of the loan Interest rate on the loan Loan amount Net operating income
Loan amount Net operating income
Which of the following statements about lockout provisions are correct? Multiple choice question. Most fixed-rate commercial mortgages allow borrowers to freely prepay at par. Lockout provisions reduce lenders' interest rate risk. Lockout provisions reduce borrowers' reinvestment risk. Lockout provisions reduce lenders' reinvestment risk.
Lockout provisions reduce lenders' reinvestment risk.
The debt yield ratio is defined as Multiple choice question. annual debt service dived by NOI in the next year NOI in the next year divided by the loan amount the loan amount divided by NOI in the next year NOI in the next year divided by the annual debt service
NOI in the next year divided by the loan amount
The "going-in" cap rate on a property acquisition is equal to the forecasted ________ over the next 12 months divided by the ___________. Multiple choice question. NOI, required equity investment BTCF, acquisition price BTCF, required equity investment NOI, acquisition price
NOI, acquisition price
Discounted cash flow decision making models include which of the following? Multiple select question. Net present value Internal rate of return Capitalization rate Effective gross income multiplier
Net present value Internal rate of return
Paul has put together a real estate investment opportunity and has formed a limited partnership to purchase the property. He will act as the general partner. Which of the following statements are true? Multiple choice question. The general partner must be a sole proprietor Paul is concerned about personal unlimited liability. Paul cannot avoid unlimited personal liability. Paul will probably received cash flow distributions that are based on the percentage of equity capital he contributed to the LP.
Paul is concerned about personal unlimited liability.
Which of the following clauses or provisions provide commercial mortgage borrowers the ability to prepay the loan, but at a cost to the borrower? Multiple select question. Lockout provisions Prepayment penalties Yield-maintenance agreements Escrow clauses
Prepayment penalties Yield-maintenance agreements
The $12.6 trillion total market value of investible commercial real estate can be broken into four quadrants. Which of the following quadrants currently accounts for the largest proportion of total market value? Multiple choice question. Publicly-held debt Privately-held equity Privately-held debt Publicly-held equity
Privately-held equity
With regard to taxation, Multiple select question. REITs are similar to S corporations, in that they can avoid "double" taxation REITs are similar to real estate limited liability companies, in that they provide limited liability for all investors REITs are similar to real estate limited partnerships in that the REIT's management team is potentially subject to unlimited liability REITs are similar to C corporations in that there is separation of ownership and control
REITs are similar to S corporations, in that they can avoid "double" taxation REITs are similar to real estate limited liability companies, in that they provide limited liability for all investors REITs are similar to C corporations in that there is separation of ownership and control
Which of the following characteristics describe(s) the type of properties that are the focus of the quarterly RERC survey? Multiple select question. Located in non-major metropolitan areas Relatively new Market values greater than $10 million Not fully leased
Relatively new Market values greater than $10 million
Which of the following are usually contained in a commercial mortgage loan submission package? Multiple select question. Environmental reports Requested loan amount Size of property pledged as collateral Title report
Requested loan amount Size of property pledged as collateral
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? Multiple select question. Restaurants owned by fast-food companies Medical office buildings owned by a hospital Factories owned by automobile manufacturers Warehouses owned by a group of real estate investors
Restaurants owned by fast-food companies Medical office buildings owned by a hospital Factories owned by automobile manufacturers
Advantages of using a C corporation for investing in commercial real estate include which of the following? Multiple select question. The avoidance of double taxation Separation of ownership and control Limited liability for the obligations of the corporation
Separation of ownership and control Limited liability for the obligations of the corporation
Which of the following statements about general partnerships (GPs) is true? Multiple choice question. 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 Investors face the potential of double taxation Taxable income from ownership of properties "flowthrough" to the individual partners
Taxable income from ownership of properties "flowthrough" to the individual partners
Which of the following are important considerations when choosing an ownership form for real estate investment? Multiple select question. The desire to avoid unlimited personal liability Federal income tax considerations The desire to distribute cash flows based on the percentage of equity capital contributed by each investor The ability to share risk with other investors
The desire to avoid unlimited personal liability Federal income tax considerations The ability to share risk with other investors
Financial leverage is frequently used in commercial real estate investments. Which of the following statements about financial leverage are correct? Multiple select question. With respect to the IRR, positive financial leverage occurs when the cost of borrowing is less than the unlevered IRR. The use of financial leverage always increases the expected IRR on equity. Financial leverage is used by some investors because of limited financial resources (savings). Financial leverage decreases the riskiness of the returns on the equity investment.
With respect to the IRR, positive financial leverage occurs when the cost of borrowing is less than the unlevered IRR. Financial leverage is used by some investors because of limited financial resources (savings).
If the per share stock price of a REIT is less than its per share net asset value (NAV), the REIT is said to be selling at: Multiple choice question. a premium to net asset value a discount to the share price a premium to the share price a discount to net asset value
a discount to net asset value
Prepayment penalties are typically expressed as Multiple choice question. a multiple of the monthly payment a declining function of the contract interest rate a fixed dollar amount a percentage of the remaining mortgage balance
a percentage of the remaining mortgage balance
Potential outcomes of the lender's discovery of inconsistencies or errors in the loan submission package include: Multiple select question. a refusal to fund the loan a reduction in the loan amount a shortening of the total time required to close the loan an alteration of the loan terms
a refusal to fund the loan a reduction in the loan amount an alteration of the loan terms
When an investor in a limited partnership receives a disproportionate share of cash flow distributions from the underlying property, relative to her equity investment, this is referred to as: Multiple choice question. a special allocation a pro rata distribution a percentage distribution
a special allocation
The measure of annual cash flow from a real estate investment most important to an investor is the: Multiple choice question. net operating income minus capital expenditures after-tax cash flow from operations net operating income before-tax cash flow from operations
after-tax cash flow from operations
Changes in local zoning, land use, and environmental controls: Multiple select question. are difficult to predict can have a dramatic impact on property values do not affect capitalization rates are typically ignored by appraisers
are difficult to predict can have a dramatic impact on property values
Promised payments on "private label" CMBS securities Multiple choice question. are typically guaranteed by the issuer of the security are backed by a government agency/entity are not backed by a government agency/entity
are not backed by a government agency/entity
Construction loans Multiple choice question. are most frequently provided by Fannie Mae and Freddie Mac are most frequently provided by life insurance companies are included as providers of commercial real estate loans in Figure 17-4 are not included as providers of commercial real estate debt in Figure 17-4
are not included as providers of commercial real estate debt in Figure 17-4
Individuals and institutions that invest directly in private commercial real estate: Multiple select question. expect more liquidity than when they invest in private real estate through a sponsor 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
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
Income multipliers: Multiple choice question. are useful as preliminary screening tools to eliminate unacceptable investment opportunities are adequate as a sole indicator of an investment opportunity's attractiveness relate the property's price or value to expected after-tax cash flow
are useful as preliminary screening tools to eliminate unacceptable investment opportunities
Which of the following lenders is more likely to require some from of credit enhancement on a commercial real estate loan? Multiple choice question. Fannie Mae life insurance companies commercial banks pension funds
commercial banks
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? Multiple choice question. Value-added fund Full platform fund Opportunistic fund Core fund
core fund
The estimated market value of owner-occupied housing in the U.S. is second to ___________ in magnitude. Multiple choice question. corporate and foreign bonds commercial real estate corporate equities (stocks) U.S. Treasury securities
corporate equities (stocks)
Assume a small office building is purchased for $4,842,000. A loan of $3,400,000 is obtained from a local lender. Up-front financing costs associated with the mortgage total $68,000. NOI is estimated at $460,000. The annual debt service will be $206,728. The debt yield ratio is equal to: Multiple choice question. 0.135 2.25 7.39
debt yield ratio = NOI / loan amount x 100% 460000 / 3400000 = 0.135294
As the required internal rate of return increases, the calculated net present value will: Multiple choice question. decline stay the same become zero increase
decline
Upfront financing costs __________ net loan proceeds and __________ the cash down payment (equity) required when purchasing a property. Multiple choice question. increase, increase decrease, increase increase, decrease decrease, decrease
decrease, increase
A borrower's current wealth is ___________ by the present value of future mortgage payments. Multiple choice question. decreased increased not affected
decreased
In DCF analysis, the sale price of the property must be estimated at the end of the expected holding period. The most common method for determining the terminal value (sale price)of the property is Multiple choice question. yield capitalization method cost approach repeat-sales approach direct capitalization method
direct capitalization method
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. Multiple choice question. disproportionate equal negatively related proportionate
disproportionate
A C corporation: Multiple choice question. earns income that may be taxed at both the corporate level and investor level earns income, but does not incur tax liabilities at the corporate level can deduct dividends paid in the calculation of corporate taxable income constitutes a legal, nontaxable entity that is separate from the shareholders
earns income that may be taxed at both the corporate level and investor level
Use the following information: Acquisition price: $4,132,000; PGI: $600,000; Vacancy and collection losses: $42,000; Operating expenses: $167,400; Capital expenditures: $60,000. The operating expense ratio is equal to ______ percent. Multiple choice question. 30.00 40.75 4.05 27.90
effective gross income = pgi - vacancy and collection = 600000 - 42000 = 558000 operating expense ratio = operating expenses / effective gross income = 167400 / 558000 = 0.3 answer = 30.00
Which of the following has the first claim on cash flows generated by a commercial property? Multiple choice question. Equity investor Lender that provided the second mortgage First mortgage lender
first mortgage lender
When a lender forecloses on a mortgage loan, the _____ lien holder is entitled to the foreclosure sales proceeds before the _____ mortgage holder receives any of the proceeds from sale.
