Real Estate Chapter 19,20,22
B. equal to zero
7. The internal rate of return (IRR) on a proposed investment is the discount rate that makes the net present value of the investment: A. greater than zero B. equal to zero C. less than zero D. greater than the opportunity cost of not investing
B
Given the following information, calculate the NPV for this property. Initial cash outflow: $200,000, Discount rate: 15%, CF for year 1: $25,876, CF for year 2: $23,998, CF for year 3: $23,013, CF for year 4: $22,105, CF for year 5: $144,670. A. -$51,875 B. -$59,657 C. $140,343 D. $295,951
D
Given the following information, calculate the appropriate after-tax discount rate. Tax rate on comparable risk investment: 35%, Investor's before-tax opportunity cost: 12%, Capitalization rate: 8%. A. 2.8% B. 4.2% C. 5.2% D. 7.8%
B
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. Default risk
10. The use of financial leverage when investing in real estate is a double-edged sword. While increased leverage may allow the investor to "purchase" higher expected returns, the "price" of doing so is an increase in which of the following risks? A. Liquidity risk B. Default risk C. Interest rate risk D. Pipeline risk
B
Which of the following terms refers to the present value of the right to receive a lump sum payment of $1 at the end of a particular year, given a specified discount rate? A. Net present value B. Present value factor C. Future value D. Net operating income
C
Given the following information, calculate the effective monthly rent payment. Lease Term: 10 years, Concession: 1 year free rent to be spread over the term of the lease, Rental Space: 5000 square feet, Rental Rate: $20 per square foot per year, Landlord's discount rate: 10%. A. $4,676 B. $5,901 C. $7,081 D. $10,122
C
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
B. after-tax cash flows (ATCF)
1. The direct ownership of commercial real estate produces cash flows from rental operations and, perhaps, cash flow from an eventual sale of the property. Since financial leverage and tax considerations play an important part in determining an investor's returns, the measure of investment value most relevant to investors is the present value of: A. before-tax cash flows (BTCF) B. after-tax cash flows (ATCF) C. net operating income (NOI) D. net sale proceeds (NSP)
D. Only with DCF must the investor use a defensible cash flow estimates that incorporates appropriate measures of income and expenses.
1. 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 estimates that incorporates appropriate measures of income and expenses.
C
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: $1,350,000. A. 8.9% B. 11.1% C. 11.5% D. 11.9%
C. less than the effective tax rate on a stock or bond investment
11. 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.
B. Income taxes reduce the levered going-in-IRR
12. Just as it is important for an investor to consider the impact of financial leverage on her return, it is also necessary to account for the effect of income taxes. How would the presence of income taxes impact the levered going-in IRR? A. Income taxes increase the levered going-in-IRR B. Income taxes reduce the levered going-in-IRR C. Income taxes do not affect the going-in-IRR D. Income taxes cause the levered going-in-IRR to become invalid as a measure of return.
B. direct capitalization method
13. In discounted cash flow (DCF) analysis, the sale price of the property must be estimated at the end of the expected holding period. The most common method for determining the terminal value of the property is the: A. yield capitalization method B. direct capitalization method C. repeat-sales approach D. cost approach
C. residual claim
14. Many investors use mortgage debt to help finance capital investment for income-producing real estate. In doing so, the owner will receive income as long as the property produces enough income to cover all operating and capital expenditures, the mortgage payment, and all state and federal income taxes. Therefore, the owner's claim is commonly referred to as a: A. primary claim B. joint claim C. residual claim D. superior claim
C. $1,133,333
15. 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
B. $343,674
16. 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
D. 7.8%
17. Given the following information, calculate the appropriate after-tax discount rate. Tax rate on comparable risk investment: 35%, Investor's before-tax opportunity cost: 12%, Capitalization rate: 8%. A. 2.8% B. 4.2% C. 5.2% D. 7.8%
C. 11.5%
18. 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%
B. -$59,657
19. Given the following information, calculate the NPV for this property. Initial cash outflow: $200,000, Discount rate: 15%, CF for year 1: $25,876, CF for year 2: $23,998, CF for year 3: $23,013, CF for year 4: $22,105, CF for year 5: $144,670. A. -$51,875 B. -$59,657 C. $140,343 D. $295,951
B. 12.2%
24. Given the following information regarding an income producing property, determine the unlevered internal rate of return (IRR). Expected Holding Period: 5 years; 1st year Expected NOI: $89,100; 2nd year Expected NOI: $91,773; 3rd year Expected NOI: $94,526; 4th year Expected NOI: $97,362; 5th year Expected NOI: $100,283; Debt Service in each of the next five years: $58,444; Current Market Value: $885,000; Required equity investment: $221,250; Net Sale Proceeds of Property at end of year 5: $974,700; Remaining Mortgage Balance at end of year 5: $631,026. A. 10.6% B. 12.2% C. 22.9% D. 33.4%
A. Investment value is based on the expectations of a typical, or average, investor.
2. 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.
