R E 358 Exam 2
Suppose that an appraiser has come to the following conclusions in evaluating the subject property. Due to the dramatic shift in the perceived safety of the neighborhood, values of any residential properties in the area of the subject property have fallen by $10,000, on average. Due to the subject property's age, physical deterioration to the building accounts for an estimate of $50,000 in lost value. An evaluation of the floor plan reveals that it is quite obsolete relative to current homebuyer preferences. This has a detrimental effect on the value of the property that is estimated to be approximately $15,000. Based on your understanding of adjustments related to accrued depreciation, which of the following pertains to the adjustment for external obsolescence? A) $10,000 B) $15,000 C) $50,000 D) $75,000
A) $10,000
Suppose the operating agreement of an LLC insists that all investors receive their pro rata share of all cash flows when a property is liquidated from the portfolio. If all 15 investors contributed an equal amount of equity in establishing the LLC, each investor should receive how much from the liquidation of a property valued at $3,500,000. A) $233,333 B) $350,000 C) $3,500,000 D) $52,500,000
A) $233,333
Unlike the debt coverage ratio, the debt yield ratio (DYR) is not affected by the interest rate or amortization period of the loan; the DYR is simply a measure of how large the NOI is relative to the loan amount. Lenders who rely on this ratio are typically willing to accept a minimum DYR of: A) 10%. B) 20%. C) 60%. D) 80%.
A) 10%
Given the following information, calculate the capitalization rate for the following apartment complex: Number of apartments: 15Market Rent (per month): $1,000 Vacancy and Collection Loss: 10% of potential gross income Operating Expenses: 5% of effective gross income Capital Expenditures: 10% of effective gross income Acquisition Price: $1,710,000 A) 8.1% B) 9.0% C) 9.5% D) 10.5%
A) 8.1%
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? A) C Corporation B) Subchapter S Corporation C) General Partnership D) Limited Liability Company
A) C Corporation
While the general concepts of investment value and market value are very similar, there is an important distinction between the two. All of the following statements regarding investment value are true EXCEPT: A) Investment value is based on the expectations of a typical, or average, investor. B) Investment value is a function of estimated cash flows from annual operations. C) Investment value takes into consideration estimated proceeds from the sale of the property. D) Investment value applies a discount rate to future cash flows.
A) Investment value is based on the expectations of a typical, or average, investor
Construction loans are used to finance the costs associated with erecting the building or buildings on a site. All of the following would be typical of a construction loan EXCEPT: A) LTV ratios above 90 percent. B) preleases with anchor tenants. C) relatively short maturity length of one to three years that may also allow for time to construct and lease up the project. D) personal liability.
A) LTV ratios above 90 percent
Gross income multiplier analysis assumes that the subject and comparable properties are collecting market rents. Therefore, it is frequently argued that an income multiplier approach to valuation is most appropriate for properties with short-term leases. Which of the following property types, therefore, would we find it most appealing to use a gross-income multiplier in our analysis? A) apartments B) office C) industrial D) retail
A) apartments
The use of financial leverage in purchasing an income-producing property can affect the amount of cash required at acquisition, the net cash flows from rental operations, the net cash flows from the eventual sale of the property, and the ultimate return on invested equity. Assuming the going-in IRR is greater than the effective borrowing cost, if an investor increases his leverage rate, say from 75% to 80%, we would expect which of the following to occur? A) both NPV and going-in IRR increase B) NPV decreases, while going-in IRR increases C) NPV increases, while going-in IRR decreases D) both NPV and going-in IRR decrease
A) both NPV and going-in IRR increase
Single year return measures and ratios can be categorized into three groups: profitability ratios, multipliers, and financial ratios. All of the following are considered financial ratios EXCEPT: A) capitalization ratio. B) operating expense ratio. C) loan-to-value ratio. D) debt yield ratio.