first, second
Projecting the cash flow performance of a potential investment opportunity beyond the investor's expected holding period: Multiple choice question. is not necessary because the property's performance beyond the investor's expected holding period will only affect the next owner is not typically necessary given the short economic lives of most properties forces the investor to consider all of the changes that could affect the property's long-term ability to produce cash flows is so difficult to do accurately that there is little value to doing so
forces the investor to consider all of the changes that could affect the property's long-term ability to produce cash flows
Investing in a ______ typically has the highest expected return and the highest expected risk for the investor. Multiple choice question. real estate private equity fund full platform operating company commingled real estate fund
full platform operating company
Scenario analysis: Multiple select question. helps quantify the impact of important assumptions on NPV and IRR helps to evaluate the potential risk of the investment allows the investor to calculate the probability that a particular IRR will actually be achieved
helps quantify the impact of important assumptions on NPV and IRR helps to evaluate the potential risk of the investment
An investor's total capital commitment to a real estate private equity fund: Multiple choice question. is paid in total at the time of commitment is paid in total when the fund acquires its first property is collected over several yeas as the fund acquires properties
is collected over several yeas as the fund acquires properties
Investment value: Multiple select question. is the most probable selling price is typically the same for the buyer and seller is unique to the individual investor may differ than market value
is unique to the individual investor may differ than market value
If a REIT complies with a list of conditions on an on-going basis, Multiple choice question. it can eliminate for shareholders the taxation of dividend income it can avoid paying taxes at the entity level it can eliminate for shareholders the taxation of capital gain income
it can avoid paying taxes at the entity level
Ratio analysis (including single-year return measures) is sometimes considered superior to discounted cash flow analysis for making real estate investment decisions because: Multiple select question. it requires the investor to specify her required discount rate it is generally more easily understood by investors and lenders it is easier to perform it considers the time value of money
it is generally more easily understood by investors and lenders it is easier to perform
Due-on-sale clauses primarily protect the ______. Multiple choice question. lender borrower mortgage brokerage
lender
All else equal, Multiple choice question. lenders prefer the debt yield ratio to be as high as possible commercial banks tend not to use the debt yield ratio as a metric for sizing loans lenders prefer the debt yield ratio to be as low as possible
lenders prefer the debt yield ratio to be as high as possible
All else equal, Multiple choice question. lenders prefer the debt yield ratio to be as low as possible lenders prefer the debt yield ratio to be as high as possible commercial banks tend not to use the debt yield ratio as a metric for sizing loans
lenders prefer the debt yield ratio to be as high as possible
Disadvantages of direct investment for many "smaller" investors include: Multiple choice question. less ability to diversify their overall portfolio less knowledge of their local market a loss of liquidity
less ability to diversify their overall portfolio
Shares of stock in a public, nonlisted REIT are generally ______ shares of REITs that trade on a major stock exchange. Multiple choice question. less liquid than equally liquid as more liquid than
less liquid than
The ownership form typically chosen by a local syndication to attract noninstitutional investors is a: Multiple choice question. general partnership limited partnership limited liability company S corporation
limited liability company
If investors expect less growth in rental income in a particular market, relative to the growth expected in nearby markets, we would expect to observe effective gross income multipliers that are __________ effective gross income multipliers in the nearby markets. Multiple choice question. higher than about the same as lower than
lower than
Passive (non-managing) investors in a commercial real estate investment generally expect to earn a return on their equity investment that is _________ the return expected to be earned by the sponsor/organizer of the investment opportunity. Multiple choice question. higher than about the same as lower than
lower than
All else the same, an above-line treatment of capital expenditures ________ NOI and thereby __________ the cap rate. Multiple choice question. increases, lowers lowers, increases lowers, lowers increases, increases
lowers, lowers
The use of financial leverage amplifies the expected IRR on investors' equity. This _____ of equity returns is known as financial leverage.
magnification
A REIT's net asset value is equal to the: Multiple choice question. market value of its assets minus the market value of its liabilities book value of its assets plus the book value of its liabilities book value of its assets minus the book value of its liabilities market value of its assets plus the market value of its liabilities
market value of its assets minus the market value of its liabilities
Holding everything but the loan-to-value (LTV) constant, the expected equity return (IRR) divided by the standard deviation of the equity return (IRR): Multiple select question. may actually decrease as as the LTV increases is a measure of expected return per unit of risk generally increases as the LTV increases
may actually decrease as as the LTV increases is a measure of expected return per unit of risk
Development and construction loans are typically ________ for the lender than permanent mortgages. Multiple choice question. more risky less risky equally risky
more risky
Relative to conventional mortgages, bridge loans are __________ from the lender's perspective and therefore carry ________ contract interest rates. Multiple choice question. more risky, higher less risky, lower very profitable, higher
more risky, higher
Buyers do not wish to pay _____, nor the seller take _____, than the market value of the property.
more, less
In order for positive financial leverage to be observed in the calculation of NPV, the effective borrowing cost: Multiple choice question. must be lower than the overall capitalization rate must be greater than the IRR must be lower than the investor's discount rate
must be lower than the investor's discount rate
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? Multiple choice question. Net income Funds from operations Net asset value Stock market capitalization
net asset value
According to Exhibit 17-3, the largest percentage of private commercial real estate equity is owned by: Multiple choice question. pension funds investors in noninstitutional properties foreign investors other investors in institutional properties
other investors in institutional properties
Net present value is equal to the: Multiple choice question. present value of expected cash inflows, plus the present value of all expected cash outflows present value of expected cash flows minus the mortgage loan amount present value of expected cash inflows, minus the present value of all expected cash outflows
present value of expected cash inflows, minus the present value of all expected cash outflows
The maximum amount the lender should be willing to lend today should be equal to the ________ of the expected mortgage payments, discounted at the _____________. Multiple choice question. present value, contract interest rate present value, lender's opportunity cost future value, lender's opportunity cost
present value, lender's opportunity cost
"Country-club" money raised from equity investors by a sponsor/syndicator is typically used to Multiple choice question. purchase full platform operating companies purchase non-institutional quality properties real estate funds purchase institutional-quality properties
purchase institutional-quality properties
Lockout provisions, defeasance clauses, prepayment penalties, and yield-maintenance agreement are employed to restrict borrower's prepayment when mortgage rates are declining. They all reduce the lender's _________. Multiple choice question. bankruptcy risk default risk reinvestment risk
reinvestment risk
Investments in commercial real estate through limited liability companies are considered: Multiple choice question. tangible property securities real property
securities
An investor's closest alternative to direct ownership is a: Multiple choice question. commingled real estate fund real estate syndicate securitized real estate investment separate account with an investment manager
separate account with an investment manager
An estimated operating expense ratio for a potential investment that is higher than the OER on comparable properties may: Multiple select question. indicate the property is well-managed signal a hidden problem with the property indicate rents are higher than market rents indicate bad management
signal a hidden problem with the property indicate bad management
Single-year ratios or "rules of thumb" work best when applied to: Multiple choice question. properties under construction relatively large properties stabilized properties properties that require large amounts of deferred capital expenditures
stabilized properties
The effective gross income multiplier is equal to: Multiple choice question. effective gross income divided by the acquisition price the acquisition price divided by NOI the acquisition price divided by effective gross income
the acquisition price divided by effective gross income
he investment cash flows most important to taxable equity investors are: Multiple choice question. the before-tax cash flows from annual rental operations and sale the after-tax cash flows from annual rental operations and sale the cash flows available for distribution after the limited partnership or limited liability company pay taxes the annual net operating income and the net sale price from sale
the after-tax cash flows from annual rental operations and sale
In commercial mortgage financing, a note contains the terms of the loan and provisions agreed to by the borrower and lender. Typically, the provisions of the promissory note cover matters such as Multiple select question. the amounts and timing of periodic payments the property pledged as collateral for the loan what happens if the borrower defaults the borrower's responsibility for maintenance of the property the penalties for late payments
the amounts and timing of periodic payments what happens if the borrower defaults the borrower's responsibility for maintenance of the property the penalties for late payments
The primary reason at least two ownership forms are usually associated with a commercial real estate investment is: Multiple choice question. the requirements of state and federal law to provide for better property management the desire of the ultimate owner(s) to avoid unlimited personal liability
the desire of the ultimate owner(s) to avoid unlimited personal liability
The primary risk of development and construction lending is: Multiple choice question. similar to the risk of lending to investors who are purchasing existing properties the developer will fail to complete the project in a timely manner the lack of recourse against other borrower assets should the project fail
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: Multiple choice question. they have an infinite life the income their assets generate is typically taxed at both the entity level and the investor level the income their assets generate is typically taxed only once they are typically liquid investments
