Fin 351 Final Review Ch: 14, 15, 16, 17, 18, 19, 20,

5. Which of the following statements is true about 15-year and 30-year fixed-payment mortgages?

. Assuming they can afford the payments on both mortgages, borrowers usually should choose a 30-year mortgage over an otherwise identical 15-year loan if their discount rate (opportunity cost) exceeds the mortgage rate

How are investment decisions made?

By comparing estimate of present value to required equity investment

Investment Value:

Maximum price an investor is willing to pay for an ownership interest in real property or mortgages

Does landlord or tenant(s) pay operating expenses?

May depend on whether lease is a gross, net, net-net, or triple net lease

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

Treated like a separate building.

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

Underestimated.

Class C:

Usually once Class A or B Are older & reasonably well maintained But are below current standards for one or more reasons

10. As the level of perceived risk increases,

Values decrease and expected returns increase.

3. If a mortgage is to mature (i.e. become due) at a certain future time without any reduction in principal, this is called

An interest-only mortgage.

How are reimbursable expenses allocated among tenants? In retail:

Generally prorated based on gross leased area (GLA) of store as % of GLA of entire center

2. 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

5. 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

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

The property's investment value to that investor.

If tenant is responsible for some of, or all, operating expenses, according to lease they may

pay them directly (typical in single-tenant properties) reimburse landlord (typical in multi-tenant properties)

How are reimbursable expenses allocated among tenants? In multi-tenant industrial properties:

prorated based on tenant's rentable area as % of total rentable area in building

How are reimbursable expenses allocated among tenants? In office:

prorated based on tenant's rentable area as % of total rentable area in building

Risk is the possibility that actual outcomes will vary from what was expected when the asset was purchased. If investors require a higher rate of return for undertaking more risk, the underlying assumption is that investors are

risk averse.

With the recent popularity of adjustable rate mortgages (ARM), lenders have begun to offer ARMs with different adjustment periods. Which of the following ARM choices will most likely have the highest initial rate?

ten-year-one-year ARM

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

2. The net present value of an acquisition is equal to:

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

4. The internal rate of return equation incorporates

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

There are two major types of REITs: equity REITs and mortgage 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 overall capitalization rate calculated on a potential acquisition

is the reciprocal of the net income multiplier

3. Present value:

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

Value of a property or mortgage thus depends on:

magnitude of expected cash flows timing of expected cash flows riskiness of expected cash flows

All else equal, longer lease terms:

minimize transaction costs provide rental rate security for tenant & owner decrease tenant & owner flexibility

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.

9. 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.

10. Which of the following statements is false?

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

9. Assume a property is priced at $5,000 and has the following income stream (year 1, $1,000; year 2, -$2,000; year 3, $3,000; and year 4, $3,000). Would an investor with a required rate of return of 15 percent be wise to invest at the current price?

No, because the project has a net present value of -$1,954.91

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.

1. The most typical adjustment interval on an adjustable rate mortgage (ARM) once the interest begins to change is:

One year.

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

Passive income.

7. 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

3. Lockout provisions are primarily intended to reduce the lender's

Reinvestment risk

Class B:

Rents usually less than Class A buildings because of a less desirable location; fewer amenities; less impressive lobbies, elevators, etc.

Order of Payments:

Taxes, Mortgage, Junior Loans, then Equity

7. The annual percentage rate (APR) was created by

The Truth-in-Lending Act of 1968

As a general rule, using financial leverage:

increases risk to the equity investor

4. What amount invested at the end of each year at 10 percent annually will grow to $10,000 at the end of five years?

$1,637.97

6. What is the present value of $500 received at the end of each of the next three years and $1,000 received at the end of the fourth year, assuming a required rate of return of 15 percent?

$1,713.37

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? 10,000 + (170,000 - 143,000)*.07 =

$11,890

An investor agreed to sell a warehouse five years from now to the tenant who currently rents the space. The tenant will continue to pay $20,000 rent at the end of each year including year 5 in which he will purchase the building for an additional $150,000. Assuming the investor's required rate of return is 10%, how much is this deal presently worth to the investor who was willing to sell?

