Chapter 16-20 Study Questions

If the property's NOI is expected to be $22,560 operating expenses $12,250, and the debt service $19,987, the debt coverage ratio (DCR) is approximately equal to:

1.13.

For tax purposes, a substantial real property improvement made after the initial purchase is:

Treated like a separate building.

When a property is sold for less than its remaining book value, its depreciation (wear and tear) was:

Underestimated

Consider a 30-year, 7 percent, fixed rate, fully amortizing mortgage with a yield maintenance provision. Relative to this mortgage, a 10-year balloon mortgage with the same interest rate and yield maintenance provisions will primarily reduce the lender's:

Interest rate risk.

What term best describes the maximum price a buyer is willing to pay for a property?

Investment value

Which of the following statements is most accurate?

Joint ventures usually decrease the amount of equity capital the developer/borrower must invest in the project.

Which of these loans is a life insurance company most likely to invest in?

Large office building loan (nonconstruction)

Special allocations of income or loss are available if the form of ownership is a(n):

Limited partnership

Real estate syndicates traditionally have been legally organized most frequently as:

Limited partnerships

With regard to double taxation, distributions, and the treatment of the losses, general partnerships are most like:

Limited partnerships

Which statement is false concerning the limited partnership of ownership?

The limited partners cannot enjoy tax deduction benefits but the general partners can.

The purchase price that will yield an investor the lowest acceptable rate of return is:

The property's investment value to that investor.

Ratio analysis:

serves as an initial evaluation of the adequacy of an investment's expected cash flows.

With a mezzanine loan

the borrower's promise to pay is secured by the equity interest in the borrower's limited partnership or limited liability company.

The net present value of an acquisition is equal to:

the present value of expected future cash flows, less the initial cash outlay.

The internal rate of return equation incorporates:

initial cash outflow and inflow, and future cash outflow and inflow.

The overall capitalization rate calculated on a potential acquisition:

is the reciprocal of the net income multiplier.

Present value:

is the value now of all net benefits that are expected to be received in the future.

Which of the following forms of ownership involve both limited and unlimited liability?

limited partnerships

Which of these financial firms is the least likely to invest in a large, long-term mortgage loan on a shopping center?

Mortgage broker

Which of the following best describes the taxation of gain and losses from the sale of Section 1231 assets?

Net gains are taxed as capital gains; net losses are taxed as ordinary income.

Which of the following statements is false?

Net passive activity losses can be used to offset dividend income from a real estate stock.

An income-producing property is priced at $600,000 and is expected to generate the following after-tax cash flows: Year 1: $42,000; Year 2: $44,000; Year 3: $45,000; Year 4: $50,000; and Year 5: $650,000. Would an investor with a required after-tax rate of return of 15 percent be wise to invest at the current price?

No, the NPV is -$148,867.

A real estate investment trust generally:

None of the above

Under current federal income tax law, what is the shortest cost recovery period available to investors purchasing residential rental property?

None of the above.

Taxable income from the rental of actively managed depreciable real estate is classified as:

Passive income.

Using financial leverage on a real estate investment can be for the purpose of all of the following except:

Reduction of financial risk for the leveraged investment

Lockout provisions are primarily intended to reduce the lender's :

Reinvestment risk

As a general rule, using financial leverage:

increases risk to the equity investor.

If the investor is in the 33% income tax bracket, how much will a tax credit of $2,000 save the investor in taxes?

$2,000.00

Given the following information, what is the required equity down payment? • Acquisition price: $800,000 • Loan-to-value ratio: 75% • Total up-front financing costs: 3%

$218,000

In 2009, you purchase a small office building for $450,000, which you financed with a $337,500 fixed-rate mortgage. Up-front financing costs total $6,750. How much of this up-front financing expense could be written off against ordinary income in 2009? (Note: You also need to know that loan term is 25 years.)

$270.00

Assume a retail shopping center can be purchased for $5.5 million. The center's first year NOI is expected to be $489,500. A $4,000,000 loan has been requested. The loan carries a 9.25 percent fixed contract rate, amortized monthly over 25 years with a 7-year term. What will be the property's (annual) debt coverage ratio in the first year of operations?

1.19

A real estate investment is available at an initial cash outlay of $10,000, and is expected to yield cash flows of $3,343.81 per year for five years. The internal rate of return (IRR) is approximately:

20 percent.

What percent of the rental income from residential property must be derived from the leasing of units occupied by tenants as housing?

80 percent

What is the IRR, assuming an industrial building can be purchased for $250,000 and is expected to yield cash flows of $18,000 for each of the next five years and be sold at the end of the fifth year for $280,000?

9.20 percent

You are considering purchasing an office building for $2,500,000. You expect the potential gross income (PGI) in the first year to be $450,000; vacancy and collection losses to be 9 percent of PGI; and operating expenses and capital expenditures to be 38 percent and 4 percent, respectively, of effective gross income (EGI). What is the implied first-year overall capitalization rate? What is the effective gross income multiplier?

9.5 percent 6.11

Which of the following is the least true?

After-tax discount rates are greater than discount rates used to value before-tax cash flows

Which of these ratios is an indicator of the financial risk for an income property?

Both a and b, but not c

Double taxation is most likely to occur if the commercial properties are held in the form of a(n):

C Corporation

The tax-benefits associated with installment sales are:

Captured exclusively by the seller.

Which of these lenders is most likely to provide a construction loan?

Commercial bank

Which of the following financing structures provides for 100 percent financing?

Complete (land and building) sale-leaseback

If an investor is a "dealer" with respect to certain real estate, that real estate is classified (by the IRS) as being held:

For sale to others

Which of the following is not an operating expense associated with income-producing (commercial) property?

Debt service

Due-on-sales clauses are included in commercial mortgages primarily to protect lenders from:

Default risk.

Income multipliers:

are useful as a preliminary analysis tool to weed out obviously unacceptable investment opportunities.

The equity dividend rate:

expresses before-tax cash flow as a percent of the required equity capital investment.

The operating expense ratio:

expresses operating expenses as a percent of effective gross income.