the income their assets generate is typically taxed only once
The true (or realized) effective borrowing cost for an ARM is more difficult to predict than the EBC for a level-payment mortgage because Multiple choice question. the mortgage payments and the holding period are uncertain the up-front financing costs of an ARM are not typically known until the loan is paid off. borrowers are more likely to make extra principal payments on an ARM
the mortgage payments and the holding period are uncertain
The market capitalization of an equity REIT's stock is equal to Multiple choice question. the estimated market value of the properties owned by the REIT, minus the value of the firm's outstanding debt the number of outstanding shares times the current price of the stock the estimated value of the properties owned by the REIT
the number of outstanding shares times the current price of the stock
An investment opportunity is wealth increasing when: Multiple select question. the present value of all inflows exceeds the present value of all outflows the sum of all cash inflows exceeds the sum of all cash outflows the net present value is positive the internal rate of return on equity exceeds the required rate of return on equity
the present value of all inflows exceeds the present value of all outflows the net present value is positive the internal rate of return on equity exceeds the required rate of return on equity
The purchase price that produces an IRR equal to the investor's required rate of return is Multiple choice question. the property's investment value to that investor the property's net present value the present value of expected future cash flows
the property's investment value to that investor
In this chapter, the saying "garbage in, garbage out" refers to: Multiple choice question. the appropriateness of the decision making tool political decisions that affect real estate values the quality of the cash flow assumptions
the quality of the cash flow assumptions
The use of mortgage financing by an investor directly affects: Multiple select question. net operating income the required equity investment (down payment) the after-tax cash flow from operations the before-tax cash flow from operations
the required equity investment (down payment) the after-tax cash flow from operations the before-tax cash flow from operations
A potential property acquisition with a higher going-in cap rate than comparable properties may signal: Multiple select question. the seller's asking price is below market value rental growth expectations for the property exceed the growth expectations of otherwise comparable properties there is less risk associated with future price appreciation on the potential acquisition the seller has delayed badly needed capital expenditures
the seller's asking price is below market value the seller has delayed badly needed capital expenditures
In a limited partnership, the "principal" is ______________ and the "agent" is ___________________---- Multiple choice question. the general partner, the property manager the general partner, the set of limited partners the set of limited partners, the property manager the set of limited partners, the general partner
the set of limited partners, the general partner
A limited partnership is a "flow through" entity. In a limited partnership, Multiple choice question. there are multiple (at least two) investors there is a separate corporate entity that pays income taxes cash flow distributions are always based on each investor's pro rata share of invested equity
there are multiple (at least two) investors
In the real estate appraisal business, the IRR is often referred to as the ________. Multiple choice question. appreciation yield current yield dividend yield total yield
total yield
True or false: A typical commercial real estate pro forma contains the investor's point estimates or best guesses of income, expense, and future sale prices.
true
True or false: An advantage of single-year return measures and ratios is that, relative to discounted cash flow analysis, they are easy to calculate and understand.
true
True or false: An advantage to the borrower of using a mortgage broker is that the broker will generally obtain quotes from multiple lenders.
true
True or false: Based on its calculation of a financial risk ratio, a lender may approve a loan amount smaller than that requested by the borrower.
true
True or false: Borrowers who expect to keep the loan outstanding for a long period of time should generally consider paying discount points to buy down the interest rate.
true
True or false: In a general partnership, each partner is liable for all the actions of, and the debts incurred by, other partners in the conduct of the business of the partnership.
true
True or false: Most equity REITs tend to focus their investment by property type and/or geographic area.
true
True or false: Single-year return measures and ratios calculated for a potential investment allow quick comparisons to comparable properties.
true
True or false: The CMBS market has significantly contributed to the growth of the U.S. commercial mortgage market by attracting investment capital from nontraditional mortgage investors.
true
True or false: The cash flow proceeds to the owner from the sale of the property is called the equity reversion.
true
Holding other assumptions constant, increasing the LTV will increase the equity dividend rate: Multiple choice question. when the unlevered IRR is greater than the annual mortgage constant when the annual mortgage constant (annual payment divided by the net loan proceeds) is less than the going-in cap rate when the annual mortgage constant is greater than the going-in cap rate when the contract interest rate is less than the going-in cap rate
when the annual mortgage constant (annual payment divided by the net loan proceeds) is less than the going-in cap rate
Given the following information for a 30-year, $180,000 ARM loan, what is the remaining mortgage balance at the end of year 3: Margin, 3%, index for the beginning of year 2, 3%; Index for the beginning of year 3, 5%; teaser, 6%. Assume no cap. Multiple choice question. $177,789.58 $175,442.83 $173,693.42 $173,349.62
$173,693.42
Last year, Harvey Realty Inc.'s sales were $450 million. If sales grow at 12% per year, how large (in millions) will they be 5 years later? Multiple choice question. $786.05 $771.74 $793.05 $816.16
$793.05
For stabilized income producing properties, the industry standard is construct a _____ year pro forma.
10
Tom is developing an apartment building in downtown Boston. He requires an 20% going-in IRR on equity on the expected 20-year investment. The current 20-year Treasury bond (T-bond) yield is 3%. What is the risk premium on Tom's investment? Multiple choice question. 20% 6% 15% 17%
17%
________ year mortgages are a common form of LPM, but _________ year mortgages are also popular. Multiple choice question. 30, 10 15, 5 15, 30 30, 15
30, 15
As of June 2019, _____ REITS were included in the S&P 500.
31
For how many years will the contract interest rate be fixed with a 7/1 adjustable-rate mortgage (ARM)? Multiple choice question. One year Six years Seven years Five years
7
HUD actively participates in the mortgage market by issuing loan guarantees for multifamily mortgages through _____ (enter the acronym).
FHA
Which of the following ownership forms is generally used for small, local investments that are marketed to higher income, but non-institutional investors? Multiple choice question. Limited partnership S corporation General partnership Limited liability company
Limited liability company
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. A clause that holds the actual borrower liable in such instances is commonly referred to as: Multiple choice question. a lockout provision a credit enhancement provision a bad boy clause
a bad boy clause
The balance of a partially amortizing mortgage loan at loan maturity is not zero and is typically satisfied with: Multiple choice question. a balloon payment an up-front payment jumbo payment an early payment
a balloon payment
All else the same, levered cash flows associated with a potential real estate investment should be discounted at ___________ unlevered cash flows. Multiple choice question. a lower rate the same rate as a higher rate
a higher rate
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
True or false: The borrower may be required to deposit a specific amount for legal fees and required third-party reports. These deposits are refundable if the lender decides not to fund the loan.
false
True or false: The many factors that influence the cash inflows and outflows of a real estate investment are the focal point of this chapter.
false
True or false: An ordinary annuity is defined as a fixed amount of money paid or received at the beginning of every period.
false, it's the end
Net present value (NPV) involves the use of the following decision rule: The investor should purchase the property as long as the NPV is: Multiple choice question. equal to the investor's opportunity cost equal to zero less than zero greater than zero
greater than zero
All else the same, lower quality properties sell for prices that produce Multiple choice question. lower cap rates higher cap rates
higher cap rates
Of the following, which is the primary risk that a lender reduces their exposure to through the use of a balloon mortgage instead of a fully amortizing mortgage? Multiple choice question. Default risk Liquidity risk Financial risk Interest rate risk
interest rate risk
The majority of outstanding commercial mortgage debt: Multiple choice question. is held by life insurance companies is held by investors in commercial mortgage-backed securities is held privately by mortgage investors/lenders
is held privately by mortgage investors/lenders
For taxable investors, the appropriate rate to discount after-tax cash flows is ___________ the appropriate rate to before-tax cash flows. Multiple choice question. equal to higher than lower than
lower than
The majority of bridge loan financing is provided by Multiple choice question. commercial banks non-traditional lenders life insurance companies Fannie Mae and Freddie Mac
non-traditional lenders
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? Multiple choice question. Pension funds Foreign investors Private financial institutions
private financial institutions
A multifamily property is acquired at a price of $1,000,000. The loan amount is $750,000. The property's first-year pro forma is as follows: NOI: $75,000, operating expenses: $30,000; capital expenditures: $0, and annual debt service: $60,000. What is the estimated DCR? Multiple choice question. 1.25 1.44 1.20 1.12
1.25
From the data provided in Exhibit 17-2, the overall "loan-to-value" ratio associated with the $12.6 trillion investible commercial real estate market is: Multiple choice question. 33.7% 37.4% 29.0% 50.0%
37.4%
A cash inflow or outflow that is forecasted to occur once over the analysis period, should be entered in the _________ register. Multiple choice question. I PMT FV PV
FV
Which of the following forms of ownership potentially exposes the entity to double taxation? Multiple choice question. Limited liability company General partnership C corporation S corporation
c corporation
The equity dividend rate: Multiple choice question. does not incorporate the effects of income taxes on performance does not incorporate the effects of financial leverage incorporates cash flows beyond the first year of operations
does not incorporate the effects of income taxes on performance
With a participation mortgage, the lender participates in cash flows that are generally received only by the: Multiple choice question. owner's broker equity investor second lender mortgage investor
equity investor
The effective borrowing cost of a mortgage loan is typically _________ the contract interest rate. Multiple choice question. greater than equal to less than
greater than
The compounding of interest causes the value of an investment to grow at an _____ rate.