A) capitalization ratio
While floating rate mortgage loans may offer lower interest rates to borrowers than comparable fixed-payment mortgages, floating-rate loans may increase a lender's exposure to which of the following risks since borrowers may not be able to continue to service the debt if payments on the loan increase significantly? A) default risk B) interest rate risk C) liquidity risk D) pipeline risk
A) default risk
Land acquisition, development, and construction loans used by developers differ significantly from the "permanent" mortgages that traditionally are used to finance the purchase of commercial properties. All of the statements listed below are true regarding land acquisition, development, and construction loans EXCEPT: A) developers can never be held personally liable for such loans. B) these loans have floating interest rates tied to short-term interest rate indices. C) these loans are interest-only loans. D) these loans can be prepaid at any time without penalty.
A) developers can never be held personally liable for such loans
There are a number of ways in which individual and institutional investors can hold investments in commercial real estate as a part of their portfolio. One way is to purchase and hold the title to the actual commercial property, which gives the owner complete control of the asset. This type of transaction would be considered which of the following? A) direct investment in private commercial real estate equity B) indirect investment in private commercial real estate equity C) direct investment in private commercial real estate debt D) indirect investment in private commercial real estate debt
A) direct investment in private commercial real estate equity
The sequence of adjustments to the transaction price of a comparable property would make no difference if all adjustments were dollar adjustments. However, if percentage adjustments are involved then the sequence does matter. In making adjustments to a comparable property to arrive at a final adjusted sales price, the proper sequence for the following adjustments would be: A) financing terms, market conditions, location. B) location, market conditions, financing terms. C) market conditions, location, financing terms. D) location, financing terms, market conditions.
A) financing terms, market conditions, location
In most pooled ownership forms a single partner is empowered to act on behalf of the investors in terms of making property investment decisions. Based on your understanding of the different types of pooled ownership, which of the following structures would we expect this issue to be the least prevalent? A) general partnership B) limited partnership C) C corporation D) Subchapter S corporation
A) general partnership
Real estate private equity funds have been used to facilitate investment across the risk-return spectrum. All of the following are characteristics of investments by core funds EXCEPT: A) high quality property. B) properties located in large metropolitan areas. C) strong leases. D) high expected returns.
A) high quality property
It may be appropriate for a real estate professional to utilize different approaches for estimating the market value of a property depending upon the particular property type and use. Which of the following approaches would be most applicable when considering the valuation of retail office space (i.e., which approach would receive the most weight in the valuation process)? A) income approach B) sales comparison approach C) cost approach D) investment approach
A) income approach
Which of the following terms can best be described as the maximum value a buyer would be willing to pay and the minimum value a seller would be willing to accept? A) investment value B) market value C) book value D) construction value
A) investment value
Developers may obtain a single, short-term mortgage loan from an interim lender that provides financing for the construction period, the lease-up period, and for several years beyond the lease-up stage. This loan type is more commonly referred to as a: A) miniperm loan. B) mezzanine loan. C) participation loan. D) bullet loan.
A) miniperm loan
Commercial mortgage backed securities (CMBS) backed by government-sponsored enterprises (GSEs) consist entirely of mortgages from which of the following property types? A) multifamily B) office C) industrial D) retail
A) multifamily
One of the main differences between residential mortgage loans and permanent financing of commercial real estate lies in the allocation of liability in the case of default. In commercial real estate, a "bankruptcy remote" special-purpose entity is created that shields the actual borrower from personal liability. When a lender cannot lay claim to the personal assets of the defaulted borrower, this type of loan is commonly referred to as a: A) nonrecourse loan B) mini-perm loan C) partially amortizing loan D) interest-only loan
A) nonrecourse loan
When examining a REIT's financial statements, GAAP net income will: A) understate the funds that are available to distribute to investors as dividends since most real estate assets are depreciable. B) understate the funds that are available to distribute to investors as dividends since most real estate assets are not depreciable. C) overstate the funds that are available to distribute to investors as dividends since most real estate assets are depreciable. D) overstate the funds that are available to distribute to investors as dividends since most real estate assets are not depreciable.
