Real Estate Exam 3

Classification of mortgage loans includes all of the following EXCEPT: A) HUD guaranteed mortgages B) Conventional mortgages C) FHA insured mortgages D) VA guaranteed mortgage loans

A) HUD guaranteed mortgages

RESPA has three specific objectives. Which of the following is NOT one of those objectives? More effective advance disclosure of settlement costs More informative of the cost of credit Elimination of kickbacks and unearned fees A reduction in the amount of escrow placed in accounts for homeowners

More informative of the cost of credit

Expenses for a 1,000 square foot office space are $6.00 per square foot. The lease specifies an expense stop of $5.40. What is the total expense paid by the landlord? $5,400 $6,000 $600 $0

$5,400

6. Expenses for a 1,000 square foot office space are $6.00 per square foot. The lease specifies an expense stop of $5.40. What is the total expense paid by the landlord? (A) $5,400 (B) $6,000 (C) $600 (D) $0

(A) $5,400

25. A property produces an 8.92% ATIRR on the total investment considering a tax rate of 28%. What is the maximum interest rate that could be paid on debt without causing the leverage to be negative? (A) 12.39% (B) 11.42% (C) 6.42% (D) 9.37%

(A) 12.39%

21. A property is purchase for $15 million. Financing is obtained at a 75% loan-to-value ration with total annual payments of $1,179,000. The property produces an NOI of $1,400,000. What is the equity dividend rate (ratio of first year cash flow to equity)? (A) 5.89% (B) 9.33% (C) 7.86% (D) 8.64%

(A) 5.89%

14. Total possible income less any vacancy is ___. (A) EGI (B) PGI (C) NOI (D) GIM

(A) EGI

12. A comparable property has a feature that is superior to the subject property. What adjustment would be made in the sales comparison approach to value? (A) Value of the feature would be subtracted from the sales price of the comparable property (B) Value of the feature would be added to the sales price of the comparable property (C) Value of the feature would be subtracted from the value of the subject property (D) Value of the feature would be added to the value of the subject property

(A) Value of the feature would be subtracted from the sales price of the comparable property

17. A property produces a first year NOI of $100,000 which is expected to grow by 2% per year. If the property is expected to be sold in year 10, what is the expected sale price based on a terminal capitalization rate of 9.5% applied to the eleventh year NOI? (A) $1,308,815 (B) $1,283,152 (C) $1,263,158 (D) $1,257,992

(B) $1,283,152

20. An investor who has $75,000 in taxable income purchases a building that produces another $15,000 in taxable income. According to the table below, what is the marginal tax rate? Taxable Income Marginal Tax Rate $0 - $34,000 15% $34,001 - $82,150 28% Over $82,150 31% (A) 29.50% (B) 29.57% (C) 28.00% (D) 31.00%

(B) 29.57%

26. Which of the following BEST describes the process of "partitioning the IRR"? (A) Dividing the IRR into income and appreciation components (B) Using the IRR as a discount rate and determining how much of the present value comes from income and resale (C) Dividing the IRR into before-tax and after-tax IRRs (D) Determining how much of the IRR comes from each property in a portfolio

(B) Using the IRR as a discount rate and determining how much of the present value comes from income and resale

13. A property is leased for $24,000 per year although market rents are currently $27,500 per year and are expected to increase by 2% per year. The property is expected to be sold at the end of year 10 based on a 10% terminal cap rate applied to the eleventh year NOI. The current lease on the property will expire at the end of year 10 so the property can be leased in the eleventh year at market rates. What is the value of the leased fee estate based on an 11.5% discount rate? (A) $362,489 (B) $298,325 (C) $251,298 (D) $271,486

(C) $251,298

19. A property that produces an annual NOI of $100,000 was purchased for $1,200,000. Debt service for the year was $95,000 of which $93,400 was interest and the remainder was principal. Annual depreciation is $38,095. What is the taxable income? (A) $5,000 (B) $6,600 (C) - $31,495 (D) - $33,095

(C) - $31,495

22. A property that produces a level of NOI of $200,000 per year is expected to be sold in year 5 for $2,000,000. If the property was purchased for $2,000,000, what percent of the IRR can be attributed to the operating income only? (A) 10.0% (B) 90.0% (C) 37.9% (D) 63.1%