increasing
Assume a small office building is purchased for $4,842,000. A loan of $3,400,000 is obtained from a local lender. Up-front financing costs associated with the mortgage total $68,000. The initial loan-to-value ratio is equal to _____ percent. Round your answer to the nearest whole number.
loan / appraisal 3400000/4842000 = 0.702189 = 70%
On a partially amortizing loan, monthly payments are based on an amortization term that is ______ the actual term of the mortgage loan. Multiple choice question. shorter than longer than equal to
longer than
The _____ the LTV, the lower is the likelihood of default, all else equal.
lower
Larger loans typically have contract interest rates that are ___________ the rates on smaller loans. Multiple choice question. slightly lower than slightly higher than about the same as
slightly lower than
Properties with lower going-in cap rates Multiple choice question. sold for a lower multiple of expected first-year NOI sold for a higher multiple of expected first-year NOI had lower first-year NOIs
sold for a higher multiple of expected first-year NOI
Timelines are useful because they allow us to _____ the time pattern of money returns.
visualize
Multiple IRRs are possible Multiple choice question. when the expected cash flows increase at an increasing rate over the expected holding period when the signs of the cash flows (+ or -) change more than once over the expected holding period all of the expected future cash flows after acquisition are positive
when the signs of the cash flows (+ or -) change more than once over the expected holding period
Noah wants to quit his job and return to school for a MBA degree at the end of two years. He plans to save and deposit $2,000 per month, beginning immediately from the beginning of first month. He will make monthly deposits in an account that pays 3% nominal interest (0.25% monthly). Under these assumptions, how much will he have accumulated at the end of two years? Multiple choice question. $49,529 $49,405 $45,645 $44,424
$49,529
Assuming a 7% discount rate, the present value of the right to receive $10,000 at the end of 10 years is _________. If you must wait until the end of year 11 to receive the $10,000, the present value decreases by ________. Multiple choice question. $3,855.43, $359.49 $5,083.49, $332.56 $4,750.93, $310.81
$5,083.49, $332.56
Ben Franklin invested 1,000 pounds (about $50,000 today) at the beginning of the year 1785. Assume the average annual return he earned from 1785 to the end of 1984 (200 years) was 2.4%. How much was Franklin's investment worth at the end of 1984? (Round your answer to the nearest cent). Multiple choice question. $5,211,421.41 $5,740,653.48 $4,978,335.15 $6,109,451.03
$5,740,653.48
Assume a $100,000 ARM with 30-year (monthly payments) maturity and an initial rate of 6%. The interest rates is to remain fixed for the first 5 years. If the ARM rate rises to 6.5% at the beginning of year 6 (end of year 5), what is the new payment in year 6? (round to the nearest cent) Multiple choice question. $631.63 $599.55 $628.31 $629.88
$628.31
Suppose you are buying your first condo for $300,000 and you will make a $60,000 (equity) down payment. You have arranged to finance the remainder (loan amount=$240,000) with a 30-year, monthly payment, fully amortized mortgage at a 6% annual interest rate. What will be your monthly payment? Multiple choice question. $1,438.92 $1,505.91 $1,341.57 $1,462.77
$1,438.92
Assume that a piece of land is currently valued at $50,000. If this piece of land is expected to appreciate at an annual rate of 5% per year for the next 20 years, how much will the land be worth at the end of 20 years? Multiple choice question. $132,665 $123,861 $100,899 $123,860
$132,665
Suppose a U.S. Treasury bond will pay a lump sum of $3,000 five years from now. If the current required rate of return on this 5-year treasury bonds is 4.5%, how much is the bond worth today? Multiple choice question. $2,150.32 $2,361.81 $1,928.78 $2,407.35
$2,407.35
What is the PV of an ordinary annuity (rounded to the nearest dollar) with 10 annual payments of $2,700 if the appropriate interest rate is 5.5%? Multiple choice question. $18,367 $21,435 $19,334 $20,352
$20,352
An apartment property has a projected net income of $15,000 per year, and its projected net sales price after five years is $300,000. Considering its risk, you require a 14% annual return on this investment. How much would you be willing to pay for it today? Multiple choice question. $199,435.35 $207,306.81 $214,516.28 $194,235.09
$207,306.81
Kathy currently has $15,000. How much will she have after 8 years if she leaves it invested at 8.5% with annual compounding? Multiple choice question. $20,583.32 $21,667,11 $22,807.01 $28,809.07
$28,809.07
Suppose a firm expects to receive the following cash flows over the next four years: Year 1: $1,200 Year 2: $1,200 Year 3: $1,500 Year 4: $1,000 Discount rate=10% What is the present value of this uneven cash flow stream? (round to the nearest cent) Multiple choice question. $3892.63 $4900.00 $4281.89 $3921.12
$3892.63
Jake has just taken out a 15-year mortgage for $80,000 at an (annual) interest rate of 6% with equal end-of-month payments. How much interest will he pay in the second year of the mortgage? (round to the nearest cent) Multiple choice question. $9,206.09 $6,995.96 $4,498.40 $3,602.63
$4,498.40
Joe borrows $80,000 at 6% for 30 years with monthly amortization. Assume that the mortgage payment is made on the last day of the month. How much interest will he pay in the first year of the mortgage? (round to the nearest cent) Multiple choice question. $4,773.28 $4,371.20 $4,910.03 $400.00
$4,773.28
In competitive mortgage markets, lenders must _________ the contract interest rate in exchange for _________ up-front financing costs such as discount points. Multiple choice question. reduce, more increase, more increase, fewer reduce, fewer
reduce, more
Future benefits are discounted because of ________. tax liabilities risk opportunity cost compounding
risk opportunity cost
If the (going-in) IRR exceeds the investor's required rate of return, the investor Multiple choice question. should reject the investment does not have enough information to determine if the investment will enhance wealth should accept the investment if she has the required equity investment available
should accept the investment if she has the required equity investment available
Cost associated with obtaining ownership of the property Multiple choice question. should be included in the EBC calculation only if they are paid to third-party service providers should not be included in the EBC calculation should be included in the EBC calculation
should not be included in the EBC calculation
As the perceived risk of expected future cash flows increases, Multiple choice question. the required (expected) return should increase the actual (realized) return will increase the required (expected) return should decrease
the required (expected) return should increase
All else equal, an increase in up-front financing costs has a larger impact on the effective borrowing cost Multiple choice question. the larger is the loan amount the longer is the expected holding period the shorter is the expected holding period
the shorter is the expected holding period
The expected (required) IRR of an investment is composed of a risk-free rate and the required risk premium. The risk-free component is compensation for Multiple choice question. the time value of money idiosyncratic risk default risk
the time value of money
In addition to discount points, home mortgage borrowers usually pay which of the following as up-front financing costs? Multiple select question. title insurance brokerage commissions a loan origination fee loan application and document preparation fee
title insurance a loan origination fee loan application and document preparation fee
A going-in cap rate of 5% implies that the property had a purchase price that was Multiple choice question. 5 times greater than expected first-year NOI expected to produce a 5% total return for the investor 20 times greater than expected first-year NOI
20 times greater than expected first-year NOI
Debbie qualifies to borrow $250,000 on a mortgage at 6% for 30 years with monthly payments. Based on this information, determine the remaining loan balance at at the end of year three (round to the nearest cent). Multiple choice question. 251241.34 240210.18 240280.71 234251.45
240210.18
A loan for $250,000 is made for 15 years at 6% annual interest. The lender and borrower agree that payments will be made monthly. Assuming three discount points are charged by the lender and the borrower will keep the loan outstanding to maturity, what will be the lender's yield? Multiple choice question. 6.70% 6.00% 6.48% 0.54%
6.48%
Interest rates on floating-rate mortgages have typically been tied to the London Interbank Offer Rate (LIBOR). All else being equal, compared to fixed-payment mortgages and from the perspective of the lender, floating-rate mortgages typically have: Multiple choice question. higher interest rate risk and higher default risk Lower interest rate risk and lower default risk Lower interest rate risk but higher default risk higher interest rate risk but lower default risk
Lower interest rate risk but higher default risk
Single-year ratios or "rules of thumb" include which of the following? Multiple select question. Measures of vacancies Capital expenditure ratios Profitability ratios Multipliers
Profitability ratios Multipliers
The majority of commingled funds Multiple choice question. are open-end funds are marketed to smaller, non-wealthy, investors are set up as separate accounts closed-end funds
are open-end funds
Which of the following investments is generally considered the least risky? Multiple choice question. U.S. Treasury securities "Raw" land held for development Technology stocks Office properties
U.S. Treasury securities
As the opportunity cost of waiting for future cash flows increases, the present value of those future cash flows ___________. Multiple choice question. remains the same increases decreases
decreases
As the use of financial leverage increases, the probability that the property will be "cash flowing" ___________ Multiple choice question. is unaffected decreases increases
decreases
Holding constant the contract interest rate and the number of discount points, the borrower's effective borrowing cost ____________ as the expected number of years the loan is outstanding ___________. Multiple choice question. increases, increases increases, decreases decreases, decreases decreases, increases
decreases, increases
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: High net worth families are typically more risk averse in their real estate investments than pension funds.