A) understate the funds that are available to distribute to investors as dividends since most real estate assets are decpreciable
Suppose that an income producing property is expected to yield cash flows for the owner of $150,000 in each of the next five years, with cash flows being received at the end of each period. If the opportunity cost of investment is 8% annually and the property can be sold for $1,250,000 at the end of the fifth year, determine the value of the property today. A) $304,704.00 B) $1,449,635.50 C) $1,481,143.98 D) $2,000,000.00
B) $1,449,635.50
A comparable property sold 4 months ago for $287,000. If the appropriate adjustment for market conditions is -0.50% per month (without compounding), what would be the adjusted price of the comparable property assuming all else is the same between the two properties? A) $269,780.00 B) $281,260.00 C) $285,565.00 D) $292,740.00
B) $281,260.00
The home was originally constructed in the early 1900s, and the cost of constructing an exact replica of this residence is estimated to be $350,000. This is the only residential unit located on this particular road. Based on the current usage of adjacent real estate, we estimate that the property would be worth an additional $25,000. Due to the dramatic shift in the perceived safety of the neighborhood, values of any remaining residential properties in the area have fallen by $20,000. Due to the home's age, we also notice that there has been physical deterioration to the building, amounting to $50,000 in lost value. Since the home was built over 100 years ago, the floor plan is quite obsolete relative to current preferences. This has an effect on the value of the property that is estimated to be $15,000. Determine the appraised value of the home using the cost approach A) $265,000 B) $290,000 C) $350,000 D) $460,00
B) $290,000
Given the following information, calculate the before-tax equity reversion (BTER): NOI: $89,100 Annual Debt Service: $58,444 Net Sale Proceeds: $974,700 Remaining Mortgage Balance: $631,026 A) $30,656 B) $343,674 C) $572,582 D) $885,600
B) $343,674
Given the following information, calculate the after tax-cash flow for this property: Debt Service: $45,000 First-year NOI: $91,750 Tax liability: 25% of Before Tax Cash Flow A) $23,812.50 B) $35,062.50 C) $68,812.50 D) $80,500.00
B) $35,062.50
Given the following information, calculate the funds from operation (FFO): Net 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. A) $12,581,000 B) $75,809,000 C) $75,859,000 D) $75,909,000
B) $75,908,000
Analysis of a subject property's pro forma reveals that its fifth year net operating income (NOI) is projected to be $100,282 (you can assume that this cash flow occurs at the end of the year). If you estimate the projected rental growth rate for the property to be 3% per year and the going-out capitalization rate in year five to be 10%, determine the net sale proceeds the current owner of the property would receive if he were to sell the property at the end of year five and incur selling expenses that amounted to $58,300. A) $944,520.00 B) $974,610.00 C) $1,002,820.00 D) $1,032,910.00
B) $974,610.00
Suppose that we observe two comparable properties that have each sold twice within the past four years. Property A sold 24 months ago for $500,000 and Property B sold 48 months ago for $575,000. If the two properties were sold today at $425,000 and $465,000, respectively, estimate the change in market conditions (percentage change in price) per month, assuming we equally weight the two properties in our analysis? A) −0.56% B) −0.51% C) 0.61% D) 0.68%
B) -0.51%
Given the following information, calculate the loan-to-value ratio of this commercial loan. Estimated net operating income in the first year: $150,000 Debt service in the first year: $100,000 Loan amount: $1,000,000 Purchase price: $1,300,000 A) 0.08 B) 0.77 C) 1.30 D) 1.75
B) 0.77
Given the following information, calculate the debt coverage ratio for this investment: Potential gross income: $120,000 Vacancy rate: 9% Net operating income: $57,900 Operating expenses: $51,300 Acquisition Price: $520,000 Debt service: $40,000 A) 0.69 B) 1.45 C) 2.73 D) 8.29
B) 1.45