$168,953.93 NPV

8. What is the present value of the following series of cash flows discounted at 12 percent: $40,000 now; $50,000 at the end of the first year; $0 at the end of year the second year; $60,000 at the end of the third year; and $70,000 at the end of the fourth year?

$171,836 (without rounding, answer is $171,835.94)

2. How much would you pay for the right to receive $80 at the end of 10 years if you can earn 15 percent interest on alternative investments of similar risk?

$19.77

8. 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

You have taken out a $300,000, 5/1 ARM. The initial rate of 5.4% (annual) is locked in for five years. Calculate the payment after recasting the loan (i.e., after the reset) assuming the interest rate after the initial lock period is 8.0%. (Note: the term on this 5/1 ARM is 30 years.)

$2,138.02

Suppose an investor deposits $2,500 in an interest-bearing account at her local bank. The account pays 2.5% interest compounded annually. If the investor plans on withdrawing the original principal plus accumulated interest at the end of seven years, what is the total amount that she should expect to receive assuming interest rates do not change?

$2,971.71

Given the following information, determine the unrecovered depreciable basis: depreciable basis: $300,000; declining balance depreciation: 200%; cost recovery period: 7 years.

$214,286

7. 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

1. How much will a $50 deposit made today be worth in 20 years if the compound rate of interest is 10 percent?

$336.37

5. How much would you pay today for the right to receive nothing a year for the next 10 years and $300 a year for the following 10 years if you can earn 15 percent interest on alternative investments of similar risk?

$372.17

7. If a landowner purchased a vacant lot six years ago for $25,000, assuming no income or holding costs during the interim period, what price would the landowner need to receive today to yield a 10 percent annual return on the land investment?

$44,289.03

8. On a level-payment loan with 12 years (144 payments) remaining, at an interest rate of 9 percent, and with a payment of $1,000, the balance is

$87,871

3. How much would you pay today to receive $50 in one year and $60 in the second year if you can earn 15 percent interest on alternative investments of similar risk?

$88.85

Suppose you own a house that you are renting out to a group of college students for the 10-month academic year. You are charging $1,000 per month in rent. You will collect the first rent payment today and then on the first of the month each month thereafter. What is the value of this investment opportunity to you today if you could reinvest your income at an annualized rate of 6%?

$9,779.06

6. Adjustable rate mortgages (ARMs) commonly have all the following except

. An inflation index

Given the following information, calculate the loan-to-value ratio for this property: loan amount: $450,000; interest rate: 7.5%; acquisition price: $550,000. $450,000 / $550,000 =

0.82

9. 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

Which of the following is the least true?

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

Given the following information, calculate the debt coverage ratio of this commercial loan: estimated net operating income (NOI) in the first year: $150,000; debt service in the first year: $100,000; loan amount: $1,000,000; purchase price: $1,300,000. DCR = NOI / DS 150,000 / 1,000,000 =

1.50

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: years; end of first year NOI estimate: $113,900; NOI estimates in subsequent years will grow by 5% per year; price at which the property is expected to be sold at the end of year 5: $1,615,205.22; current market price of the property: $1,475,667.71.

10.00% Find IRR with growing CFs

Given the following information, calculate the equity dividend rate for this investment: first-year NOI: $87,750; acquisition price: $1,250,000; equity investment: 35%; before-tax cash flow: $53,500. EDR = 53,500 / (35% * 1,250,000) =

12.2%

1. 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.

