RE Test 3
Suppose that you decide to purchase a property that has annual property taxes of $2,427.22. If the closing occurred on March 13th, calculate your share (Buyer's share) of the total property taxes. For this problem, assume that we are dealing with a 365 day calendar year.
$1,955.08
Jonathan recently sold his home and was able to take home $423,000 after paying the real estate broker's commission of 6%. If the buyer was ultimately found through a buyer broker, the dollar commission will need to be split between the listing broker and buyer broker. If the buyer broker is entitled to 40% of the commission, what is her share of the commission rounded to the nearest dollar?
$10,800
Given the following information, calculate the effective gross income. Property: 4 office units Contract rents per unit: $2500 per month Vacancy and collection losses: 15% Operating Expenses: $42,000 Capital Expenditures: 10%
$102,000
Assume a retail tenant is paying a base rent of $120,000 per year (or $10,000 per month). In addition, the tenant must pay 7 percent of gross store sales in excess of $143,000 per month as percentage rent. If the store produces $170,000 in gross sales in a month, what is the total rent due for the month?
$11,890
Since hazard insurance premiums are paid up-front, the buyer will have to reimburse (credit) the seller a portion of the premium at the closing. Suppose that the insurance policy's coverage began on December 15th of the prior year and the property transaction is set to close on March 16th of a 365-day year. The premium paid originally by the seller was $250. If the coverage will expire as of the end of day December 14th in the current year, what is the dollar amount that the buyer must credit the seller?
$187.67
Given the following information regarding an income producing property, determine the NPV using levered cash flows in your analysisRequired equity investment: $270,000Expected NOI for each of the next five years: $150,000Debt Service for each of the next five years: $125,000Expected Holding Period: 5 yearsRequired yield on levered cash flows: 15%Expected Sale Price at end of Year 5: $2,000,000Expected Cost of Sale: $125,000Expected Mortgage Balance at time of sale: $1,500,000
$245.15
Given the following information, calculate the estimated terminal value of the property at the end of its holding period. Going-out cap rate: 9%, Estimated holding period: 5 years, NOI for year 5: $100,500, NOI for year 6: $102,000.
$1,133,333
Suppose that an income producing property is expected to yield cash flows for the owner of $150,000 in each of the next five years, with cash flows being received at the end of each period. If the opportunity cost of investment is 8% annually and the property can be sold for $1,250,000 at the end of the fifth year, determine the value of the property today.
$1,449,635.50
Suppose that examination of a pro forma reveals that the fifth year net operating income (NOI) for an income producing property that you are analyzing is $138,446 (you can assume that this cash flow occurs at the end of the year). If you estimate the projected rental growth rate for the property to be 5% per year, determine the projected sale price of the property at the end of year five if the going-out capitalization rate is 9%.
$1,615,203.00
Suppose that you are attempting to value an income producing property using the direct capitalization approach. Using data from comparable properties, you have determined the overall capitalization rate to be 7.5%. If the projected first year net operating income (NOI) for the subject property is $135,500, what is the indicated value of the subject using direct capitalization?
$1,806,666.67
Which of the following classes of the office sector includes office buildings that are considered the most prestigious in their tenancy, location, amenities and overall desirability?
class A office
The two most important determinants of the classification of an office property are age and obsolescence. Which of the following classes includes office buildings that are older and reasonably maintained, but are below current standards for one or more reasons?
class C office
When the supply of space exceeds the demand, it is common for owners to provide the tenant with a period of free or perhaps reduced rent. This is commonly referred to as a(n):
concession
The value given up, or promise made, by each party in a contract is referred to as:
consideration
The actual rental income being paid in accordance with a legally binding commitment is more commonly referred to as the:
contract rent
The successful conveyance of real estate depends on a well-formed contract for sale since the contract dictates the rights and type of deed involved, as well as choreographs the entire transaction. Which of the following features of the contract for sale refers to the arrangements agreed to by the parties, such as price and date of closing?
contract terms
Contracts for sale may contain sections that cause implementation of the contract to depend on the successful completion of some prior action such as the buyer's ability to obtain financing on specified terms. This type of contract is commonly referred to as a(n):
contract with contingencies.