D. 11.37%
20. 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. 10.00%
21. 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: 5 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. A. -15.30% B. 8.60% C. 9.86% D. 10.00%
B. NPV is -$20,246; Decision is not to invest
22. Given the following expected cash flow stream, determine the NPV of the proposed investment in an income producing property and determine whether or not the investment should be pursued. Investment Horizon: 5 years; Expected Yearly Cash Flow in each of the next five years: $127,628. Expected Sale Price at end of 5 years: $1,595,350; Opportunity Cost of Investment 6%; Current Market Price of Property: $1,750,000 A. NPV is -$20,246; Decision is to invest B. NPV is -$20,246; Decision is not to invest C. NPV is $249,967; Decision is to invest D. NPV is $249,967; Decision is to not invest
A. $245.15
23. Given the following information regarding an income producing property, determine the NPV using levered cash flows in your analysis. Required equity investment: $270,000; Expected NOI for each of the next five years: $150,000; Debt Service for each of the next five years: $125,000; Expected Holding Period: 5 years; Required yield on levered cash flows: 15%; Expected Sale Price at end of Year 5: $2,000,000; Expected Cost of Sale: $125,000; Expected Mortgage Balance at time of sale: $1,500,000 A. $245.15 B. $270,245.15 C. $419,264.54 D. $1,435,029.64
C. 22.9%
25. Given the following information regarding an income producing property, determine the internal rate of return (IRR) using levered cash flows. Expected Holding Period: 5 years; 1st year Expected NOI: $89,100; 2nd year Expected NOI: $91,773; 3rd year Expected NOI: $94,526; 4th year Expected NOI: $97,362; 5th year Expected NOI: $100,283; Debt Service in each of the next five years: $58,444; Current Market Value: $885,000; Required equity investment: $221,250; Net Sale Proceeds of Property at end of year 5: $974,700; Remaining Mortgage Balance at end of year 5: $631,026. A. 10.6% B. 12.2% C. 22.9% D. 33.4%
C. $40,858
26. Given the following information regarding an income producing property, determine the after tax net present value (NPV). Expected Holding Period: 5 years; 1st year Expected BTCF: $30,656; 2nd year Expected BTCF: $33,329; 3rd year Expected BTCF: $36,082; 4th year Expected BTCF: $38,918; 5th year Expected BTCF: $41,839; 1st year Expected Tax Liability: $7,645; 2nd year Expected Tax Liability: $8,658; 3rd year Expected Tax Liability: $9,708; 4th year Expected Tax Liability: $10,798; 5th year Expected Tax Liability: $6,951; Estimated Before Tax Equity Reversion at end of year 5: $343,674; Expected Taxes Due on Sale at end of year 5: $32,032; Required equity investment: $241,163; After Tax Opportunity Cost: 11.2% A. -$40,858 B. -$91,785 C. $40,858 D. $91,785
C. 15.4%
27. Given the following information regarding an income producing property, determine the after tax internal rate of return (IRR). Expected Holding Period: 5 years; 1st year Expected BTCF: $30,656; 2nd year Expected BTCF: $33,329; 3rd year Expected BTCF: $36,082; 4th year Expected BTCF: $38,918; 5th year Expected BTCF: $41,839; 1st year Expected Tax Liability: $7,645; 2nd year Expected Tax Liability: $8,658; 3rd year Expected Tax Liability: $9,708; 4th year Expected Tax Liability: $10,798; 5th year Expected Tax Liability: $6,951; Estimated Before Tax Equity Reversion at end of year 5: $343,674; Expected Taxes Due on Sale at end of year 5: $32,032; Required equity investment: $241,163 A. 11.2% B. 13.3% C. 15.4% D. 20.3%
C. 10 years
3. In discounted cash flow analysis, the industry standard for pro forma cash flow projections of investment properties is typically: A. 3 years B. 5 years C. 10 years D. 15 years
A. Levered cash flows
4. It is common for investors in real estate to use mortgage debt to help finance capital investment. The use of debt can have a profound impact on the expected cash flows for a particular property. Which of the following terms refers to cash flows that represent the property's income after subtracting any payments due to the lender? A. Levered cash flows B. Unlevered cash flows C. Discounted cash flows D. Compounded cash flows
A. greater than zero
5. Net present value (NPV) is interpreted using the following decision rule: The investor will purchase the property as long as the NPV is: A. greater than zero B. equal to zero C. less than zero D. equal to the opportunity cost of investment
A. decline
6. Changes in the discount rate used to complete net present value analysis can have a significant impact on the estimated value of the investment and therefore affect the overall investment decision. As the required internal rate of return (IRR) increases, the net present value will: A. decline B. increase C. remain the same D. become zero
