Exam 1 Real Estate Principles

Mid-1980s CBD office bldgs were selling at "8% cap rates." That means investors at that time were willing to pay??

$1/0.08 =$12.50

Five Major Market Indicators:

(1) Vacancy Rate (2) Market Rent (3) Quantity of new construction starts (4) Quantity of new construction completions (5) Absorption of new space

18. Silicon Valley is an example of: (a) Economies of agglomeration. (b) Economies of scale. (c) The rank-size rule. (d) A planned community.

(a) Economies of agglomeration.

Debt Assets:

- Public Markets: Bonds, MBS, Money, Instruments. - Private Markets: Bank loans, whole mortgages, venture debt.

The Real Estate Asset Market

- Supply: Investors wanting to sell - Demand: Investors wanting to buy.

LR equilibrium Rent

= "Replacement cost rent" = Rent the market tends to return to. = Rent just sufficient to make new development profitable.

Residual Theory of Land Value:

Land value is the difference between the value of what is produced on the site and the cost of producing it there.

32. If buildings are torn down and replaced on average every 75 years, and site acquisition costs are typically 25% of total development costs, then the average annual rate of property depreciation below the HBU value of the site is: (a) 0.0%/yr. (b) 1.1%/yr. (c) 1.8%/yr. (d) 2.2%/yr.

(c) 1.8%/yr.

"Economic Base"

- The sources of the city's (or region's) income. - The engine that drives and underlies all real estate activity in a region.

Concentric Ring Model

- to explain urban social structures ( starts with transtion, then lower income, then middle and upper income.) the more it expands the higher income.

The "Highest and Best Use"

This means each site is used in the way that is most productive for that location.

15. According to the rank/size rule (Zipf's Law), the rank of a city's population should be approximated by knowledge of the following two factors: a) The city's population and the population of the largest city in the system of cities b) The city's population and the city's growth component c) The city's growth component and the population of the largest city in the system of cities d) The city's population and the objective rank of how nice the city is

a) The city's population and the population of the largest city in the system of cities

16. The magnitude of the transportation costs in a production process of a given land use and the relative sensitivity of these transportation costs to distance from the city center determine: a) The slope of the bid-rent function b) The ease of transportation c) The cost of real estate taxes d) The optimal size of the buildings in the area

a) The slope of the bid-rent function

"Central Place Theory"

is a geographical theory that seeks to explain the number, size and location of human settlements in a residential system.

Cap Rate is..

Commercial property prices. Cap rate = Current Annual Net Income/Property Price.

The "Export" Base

In any city or region TWO TYPES of goods and services are produced by the local economy - Export Goods: and services are those produced in greater quantities than needed for local consumption. - Local Goods: are services are those produced in quantities equal to or less than what is needed for local consumption.

7. If the cap rates prevailing in a given market are 10.5%, then how much would you expect a property to sell for in that market if its annual net income were $50,000? (a) $5,250. (b) $50,000. (c) $476,190. (d) $525,000.

(c) $476,190.

Equity Assets:

- Public Markets: Stocks, REITS, Mutual funds, ETFS. - Private Markets: Real property, Private frims, Oil and gas, Partnerships, and hedge funds.

Vacancy Calculations

Vacancy Rate = (empty SF)/(total SF) = 1 -occup.Rate

Effective Rent

is defined as the remaining cash the landlord receives after paying all expenses for operating the property, and any costs for tenant work to get the space ready for occupancy.

"Urban Hierarchy"

ranks each city based on the size of population residing within the nationally defined statistical urban area.

23. According to Property Life Cycle Theory, the two components of property value are: (a) Structure value plus land value. (b) Structure value plus agricultural opportunity value. (c) Construction cost plus land value. (d) Construction cost plus agricultural opportunity value.

(a) Structure value plus land value.

10. According to Central Place Theory, concentrations of human activity (e.g., cities in a country, shopping centers in a metropolitan area) will tend to be located: (a) On major waterways. (b) All clustered together in the center of the region. (c) Where there are the most environmental amenities. (d) About evenly-spaced, with some territory around each concentration point.

(d) About evenly-spaced, with some territory around each concentration point.

