Chapter 17 - Sources of Commercial Debt and Equity Capital
At least ____ percent of a REIT's gross income must be derived from real estate assets.
75
Important trade-offs involved in the choice between direct ownership versus investing through an intermediary include which of the following?
Decision making control Risk sharing Access to talented managers/sponsors
The market value of U.S. commercial real estate held by non-real estate corporations is estimated to be $12.5 trillion. Which of the following are examples of non-investible real estate held by non-real estate corporations?
Factories owned by automobile manufacturers Restaurants owned by fast-food companies Medical office buildings owned by a hospital
True or false: Commercial real estate investors can realize substantial tax benefits, relative to other widely used ownership forms, when investing in REITs.
False
Paul has put together a real estate investment opportunity and has formed a limited partnership to purchase the property. He will act as the general partner. Which of the following statements are true?
Paul will probably receive disproportionate share of cash flows generated by the underlying property or properties.
According to Exhibit 17-3, the value of commercial real estate owned by life insurance companies exceeds the value owned by which of the following?
Private financial institutions
The $14.3 trillion total market value of investible commercial real estate can be broken into four quadrants. Which of the following quadrants currently accounts for the largest proportion of total market value?
Privately-held equity
Which of the following choices best describes the investment focus of an equity REIT?
They invest primarily in commercial properties
True or false: Foreign investors are often active investors in U.S. commercial real estate.
True
True or false: In a general partnership, each partner is liable for all the actions of, and the debts incurred by, other partners in the conduct of the business of the partnership.
True
If the per share stock price of a REIT is less than its per share net asset value (NAV), the REIT is said to be selling at:
a discount to net asset value
Which of the following is the largest single source of long-term mortgages used by investors to help finance commercial real estate investments?
commercial banks
The estimated market value of owner-occupied housing in the U.S. is second to ____ in magnitude.
corporate equities (stocks)
Because of the large amounts of capital they have to invest, pension funds have an influence on commercial real estate markets that is ____ to the percentage of properties they own. Multiple choice question.
disproportionate
An entity that arranges investments in commercial real estate and then sells claims on those investments to the ultimate, capital providing, investors is often referred to as a(n):
intermediary
An investor's total capital commitment to a closed-end real estate fund:
is collected over several years as the fund acquires more property.
The pooling of equity capital by investors to purchase real estate:
is sometimes done with the intent to develop land is often referred to as a syndication takes place among both institutional and noninstitutional investors
If a REIT complies with a list of conditions on an on-going basis,
it can avoid paying taxes at the entity level
Disadvantages of direct investment for many "smaller" investors include:
less ability to diversify their overall portfolio
Shares of stock in a public, nonlisted REIT are generally ____ shares of REITs that trade on a major stock exchange.
less liquid than
A major benefit to a limited partner that invests in commercial real estate through a limited partnership is:
limited liability
Publicly-traded REITs have been described as mutual funds for real estate because they provide:
liquidity investment portfolio diversification
A publicly-traded REIT is one that is:
listed on a major stock exchange
Assume the following information for an equity REIT: Funds from operations, $4,000,000; current stock price price, $40; total shares outstanding, 1,000,000. What is the price-FFO multiple?
10
On the risk-return spectrum, which of the following fund types generally offers investors the highest expected return?
Opportunistic fund
A subchapter S corporation:
allows for limited liability for all of its shareholders
The ownership form typically chosen by a local syndication to attract noninstitutional investors is a:
limited liability company
The most common investors in commingled real estate funds are:
pension funds
The primary risk of development and construction lending is:
the developer will fail to complete the project in a timely manner
As of May 2022, ____ REITS were included in the S&P 500.
29
Which of the following financial measures is an attempt by a stock market analyst or a REIT to estimate the total market value of a REIT's underlying assets and liabilities?
Net asset value
Which of the following statements about general partnerships (GPs) is true?
Taxable income from ownership of properties "flowthrough" to the individual partners
Which of the following are important considerations when choosing an ownership form for real estate investment?
The desire to avoid unlimited personal liability The ability to share risk with other investors Federal income tax considerations
purchase institutional-quality properties
institute
The importance of ____ has grown in importance in recent years relative to traditional commercial bank lending.
private equity funds that invest in debt
An investor's closest alternative to direct ownership is a:
separate account with an investment manager
Advantages of the general partnership form of ownership include:
the ability to create multiple classes of equity investors relative ease of creation
Which of the following forms of ownership potentially exposes the entity to double taxation?
C corporation
True or false: S corporations require more than 100 shareholders.
False
Which of the following ownership forms is generally used for small, local investments that are marketed to higher income, but non-institutional investors?