false
Holding everything else constant, increasing the amount of leverage used to finance an investment: Multiple choice question. decreases the standard deviation of the equity return does not affect the standard deviation of the equity return increases the standard deviation of the equity return
increases the standard deviation of the equity return
The use of financial leverage generally ______ the expected rate of return on the equity investment and ______ risk. Multiple choice question. decreases, increases increases, does not affect increases, increases increases, decreases
increases, increases
No principal reduction occurs from one month to the next with Multiple choice question. early payment mortgages partially amortizing mortgages fully amortizing mortgages interest-only mortgages
interest-only mortgages
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): Multiple choice question. general partner intermediary sole proprietorship broker
intermediary
A rate lock agreement: Multiple select question. is purchased by the borrower for the benefit of the borrower is less valuable to the borrower the more uncertain the borrower is about interest movements prior to closing may result in a lower contract interest rate than if the rate is not locked is purchased by the borrower for the benefit of the lender
is purchased by the borrower for the benefit of the borrower may result in a lower contract interest rate than if the rate is not locked
The pooling of equity capital by investors to purchase real estate: Multiple select question. is unrelated to the large size of many real estate investments is sometimes done with the intent to develop land takes place among both institutional and noninstitutional investors is often referred to as a syndication
is sometimes done with the intent to develop land takes place among both institutional and noninstitutional investors is often referred to as a syndication
Private equity real estate funds are typically set up as Multiple choice question. limited liability companies C corporations limited partnerships general partnerships
limited partnerships
Use the following information: PGI: $600,000; Vacancy and collection losses: $42,000; Operating expenses: $88,000; Capital expenditures: $10,000. Mortgage payments total $206,728 annually. Assume an above-line treatment of capital expenditures. The before-tax cash flow from operations is equal to _____.
$253,272
A multifamily property is acquired at a price of $1,000,000. The loan amount is $750,000. The property's first-year pro forma is as follows: NOI, $75,000, operating expenses, $30,000, capital expenditures, $0. Annual debt service, $60,000. What is the estimated debt yield ratio? Multiple choice question. 2.5 10.0% 7.5% 1.25
10.0%
Approximately _____ percent of REIT shares are owned by institutional investors Multiple choice question. 80 95 65 50
80
Assume the following information: Potential gross income: $1,200,000; Vacancy rate: 9%; Net operating income: $579,000; Operating expenses: $491,400; Capital expenditures: $80,000. The operating expense ratio is equal to ______. Multiple choice question. 40.95 52.33 84.87 45.00
Effective gross income = potential gross rental income + other income - vacancy and credit costs = 1200000 - (1200000*0.09) = 1092000 operating expense ratio = operating expenses / effective gross income = 491400 / 1092000 = 0.45 answer = 45.00
A fixed (level) cash inflow or outflow (ex., monthly or annually) should be entered in the Multiple choice question. PV register I register PMT register FV register
FV register
The liabilities of life insurance companies can be characterized by which of the following? Multiple select question. Fairly predictable Long-term Not well-suited for long-term investments
Fairly predictable Long-term
Which of the following type of real estate investment is the generally considered the least risky? Multiple choice question. "Raw" land held for future development Office properties Hospitality properties Properties net leased to a high quality tenant
Properties net leased to a high quality tenant
Which of the following are typically classified as operating expenses? Multiple select question. Property taxes Small additions to a property Repair and maintenance expenses federal income taxes
Property taxes Repair and maintenance expenses
In which of the following ownership forms is there no separation of ownership and control? Multiple choice question. C corporation Sole proprietorship Limited partnership Limited liability company
Sole proprietorship
If an expenditure increases the value of a property and extends its useful life, it is likely to be classified as Multiple choice question. an operating expense a capital expenditure a tenant improvement
a capital expenditure
All else equal, when the DCR ratio increases, the likelihood of default by the borrower ______. Multiple choice question. is not affected increases decreases
decreases
The operating expense ratio: Multiple choice question. expresses operating expenses as a percentage of effective gross income is the reciprocal of the equity dividend rate shows the percentage of potential gross income consumed by operating expenses highlights the relation between NOI and operating expenses
expresses operating expenses as a percentage of effective gross income
An implicit cost of direct ownership relative to joint ownership, especially for smaller, less wealthy investors, is Multiple choice question. the reduction in the ability to earn high returns the loss of day-to-day management control inadequate portfolio diversification
inadequate portfolio diversification
Payments on commercial mortgage loans are expected to come primarily from: Multiple choice question. income generated by the property pledged as collateral the personal income of the borrower income generated by the property owner's Treasury bond investments the personal income of the mortgage broker
income generated by the property pledged as collateral
Although increased financial leverage often increases the calculated IRR of an investment, this increase in the estimated IRR Multiple choice question. may not be enough to offset the increased risk to the equity investor associated with increased leverage will occur so long as the borrower does not default on the loan will occur as long as the lender does not increase the interest rate on the loan
may not be enough to offset the increased risk to the equity investor associated with increased leverage
The Centre Point case example presented in this and prior chapters shows the general form of a real estate pro forma for an existing property. However, a typical "real world" pro forma contains: Multiple select question. more expense detail than the Centre Point pro forma less expense detail than the Centre Point pro forma less revenue detail than the Centre Point pro forma more revenue detail than the Centre Point pro forma
more expense detail than the Centre Point pro forma more revenue detail than the Centre Point pro forma
Commercial banks and other private financial institutions collectively owned $49 billion in commercial real estate equity in late 2018. The majority of this $49 billion resulted from: Multiple choice question. investment in life insurance companies direct investment through limited partnership real estate obtained through foreclosure on mortgage loans
real estate obtained through foreclosure on mortgage loans
Lockout provisions/clauses in commercial mortgage ___________ the lenders' ______________. Multiple choice question. increase, reinvestment risk reduce, default risk reduce, reinvestment risk
reduce, reinvestment risk
Reducing the term of a fixed rate mortgage from 30 years to 10 years but keeping a 30-year amortization schedule: Multiple choice question. reduces the affordability of the mortgage for the borrower reduces the lender's interest rate risk increase the probability the borrower will find it advantages to refinance during the life of the loan
reduces the lender's interest rate risk
When using historical information provided by the current owner to develop cash flow forecasts, which of the following should be considered in the investor's estimate of operating expenses? Multiple select question. repair and maintenance expenditures utility expenses costs of debt financing federal income taxes property taxes
repair and maintenance expenditures utility expenses property taxes
The Russell 2000 tracks the performance of a portfolio of: Multiple choice question. real estate stocks large cap stocks small cap stocks growth stocks
small cap stocks
The ARM market was first developed in the early 1980s in response to ________ interest rates. Multiple choice question. high and stable low and volatile high and volatile low and stable
high and volatile
Opportunity cost is the return the investor is forgoing on an alternative investment of _____ risk in order to invest in the current opportunity.