Changes in the discount rate used to complete net present value analysis can have a significant impact on the estimated value of the investment and therefore affect the overall investment decision. As the required internal rate of return (IRR) increases, the net present value will:
decline
The use of financial leverage when investing in real estate is a double-edged sword. While increased leverage may allow the investor to "purchase" higher expected returns, the "price" of doing so is an increase in which of the following risks?
default risk
One solution for addressing conflicts of interest that arise from dual agency scenarios is for a broker to appoint a separate salesperson to represent each client. The appointed agent is considered a:
designated agent
In discounted cash flow (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 of the property is the:
direct capitalization method.
Appraisers rely on recently completed transactions of similar properties to guide their selection of the cap rate to be used to value a single property. The method of estimating a cap rate from a series of comparable properties is more commonly referred to as:
direct market extraction
According to the law of agency, real estate brokers are required to observe several duties as they act as an agent for an individual trying to buy or sell a property. Which of the following duties refers to a broker's obligation to be completely open and honest with the principal?
disclosure
Net operating income is similar to which of the following measures of cash flow in corporate finance?
earnings before deductions for interest, depreciation, income taxes, and amortization (EBIDTA)
The internal rate of return (IRR) on a proposed investment is the discount rate that makes the net present value of the investment:
equal to zero.
The right of someone to obtain full, legal title to real estate is more commonly referred to as:
equitable title
One of the traditional requirements for individuals who wish to obtain a brokerage license has been to demonstrate financial capacity to cover damage judgments brought against them by clients. In order to address this concern, some states have required licensees to first obtain:
errors and omission insurance.
There are a number of different types of listing contracts that can be used when marketing a property. Which of the following types of listings requires the broker to be paid a commission if anyone, other than the owner, sells the property during the contract period?
exclusive agency listing
In determining the appropriate listing contract to be used, it is important to know whether a multiple listing service (MLS) will be employed. The MLS only accepts which of the following types of listing contracts?
exclusive right of sale listing
There are a number of different types of listing contracts that can be used when marketing a property. Which of the following types of listings requires the broker to be paid a commission if any other broker, or even the owner, sells the property during the contract period?
exclusive right of sale listing
In acting as an agent for another person, the broker carries several special responsibilities, which by law must be adhered here to throughout the transaction process. These responsibilities constitute what is commonly referred to as a:
fiduciary relationship
Newer industrial parks have begun to specialize in providing space that can be configured to suit the diverse needs of various tenants. This type of industrial space is more commonly referred to as:
flex space.
Which of the following multifamily structures will typically consist of numerous two- to three-story buildings including a separate building containing a management office and clubhouse and is more common in suburban areas?
garden apartments
When the principal in an agency relationship delegates the power to act within the confines of a business or employment relationship, the agent is more commonly referred to as a:
general agent
A recent trend in commercial leases is for tenants to negotiate a cap on the amount of certain operating expenses they are required to reimburse the landlord. Such caps are usually negotiated on operating expenses thought to be at least partially controllable by the owner. Which of the following would typically be considered an operating expense controllable by the owner?
general maintenance
In commercial leases, rents do not necessarily have to be kept constant over the life of the lease term. One option is for there to be pre-specified increases in the contract rental rate over time, sometimes referred to as "step-ups" or "escalations." This type of rent treatment is commonly referred to as:
graduated rent
Net present value (NPV) is interpreted using the following decision rule: The investor will purchase the property as long as the NPV is:
greater than zero.
In accordance with RESPA, whenever a buyer obtains a new first mortgage loan from a chartered or insured lender, when the loan is insured by the FHA or guaranteed by the VA, or when the loan will be sold to one of the federally related secondary mortgage market agencies, an estimate of loan costs must be provided by the lender within:
3 business days
Given the following information, calculate the effective gross income multiplier. Sale price: $950,000 Potential Gross Income: $250,000 Vacancy and Collection Losses: 15% Miscellaneous Income: $50,000
3.6
If a property transaction is scheduled to close on May 14th, calculate the individual tax responsibility for the buyer if the total tax owed at the end of the year is $5,000. For this problem, assume that we are dealing with a 365 day calendar year.
$3,178.08
Suppose you are interested in selling your home and would like to clear a net value of $300,000. If you have agreed to pay your broker a commission of 5.5% (no matter who ultimately is responsible for finding the buyer), what price must you sell the home for in order to meet your net profit (rounded to the nearest dollar)?
$317,460
Given the following information, calculate the before-tax equity reversion (BTER):NOI: $89,100Annual Debt Service: $58,444Net Sale Proceeds: $974,700Remaining Mortgage Balance: $631,026
$343,674
For smaller income-producing properties, appraisers may use the ratio of a property's selling price to its effective gross income. This is an example of a:
gross income multiplier.