Given the following information, calculate the debt yield ratio on the following commercial property: Estimated Net Operating Income in the first year: $250,000 Loan amount: $2,047,500 Purchase price: $2,730,000 A) 4.8% B) 12.2% C) 68.6% D) 75.2%
B) 12.2%
Given the following information, calculate the debt yield ratio on the following commercial property. Estimated Net Operating Income in the first year: $2,500,000 Debt service in the first year: $960,000 Loan amount: $20,000,000 Purchase price: $27,300,000 A) 4.8% B) 12.5% C) 68.6% D) 75.2%
B) 12.5%
Given the following information, calculate the going-in capitalization rate for the specific property: First-year NOI: $87,750 Acquisition price: $1,250,000 Equity Investment: 35% Before-tax cash flow: $53,500 A) 4.3% B) 7.0% C) 10.8% D) 20.1%
B) 7.0%
Given the following information, calculate the effective gross income multiplier. Sale price: $2,500,000 Effective Gross Income: $340,000 Operating Expenses: $100,000 Capital Expenditures: $36,000 A) 0.136 B) 7.35 C) 10.42 D) 12.25
B) 7.35
Given the following information, calculate the appropriate going-in cap rate using general constant-growth formula. Overall market discount rate = 12% Constant growth rate projection: 3% per year Sale price: $1,950,000 Net operating income: $390,000 Potential gross income: $520,000 A) 8% B) 9% C) 10% D) 11.5%
B) 9%
Appraisers rely on recently completed transactions of similar properties to guide their selection of the cap rate to be used to value a single property. The method of estimating a cap rate from a series of comparable properties is more commonly referred to as: A) indirect capitalization. B) direct market extraction. C) overall capitalization. D) terminal capitalization
B) direct market extraction
Accrued depreciation is the difference between the current market value of a building and the total cost to reproduce it new. One reason for this difference is related to changes in tastes, preferences, technical innovations, or market standards. This is commonly referred to as: A) physical deterioration. B) functional obsolescence. C) external obsolescence. D) tax depreciation.
B) functional obsolescence
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: A) high transaction costs and high liquidity. B) high transaction costs and low liquidity. C) low transaction costs and high liquidity. D) low transaction costs and low liquidity.
B) high transaction costs and low liquidity
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
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? A) invests a significant percentage of their assets in both properties and mortgages B) invests primarily in and operates commercial properties C) purchases mortgage obligations D) purchases ownership interests in shares of pension funds and life insurance companies
B) invests primarily in and operates commercial properties
In recent years, which of the following pooled ownership structures are used by private funds that are trying to attract capital from very high net worth and institutional investors? A) general partnership B) limited partnership C) C corporation D) Limited Liability Company
B) limited partnership
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? A) loan application B) loan commitment C) loan underwriting D) loan document
B) loan commitment
When investing in commercial real estate through an intermediary, it is important to consider whether the fund has a finite or infinite life. By having a finite life, the fund manager is forced to eventually dispose of the assets and return the investors' capital. With which of the following fund structures do you expect the issues associated with finite life to be least prevalent? A) closed-end commingled real estate fund B) open-end commingled real estate fund C) real estate private equity fund D) public, non-traded REIT
B) open-end commingled real estate fund
Commercial mortgage backed securities (CMBS) can be classified based on whether or not they are issued or backed by a government agency. CMBS that are not issued or backed by a government agency or more commonly referred to as: A) public, nonlisted. B) private label. C) private equity. D) commingled funds.