(C) 37.9%

. When an investor performs an investigation while considering acquisition of a property, this is referred to as: (A) Investigation (B) Risk analysis (C) Due diligence (D) Acquisition analysis

(C) Due diligence

7. Which of the following describes the function of an expense stop in a lease? (A) Expenses are stopped from increasing (B) Expenses above the stop are paid by the owner (C) Expenses above the stop are paid by the tenant (D) Expenses below the stop are paid for by the tenant

(C) Expenses above the stop are paid by the tenant

27. Risk due to potential tax law changes is referred to as: (A) Business risk (B) Financial risk (C) Legislative risk (D) Tax risk

(C) Legislative risk

5. The supply of space is: (A) Inelastic in both the short run and the long run (B) Elastic in both the short run and the long run (C) Relatively inelastic in the short run, and highly elastic in the long run (D) Relatively elastic in the short run, and highly inelastic in the long run

(C) Relatively inelastic in the short run, and highly elastic in the long run

18. A property that produces a first year NOI of $80,000 is purchased for $750,000. The NOI is expected to increase by 15% in the sixth year when some of the leases turnover. The resale price in year 10 is expected to be $830,000. What is the net present value of the property based on the 10-year holding period and a discount rate of 9.5%? (A) $87,433 (B) $87,221 (C) $95,294 (D) $116,490

(D) $116,490

15. Capitalization rates will differ from yield rates when the income is expected to __________ over time. (A) Stay the same (B) Decrease (C) Decrease (D) Both B and C.

(D) Both B and C.

29. Which of the following refers to the risk real estate investors face stemming from changes in general economic conditions? (D) (A) Financial risk (B) Liquidity risk (C) Environmental risk (D) Business risk

(D) Business risk

4. The difference between the existing stock of space and the equilibrium occupancy is known as: (A) Supply (B) Demand (C) Equilibrium (D) Vacancy

(D) Vacancy

Comp 1 Comp 2 Comp 3 Price $300,000 $350,000 $375,000 Effective gross income 50,000 55,000 60,000 % operating expense 50% 55% 54% NOI 25,000 30,000 32,500 8. Consider the table above. Assume that the subject property has effective gross income of $53,000 and a NOI of $27,500. What value would a GIM approach yield (rounded to the nearest $100)? (C) (J) $322,600 (K) $325,600 (L) $328,600 (M) $330,000

(L) $328,600

A typical RESPA closing statement contains which of the following characteristics? 2 columns — summary of borrower's and seller's transactions 2 columns — summary of borrower's and broker's transactions 3 columns — summary of borrower's, seller's, and broker's transactions 3 columns — summary of borrowers, seller's, and lender's transactions

2 columns — summary of borrower's and seller's transactions

Which of the following does the term "anchor tenant" usually refer to? Someone who leases space The largest tenant in an office building A department store in a mall The tenant who pays the highest rent in a mall

A department store in a mall

What is the rationale for the sales comparison approach? A) an informed investor would never pay more for a property than other investors have recently paid B) in a relatively short period of time, comparable houses in the same area will always sell for the same price C) value of property is related to its ability to produce cash flow through sales D) the value of a property depends on its replacement cost

A) an informed investor would never pay more for a property than other investors have recently paid

Which of the following would most likely NOT be used if a mortgage is granted for less than 80% of the value of the home? A) conventional mortgage B) insured conventional mortgage C) federal housing authority insured mortgage D) veteran affairs guaranteed mortgage loan

A) conventional mortgage

Triple Net Lease usually refers to the tenant paying all but which of the following expenses? A) management fees B) property taxes C) maintenance D) insurance

A) management fees

Which of the following is NOT harder to estimate using the cost approach for a property that is not new? A) replacement cost B) physical deterioration C) functional obsolescence D) external obsolescence

A) replacement cost

Five tenants rent equal proportions of a 100,000 sf. building, where 20,000 sf. is common area. Annually, if tenant A pays $20 per sf., tenant B pays $25 per sf. and all other tenants pay $18 per sf. What is the total monthly rent? A) $108,000 B) $132,000 C) $135,000 D) $165,000