In retail property types, rents are quoted on the basis of which of the following?
gross leasable area
In which of the following types of leases is the property owner responsible for all operating expenses?
gross lease
State licensing laws prescribe behavioral requirements with which licensees must comply to keep their licenses. Licensing laws generally seek to prevent brokers from partaking in all of the following activities EXCEPT:
handling money in trust for clients.
Certain closing costs will be prorated to account for the period of time during which the seller occupied the house. If a transaction is scheduled to close on May 17 (136 days into a 365-day year), calculate the amount that the buyer will be credited if the particular closing cost in question is estimated to be $1,000 for the entire year.
$372.60
Suppose that you are attempting to value an income producing property using the direct capitalization approach. Using data from comparable properties, you have determined the overall capitalization rate to be 11.44%. If the projected first year net operating income (NOI) for the subject property is $44,500, what is the indicated value of the subject using direct capitalization?
$388,986.00
At the closing, the buyer will be credited for a number of costs that have been paid up-front (or will be paid after closing) as well as a number of prorated expenses that account for the period of time during which the seller occupied the house. All of the following items detailed in the closing costs involve credits that are commonly passed on to the buyer EXCEPT:
hazard insurance premiums.
Given the following information regarding an income producing property, determine the after tax net present value (NPV): Expected Holding Period: 5 years 1st year Expected BTCF: $30,6562nd year Expected BTCF: $33,3293rd year Expected BTCF: $36,0824th year Expected BTCF: $38,9185th year Expected BTCF: $41,839 1st year Expected Tax Liability: $7,6452nd year Expected Tax Liability: $8,6583rd year Expected Tax Liability: $9,7084th year Expected Tax Liability: $10,7985th year Expected Tax Liability: $6,951 Estimated Before Tax Equity Reversion at the end of year 5: $343,674Expected Taxes Due on Sale at end of year 5: $32,032Required equity investment: $241,163After Tax Opportunity Cost: 11.2%
$40,858
Jim has hired a real estate broker to help facilitate the sale of his home. If the broker requires a commission of 6%, how much will Jim clear from the sale (after the commission has been paid) if he is able to sell his house for $478,723? (Assume that Jim has already paid off his mortgage.)
$450,000
Suppose that you just sold a property that has annual property taxes of $2,427.22. If the closing occurred on March 13th, calculate your share (Seller's share) of the total property taxes. For this problem, assume that we are dealing with a 365 day calendar year.
$472.14
Given the following information, calculate the net operating income assuming below-line treatment of capital expenditures. Property: 4 office units Contract Rents per unit: $2500 per month Vacancy and collection losses: 15% Operating Expenses: $42,000 Capital Expenditures: 10%
$60,000
Given the following information, calculate the effective monthly rent payment:Lease Term: 10 yearsConcession: 1 year free rent to be spread over the term of the leaseRental Space: 5000 square feetRental Rate: $20 per square foot per yearLandlord's discount rate: 10%
$7,081
Suppose that an income producing property is expected to yield cash flows for the owner of $10,000 in each of the next five years, with cash flows being received at the end of each period. If the opportunity cost of investment is 12% annually and the property can be sold for $100,000 at the end of the fifth year, determine the value of the property today.
$92,790.45
Just as it is important for an investor to consider the impact of financial leverage on her return, it is also necessary to account for the effect of income taxes. How would the presence of income taxes impact the levered going-in IRR?
income taxes reduce the levered going-in-IRR
Which of the following core property types includes buildings designed for the temporary storage of goods such as inventory, company records, and excess raw materials?
industrial
The risk associated with the replacement of a tenant's first lease with another lease of uncertain terms and conditions is more commonly referred to as:
interlease risk.
Analysis of a subject property's pro forma reveals that its fifth year net operating income (NOI) is projected to be $100,282 (you can assume that this cash flow occurs at the end of the year). If you estimate the projected rental growth rate for the property to be 3% per year and the going-out capitalization rate in year five to be 10%, determine the net sale proceeds the current owner of the property would receive if he were to sell the property at the end of year five and incur selling expenses that amounted to $58,300.
$974,610.00
Determine the net present value (NPV) of an investment decision to purchase a property for $90,000 that will generate annual cash flows of $10,000 per year for eight years and sell for $80,000 at the end of the eight year holding period, if the appropriate discount rate is 10%? (Note: Assume payments are made at end of year.)