equal
Assume a $100,000 ARM with 30-year (monthly payments) maturity and an initial rate of 6%. The interest rates remains fixed at 6% for the first three years. If the ARM rate rises to 6.5% at the beginning of year 4 (end of year 3), what is the new payment in year 4? (round to the nearest cent) Multiple choice question. $631.63 $629.88 $630.64 $599.55
$629.88
You just inherited some money, and a broker offers to sell you an annuity that pays $5,200 at the beginning of each year for 20 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity today? Multiple choice question. $65,560 $50,953 $56,936 $62,142
$65,560
Assume a $100,000 monthly payment mortgage loan with 30-year term. The lender is charging an annual interest rate of 10% and two discount points at origination. Up-front financing costs paid to third parties total $1,000. Assuming the mortgage is held for five years and then prepaid, what is the EBC on this mortgage? Multiple choice question. 10.37% 10.00% 10.79% 10.52%
10.79%
At any point in time, which of the following ARM products typically has the highest effective borrowing cost, all else equal? Multiple choice question. 5/1 ARMs 7/1 ARMs 10/1 ARMs 3/1 ARMs
10/1 arms
Educational Realty Corporation is considering a student housing investment which is expected to produce $41,000 at the end of every year for three years. If the company invests $100,000 today, what is the IRR of this investment? Multiple choice question. 11.11% 12.01% 11.25% 10.00%
11.11%
An investor originally paid $22,000 for a vacant lot 12 years ago. If the investor is able to sell the lot today for $63,000, what would be her annual rate of return (rounded to the nearest full percent)? Multiple choice question. 5% 11% 7% 9%
9%
Consider a mortgage with discount points paid to the lender and some up-front financing costs paid to third parties. If prepayment prior to maturity occurs, which of the following will be the highest? Multiple choice question. EBC Lender's yield Rate caps APR
EBC
The most common type of single-family home mortgage loan is? Multiple choice question. a fixed-rate, level-payment loan that does not fully amortize over the loan term. an adjustable rate loan that does not fully amortize over the loan term. a fixed-rate, level-payment, fully amortizing loan. an adjustable rate, fully amortizing loan.
a fixed-rate, level-payment, fully amortizing loan.
Which of the following loan characteristics must be considered when calculating the EBCs of two ARM products? Multiple choice question. initial adjustment period initial interest rate margin all of the characteristics must be considered rate caps
all of the characteristics must be considered
A borrower should consider making extra principal payments on a level-payment mortgage (assuming they are allowed) Multiple choice question. if the dollar amount of those extra payments could be invested at a higher rate than the interest rate on the loan if the dollar amount of those extra payments could not be invested at a higher return than the interest rate on the loan. if the borrower believes interest rates are going to rise.
if the dollar amount of those extra payments could not be invested at a higher return than the interest rate on the loan.
The "total" yield on an investment opportunity Multiple choice question. is equal to current yield plus the appreciation yield ignores the periodic "dividend" generated by the investment should not be confused with the IRR
is equal to current yield plus the appreciation yield
On a fixed-rate, level payment mortgage, the present value of the remaining payments at any point in time is equal to Multiple choice question. the present value of the remaining payments discounted at the borrower's opportunity cost (discount rate) the present value of the remaining payments discounted at the lender's opportunity cost (discount rate) the present value of the remaining payments discounted at the contract rate of interest
the present value of the remaining payments discounted at the contract rate of interest
True or false: borrowers typically get to choose the number of discount points they pay but not the loan origination fee.
true
At least _____ percent of a REIT's gross income must be derived from real estate assets.
75
Assume you have obtained an interest-only mortgage. The loan amount is $300,000, payments will be made monthly, the (annual) interest rate is 4%, and the loan term is 30 years. What is the monthly payment? Multiple choice question. $1,000 $1,432.25 $1,200 $12,000
$1,000
Use the following information: NOI: $460,000; no capital expenditures; mortgage payments total $206,728 annually. Estimated total income tax liability: $80,000. The before-tax cash flow from operations is equal to _____.
$252,272
You want to buy a new sports car 5 years from now, and you plan to save $5,800 per year, beginning one year from today. You will deposit your savings in an account that pays 6% interest. How much will you have just after you make the 5th deposit, 5 years from now? Multiple choice question. $32,695 $36,063 $34,657 $35,260
$32,695
Given the following information,calculate the before-tax equity reversion (BTER). NOI: $89,100; annual debt service: $58,444; net sale proceeds: $974,700: remaining mortgage balance: $631,026. Multiple choice question. $30,656 $885,600 $572,582 $343,674
$343,674
Given the following information,calculate the before-tax equity reversion (BTER). NOI: $89,100; annual debt service: $58,444; net sale proceeds: $974,700: remaining mortgage balance: $631,026. Multiple choice question. $343,674 $885,600 $572,582 $30,656
$343,674
The average annual return for the S&P 500 since its inception in 1928 through 2014 is approximately 10%. Assume a person invested $1.00 in the S&P 500 Index every year since the end of 1928. It would have grown into $ by the end of 2014
$36,278.66
Paul wants to buy a new condo six years from now and plans to save $8,000 per year for the down payment, beginning one year from today. He will invest in a fund that offers an 8% return. How much will Paul have accumulated after he makes the 6th deposit, 6 years from now? Multiple choice question. $65,260 $58,687 $56,063 $54,657
$58,687
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). Multiple choice question. $75,909,000 $12,581,000 $75,859,000 $75,809,000
$75,809,000
Equity Real Estate Investment Trusts are REITs that invest in and operate commercial properties. From 2000 to 2006, equity REITs delivered an average annualized return of 22.9%. John invested $5,000 in equity REITs at the beginning of every year from 2000 to 2006. How much was his investment worth at the end of 2006? Multiple choice question. $83,409.15 $85,785.25 $86,810.74 $70,635.27
$86,810.74
Jennifer owns a 12-unit apartment complex. Potential gross income is projected to be $108,000. Vacancy and collection losses are estimated to be $9,750. Operating expenses and capital expenditures are estimated to be $40,000 and $5,900, respectively. Assume an above-line treatment of capital expenditures. The purchase price is $500,000, the loan amount is $400,000, and annual debt service is $44,000. The debt yield ratio is: Multiple choice question. 0.80 0.131 0.27 1.19
(PGI - VC - OE - CAPX) / loan amount 0.131
Susan is considering buying a class-A office building in Miami. The acquisition price is $2,500,000. She expects the first-year potential gross income (PGI) to be $300,000. Based on her pro forma analysis, vacancy and collection losses comprise 5% of PGI, and operating expenses and capital expenditures will consume 40% of EGI. The interest rate on her commercial mortgage is 6%, with monthly payments and 25-year amortization schedule. If the lender requires the DCR to be 1.35 or greater, what is the maximum loan amount? Multiple choice question. 1,250,870.43 1,760,578.15 1,638,294.68 1,473,352.59
1,638,294.68
Susan is considering to buying a class-A office building in Miami. The acquisition price is $2,500,000. She expects the first-year potential gross income (PGI) to be $300,000. Based on her pro forma analysis, vacancy and collection losses comprise 5% of PGI, and operating expenses and capital expenditures are expected to consume 40% of EGI. The interest rate on her commercial mortgage is 6%, with monthly payments and 25-year amortization schedule. If the lender requires the DYR to be 10% or greater, what is the maximum loan amount? Multiple choice question. 1,710,000 2,137,500 1,900,000 1,554,545
1,710,000
Assume the following information for an equity REIT: Funds from operations, $4,000,000; current stock price price, $40; total shares outstanding, 1,000,000. What is the price-FFO multiple? Multiple choice question. 0.25 10 0.10 4.00
10
The most common loan term of those listed below on fixed-rate commercial mortgages is ________ years. Multiple choice question. 10 20 30 15
10
Calculate the simple (non-weighted) mean of the following potential IRRs. Scenario 1: 12.0%; scenario 2: 11.0%; scenario 3: 9.0%; scenario 4: 10,0%; scenario 5: 12.0%. Multiple choice question. 13.0% 11.0% 10.8% 9.2%
10.8%
Use the following information: purchase price: $4,842,000; mortgage loan: $3,400,000; no up-front financing costs; NOI: $460,000; mortgage payments total $206,728 annually. The equity dividend rate is equal to ______ percent.
17.56
Maxwell Realty Corporation is considering an apartment investment that is expected to produce an after-tax cash flow of $2,000 at the end of year one, $2,025 in year two, $2,050 in year three, $2,075 in year four, and $2,100 in year five. If the company invests $9,500 today, what is the IRR of this investment? Multiple choice question. 2.65% 2.82% 2.57% 2.31%
2.57%
A commercial real estate investment can be acquired for $100,000 in equity capital and is expected to produce a net cash flow to the equity investor of $33,439 at the end of each year for five years. The internal rate of return on equity is approximately equal to ______ percent. Multiple choice question. 2 17 20 23
20
All else being equal, which of the following balloon mortgages minimizes the lender's interest rate risk? Multiple choice question. 3-year loan 7-year loan 10-year loan 5-year loan
3-year loan
A borrower is choosing between a 15-year $100,000 mortgage and a 30-year $100,000 mortgage. Assume both would have the same contract interest rate and no up-front financing costs would be associated with either loan. If both loans remain outstanding until they are fully amortized, on which loan would more interest be paid? Multiple choice question. The 30-year mortgage The 15-year mortgage
30
An investor calculates that the levered, before-tax internal rate of return on a potential investment is 16%. The levered, after-tax return is estimated to be 11.2%. The effective tax rate of this investment is _____ percent.