B) private label
The $12.6 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 currently accounts for the largest proportion of market value? A) public equity B) privately held equity C) publicly traded mortgage debt D) privately held mortgage debt
B) privately held equity
Based on your understanding of the concept of a lockout provision, lenders are able to reduce their exposure to which of the following risks through its use? A) default risk B) reinvestment risk C) liquidity risk D) interest rate risk
B) reinvestment risk
The cost approach to valuation assumes the market value of a new building is similar to the cost of constructing it today. Which of the following terms refers to the expenditure required to construct a building of equal utility using modern construction techniques, materials, and design that eliminates outdated aspects of the structure? A) reproduction cost B) replacement cost C) fixed cost D) variable cost
B) replacement cost
Which of the following types of real estate private equity funds would you expect to invest in properties that have some lease-up risk and/or the need for moderate renovation or repositioning? A) core B) value added C) opportunistic D) full platform
B) value added
Given the following information, calculate the estimated terminal value of the property at the end of its holding period. Going-out cap rate: 9%, Estimated holding period: 5 years, NOI for year 5: $100,500, NOI for year 6: $102,000. A) $1,113,333 B) $1,116,667 C) $1,133,333 D) $1,166,667
C) $1,133,333
Assume you have taken out a balloon mortgage loan for $2,500,000 to finance the purchase of a commercial property. The loan has a term of 5 years, but amortizes over 25 years. Calculate the balloon payment at maturity (Year 5) if the interest rate on this loan is 4.5%. A) $5,637.99 B) $13,895.82 C) $2,196,447.59 D) $2,495,479.19
C) $1,296,447.59
Suppose that you are attempting to value an income producing property using the direct capitalization approach. Using data from comparable properties, you have determined the overall capitalization rate to be 7.5%. If the projected first year net operating income (NOI) for the subject property is $135,500, what is the indicated value of the subject using direct capitalization? A) $144,985.00 B) $150,555.56 C) $1,806,666.67 D) $9,033,333.33
C) $1,806,66.67
Given the following information, calculate the total amount of annual operating expenses for this income-producing property: Minor roof repairs: $20,000 Property taxes: $30,000 Maintenance: $25,000 Janitorial: $15,000 Security: $10,000 Debt service: $175,000 A) $70,000 B) $80,000 C) $100,000 D) $275,000
C) $100,000
Using the following information, determine the net operating income (NOI) for the first year of operations of the subject property assuming "below-line" treatment of capital expenditures. Subject Property Number of apartments 15 Market Rent (per month) 1000 Vacancy and Collection Losses 10% of PGI Operating Expenses 5% of EGI Capital Expenditures 10% of EGI A) $135,000 B) $137,700 C) $153,900 D) $162,000
C) $153,900
Suppose that you are attempting to value an income producing property using the direct capitalization approach. Using data from comparable properties, you have determined the overall capitalization rate to be 11.44%. If the projected first year net operating income (NOI) for the subject property is $44,500, what is the indicated value of the subject using direct capitalization? A) $49,590.80 B) $50,225.73 C) $388,986.00 D) $509,080.00
C) $388,986.00
Suppose that an appraiser has just completed her analysis using the cost approach to valuation. She has determined that the reproduction cost of the subject property is $370,000. If the added value of the site was $80,000 and accrued depreciation amounted to $50,000, what was the estimated value of the building using the cost approach? A) $320,000 B) $370,000 C) $400,000 D) $500,000
C) $400,000
Suppose you plan to put a 20% down payment on a house and obtain a mortgage loan that is less than the size limit on conforming loans ($417,000) to finance the remainder of the purchase. Based on your understanding of the loan-to-value ratio, what is the maximum price that you could pay for a home with these restrictions in mind? A) $333,600 B) $500,400 C) $521,250 D) $2,085,000
C) $521,250
When a mortgage loan is obtained, the cash down payment (equity) required at property acquisition is a function of the acquisition price and the net loan proceeds. Given the following information, determine the required equity down payment on the property: Acquisition price: $1,500,000 Face amount of loan: $975,000 Up front financing costs: 2 points A) $505,000 B) $525,000 C) $544,500 D) $2,494,500
C) $544,500
Given the following information, calculate the acquisition price of the property: First-year NOI: $57,750 Capitalization rate 8.5% Equity Investment: 30% A) $192,500 B) $203,824 C) $679,412 D) $2,264,706
C) $679,412