+$670
Ownership of a freehold estate is referred to as:
legal title
An important piece of criteria for investors to consider when deciding between real estate investment opportunities and investing in stocks or bonds is the effect of income taxes on their return. For most investors, the effective tax rate on commercial real estate is:
less than the effective tax rate on a stock or bond investment.
The use of mortgage debt to help finance an investment is commonly referred to as:
leverage
It is common for investors in real estate to use mortgage debt to help finance capital investment. The use of debt can have a profound impact on the expected cash flows for a particular property. Which of the following terms refers to cash flows that represent the property's income after subtracting any payments due to the lender?
levered cash flows
The final step in a real estate transaction is the closing. In most closings, which party is responsible for seeing that the closing is completed successfully?
listing broker
When a borrower (the buyer) applies for a loan, the lender will provide him/her with which of the following forms that includes details pertaining to specific loan information and an estimate of expenses that the borrower is likely to incur at the closing?
loan estimate
Since the issues in many transactions are similar, brokers often use standard preprinted contract forms. Generally, the best standard form contracts are those prepared and approved by which of the following parties?
local board of realtors
Christopher has hired a real estate broker to help facilitate the sale of his home. Realizing that Christopher is most likely going to realize a loss on his investment due to the recent decline in housing values in his neighborhood, the broker has agreed to charge Christopher a lower commission rate as long as Christopher enters into an exclusive right of sale listing contract. If Christopher ends up selling his house for $364,583 and takes home $350,000 after paying the real estate broker's commission, what was the commission rate that the broker ended up charging?
4.0%
The recent emergence of discount brokerage services has had a modest effect on the price of brokerage services. The average commission that a broker could expect to receive today would most likely range between:
5-6%.
Amy is trying to decide whether or not it would be beneficial to employ the services of a real estate broker in order to facilitate the sale of her home. She has estimated that the marketing costs and opportunity cost associated with time spent dealing with prospective buyers amounts to $5,000. If Amy were to sell the house on her own for $200,000, but a broker would have been able to negotiate a higher price of $206,350, what commission rate should Amy have been willing to accept from a real estate broker to make her indifferent between selling the house on her own and hiring a real estate broker?
5.5%
Since property taxes are paid in arrears, the buyer will be responsible for paying them after closing. Suppose that the closing date on the home for sale is February 28th of a leap year (e.g., 2012, 2016, etc.). How many calendar days would the seller be responsible for when calculating his/her share of the property tax owed for the year in which the home was sold?
58 days
Given the following information, calculate the appropriate after-tax discount rate:Tax rate on comparable risk investment: 35%Investor's before-tax opportunity cost: 12%Capitalization rate: 8%
7.8%
Given the following information, calculate the appropriate going-in cap rate using general constant-growth formula. Overall market discount rate = 12% Constant growth rate projection: 3% per year Sale price: $1,950,000 Net operating income: $390,000 Potential gross income: $520,000
9%
Given the following information, calculate the load factor for this office property:Total usable area: 20,000 sq. ft.Tenant's prorated share of common area: 5,000 sq. ft.
1.25
In discounted cash flow analysis, the industry standard for pro forma cash flow projections of investment properties is typically:
10 years
Suppose an industrial building can be purchased for $2,500,000 and is expected to yield cash flows of $180,000 each of the next five years (Note: assume payments are made at end of year). If the building can be sold at the end of the fifth year for $2,800,000, calculate the IRR for this investment over the five year holding period.
9.20%
A client has requested advice on a potential investment opportunity involving an income producing property. She would like you to determine the internal rate of return of the investment opportunity based on the following information:Expected Holding Period: 5 yearsEnd of first year NOI estimate: $113,900NOI estimates in subsequent years will grow by 5% per yearPrice at which the property is expected to be sold at the end of year 5: $1,615,205.22Current market price of the property: $1,475,667.71
10.00%
Suppose you purchased an income producing property for $95,000 five years ago. In Year 1, you were able to negotiate a lease that paid $10,000 per year at the end of each year. If you are able to sell the property at the end of year 5 for $100,000 (after receiving our final lease payment), what was the internal rate of return (IRR) on this investment?
11.37%
Which of the following duties refers to a broker's obligation to never subordinate the best interest of their principal to the interests of others?
loyalty
While a sublease and an assignment are two distinct choices for a tenant who wishes to transfer his rights during the term of a lease, both agreements:
maintain that the original tenant be held liable for fulfilling the original lease unless otherwise specified.