B) $132,000

Given the following: Loan to value ratio = 80% Beginning Interest Rate = 7% Loan term 20 years Down payment = $20,000 What is the initial loan amount? A) $60,000 B) $80,000 C) $100,000 D) $120,000

B) $80,000

Requirements under the Real Estate Settlement and Procedures Act (RESPA) do NOT include: A) advance disclosure of settlement costs. B) disclosure of kickbacks C) title insurance placement D) escrow deposits

B) disclosure of kickbacks

Which of the following was not listed as a method of calculating real estate value when the subject does not have comparable sales and has a very long economic life? A) developing terminal capitalization rates on expected long term cash flows B) extended economic life reversion C) estimating terminal capitalization rate directly from sales transaction data D) estimating resale price based on expected change in property values

B) extended economic life reversion

Using this approach the appraiser typically uses sales of a rental property similar to the subject property and determines the ratio of sale price to monthly rental income. A) market value approach B) income approach C) sales comparison approach D) cost approach

B) income approach

Which of the following was NOT listed as a method of receiving additional rent beyond the base rent from tenants? A) CPI adjustments B) interest adjustments C) step-up provisions D) percentage rent

B) interest adjustments

Which of the following is NOT true of capitalization rates? A) it is equal to net operating income divided by transaction price B) it assures the property will be a good investment if purchased C) it is derived form comparable sales D) it is noted in equations as "R"

B) it assures the property will be a good investment if purchased

When the rent from a retail lease exceeds the minimum rent due to a percentage rent clause, the additional rent above the minimum rent is referred to as: A) percentage rent B) overage rent C) excess rent D) participating rent

B) overage rent

Which of the following is true of an expense stop? A) the tenant pays expenses up to the amount of the stop. B) the owner pays expenses up to the amount of the stop. C) the tenant stops paying expenses after a certain date. D) the owner stops paying expenses after a certain date.

B) the owner pays expenses up to the amount of the stop.

Which of the following is NOT true of load factors? A) usually used as efficiency measures B) used to compare leasing alternatives C) used to determine rentable area D) calculated as rentable area per floor over the usable area per floor

B) used to compare leasing alternatives

Which if the following is NOT a step in the appraisal process? A) identify property rights to be valued B) specify effective date of value C) apply grantors principals D) gather and analyze market data

C) apply grantors principals

The text notes that higher market capitalization rates and therefore lower property values tend to be brought about by: A) unanticipated increase in the supply of real estate relative to demand B) unanticipated increase in interest rates C) both of the above D) neither of the above

C) both of the above

Which of the following was not noted as a factor of market rent? A) outlook of national economy B) the demand for the type of space provided by the property in the location being analyzed C) existing liens on the property D) the supply of similar competitive space

C) existing liens on the property

Which of the following is NOT classified as nonresidential property? A) hotel/motel B) industrial C) mixed use D) office

C) mixed use

The two fundamental relationships that must be assessed by a lender when considering the risk of a mortgage are: A) payment to income ratio and loan to price ratio B) payment to debt ratio and loan to price ratio C) payment to income ratio and loan to value ratio D) payment to debt ratio and loan to value ratio

C) payment to income ratio and loan to value ratio

In estimating the value for a specific property, this approach involves selecting properties that have sold most recently and that are most comparable to the subject property. A) market value approach B) cost approach C) sales comparison approach D) income approach

C) sales comparison approach

Gross income multiplier is defined as: A) gross income/sales price B) gross income/market value C) sales price/gross income D) market value/gross income

C) sales price/gross income

Underwriting is the process of evaluating which of the following? A) the lender's ability to offer money B) the value of the home C) the borrower's loan request D) the potential profitability to the borrower

C) the borrower's loan request

Which of the following tends to lower effective rents? Percentage rent Step up provisions Concessions CPI adjustment

Concessions

Calculate the residual land value given the following information: NOI year 1 = $360,000 Annual growth rate = 2.5% Capitalization rate = 12.5% Construction costs for new building = 2,000,000 A) 400,000 B) 880,000 C) 1,000,000 D) 1,600,000