Suppose that we observe two comparable properties that have each sold twice within the past two years. Property A sold 24 months ago for $350,000 and Property B sold 18 months ago for $325,000. If the two properties were sold today at $375,000 and $340,000, respectively, estimate the change in market conditions (percentage change in price) per month, assuming we equally weight the two properties in our analysis? A) 0.19% B) 0.24% C) 0.28% D) 0.33%
C) 0.28%
Given the following information, calculate the equity dividend rate for this investment: First-year NOI: $18,750 Before-tax cash flow: $11,440 Acquisition price: $520,000 Equity Investment: 20% A) 2.2% B) 3.6% C) 11.0% D) 18.02%
C) 11.0%
Given the following information, calculate the going-out cap rate: Estimated holding period: 5 years NOI for year 1: $120,000 NOI for year 5: $150,000 NOI for year 6: $155,250 Expected sale price at end of year 5: $1,350,000 A) 8.9% B) 11.1% C) 11.5% D) 11.9%
C) 11.5%
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 A) 4.3% B) 7.0% C) 12.2% D) 20.1%
C) 12.2%
Given the following information, calculate the appropriate going-in cap rate using mortgage-equity rate analysis. Mortgage financing = 75% Typical debt financing cap rate: 10% Sale price: $1,950,000 Before Tax Cash Flow (BTCF): $390,000 A) 9.6% B) 10% C) 12.5% D) 13.6%
C) 12.5%
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 A) 34% B) 43% C) 47% D) 53%
C) 47%
Given the following information, calculate the net income multiplier for this property: First-year NOI: $18,750 Acquisition price: $150,000 Equity investment: 20% A) 0.1 B) 1.6 C) 8.0 D) 12.5
C) 8.0
The loan-to-value ratio measures the percentage of the acquisition price (or current market value) encumbered by debt. To protect their invested capital in the event that property values do fall, commercial mortgage lenders generally require that the senior mortgage not exceed approximately what percentage of the acquisition price? A) 60% B) 70% C) 80% D) 90%
C) 80%
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. A) 8.10% B) 8.61% C) 9.00% D) 12.05%
C) 9.00%
Given the following information, calculate the price-FFO multiple for the following REIT: 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 Stock Price: $40 Market Capitalization: $40,000,000 A) 0.10 B) 4.07 C) 9.83 D) 393.12
C) 9.83
Based on your understanding of the variables used to calculate a capitalization rate and an equity dividend rate, which of the following statements best describes the difference in how each handles the effect of mortgage financing? A) In constructing the EDR, the analyst subtracts the effects of mortgage financing from the numerator, but not the denominator. B) In constructing the EDR, the analyst subtracts the effects of mortgage financing from the denominator, but not the numerator. C) In constructing the EDR, the analyst subtracts the effects of mortgage financing from both the numerator and the denominator. D) In constructing the EDR, the analyst does not subtract the effects of mortgage financing from neither the numerator nor the denominator.
C) In constructing the EDR, the analyst subtracts the effects of mortgage financing from both the numerator and the denominator
The going-in cap rate, or overall capitalization rate, is a measure of the relationship between a property's current income stream and its price or value. Which of the following statements regarding cap rates is true? A) It is a measure of total return since it accounts for future cash flows from operations and expected appreciation (depreciation) in the market value of the property. B) It is a discount rate that can be applied to future cash flows. C) It is analogous to the dividend yield on a common stock. D) It is the projected rate at which prices will appreciate in the future.
C) It is analogous to the dividend yield on a common stock
As part of the data analysis step in the appraisal process, it is necessary to consider the highest and best use of the property in question. In regards to determining highest and best use, all of the following statements are true EXCEPT: A) The proposed property use must be legally permissible. B) It must be physically possible for the property to be used in the manner specified. C) No financial limits are considered when determining the property's best use. D) The property use must provide the greatest benefit to the owner.
C) No financial limits are considered when determining the property's best use
While net present value (NPV) and internal rate of return (IRR) analysis both may be used as investment decision criteria, there are some limitations to the IRR method that make its use as an investment criterion problematic in certain situations. All of the following are limitations of the IRR method EXCEPT: A) IRR calculations assume that cash flows are reinvested at the IRR, rather than at the actual rate that investors expected to earn on reinvested cash flows. B) With the IRR decision criterion multiple solutions may exist for investments where the sign of the cash flows changes more than once over the expected holding period. C) The IRR methodology cannot be used to make comparisons across different investment opportunities. D) The use of IRR as a decision criterion will not necessarily result in wealth maximization for the investor.