It is common for real estate firms to identify submarkets, such as property types or particular sections of a city, in which they can specialize and concentrate their transaction activity. This practice is referred to as:
market segmentation
The majority of residential units in the U.S. are contained in multifamily structures, or apartment buildings that contain five or more housing units. Which of the following multifamily structures will range in height from four to nine stories and are typically found in both cities and suburbs?
midrise apartment buildings
When calculating the net operating income of a property, it is important to identify any expenses that will be incurred in attempts to maintain the property. All of the following would be considered operating expenses EXCEPT:
mortgage payments
There are three basic types of listing contracts. These include all of the following EXCEPT:
multiple listing
The proportion of potential gross income not collected, even when supply equals demand in the rental market, is more commonly referred to as the:
natural vacancy rate
State licensing laws generally prescribe two levels of real estate brokerage licensing: the broker license and the salesperson license. Which of the following responsibilities is an individual with a salesperson license permitted to do?
negotiate listing contracts or contracts for sale
Which of the following measures is considered the fundamental determinate of market value for income-producing properties?
net operating income
Of the following choices, which best describes the operating expenses that you would expect to be the paid by the tenant in a net lease agreement?
only property taxes
There are a number of different types of listing contracts that can be used when marketing a property. Which of the following types of listings allows property owners to list the property with more than one broker?
open listing
In some leases, the method used to share responsibility for operating expenses is a hybrid of the four basic lease types. For example, the inclusion of which of the following clauses calls for only increases in one or more operating expenses, relative to a base year, to become the responsibility of the tenant?
operating expense escalation clause
The ordinary and necessary expenditures owners expect to incur during the next 12 months that do not materially add value, but keep the property competitive in its local rental market are more commonly referred to as:
operating expenses
As with any valid contract, enforceable leases must meet a number of requirements. One of these requirements is for each party to provide appropriate consideration. In a lease, which of the following constitutes the landlord's consideration?
permission to occupy the space or property
The starting point in calculating net operating income is the total annual income the property would produce assuming 100 percent occupancy and no collection losses. This is commonly referred to as:
potential Gross Income.
While the principal parties to a transaction must be legally competent for a contract to be valid, it is possible for a party acting on behalf of a principal to obtain this legal right. In order for personal representatives and trustees to be authorized to act on behalf of a principal, a legal instrument commonly referred to as ____________ must be in place.
power of attorney
Under the law of agency, a real estate broker is given the right to act on behalf of another individual or entity who is trying to buy or sell a property. The individual or entity that grants authority to the broker to act on their behalf is more commonly referred to as the:
principal
When using discounted cash flow analysis for valuation, an appraiser will prepare a cash flow forecast, often referred to as a:
pro forma
Which of the following contract elements is an additional requirement that must be satisfied in a contract for sale of real estate that isn't necessarily a part of other contracts?
proper description of the property
Once possession and control are conveyed in a lease agreement, the owner must provide the tenant with uninterrupted use of the property without any interference from any entity that may threaten to impose upon the tenant's leasehold interest in the property. In other words, the tenant is entitled to which of the following?
quiet enjoyment
A lease option is a clause that grants an option holder the right, but not the obligation, to renew the lease, cancel the agreement, relocate within a property, or even expand to adjacent space. The existence of these options in a leasing agreement:
reduces the expected present value of lease cash flows to the owner.
Federal and state laws prohibit discrimination in housing. However, exemptions do exist depending on the particular type of property that is being considered. All of the following activities could be considered exempt in specific scenarios EXCEPT:
refusing to sell or rent to a person because of race.
Which of the following lease options can serve to mitigate exposure to interlease risk for the tenant?
renewal option
The choice of which method to use in constructing the contracted rental rate can also be impacted by the type of property being leased. With which of the following property types would one most expect to see a percentage rent method used?
retail
The lease is a contract between a property owner and tenant that transfers exclusive use and possession of space to the tenant, but allows the owner to retake possession of the property at the expiration of the lease. Which type of interest allows the owner to retake possession at the end of a lease?
reversion interest
Which of these is most likely to be regarded as a capital expenditure rather than an operating expense?
roof replacement
In an open-listing contract, an individual broker is entitled to a commission if:
she procures the buyer of the property.