D) 1,600,000

A market analysis of supply and demand for a proposed real estate investment will include: A) vacancy rates B) new construction under way C) rent levels D) all of the above

D) all of the above

When using this approach, the appraiser establishes a value for the site on which the improvement is located, then determines the cost of reproducing the improvement and adds the two. A) market value approach B) income approach C) sales comparison approach D) cost approach

D) cost approach

Which of the following was NOT listed as an influence for demand on retail space? A) age B) gender C) population D) distribution

D) distribution

Which of the following is not an aspect of data gathered from a borrower in determining the amount of credit to extend? A) place of employment B) wages C) whether employment is likely to continue D) education

D) education

Which of the following statements concerning mortgage-equity capitalization is NOT true? A) it is a method for estimating value B) it takes into consideration requirements by mortgage lender and equity investor C) total value equals present value of expected mortgage financing and present value of equity investment D) it takes the total value and then is able to find the capitalization rates for mortgage and equity

D) it takes the total value and then is able to find the capitalization rates for mortgage and equity

Which of the following represents the present value of expected net operating income beyond the holding period? A) present value of future flows B) holding period value C) future net operating income D) reversion value

D) reversion value

Which of the following describes the function of an expense stop in a lease? Expenses are stopped from increasing Expenses above the stop are paid by the owner Expenses above the stop are paid by the tenant Expenses below the stop are paid for by the tenant

Expenses above the stop are paid by the tenant

A gross lease is riskier for the lessor than a net lease. True False

False

A gross lease is where tenants pay all expenses. True False

False

For a loan with an LTV greater than 80 percent, the costs of mortgage insurance always exceed the costs of second lien financing. True False

False

General industry standards for a conventional loan specify a maximum LTV of 60 percent. True False

False

If a lease has free rent earlier in its term, its default risk might be considered slightly higher. True False

False

One of the objectives of RESPA was to disclose kickbacks and unearned fees on the settlement sheet. True False

False

The calculated APR usually represents the true costs of financing. True False

False

The term "usable area" is typically synonymous with "leaseable area." True False

False

Consider the figure above. If the demand for units increases, what would happen in equilibrium, holding everything else constant? Market rent would decrease; equilibrium occupancy would decrease Market rent would decrease; equilibrium occupancy would increase Market rent would increase; equilibrium occupancy would decrease Market rent would increase; equilibrium occupancy would increase Impossible to determine from the information provided

Market rent would increase; equilibrium occupancy would increase

A conforming loan: Exceeds the loan limits of loans that Fannie Mae and Freddie Mac can buy Meets loan limits of loans that Fannie Mae and Freddie Mac can buy Cannot be purchased by GSEs such as Fannie Mae and Freddie Mac Is another term for fixed-rate mortgage loan

Meets loan limits of loans that Fannie Mae and Freddie Mac can buy

RESPA requires lenders to disclosure to buyers a uniform settlement statement detailing all closing costs within: One day before the real estate closing Three days before the real estate closing One day after loan application Three days after loan application

One day before the real estate closing

The dollar amount by which total rent exceeds base rent under a percentage lease for retail is referred to as: Overage rent Excess rent Percentage rent Marginal rent

Overage rent

Which of the following is FALSE regarding cap rates? Excess supply tends to drive cap rates up Rising interest rates generally tends to lower cap rates Excess demand and falling interest rates results in lower cap rates Excess demand leads to lower cap rates

Rising interest rates generally tends to lower cap rates

Which of the following does the term "in-line tenants" refer to? Smaller stores in a mall that are not anchor tenants Tenants whose sales are in line with estimates Tenants who pay their rents on a timely basis All stores located inside the mall, including anchors

Smaller stores in a mall that are not anchor tenants

A jumbo loan: Is another term for an adjustable-rate mortgage loan Meets loan limits of loans that Fannie Mae and Freddie Mac can buy Tends to have a higher interest rate than conforming loans Has lower LTV requirements than conforming loans

Tends to have a higher interest rate than conforming loans

A clause which requires a tenant in retail space to achieve a certain level of sales or the lease will be terminated is referred to as a: Change clause Termination clause Option clause Santa clause