19. In most American cities, improvement in transport and telecommunications technology (transport cost reduction) tends to: (a) Increase land values throughout the metropolitan area. (b) Decrease land values throughout the metropolitan area. (c) Leave land values unchanged throughout the metropolitan area. (d) Decease land values in central locations and increase land values around the expanding periphery.

(d) Decease land values in central locations and increase land values around the expanding periphery.

14. Congestion, pollution, crime, and high transportation costs are all examples of: a) Centripetal forces b) Centrifugal forces c) Central Place Theory d) Export multiplier

b) Centrifugal forces

Property Value can be represented as..

Property Price = Current Annual Net Income/Cap Rate

Hoyt Sector Model

The benefits of the application of this model include the fact it allows for an outward progression of growth. As with all simple models of such complex phenomena, its validity is limited.

28. "Over the long run, the change in location value provides a theoretical ceiling to the average capital gain of the unlevered investor in already-built property..." This summarizes: a) The property principle b) The depreciation principle c) The investment principle d) The leverage principle

b) The depreciation principle

The "Rank Size Rule"

The rank-size rule (or rank-size distribution) of city populations, is a commonly observed statistical relationship between the population sizes and population ranks of a nation's cities. For many years, the reasoning behind the rank-size rule was unknown (at least to geographers). - Population of rank size = (P) Population of largest city/ (R) ranked city

The Causes (sources) of structure (building) depreciation.

(1) Physical Depreciation: The structure physically "wear out" cost more and more to operate and keep, and/or gradually falls apart. Example: Roof Leaks, Foundation cracks, etc.. (2) Functional Depreciation: The structure becomes more and more "Out of Date" (3) Economic Depreciation: The structure no longer serves the HBU of the site. EXAMPLE: HBU(as if vacant) is now high-density apartment or cando, or commercial usage, instead of the single-family home that is on the site.

20. Which of the following types of activity centers would you expect might have the highest land rent location premium in a polycentric city? (a) An "Edge City". (b) A Neighborhood Business District (NBD). (c) Land adjacent to the city's major airport. (d) A very upscale, low-density residential neighborhood in the suburbs.

(a) An "Edge City".

33. If the natural vacancy rate is 10% and the current vacancy rate is 15%, then you would expect: (a) Current rents are falling. (b) Current rents are rising. (c) Current rents are stable. (d) With so little information the wise student would not hazard a guess about what might be happening to current rents.

(a) Current rents are falling.

31. An example of functional depreciation is: (a) Electrical conduits that are too small for modern computer-based wiring needs in an office building. (b) A leak in the roof. (c) A single-family home near a growing university, on a lot zoned for apartments. (d) Overgrown landscaping.

(a) Electrical conduits that are too small for modern computer-based wiring needs in an office building.

25. The difference between gross absorption and net absorption is best described as follows: (a) Gross absorption indicates the total amount of movement in the market while net absorption indicates the growth in overall demand. (b) Gross absorption indicates the growth in overall demand while net absorption indicates the total amount of movement in the market. (c) Gross absorption indicates demand for both Class A and Class B space, while net absorption refers only to demand for Class A space. (d) The wise student realizes that, at a deep and fundamental level, gross absorption and net absorption are really the same thing!

(a) Gross absorption indicates the total amount of movement in the market while net absorption indicates the growth in overall demand.

9. In order for the real estate system to function more efficiently and effectively, it is important for: (a) Investors to try to forecast the economy, the space market, development activity, and the capital market. (b) Potential tenants to make their space needs explicitly known to developers. (c) Government regulators not to place too strict requirements on real estate developers. (d) Landlords to treat tenants fairly.

(a) Investors to try to forecast the economy, the space market, development activity, and the capital market.

24. One major cause for the natural vacancy rate to be greater than zero in a stable market is: (a) The irreversibility of the leasing decision causes landlords to take time to search for a good leasing deal. (b) Bankers make money from construction loans whether the space is leased or not. (c) Developers are stupid. (d) Landlords have to repair the apartments after the students' wild parties.

(a) The irreversibility of the leasing decision causes landlords to take time to search for a good leasing deal.