Which of the following duties refers to a broker's obligation to represent the interests of their principals to the best of their ability in the same way they would represent themselves, acquiring and applying the necessary knowledge and information about relevant laws and regulations, the market, and subject property?
skill and care
When the seller in a contract for sale fails to perform (e.g. breach of contract, nonperformance, or default), the buyer has a variety of remedies. One such remedy is to appeal to the court to force the defaulting seller to carry out the contract. This remedy is most commonly referred to as suing for:
specific performance
Modern real estate brokerage normally relies on a multiple listing service (MLS) through which brokers have access to each other's listings. Which of the following types of agency agreements is established with the use of a MLS?
subagency agreement
Lenders may request that property owners of rental properties include a clause in their lease agreement that gives the lender the right to terminate the lease and evict the tenant, even if the tenant has fulfilled all of its responsibilities under the lease, in the case that the owner of the property defaults on her mortgage. This part of the lease agreement is more commonly referred to as a:
subordination clause.
When a party in a contract fails to perform (e.g. breach of contract, nonperformance, or default) the other party has a variety of remedies. All of the following are remedies that an aggrieved seller may pursue EXCEPT:
sue for specific performance.
Most appraisers adhere to an "above-line" treatment of capital expenditures. This implies which of the following?
Capital expenditures are subtracted in the calculation of net operating income.
Placed under the umbrella of the Consumer Financial Protection Bureau as part of the Dodd-Frank Act of 2010, the Real Estate Settlement Procedures Act (RESPA) requires loan settlement information to be prepared on a special form known as the:
Closing disclosure.
Blockbusting, which involves persuading an individual to sell her home by telling her that minority groups are moving into the neighborhood, is one form of discrimination in housing that is prohibited by which of the following acts of Congress?
Fair Housing Act (Title VIII of the Civil Rights Act)
Given the following expected cash flow stream, determine the IRR of the proposed investment in an income producing property and determine whether or not the investment should be pursued using IRR as your decision making criteria:Investment Horizon: 5 yearsExpected Yearly Cash Flow in each of the next five years: $127,628Expected Sale Price at end of 5 years: $1,595,350Required return on equity: 5%Current Market Price of Property: $1,750,000
IRR is 5.72%; Decision is to invest
Critical to any listing contract is the question of when the broker becomes entitled to a commission. Traditionally, the broker is still entitled to a commission in all of the following scenarios EXCEPT:
If a contract is contingent upon the buyer obtaining financing and the buyer is unable to do so.
While the general concepts of investment value and market value are very similar, there is an important distinction between the two. All of the following statements regarding investment value are true EXCEPT:
Investment value is based on the expectations of a typical, or average, investor.
Based on your understanding of the decision rule associated with an internal rate of return (IRR) calculation, the investor will reject the property investment opportunity if:
the calculated IRR is less than the required IRR.
The distinction between legal title and equitable title is an important concept in the contract for sale of real estate. When the buyer obtains equitable title, the seller can no longer sell the property to someone else, even though the legal title has not officially passed on. In the contract for sale process, the creation of equitable title occurs when:
the contract for sale is signed
The going-in cap rate, or overall capitalization rate, is a measure of the relationship between a property's current income stream and its price or value. Which of the following statements regarding cap rates is true?
It is analogous to the dividend yield on a common stock.
Given the following expected cash flow stream, determine the NPV of the proposed investment in an income producing property and determine whether or not the investment should be pursued:Investment Horizon: 5 yearsExpected Yearly Cash Flow in each of the next five years: $127,628Expected Sale Price at end of 5 years: $1,595,350Opportunity Cost of Investment: 6%Current Market Price of Property: $1,750,000
NPV is −$20,246; decision is not to invest
Given the following information, calculate the estimated terGiven the following expected cash flow stream, determine the NPV of the proposed investment in an income producing property and determine whether or not the investment should be pursued:Investment Horizon: 5 yearsExpected Yearly Cash Flow in each of the next five years: $127,628Expected Sale Price at end of 5 years: $1,595,350Opportunity Cost of Investment: 6%Current Market Price of Property: $1,750,000minal value of the property at the end of its holding period. Going-out cap rate: 9%, Estimated holding period: 5 years, NOI for year 5: $100,500, NOI for year 6: $102,000.
NPV is −$20,246; decision is not to invest
Which of the following defects to mutual assent involves intentional misrepresentation?
One of the parties is committing fraud.
In certain circumstances, mutual assent between the contracting parties may be broken, thus invalidating the contract. Which of the following defects to mutual assent involves compelling a person to act by the use of force?