Limited liability company
Private REITs can provide investors with which of the following?
Limited personal liability Avoidance of double taxation
With regard to taxation,
REITs are similar to S corporations, in that they can avoid "double" taxation REITs are similar to real estate limited liability companies, in that they provide limited liability for all investors REITs are similar to C corporations in that there is separation of ownership and control
In which of the following ownership forms is there no separation of ownership and control?
Sole proprietorship
Which of the following are NOT characteristics of a limited liability company?
The managing member assumes unlimited liability
According to Exhibit 17-3, the largest percentage of private commercial real estate equity is owned by:
other investors in institutional properties
The Russell 2000 tracks the performance of a portfolio of:
small cap stocks
From the data provided in Exhibit 17-2, the overall "loan-to-value" ratio associated with the $14.3 trillion investible commercial real estate market is:
37.4%
According to Exhibit 17-3, the value of commercial real estate owned by pension funds exceeds the value owned by which of the following?
Life insurance companies Foreign investors Private financial institutions
The liabilities of life insurance companies can be characterized by which of the following?
Long-term Fairly predictable
Approximately ____ percent of REIT shares are owned by institutional investors
80
The construction of commercial properties is generally financed with ____ loans.
short-term
According to the text, the chosen form of real estate ownership is driven primarily by a desire for:
single-taxation, limited liability, and special allocations
The emergence and growth of umbrella partnership REITs has been primarily driven by:
tax considerations
A REIT's net asset value is equal to the:
market value of its assets minus the market value of its liabilities
The total value of investible commercial real estate is approximately $____ trillion.
14.3
Relative to direct ownership, separate accounts allow investors to:
access the expertise of a management company
The majority of commingled funds
are open-end funds
The primary investment strategies of REITs are to develop or acquire properties directly or:
buy or originate mortgage loans
When an investor in a limited partnership receives a disproportionate share of cash flow distributions from the underlying property, relative to her equity investment, this is referred to as:
carried interest
An implicit cost of direct ownership relative to joint ownership, especially for smaller, less wealthy investors, is
inadequate portfolio diversification
Commercial banks and other private financial institutions collectively owned $49 billion in commercial real estate equity in late 2018. The majority of this $49 billion resulted from:
real estate obtained through foreclosure on mortgage loans
Investments in commercial real estate through limited liability companies are considered:
securities
In a limited partnership, the "principal" is ____ and the "agent" is ____.
the set of limited partners, the general partner
Individuals and institutions that invest directly in private commercial real estate:
often do so in order to have more control over investment decisions typically form a LP or LLC to limit liability are often wealthy individuals or families
Typical sources of compensation for the GPs of closed-end real estate funds set up as limited partnerships include:
property acquisition fees carried interest management fees
"Country-club" money raised from equity investors by a sponsor/syndicator is typically used to
purchase institutional-quality properties
On the risk-return spectrum, which of the following private equity fund types tends to invest primarily in "Class A" properties with limited use of leverage?
Core fund
True or false: Life insurance companies are more likely to act as equity investors in commercial real estate than as commercial real estate lenders
False
Which of the following is the better measure of the net cash flow a REIT has available to distribute to shareholders as dividends?
Funds from operations
Which of the following best describes the type of investors typically most willing to contribute their properties, currently owned in the form of a limited liability company, to an UPREIT?
Investors who would face large capital gain taxes if they engaged in a regular taxable sale
Advantages of using a C corporation for investing in commercial real estate include which of the following?
Limited liability for the obligations of the corporation Separation of ownership and control
To avoid taxation at the entity (REIT) level, a REIT must do which of the following?
Make sure that 75% of its gross income is derived from real estate investments Have at least 100 shareholders Keep 75% of its assets invested in real estate, cash, or government securities
Which of the following items typically accounts for the largest portion of the difference between accounting (GAAP) net income and funds from operations (FFO)?
Tax depreciation
True or false: Limited liability companies are thought by some to be "super passthrough entities."
True
A C corporation:
earns income that may be taxed at both the corporate level and investor level
According to the data presented in Exhibit 17-8, equity REITs have
underperformed large cap stocks over the last 3 years and 5 years outperformed large cap stocks over the last 10, 15, 20, and 25 years
Assume the following information for a publicly-traded REIT: Net (accounting) income: $44,245,000; Gain/losses from infrequent and unusual events: $50,000; Amortization of tenant improvements: $575,000; Amortization of leasing expenses: $133,000; Depreciation (real property): $30,906,000. Calculate the REIT's funds from operation (FFO).
$75,809,000