5. Equilibrium between current supply and demand in the space market is reflected by: (a) The prices (rents) and occupancy observed in the market. (b) The amount of new construction in process in the market. (c) The volume of properties bought and sold during the year. (d) A constant long-run marginal cost function.

(a) The prices (rents) and occupancy observed in the market.

1. Which are the two fundamental markets in commercial real estate? (a) The space market and the asset market. (b) The space market and the money market. (c) The construction market and the land market. (d) The asset market and the stock market.

(a) The space market and the asset market.

30. The asking rent is $10/SF/yr. The landlord agrees to give the first year rent-free in a five-year lease, in return for a step-up in the rent to $12/SF/yr in the third year. What is the effective rent? (a) $8.00/SF/yr. (b) $9.20/SF/yr. (c) $11.20/SF/yr. (d) Insufficient information

(b) $9.20/SF/yr.

26. A certain market has 1,000,000 SF of vacant space, 500,000 SF under construction, and annual absorption of 750,000 SF. What is the "months supply" in this market? (a) 12 months. (b) 24 months. 1m + 500k/750k/12 = 24 (c) 36 months. (d) With so little information the wise student would not hazard a guess about what might be the months supply in this market.

(b) 24 months. 1m + 500k/750k/12 = 24

6. Which of the following statements is true about equilibrium real rents (net of inflation) in the space market over time? (a) An increase in demand will necessarily produce an increase in rents, but a decrease in demand will not necessarily produce a decrease in rents. (b) An increase in demand will not necessarily produce an increase in rents, but a decrease in demand will necessarily produce a decrease in rents. (c) An increase in supply will necessarily produce an increase in rents, but a decrease in supply will not necessarily produce a decrease in rents. (d) An increase in supply will not necessarily produce an increase in rents, but a decrease in supply will necessarily produce a decrease in rents.

(b) An increase in demand will not necessarily produce an increase in rents, but a decrease in demand will necessarily produce a decrease in rents.

4. The "real estate system" consists of the following three major components: (a) The space market, the capital market, and the mortgage industry. (b) The space market, the asset market, and the development industry. (c) The public equity market, the private equity market, and the debt market. (d) The capital market, the government, and land.

(b) The space market, the asset market, and the development industry.

17. If the largest city in an economically integrated region has a population of 10,000,000, then according to the rank-size rule the fifth-largest city in that region should have a population of: (a) 100,000. (b) 1,000,000. (c) 2,000,000. (d) 5,000,000.

(c) 2,000,000.

11. Which of the three industries in the above table is not in the export sector of this locality? a) State & Federal Government. (b) Legal Services. (c) Computer Manufacturing & Repair. (d) They all are in the export base.

(c) Computer Manufacturing & Repair.

2. The term "real property" refers to: (a) Financial capital as opposed to physical capital. (b) Long-lived personal property, such as automobiles, musical instruments, works of art. (c) Land or built space. (d) Property valued net of inflation.

(c) Land or built space.

22. According to Neighborhood Succession Theory, in a mature (fully built up) neighborhood: (a) Location value tends to grow steadily over time in real terms (net of inflation). (b) Location value tends to decline steadily over time in real terms. (c) Location value tends to remain about constant in real terms unless there are substantial changes in the city, under which case value might go in either direction. (d) Location value is determined purely by the average income of the residents.

(c) Location value tends to remain about constant in real terms unless there are substantial changes in the city, under which case value might go in either direction.

3. In a real estate market. "constrained supply", or rising real Long-Run Marginal Cost (upward-sloping supply curve), is generally caused by: (a) Inflation. (b) Technological improvements in the construction industry. (c) Scarcity of buildable land due to geographic or regulatory constraints. (d) Tenant requirements for more lavish accommodations.

(c) Scarcity of buildable land due to geographic or regulatory constraints.

12. Suppose the most productive use of a particular site is as a manufacturing plant that will generate revenues of $12,000,000 per year with raw material costs and operating expenses (other than net rent) of $7,000,000 per year, and construction costs (for the plant and equipment) that can be paid for with a perpetual loan with interest of $3,000,000 per year. According to the residual theory, how much is this site worth in terms of annual land rent? (a) $20,000,000. (b) $12,000,000. (c) $10,000,000. (d) $2,000,000.