C) The IRR methodology cannot be used to make comparisons across different investment opportunities
The use of financial leverage by real estate investors can be a double-edged sword. All of the following statements regarding the use of financial leverage by real estate investors are true EXCEPT: A) 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 B) 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. C) The use of financial leverage reduces the real estate investor's exposure to default risk. D) The use of financial leverage by real estate investors makes the realized return on equity more sensitive to changes in rental rates and resale values.
C) The use of financial leverage reduces the real estate investor's exposure to default risk.
Helpful in assessing the risk of lending to investors for particular projects, which of the following calculations measures the income-producing ability of the property to meet operating and financial obligations? A) profitability ratios B) income multipliers C) financial risk ratios D) income tax multipliers
C) financial risk ratios
Most real estate investment trusts (REITs) are actively managed operating companies that typically focus their investments either by property type or geographic market. As of June 2019, which of the following commercial property types represents the largest proportion of REIT market value? A) apartments B) office C) infrastructure D) retail
C) infrastructure
An important piece of criteria for investors to consider when deciding between real estate investment opportunities and investing in stocks or bonds is the effect of income taxes on their return. For most investors, the effective tax rate on commercial real estate is: A) greater than the effective tax rate on a stock or bond investment. B) equal to the effective tax rate on a stock or bond investment. C) less than the effective tax rate on a stock or bond investment. D) cannot be compared across asset classes.
C) less than the effective tax rate on a stock or bond investment
The use of a mezzanine loan in the purchase of a commercial property has all of the following impacts on the borrower EXCEPT: A) allows the borrower to increase their financial leverage in the purchase of the property. B) increases the borrower's expected first year return on equity. C) mitigates the risk of financing for the borrower. D) requires the borrower to pledge an equity interest in their company (e.g., LLC) as collateral for the loan rather than pledging the property.
C) mitigates the risk of financing for the borrower
When calculating the net operating income of a property, it is important to identify any expenses that will be incurred in attempts to maintain the property. All of the following would be considered operating expenses EXCEPT: A) property taxes. B) property insurance premiums. C) mortgage payments. D) utility expenses.
C) mortgage payments
Real estate private equity funds can focus investment on anything from "Class A" real estate to redevelopment in the urban center. On the risk-return spectrum, which of the following private equity fund categories tends to have a heavier development component and often involves investment in riskier property types and locations? A) core B) value Added C) opportunistic D) full platform
C) opportunistic
When using discounted cash flow analysis for valuation, the appraiser must estimate the sale price at the end of the expected holding period. This price (assuming selling expenses have yet to be accounted for) is referred to as the property's: A) net sale proceeds. B) selling expenses. C) terminal value. D) current market value.
C) terminal value
In recent years, lenders have been unwilling to relieve borrowers from personal liability in the event of fraud, environmental problems, or unpaid property tax obligations. Therefore, some lenders include a clause that pierces the single-purpose borrowing entity to hold the actual borrower liable in such instances. This clause is commonly referred to as a: A) habendum clause B) lockout provision C) defeasance D) "bad boy carve-out" clause
D) "bad boy carve-out" clause
Suppose that examination of a pro forma reveals that the fifth year net operating income (NOI) for an income producing property that you are analyzing is $138,446 (you can assume that this cash flow occurs at the end of the year). If you estimate the projected rental growth rate for the property to be 5% per year, determine the projected sale price of the property at the end of year five if the going-out capitalization rate is 9%. A) $988,900.00 B) $1,465,037.00 C) $1,538,289.00 D) $1,615,203.00
D) $1,615,203.00
Suppose that examination of a pro forma reveals that the fifth year net operating income (NOI) for an income producing property that you are analyzing is $913,058 (you can assume that this cash flow occurs at the end of the year). If you estimate the projected rental growth rate for the property to be 3% per year, determine the projected sale price of the property at the end of year five if the going-out capitalization rate is 8%. A) $1,603,600 B) $2,350,159 C) $11,413,225 D) $11,755,622
D) $11,755,622