One of the parties is under duress.
Which of the following defects to mutual assent involves the abuse of the control that one person has over another?
One of the parties is under undue influence.
The effective rent calculation is a common measure used to compare the true cost of one lease to another. While there are a number of limitations to this methodology, the effective rent calculation captures:
the time value of money.
The distinction between market rent and contract rent is important due to differences in lease terms. Office, retail, and industrial tenants most commonly occupy their space under leases that run:
three to five years
Given the following information, calculate the going-out cap rate:Estimated holding period: 5 yearsNOI for year 1: $120,000NOI for year 5: $150,000NOI for year 6: $155,250Expected sale price at end of year 5: $1,350,000
11.5%
Given the following information regarding an income producing property, determine the unlevered internal rate of return (IRR):Expected Holding Period: 5 years1st year Expected NOI: $89,0002nd year Expected NOI: $91,7733rd year Expected NOI: $94,5264th year Expected NOI: $97,3625th year Expected NOI: $100,283Debt Service in each of the next five years: $58,444Current Market Value: $885,000Required equity investment: $221,250Net Sale Proceeds of Property at end of year 5: $974,700Remaining Mortgage Balance at end of year 5: $631,026
12.2%
Given the following information, calculate the appropriate going-in cap rate using mortgage-equity rate analysis. Mortgage financing = 75% Typical debt financing cap rate: 10% Sale price: $1,950,000 Before Tax Cash Flow (BTCF): $390,000
12.5%
Given the following information regarding an income producing property, determine the after tax internal rate of return (IRR): Expected Holding Period: 5 years 1st year Expected BTCF: $30,6562nd year Expected BTCF: $33,3293rd year Expected BTCF: $36,0824th year Expected BTCF: $38,9185th year Expected BTCF: $41,839 1st year Expected Tax Liability: $7,6452nd year Expected Tax Liability: $8,6583rd year Expected Tax Liability: $9,7084th year Expected Tax Liability: $10,798;5th year Expected Tax Liability: $6,951 Estimated Before Tax Equity Reversion at end of year 5: $343,674Expected Taxes Due on Sale at end of year 5: $32,032Required equity investment: $241,163
15.4%
Given the following information, calculate the overall capitalization rate. Sale price: $950,000 Potential Gross Income: $250,000 Vacancy and Collection Losses: $50,000 Operating Expenses: $50,000
15.8%
Given the following information regarding an income producing property, determine the internal rate of return (IRR) using levered cash flows:Expected Holding Period: 5 years1st year Expected NOI: $89,1002nd year Expected NOI: $91,7733rd year Expected NOI: $94,5264th year Expected NOI: $97,3625th year Expected NOI: $100,283Debt Service in each of the next five years: $58,444Current Market Value: $885,000Required equity investment: $221,250Net Sale Proceeds of Property at end of year 5: $974,700Remaining Mortgage Balance at end of year 5: $631,026
22.9%
In dual agency, conflicts of interest may arise since a single broker has both the listing contract with the seller and a buyer agency agreement with the purchaser. One way that states have attempted to deal with this issue is to develop a new type of brokerage relationship in which the broker assists the buyer and seller, but does not represent either party. This type of brokerage relationship is commonly referred to as:
transaction brokerage
The rental income generated by a lease can depend significantly on the proportion of property-level operating expenses paid by the tenant. In which of the following types of leases is the tenant responsible for all operating expenses?
triple net lease
When the principal in an agency relationship delegates the power to act on all materials that can be delegated in place of the principal, the agent is more commonly referred to as a:
universal agent
In general, most contracts - including a real estate contract - can be assigned. All of the following statements regarding assignment are true EXCEPT:
when buyers assign their rights to someone else, they escape liability under the original contract.
Any contract, whether it is for the sale of real estate or some other entity, must contain five basic elements. However, any contract for the sale of real estate must adhere to two additional requirements. Which of the following contract elements is an additional requirement that must be satisfied in a contract for sale of real estate that isn't necessarily a part of other contracts?
written form
While net present value (NPV) and internal rate of return (IRR) analysis both may be used as investment decision criteria, there are some limitations to the IRR method that make its use as an investment criterion problematic in certain situations. All of the following are limitations of the IRR method EXCEPT:
The IRR methodology cannot be used to make comparisons across different investment opportunities.