30
Given the following information, calculate the estimated before-tax cash flow from annual operations (BTCF): NOI: $89,100; Annual Debt Service: $58,444; Net Sale Proceeds: $974,700; Remaining Mortgage Balance: $631,026. Multiple choice question. 572,582 342,674 30,656 885,600
30,656
A property has a potential gross income of $1,500,000; operating expenses of $700,000; vacancy and collection losses of $45,000; miscellaneous income of $9,000; and capital expenditures of $65,750. What is the net operating income in dollars? Multiple choice question. 1,455,000 1,464,000 698,250 689,250
698,250
Use the following information: acquisition price $4,132,000; effective gross income: $558,000; operating expenses: $167,400; capital expenditures: $60,000. Assume an above-line treatment of capital expenditures. The going-in capitalization rate is equal to _____ percent.
8
Assume a $250,000 mortgage loan with 15-year term. The lender is charging an annual interest rate of 8% and three discount points at origination. Other up-front financing costs paid to other service providers (i.e., not the lender) total $1,000. What is the lender's yield on the loan? Assume monthly payments and no prepayment prior to loan maturity.
8.51% (effective borrowing cost)
Assume a small office building is purchased for $4,842,000. A loan of $3,400,000 is obtained from a local lender. There are no up-front financing costs associated with the mortgage. The required equity investment is _____.
Acquisition price - net loan proceeds $4,842,000 - ($3,400,000 - 0) = $1,442,000
In an analogy to the stock market, the net operating income of a property can be viewed as which of the following? Multiple choice question. Annual return on an investment in the property Annual dividend expected to be produced by the property The price-earnings ratio of the property
Annual dividend expected to be produced by the property
Important trade-offs involved in the choice between direct ownership versus investing through an intermediary include which of the following? Multiple select question. Decision making control Income tax considerations Risk sharing Access to talented managers/sponsors
Decision making control Risk sharing Access to talented managers/sponsors
Which of the following is the better measure of the net cash flow a REIT has available to distribute to shareholders as dividends? Multiple choice question. The book value of income Funds from operations Net operating income GAAP accounting income
Funds from operations
Use the following information: NOI: $460,000; no capital expenditures; mortgage payments total $206,728 annually. Acquisition price of property: $4,842,000. The going-in capitalization rate is equal to _____.
NOI / acquisition 9.5%
A property investment is said to be "cash flowing" when: Multiple choice question. NOI is positive the return on equity is positive NOI exceeds required mortgage payments
NOI exceeds required mortgage payments
Arbitrage means taking advantage of temporary differences in market prices to make a profit. Assume two real estate companies, A and B, both operate in New York area and focus on office properties. You have determined that Company A's shares have an intrinsic value of $20 per share but are trading at $22 per share, while Company B's shares are worth $25 per share but are trading at $22 per share. What would a rational investor (or an arbitrageur) do to take advantage of this price difference (no short-selling constraint and transaction fee)? Multiple choice question. Buy company A's shares only. Sell short company B's shares, buy the same number of company A's shares. Buy company B's shares only. Sell short company A's shares, buy the same number of company B's shares.
Sell short company A's shares, buy the same number of company B's shares.
Which of the following are NOT characteristics of a limited liability company? Multiple choice question. It is typically cheaper and easier to create than a limited partnership The non-managing members have limited liability All investors may participate in management The managing member assumes unlimited liability
The managing member assumes unlimited liability
Which of the following choices best describes the investment focus of an equity REIT? Multiple choice question. They invest primarily in mortgages They invest a substantial percentage of their assets in both properties and mortgages They invest primarily in commercial properties
They invest primarily in commercial properties
When is a borrower likely to purchase a rate lock agreement on the loan before its closing? Multiple choice question. When interest rates are likely to decrease after the loan commitment is made but before closing When interest rates are likely to increase after the loan commitment is made but before closing When inflation is likely to decrease after the loan commitment is made but before closing
When interest rates are likely to increase after the loan commitment is made but before closing
Lenders typically calculate several financial risk ratios because they are concerned: Multiple choice question. about the ability of the property's net cash flow to service the debt the equity investor will earn too high of a return the equity investor will earn too low of a return
about the ability of the property's net cash flow to service the debt
Relative to direct ownership, separate accounts allow investors to: Multiple choice question. better diversify their portfolios access the expertise of a management company better share risk with other investors
access the expertise of a management company
The capital raised by equity REITs through debt and equity offerings is primarily used to: Multiple choice question. pay of other debt obligations acquire properties acquire mortgages or CMBS
acquire properties
With a balloon mortgage, the remaining mortgage balance at the end of the loan term must be satisfied by the borrower. The borrower's options do NOT include Multiple choice question. allowing a different investor to assume the loan refinancing the remaining balance with a new lender at the current interest rate and current terms selling the property and using the sale proceeds to pay off the remaining debt refinancing the remaining balance with the original lender at the current interest and current terms
allowing a different investor to assume the loan
A subchapter S corporation: Multiple choice question. allows for limited liability for all of its shareholders must not have more than 25 shareholders does not require available cash flow to be distributed to each shareholder in proportion to his or her percentage ownership in the entity
allows for limited liability for all of its shareholders
A subchapter S corporation: Multiple choice question. must not have more than 25 shareholders allows for limited liability for all of its shareholders does not require available cash flow to be distributed to each shareholder in proportion to his or her percentage ownership in the entity
allows for limited liability for all of its shareholders
The use of debt financing along with the investors' equity directly affects the property's estimated: Multiple choice question. before-tax cash flow from rental operations net operating income effective gross income future sale price
before-tax cash flow from rental operations
A primary reason why ARM interest rates are typically lower than those on otherwise comparable LPMs is because Multiple choice question. lenders are exposed to more prepayment risk with ARMs lenders have to keep ARM rates low to attract borrowers lenders are exposed to more interest rate risk with ARMs borrowers and lenders share the interest rate
borrowers and lenders share the interest rate
A borrower can increase his or her financial leverage by applying for a second mortgage, which is secured by the borrower's pledge of the property as _____ for the loan.
collateral
Which of the following is the largest single source of long-term mortgages used by investors to help finance commercial real estate investments? Multiple choice question. Real estate private equity funds Commercial banks Mortgage REITs Life insurance companies
commercial banks
All else being equal, floating-rate mortgages ______ the lender's interest rate risk. Multiple choice question. have no effect on decrease increase
decrease
The expected IRR on a commercial real estate investment is comprised of two basic parts: (1) the periodic cash flow return from rental operations and (2) expected appreciation in the market value of the property. All else equal, as the percentage of the the expected IRR that is associated with price appreciation increases, the effective tax rate Multiple choice question. decreases increases is not affected.
decreases
Which of the following types of risk is typically the most relevant to commercial mortgage lenders? Multiple choice question. Reinvestment risk Prepayment risk Default risk Interest rate risk
default risk
Relative to other valuation models, the assumptions required to perform ____________ appear to place the greatest analytical burden on the investor. Multiple choice question. effective gross income multiplier analysis discounted cash flow analysis direct capitalization
discounted cash flow analysis
True or false: All else the same, a change in the discount rate affects the present value of a 15-year loan more than a 30-year loan.
false
An investment is expected to be wealth increasing if the NPV is ________ zero. Multiple choice question. less than equal to greater than
greater than
According to the RERC data displayed in Exhibit 14-2, mean required rates of return on high quality real estate investments Multiple choice question. have been trending upward since 2009 have been trending downward since 2009 have shown no clear pattern since 2009
have been trending downward since 2009
When the expected performance of an investment opportunity is expressed _____________ it often hinders a comparison to other alternatives. Multiple choice question. as an annualized percentage return in dollar terms as an internal rate of return
in dollar terms
Publicly-traded REITs have been described as mutual funds for real estate because they provide: Multiple select question. investment portfolio diversification liquidity lower risk than direct real estate investments
investment portfolio diversification liquidity
ARGUS Enterprise: Multiple choice question. produces pro formas with fewer expense details than the Centre Point example is a software program for performing discounted cash flow analysis based on the assumptions of the analyst is a software program for estimating the growth in rental rates
is a software program for performing discounted cash flow analysis based on the assumptions of the analyst
The ownership form typically chosen by a real estate private equity fund is a: Multiple choice question. general partnership limited partnership limited liability company real estate investment trust
limited partnership
A publicly-traded REIT is one that is: Multiple choice question. listed on a major stock exchange focused on mortgage investments managed by a government entity
listed on a major stock exchange
Recently, loans on retail properties have been associated with higher delinquency rates. Assuming this trend is going to continue in the near future, lenders will likely to require _____ LTVs on such loans.