Suppose that an income producing property is expected to yield cash flows for the owner of $10,000 in each of the next five years, with cash flows being received at the end of each period. If the opportunity cost of investment is 12% annually and the property can be sold for $100,000 at the end of the fifth year, determine the value of the property today. A) $36,047.76 B) $56,742.69 C) $83,333.33 D) $92,790.45
D) $92,790.45
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 A) 0.15 B) 0.67 C) 1.30 D) 1.50
D) 1.50
Baumgartner Development is looking to purchase an office property for $11.5 million which has a projected NOI of $850,000. It can raise up to 70% in debt at an annual financing rate of 5.75%. What pre-tax rate of return can Baumgartner expect to earn on its equity investment if it avails of maximum available debt financing? A) 7.39% B) 1.64% C) 9.58% D) 11.22%
D) 11.22%
Suppose you purchased an income producing property for $95,000 five years ago. In Year 1, you were able to negotiate a lease that paid $10,000 per year at the end of each year. If you are able to sell the property at the end of year 5 for $100,000 (after receiving our final lease payment), what was the internal rate of return (IRR) on this investment? A) −18.18% B) 1.03% C) 9.57% D) 11.37%
D) 11.37%
To overcome the potential shortcomings of single-year decision making metrics, many investors in real estate also perform multiyear discounted cash flow (DCF) valuation. DCF valuation differs from the single-year ratio analysis in all of the following ways EXCEPT: A) Only with DCF must the investor estimate an appropriate investment horizon accounting for how long she will hold the property. B) Only with DCF must the investor select the appropriate yield at which to discount all expected future cash flows. C) Only with DCF must the investor make explicit forecasts of the property's net operating income for each year in the expected holding period. D) Only with DCF must the investor use a defensible cash flow estimate that incorporates appropriate measures of income and expenses.
D) Only with DCF must the investor use a defensible cash flow estimate that incorporates appropriate measures of income and expenses
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 types of loans are often used to provide short-term financing for "transitional" properties (e.g., properties that are currently experiencing heightened vacancies, or that need to be redeveloped or renovated before they can be stabilized)? A) land acquisition loan B) land development loan C) construction loan D) bridge loan
D) bridge loan
An interest-only balloon mortgage loan is commonly referred to as a(n): A) miniperm loan B) mezzanine loan C) land acquisition loan D) bullet loan
D) bullet loan
Of the $4.71 trillion in outstanding mortgage debt in the U.S., approximately $3.66 trillion is privately held by institutional and individual investors. Which of the following investor groups is the largest single source of private mortgage funds? A) individual investors B) life insurance companies C) government Sponsored Enterprises D) commercial banks
D) commercial banks
Commercial banks most commonly provide floating rate loans. However, borrowers who prefer a fixed rate can obtain an agreement that exchanges floating rate payments for a fixed rate schedule. This type of agreement is more commonly referred to as a(n): A) curtailment. B) defeasance. C) foreclosure. D) interest rate swap.
D) interest rate swap
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? A) investment banks B) life insurance companies C) real estate advisory firms D) pension funds
D) pension funds
The cap rate is an important metric that investors use to analyze the state of commercial real estate markets. When interpreting cap rate movements, an increase in cap rates over time would indicate that: A) the discount rate used in TVM (time value of money) calculations has increased. B) the discount rate used in TVM (time value of money) calculations has decreased. C) property values have increased. D) property values have decreased.
D) property values have decreased
The note is the document used to create a legal debt. In most states, the note creates personal liability for residential borrowers. When mortgage lenders have access to other borrower assets in situations where the foreclosure sale price is less than the total amount of the loan outstanding, we commonly refer to this type of loan as a: A) nonrecourse loan. B) miniperm loan. C) partially amortizing loan. D) recourse loan.
D) recourse loan
If all appraisal methods are appropriate for use in valuing a particular property, there is a clear order of preference that real estate professionals adhere to. Which of the following depicts the preferred order, with the most preferable approach being listed first and the least preferable listed last? A) sales comparison approach, cost approach, income approach B) income approach, Sales comparison approach, cost approach C) cost approach, income approach, sales comparison approach D) sales comparison approach, income approach, cost approach
D) sales comparison approach, income approach, cost approach
