Chapter 17

While the development of the secondary market for mortgages focuses on funding provided by long-term holders of mortgage assets, loan originators still play an important role in the growth of the commercial real estate market. Historically, the most active commercial mortgage originators have been:

Mortgage conduits

At the end of 2008, commercial banks and other financial institutions collectively owned $20 billion in commercial real estate equity. The vast majority of these holding are the result of which of the following types of investment by these institutions?

Real estate obtained as a result of borrower default and foreclosure.

Section 1031 of the Internal Revenue Code permits investors to defer some or all of the taxable gain that would ordinarily be due on the sale of a property if they exchange for "like-kind" property. In order to avoid income taxes, many investors attempted to make use of this tax code when disposing of commercial real estate assets. This led to the reemergence of which of the following forms of ownership in commercial real estate?

Tenancy-in-common

Given the following information, calculate the funds from operation (FFO). Net income: $1,200,000, Gain/losses from infrequent and unusual events: $0, Amortization of tenant improvements: $120,000, Amortization of leasing expenses: $75,000, Depreciation (real property): $2,675,000.

$4,070,000

There are a set of restrictive conditions that REITs must satisfy on an ongoing basis in order to maintain their special tax status. All of the following statements regarding the main restrictions are true EXCEPT:

A REIT must distribute at least 75% of its taxable income to shareholders in the form of dividends.

If the per share stock price of a REIT is greater than its per share net asset value (NAV), the REIT is said to be selling at:

A premium

The market value of U.S. real estate held by non-real estate corporations is estimated to exceed $2 trillion. All of the following are examples of noninvestible commercial real estate that are held by non-real estate entities EXCEPT:

Assembly plant building owned by a group of investors as part of a sale-leaseback agreement with an auto manufacturer

The choice of ownership form for pooled equity investments depends heavily on federal tax considerations. Which of the following ownership structures suffers from the major disadvantage of double taxation?

C Corporation

Of the $3.6 trillion in outstanding mortgage debt in the U.S., approximately 71% is privately held by institutional and individual investors. Which of the following institutions is the largest single source of private mortgage funds?

Commercial banks

Up until the market for these instruments collapsed in 2008, which of the following was the fastest-growing source of long-term commercial mortgage funds from 2002-2007?

Commercial mortgage backed securities (CMBS)

Since most real estate assets are depreciable, using accounting income to measure a REIT's cash flow may actually understate the funds that are available to distribute to investors as dividends. Therefore, REITs utilize a measure that adds back depreciation and amortization expenses, more commonly referred to as:

Funds from operations

The choice of ownership form for pooled equity investments can also depend on the desire to avoid personal liability. Which of the following ownership structures suffers from the major disadvantage of unlimited liability for all investors?

General Partnership

In contrast to public markets, private markets are characterized by individually negotiated transactions that take place without the aid of a centralized market. Therefore, private markets will generally have:

High transaction costs and low liquidity

There are three major types of REITs: Equity REITs, Mortgage REITs, and Hybrid REITs. Each differs in terms of what they invest in. Which of the following choices best describes the investment focus of an Equity REIT?

Invests primarily in and operates commercial properties

The pooling of equity capital by investors to purchase real estate in the private market is referred to as syndication. With pooled ownership structures, investors expect to receive all of the following benefits EXCEPT:

Management control of each of the properties in the syndicate's portfolio.

One measure of the importance of a publicly traded asset class in the U.S. economy can be calculated by multiplying the number of publicly traded shares by the current market price of the stock. The result of this calculation is more commonly referred to as:

Market Capitalization

The syndication agreement generally creates a principal/agent relationship in which the syndicator (agent) is empowered to act on behalf of the investors (principals). In most principal/agent relationships, there is the concern that the agent will act in the agent's best interest, not in the best interests of the principal. This issue is more commonly referred to as:

Moral hazard

Which of the following measures, equal to the estimated total market value of a REITs underlying assets, allows investors to compare the value of a publicly traded security to the value of the properties that it holds in the private market?

Net asset value

When fund managers collect contributions from multiple sources and "commingle" them to purchase properties, this is referred to as the use of commingled real estate funds. Which of the following institutional investors utilize commingled real estate funds for approximately one-half of their investments in real estate?

Pension funds

In most small to medium private real estate deals, syndicators play important roles within the origination, operation, and completion phases of a real estate syndicate's life. All of the following are responsibilities of the syndicator in the operation phase of a syndicate's life EXCEPT:

Prepare the properties for sale

The $6 trillion total market value of commercial real estate can be broken into four quadrants. Which of the following sectors of the commercial real estate market accounts for the largest proportion of market value?

Privately held mortgage debt

Most real estate investment trusts (REITs) are actively managed operating companies that typically focus their investments either by property type or geographic market. Which of the following commercial property types represents the largest proportion of REIT market value?

Retail

Ownership forms for pooled equity investment can differ in terms of how the entity's cash flows are distributed to its investors. Which of the following ownership structures requires cash flows to be allocated to each shareholder in proportion to his or her ownership of the entity, thereby preventing special allocations to multiple classes of investors?

Subchapter S Corporation

As of 2008, nearly 88% of private commercial real estate equity was owned by "noninstitutional investors." Which of the following investor categories represents the most common form of noninstitutional ownership?

Syndicate

The estimated market value of investible commercial real estate in the United States at the end of 2008 was approximately $6 trillion. In terms of market size, which of the following asset categories is most closely related to commercial real estate?

U.S. Treasury securities