lower
A tenant improvement allowance (TI) in a lease Multiple choice question. obligates the owner to pay for the tenant's cost of setting aside a reserve for replacement obligates the owner to incur a prespecified dollar amount of expenditures to help the tenant get the space ready to use obligates the tenant to incur a pre-specified dollar amount of expenditures to improve the space the tenant is renting
obligates the owner to incur a prespecified dollar amount of expenditures to help the tenant get the space ready to use
Real estate investors often use financial leverage because: Multiple select question. of the desire to use "other people's money" the cost of debt is typically greater than the cost of equity financing of limited savings (wealth) of the desire to reduce risk
of the desire to use "other people's money" of limited savings (wealth)
On the risk-return spectrum, which of the following fund types generally offers investors the highest expected return? Multiple choice question. Infinite-life fund Value-added fund Opportunistic fund Core fund
opportunistic fund
Mortgage lenders have a claim on the cash flows of a property they have financed that is _____ to the owners' claim.
superior
Relative to home loan underwriting, the underwriting of commercial real estate loans is more focused on: Multiple choice question. the property pledged as collateral for the loan the credit worthiness of the borrower the size of the mortgage payment relative to the borrower's income
the property pledged as collateral for the loan
Current and subsequent year NOI is the _____ determinant of value.
fundamental
According to the data presented in Exhibit 17-8, equity REITs have underperformed large cap stocks Multiple select question. underperformed small cap stocks over the last 5, 10, 15, 20, nd 25 years 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
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
In order to have positive financial leverage when a second mortgage or mezzanine loan is used, the ________ property return (cap rate) must be greater than the ________. Multiple choice question. unlevered, cost of the second mortgage unlevered, cost of the first mortgage unlevered, weighted average cost of debt
unlevered, weighted average cost of debt
Holding the contract interest rate constant, the effective borrowing cost increases as _____________. Multiple choice question. up-front financing costs increase the borrower's holding period increases the borrower's equity down payment increases
up-front financing costs increase
Capitalization rates _______ with property quality. Multiple choice question. vary inversely do not vary vary positively
vary inversely
Holding other assumptions constant, increasing the LTV will increase the equity dividend rate Multiple choice question. when the unlevered IRR is less than the cost of debt when the unlevered IRR is greater than the equity dividend rate when the annual mortgage payment divided by the net loan proceeds is less than the overall cap rate when the rental growth rate is positive
when the annual mortgage payment divided by the net loan proceeds is less than the overall cap rate
Holding everything else constant, if the equity discount rate is greater than the effective borrowing cost, increasing the amount of financial leverage used to finance a real estate investment: Multiple choice question. will decrease the calculated NPV will affect the IRR but not the NPV will increase the calculated NPV
will increase the calculated NPV
You sold a car and accepted a note (promise to pay) from the buyer that obligates the buyer to pay you $1,000 at the end of year one, $2,000 at the end of year two, $2,000 in year three, $2,000 in year four, and $2,000 at the end of year five. What was the effective price you received for the car, assuming an interest rate of 5.0%? (Round your answer to the nearest whole number.) Multiple choice question. $6,446 $6,277 $5,987 $7,707
$7,707
Assume a $100,000 monthly payment mortgage loan with 30-year term. The lender is charging an annual interest rate of 10% and two discount points at origination. Up-front financing costs paid to third parties total $1,000. Assuming the mortgage is held outstanding by the borrower for the full 30 years, the lender's yield is ________ percent. (round to two decimal places) Multiple choice question. 12.15 10.24 11.43 10.37
10.24
Given the following information, calculate the effective borrowing cost. Loan amount: $300,000, Term: 30 years, Interest rate: 12%, Discount points: 2, Other up-front costs to close the mortgage not paid to the lender: $4,000. Assume monthly payments and that the borrower does not prepay the loan prior to maturity. Multiple choice question. 12.27% 12.46% 12.60% 12.00%
12.46%
Given the following information, calculate the effective borrowing cost. Loan amount: $300,000, Term: 30 years, Interest rate: 12%, Discount points: 2, Other up-front costs to close the mortgage not paid to the lender: $4,000. Assume monthly payments and that the borrower does not prepay the loan prior to maturity. Multiple choice question. 12.46% 12.60% 12.27% 12.00%
12.46%
Which of the following characteristics distinguish APR from EBC? (check all the correct answers) Multiple select question. APR assumes no prepayment. APR ignores appraisal fees. APR ignores origination fees. APR ignores discount points.
APR assumes no prepayment. APR ignores appraisal fees.
With an interest-only mortgage, the amount of interest paid each period ______ over time. Multiple choice question. increases is constant decreases
is constant
Which of the following describes an early payment mortgage? Multiple choice question. In any month, the borrower makes a principal payment that is larger than the scheduled principal payment The borrower pays off the loan completely with one extra principal payment prior to loan maturity. The borrower makes her monthly payment a few days before the due date.
In any month, the borrower makes a principal payment that is larger than the scheduled principal payment
Which of the following mortgages typically places more of the interest rate risk to the lender? Multiple choice question. ARMs with rate caps LPMs early payment mortgages ARMs without rate caps
LPMs
Under the Real Estate Settlement and Procedures Act (RESPA), which of the following costs should be included in the EBC calculation? Multiple select question. Buyer's title insurance Loan origination fees Appraisal fee Discount points
Loan origination fees Appraisal fee Discount points
Nancy is a rational, financially unconstrained borrower. She is looking for a $100,000 LPM mortgage to finance her purchase of a beach house. Bank of America offers her two options, one with 15-year term and one with a 30-year loan term. Assume no up-front financing costs for both loans. Also assume Nancy would discount all future loan payments at the contract interest rate. Which loan is the least costly and therefore the better choice? Multiple choice question. 30-year loan Nancy is always indifferent between the two options. Assuming the same interest rate for both loans, Nancy is indifferent between the two options. 15-year loan
Nancy is always indifferent between the two options.
Which of the following statements is correct? Multiple choice question. The cash flows for an ordinary annuity all occur at the beginning of each period. The cash flows for an annuity due must all occur at the beginning of each period. The cash flows for an annuity may vary from period to period, but they must occur at regular intervals, such as once a year or once a month. If an uneven cash flow stream has regular intervals, such as once a year, then it is an annuity.
The cash flows for an annuity due must all occur at the beginning of each period.
Which of the following characteristics are associated with fully amortizing, level-payment mortgages? Multiple choice question. The mortgage interest rate varies over time. At maturity, the loan balance is non-zero. The periodic payments are constant over time.
The periodic payments are constant over time.
Which of the following statements is correct? Multiple choice question. Timelines are not useful for visualizing complex problems prior to doing actual calculations. A timeline is not meaningful unless all cash flows occur annually. Timelines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities. Timelines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.
Timelines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.
The interest rate on ARMs originated by federally insured U.S. banks must be tied to a public index that is not controlled by the lender. The most common ARM indexes in the home loan market track interest rates on Multiple choice question. corporate bonds global debt instruments US Treasury securities the debt lenders use to finance mortgages
US Treasury securities
Assume an investment is expected to be worth $10,000 at the end of ten years and that you expect to earn 10% (annually) on investments of similar risk. The present value of this investment opportunity to you is therefore $3,855. Which of the following is true? Multiple choice question. If you pay $5,000 today for this investment, you will earn more than a 10% return You're happy to pay $3,000 for this investment today. If you invested $3,000 for 10 yrs. at 10% you wouldn't accumulate $10,000 at the end of 10 yrs. You're happy to pay $5,000 for this investment today. If you invested $5,000 for 10 yrs at 10% you wouldn't accumulate $10,000 at the end of 10 yrs.
You're happy to pay $3,000 for this investment today. If you invested $3,000 for 10 yrs. at 10% you wouldn't accumulate $10,000 at the end of 10 yrs.
When you invest in a risky investment, you should expect to earn Multiple choice question. at least what you could earn on an alternative investment of equal risk at most what you could earn on a risky investment of similar risk what you earned on the last investment of similar risk
at least what you could earn on an alternative investment of equal risk
The increase in the value of a one time (lump sum) investment that grows at a given rate will be greatest with __________ compounding. Multiple choice question. monthly quarterly annual daily
daily
True or false: An annuity due is defined as a fixed amount of money paid or received at the end of every period.
false
True or false: At the maturity of a partially amortizing loan, the borrower must sell the property and use the sale proceeds to pay of the lender.
false
True or false: Federal law requires that home loans have 30-year or 15-year terms/maturities.
false
True or false: The U.S. Federal Reserve ("The Fed") periodically increase interest rates when the risk of overheated economy is perceived. Rate hikes are viewed as bad for real estate investors because the present value of future cash flows is inversely related to the magnitude of the interest rate used for discounting.
true