Given the following information, calculate the operating expense ratio for this property: potential gross income: $120,000; vacancy rate: 9%; net operating income: $57,900; operating expenses: $51,300. $51,300 / (120,000 * .91) =

47%

Given the following information about a fully amortizing loan, calculate the lender's yield (rounded to the nearest tenth of a percent): loan amount: $166,950; term: 30 years; interest rate: 8%; monthly payment: $1,225.00; discount points: 2. N = 30 * 12 PV = 166,950 - (166,950 * 2%) = $163,611 Calc I/Y * 12 =

8.2%

9. On the following loan, what is the best estimate of the effective borrowing cost if the loan is prepaid in six years?Loan: $100,000 Interest rate: 7 percent Term: 180 months Up-front costs: 7 percent of loan amount

8.7 percent.

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

80 percent

An investor originally paid $22,000 for a vacant lot twelve years ago. If the investor is able to sell the lot today for $62,000, what would his annual rate of return be on this investment (rounded to the nearest percent)?

9% Find I

Suppose you are considering the purchase of an apartment building that has 12 units that can be rented out at $1,050 per month. You have estimated operating expenses and expected vacancy and collection losses for the first year to be $35,700 and $30,240, respectively. You also have estimated that you will be able to generate an additional $3,840 in the first year from garage rentals on the property. If the expected purchase price of the property is $1,100,000 and you are planning on making a 10% down payment, calculate the debt yield ratio.

9.00%

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

Suppose that an industrial building can be purchased today for $2,500,000. If it is expected to produce cash flows of $180,000 for each of the next five years (assume CFs are received at the end of each year) and can be sold at the end of the fifth year for $2,800,000, what is the internal rate of return (IRR) on this investment?

9.20%

Given the following information, calculate the price-FFO multiple for the following REIT: net income: $1,200,000; gains/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; stock price: $40; market capitalization: $40,000,000.

9.83

Rentable area:

= gross area - "vertical penetrations"

Usable area:

= rentable area - common areas (conference rooms, lobbies, etc.)

Tenant's pro rata share of common area:

= tenant's usable area / total usable area

2. A characteristic of a partially amortized loan is:

A balloon payment is required at the end of the loan term

Which of the following terms refers to a written agreement that binds the lender to make a loan to the borrower provided the borrower satisfies the terms and conditions of the agreement?

Correct loan commitment

4. The tax-benefits associated with installment sales are

Captured exclusively by the seller

Class A Properties:

Commands highest rents because they are most prestigious in their tenancy, location, & overall desirability Usually newer structures Typically owned by institutional investors

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

Complete (land and building) sale-leaseback

3. 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

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

Default risk

10. Lender's yield differs from effective borrowing costs (EBC) because

EBC accounts for additional up-front expenses that lender's yield does not

Steps in the Process of Development

Establishing site control Feasibility analysis, refinement, and testing Obtaining permits Design: Architect and other professionals Financing Construction Marketing and leasing Operation

Real estate valuation:

Estimate all future net cash flows Convert into estimate of present value

4. The dominant loan type originated by most financial institutions is the

Fixed-payment, fully amortized mortgage

A lease must be in writing & contain:

a named lessor & lessee adequate description of premises conveyance of premises starting time & length of arrangement negotiated rental rate

Income multipliers

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

An interest-only balloon mortgage loan is commonly referred to as a(n)

bullet loan

With compound interest, the investor earns interest on the principal amount invested plus interest on accumulated interest. Which of the following compounding frequencies would yield the investor the greatest ending balance assuming all else is equal?

daily

Under certain circumstances, investors are permitted to reduce the amount of the taxable income that they report by an amount that is intended to reflect the wear and tear of an asset over time. This is commonly referred to as

depreciation.

Tenant must provide

detailed info on tenant sales financial statements upon request

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.

Reimbursements show up in investment CF pro forma as

expense reimbursement revenue in addition to showing up as operating expenses

The operating expense ratio

expresses operating expenses as a percent of effective gross income

When a developer decides to break down the project design into sequential phases and begins construction before the last phases of the design are complete, this procedure is more commonly referred to as

fast-track construction.

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 prespecified 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.

Uncertainty of cash flows can vary significantly across property types. Which of the following property types is often considered to have the most uncertain expected cash flows?

hospitality