The importance of brokers in the real estate market is often overlooked. In the absence of a real estate broker, one would expect all of the following to be true EXCEPT:
The asking price would most likely be higher, on average, than in the case where a broker was involved because the seller is in total control of the sale.
Given the following expected cash flow stream, determine the NPV of the investment opportunity:Investment Horizon: 3 yearsEnd of first year NOI estimate: $886,464End of second year NOI estimate: $913,058End of third year NOI estimate: $940,450Price at which the property is expected to be sold at the end of year 3: $5,000,000Current market price of the property: $6,200,000Discount rate: 9%
−$28,451
Given the following information, calculate the NPV for this property:Initial cash outflow: $200,000Discount rate: 15%CF for year 1: $25,876CF for year 2: $23,998CF for year 3: $23,013CF for year 4: $22,105CF for year 5: $144,670
−$59,657
One complication that appraisers may face is the variety of lease types that may be available for a particular property type. Which of the following statements best describes a "graduated" or step-up lease?
The lease establishes schedule of rental rate increases over the term of the lease.
Which of the following statements best describes the owner's and tenant's responsibility for operating expenses when there is an expense stop clause in the lease contract?
The owner is responsible for operating expenses up to the expense stop; expenses above the expense stop become the responsibility of the tenant
Although the function of commercial brokerage is the same as that of residential brokerage, the activities of commercial brokers usually differ considerably from those of residential brokers due to fundamental differences in these two markets. All of the following statements regarding commercial brokerage are true EXCEPT:
The parties in commercial mortgage transactions are typically less knowledgeable than those in residential transactions.
Both parties to a valid and enforceable contract must provide consideration. In a contract for the sale and purchase of real estate, which of the following depicts the seller's consideration?
The property to be given up
The process of converting periodic income into a value estimate is referred to as income capitalization. Income capitalization models can generally be categorized as either direct capitalization models or discounted cash flow models. Which of the following statements best describes the direct capitalization method?
Value estimates are based on a multiple of expected first year net operating income.
The most relevant cash flow measure for investors in commercial real estate who own properties through a sole proprietorship, limited partnership, limited liability company, or private equity fund is the property's:
after-tax cash flow.
In contrast to rent for residential units, rent for U.S. commercial properties is typically quoted as:
an annual cost per square foot.
The large and generally well-known retailers who draw the majority of customers to a shopping center are more commonly referred to as:
anchors.
Gross income multiplier analysis assumes that the subject and comparable properties are collecting market rents. Therefore, it is frequently argued that an income multiplier approach to valuation is most appropriate for properties with short-term leases. Which of the following property types, therefore, would we find it most appealing to use a gross-income multiplier in our analysis?
apartments
Some tenants who are subject to long-term leases may desire to transfer all of their tenant rights and obligations to another party. This is commonly referred to as a(n):
assignment
When one party's contractual rights and obligations are transferred to someone else, it is more commonly referred to as contract:
assignment
Based on your understanding of the differences between levered and unlevered cash flows, which of the following is an example of a levered cash flow?
before-tax cash flow
In calculating net operating income, vacancy losses must be subtracted from the gross income collected. The normal range for vacancy and collection losses for apartment, office, and retail properties is:
between five and fifteen percent.
The use of financial leverage in purchasing an income-producing property can affect the amount of cash required at acquisition, the net cash flows from rental operations, the net cash flows from the eventual sale of the property, and the ultimate return on invested equity. Assuming the going-in IRR is greater than the effective borrowing cost, if an investor increases his leverage rate, say from 75% to 80%, we would expect which of the following to occur?
both NPV and going-in IRR increase
In a net lease, the tenant is responsible for paying a clearly defined portion of the property's operating expenses. Based on your understanding of the standard definitions of "netness" in commercial leases, the tenant is responsible for which of the following in a net-net lease?
both property taxes and insurance
Suppose that a recent purchase of a residential home has been facilitated equally by a listing agent and a buyer broker. Based on your understanding of how commissions are determined, which of the following scenarios best describes who would be entitled a commission upon sale of the property (Note: For simplicity, you can assume the seller did not procure the buyer on their own)?
both the listing broker and the buyer broker
The expected costs to make replacements, alterations, or improvements to a building that materially prolong its life and increase its value is referred to as:
capital expenditures
As an agent for the buyer or seller, a broker has 6 basic fiduciary responsibilities. Which of the following definitions best describes the responsibility of "Obedience"?
Broker must follow the instructions of the principal to the limits of what is legal and ethical.