(d) $2,000,000.

8. Other things being equal, which would have the lowest cap rate? (a) A building with short-term leases in a declining market. (b) A building with long-term leases in a declining market. (c) A building with short-term leases in a stable market. (d) A building with long-term leases in a growing market.

(d) A building with long-term leases in a growing market.

21. Which are examples of incompatible adjacent land uses that display negative locational externalities? (a) Community shopping center and residential neighborhood. (b) Convention center and hotel. (c) Airport and industrial park. (d) Heavy industrial zone and up-scale residential neighborhood.

(d) Heavy industrial zone and up-scale residential neighborhood.

Centrifugal Forces

- Decentralizing forces that put a break on urban agglomeration, result in a larger number of smaller cities. -Congestion -Pollution -Crime

Major Demand Drivers

- Job Growth - Migration - Household Formation - Elevated Home Prices - Lifestyle Preferences

The "Natural Vacancy Rate"

- Rate around which vacancy tends to cycle. - Rate that indicates supply/demand balance. - Above which rents fall, below which rents rise. - Tends to be higher in more volatile and faster-growth markets. - Tends to be lower in more supply-restricted markets.

Two Major types (levels) of market analysis:

- Specific Micro-level analysis: Applies to single property, site, or user - Broader, More general characterization of space market: Applies to an entire R.E. space market segment or submarket.

Three Major Determinants of cap rates..

1) The Opportunity Cost of Capital (OCC) 2)The Growth Expectations 3)Risk

, Location Quotient

A location quotient (LQ) is an analytical statistic that measures a region's industrial specialization relative to a larger geographic unit (usually the nation). An LQ is computed as an industry's share of a regional total for some economic statistic (earnings, GDP by metropolitan area, employment, etc.) divided by the industry's share of the national total for the same statistic. For example, an LQ of 1.0 in mining means that the region and the nation are equally specialized in mining; while an LQ of 1.8 means that the region has a higher concentration in mining than the nation.

The "Rank/Size Rule"

City Population = Largest City's Population/Rank of city.

Month's Supply

Months of supply is the measure of how many months it would take for the current inventory of homes on the market to sell, given the current pace of home sales. For example, if there are 50 homes on the market and 10 homes selling each month, there is a 5 month supply of homes for sale.

27. As opposed to the concentric ring model of urban growth, the sector model dictates that similar land uses tend to: a) Mix naturally over time, leading to a more integrated city b) Lie at a similar distance from the center of the city c) Cluster along rays or in pie-shaped wedges emanating from the center d) Be dictated more by ephemeral political coincidence than by well considered plans

c) Cluster along rays or in pie-shaped wedges emanating from the center

13. The primary centralizing (centripetal) forces acting on a city include the following, except: a) Economies of scale b) Economies of agglomeration c) High population density d) Positive locational externalities

c) High population density

35. The market indicator known as "months supply" is determined by all of the following except: a) Vacancy b) Construction c) Net absorption d) Point of time within the fiscal cycle

d) Point of time within the fiscal cycle

29. Rents will tend to trend upwards and new development will tend to occur in a particular city if: a) The natural vacancy rate is higher than the average of other cities b) The natural vacancy rate is lower than the average of other cities c) The natural vacancy rate is below the current vacancy rate d) The natural vacancy rate is above the current vacancy rate

d) The natural vacancy rate is above the current vacancy rate

The absorption rate

is the rate at which available homes are sold in a specific real estate market during a given time period. It is calculated by dividing the average number of sales per month by the total number of available homes.

Economic Base

it posits that activities in an area divide into two categories: basic and nonbasic. ... The basic industries of a region are identified by comparing employment in the region to national norms.

The "Employment Multiplier

Net Total Employment Increase/Export Employment Increase.

The "Population Multiplier"

Net Total Population Increase/Export Employment Increase.

34. Landowners demand a premium in the rent for developed property before they will be willing to develop agricultural land. According to Capozza and Helsley, this is know as the: a) Growth premium b) Land premium c) Agriculture premium d) Irreversibility premium

d) Irreversibility premium