Termination clause

For which of the following reasons would a business prefer to own space rather than lease it? The business demands specialized or unique facilities Owning allows the business to develop skills in operating, maintaining, and repair real estate and the associated facilities Owning reduces operating flexibility The capital commitments with owning are lower than the capital commitments associated with leasing All of the above are reasons a business would prefer to own space rather than lease it

The business demands specialized or unique facilities

Which of the following groups customarily does NOT attend the real estate closing? The buyer and seller The buyer's and seller's immediate families Real estate broker(s) Settlement agent(s)

The buyer's and seller's immediate families

Payment to income ratio is BEST described as: The factor used to determine if interest on mortgage loans is tax deductible The only measure of a borrowers ability to fulfill his or her loan obligations The ratio of the estimated rental income to the expected payments on a rental property The ratio of the expected payments on a property to the income of the borrower

The ratio of the expected payments on a property to the income of the borrower

What document usually summarizes the sources, disbursements, charges and credits associated with a real estate closing? The purchase contract The deed of trust The listing agreement The settlement statement

The settlement statement

RESPA requires lenders to disclose to buyers a good faith estimate of certain closing costs within: One day before the real estate closing Three days before the real estate closing One day after loan application Three days after loan application

Three days after loan application

Expense stops protect the lessee from unexpected changes in market rents. True False

True

RESPA requires a lender to disclose good faith estimates of closing costs within three days of loan application. True False

True

The use of a CPI index in a lease contract shifts risk to the tenant. True False

True

Title insurance protects the buyer from title claims against the property. True False

True

Which of the following is NOT typically included in housing costs used to calculate a borrower's payment-to-income ratio? Principal and interest on the mortgage applied for Mortgage insurance Property taxes Utilities All of the above are included in the housing costs

Utilities

9. Consider the table above. Assume that the subject property has effective gross income of $53,000 and a NOI of $27,500. What value would a cap rate approach yield (rounded to the nearest $100)? a. $322,600 b. $325,600 c. $328,600 d. $330,000

a. $322,600

11. Consider a property with NOI of $72,000 and a debt coverage ratio of 1.2 applied to first year NOI. What would be the estimated monthly mortgage payment? a. $5,000 b. $7,200 c. $60,000 d. $86,400

a. $5,000

23. An investment has the following characteristics: ATIRRP: After-tax IRR on total investment in the property: 9.0% BTIRRE: Before-tax IRR on equity invested: 17% BTIRRP: Before-tax IRR on total investment in the property: 12% t: Marginal tax rate: 0.40 What would be the break-even interest rate (BEIR), at which the use of leverage neither favorable nor unfavorable? a. 15.0% b. 20.0% c. 22.5% d. 28.3%

a. 15.0%

16. Which of the following statements regarding equity is TRUE? a. The amount of equity an investor has in a property may change over time if the property value and loan balance changes b. The amount of equity an investor has in a property depends on the value of the equity the investor has in his or her other investments c. The outstanding balance on loan on the property does not affect the amount of equity an investor has in the property d. All of the above

a. The amount of equity an investor has in a property may change over time if the property value and loan balance changes

3. A building owner charges net rent of $20 in the first year, $21 in the second year, and $22 in the third year. Using a 10 percent discount rate, what is the effective rent over the three years? a. $20.00 b. $20.94 c. $21.00 d. $21.73 e. $22.00

b. $20.94

24. A lender requires a 1.20 debt coverage ratio as a minimum. If the net operating income of a property is $60,000, what is the maximum amount of debt service the lender would allow? a. $30,000 b. $50,000 c. $60,000 d. $72,000

b. $50,000

10. Consider a building with a very long economic life. Assume at the end of year 6, NOI will be $80,000 as is expected to grow at a rate of 2 percent per year. You company's required rate of return is 12 percent. As part of your analysis, you must calculate the reversion value (REV) at the end of year 5, which would be: a. $571,429 b. $666,667 c. $800,000 d. $4,000,000

c. $800,000

2. Net operating income is the income after deduction of mortgage payments. true false

false