UF REE4303 Exam 2 Study Guide

A REIT with 100 shares outstanding earns $1,000 in rent and incurs operating expenses of $400. In addition the annual depreciation for this REIT is $400. What are the funds from operations per share and the earnings per share for this REIT?

$6 and $2

Given the following information, calculate the debt coverage ratio of this commercial loan: estimated NOI in the first year: $150,000; debt service is the first year: $100,000; loan amount: $1,000,000; purchase price: $1,300,000.

1.5

Given the following information, calculate the debt yield ratio of this commercial loan: estimated NOI in the first year: $2,500,000; debt service is the first year: $960,000; loan amount: $20,000,000; purchase price: $27,300,000.

2.5%

The yields on commercial mortgages have been approximately 2 percent higher, on average, than the yields on comparable maturity treasury securities over the past 15 years. Often considered the signature risk of commercial mortgage lending, this spread primarily represents: A. Default risk B. Interest rate risk C. Pipeline risk D. Fallout risk

A. Default Risk

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: A. market capitalization B. capitalization rate C. price-earnings ratio D. earnings-per-share ratio

A. market capitalization

While balloon mortgage loan payments are typically based on a 30-year amortization schedule, the loan actually matures in either 3, 5, 7, or 10 years. Of the following, which is the primary risk that a lender reduces their exposure to through the relatively short loan term on a balloon mortgage? A. Default risk B. Interest rate risk C. Liquidity risk D. Financial risk

B. Interest rate risk

Which type of loan is the most common instrument used to finance the acquisition of existing commercial property?

Balloon mortgage loans

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: A. Net income B. Net asset value C. Funds from operations D. Effective gross income

C. Funds from operations

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. par value B. a discount C. a premium D. an auction

C. a premium

Prospective borrowers often submit loan requests directly to lenders. However, commercial loan requests can also be submitted through another channel in which a permanent lender agrees to purchase loans or consider loan requests from a mortgage banker or broker. This type of business relationship is more commonly referred to as a(n):

Correspondent relationship

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. At least 100 investors must own a REIT's shares. B. No five investors can own more than 50 percent of a REIT's shares. C. At least 75 percent of the value of a REIT's assets must consist of real estate assets. D. A REIT must distribute at least 75% of its taxable income to shareholders in the form of dividends.

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

Which of the following regarding UPREIT is true? A. Kimco became the first UPREIT through its 1991 IPO B. UPREIT converts public ownership of real estate to private ownership C. An LLC always needs to pay tax on accrued capital gain by "selling" its properties to the UPREIT D. An LLC can defer capital gain tax by "selling" its properties to the UPREIT

D. An LLC can defer capital gain tax by "selling" its properties to the UPREIT

If mortgage rates decline significantly, borrowers may decide to prepay the principal on their loan even if they face prepayment penalties. One way that lenders protect themselves from prepayments in such circumstances is by requiring the borrower who prepays to purchase for the lender a set of U.S. Treasury securities whose coupon payments replicate the cash flows the lender will lose as a result of the early retirement of the mortgage. This process is referred to as:

Defeasance

Currently, most REITs are

Equity REITs

T or F? The issuer of a mortgage pass-through bond bears all of the prepayment risk of the underlying mortgages.

F

T or F? When issuing mortgage-backed bonds, the issuer transfers ownership of the underlying mortgage to the investors/bondholders.

F

T or F? When market interest rates exceed the coupon rate of a MBB, the price of the bond will be greater than its par value.

F

T or F? The use of financial leverage reduces the real estate investor's exposure to default risk.

False

What type of REIT is not likely to own real property?

Mortgage REIT

The data sources used to produce investment returns on real estate include the

National Association of Real Estate Investment Trusts (NAREIT)

Including REITs in a portfolio containing S&P 500 securities produces diversification benefits. Why?

Real estate investment returns are not highly correlated with returns for stocks.

Based on your understanding of the concept of a lockout provision, lenders are able to reduce their exposure to which risk through its use?

Reinvestment risk

T or F? An investor in a equity REIT is basically buying equity shares of an entity whose assets are mainly income-generating properties

T

T or F? Funds from operation (FFO), is calculated by adding back depreciation and amortization and other non-cash deductions to earnings.

T

T or F? If two securities have the same positive mean returns and they are perfectly, negatively correlated, an investor in such securities will earn a positive return with zero risk.

T

T or F? In comparison to portfolios comprised entirely of corporate stocks and bonds, investment portfolios which include some form of real estate investment tend to offer lower levels of risk for equivalent returns.

T

T or F? It is difficult to compare the investment performance of real estate with stocks and bonds because when properties do sell, the sale price is generally not publicly available.

T

T or F? REITs are required to pay out 90% of their earnings as dividends.

T

T or F? The use of financial leverage by real estate investors makes the realized return on equity more sensitive to changes in resale values.

True

T or F? The use of financial leverage by real estate investors mitigates the impact that limited financial resources would otherwise have on their pursuit of investment opportunities.

True

T or F? The use of financial leverage by real estate investors will increase the internal rate of return (IRR) on equity as long as the cost of borrowing is less than the unlevered IRR

True

Once a loan application is signed, the lender begins a process that typically includes ordering the fee appraisal, the title report, and a number of third party inspection, compliance, and engineering reports in an attempt to make sure the potential borrower did not misrepresent the property in any way in the original loan submission package. This process is more commonly referred to as:

due diligence