C. The IRR methodology cannot be used to make comparisons across different investment opportunities.
8. 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.
A. Both NPV and going-in IRR increase
9. 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
D
Given the following information, calculate the leasing agent's commission in dollar terms. Lease Term: 10 years, Monthly Rent: $5,000, Commission: 3%. A. $150 A. $1,500 C. $1,800 D. $18,000 Ans: D
demand clause
A clause in the note that allows the lender to demand repayment of the balance in full.
B
A property management contract establishes an agency relationship between the manager and the owner. Considering that the management fee is often calculated as a percentage of gross income, this would seem to create an agency problem in that the agreement does not give managers the incentives to control operating expenses while they attempt to increase rental income. Though seldom the case, basing the property management fee on which of the following measures would, in theory, better align the interests of the owner and manager? A. Effective gross income B. Net operating income C. Miscellaneous income D. Capital expenditures
B
A tenant who expects her business to grow may wish to have a clause included in her lease that grants her the choice to lease adjacent space as soon as it becomes available. This lease option is more commonly referred to as a: A. relocation option B. right of first refusal C. renewal option D. consideration
B
After construction has been completed, a developer may decide to seek additional financing. If current interest rates are relatively high, but the developer expects them to decline in the near future, the developer would most likely seek financing in the form of a: A. subordination agreement B. miniperm loan C. take-out commitment loan D. floor loan
C
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.
B
An owner whose property is in a strong market position, where fewer services can be offered to tenants for the same dollar of rental income and where the owner will not lose tenants if the property is undermaintained, is said to participate in a market that has: A. a relatively elastic demand for space B. a relatively inelastic demand for space C. economies of scale D. diseconomies of scale
C
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? A. $10,000 B. $10,158 C. $11,890 D. $21,900
A
Changes in the discount rate used to complete net present value analysis can have a significant impact on the estimated value of the investment and therefore affect the overall investment decision. As the required internal rate of return (IRR) increases, the net present value will: A. decline B. increase C. remain the same D. become zero
A
Net present value (NPV) is interpreted using the following decision rule: The investor will purchase the property as long as the NPV is: A. greater than zero B. equal to zero C. less than zero D. equal to the opportunity cost of investment
A
Commercial real estate returns are determined in no small part by how well the ongoing management function is performed. Management decisions can be classified into two categories: property management and asset management. Which of the following functions would be considered a primary responsibility of an asset manager? A. Property acquisitions and dispositions B. Marketing a property to prospective tenants C. Maintaining the condition of the property D. Signing leases
D
Concerned with a potential information asymmetry problem, state legislators have been proactive in passing legislation that protects the rights and interests of tenants within which of the following property types? A. Office B. Retail C. Industrial D. Apartment
B
Despite the magnitude of their real estate holdings, many non-real estate corporations have historically expended little effort to manage these assets effectively. Recently, the development of which of the following markets has helped to quell concerns related to this issue? A. Commercial mortgage backed securities (CMBS) B. Sale-leaseback C. Tenancy-in-common (TIC) D. Installment sale
C
Development involves a complex organization of many moving parts. Which of the following choices is often viewed as the single greatest cause of project delays and cost overruns? A. Obtaining permits B. Financing C. Effective communication between developer, architect, and engineer D. Selecting the architect
B
Even the smallest building project involves a multitude of separate contractors to complete construction. Therefore, it becomes difficult for the developer to monitor the construction process. Which of the following individuals serves as the developer's liaison and representative on the project site? A. General contractor B. Construction manager C. Land planner D. Subcontractor
D
In an indexed lease, rents are dependent on a regularly reported index, most commonly the consumer price index (CPI). By using the CPI as an index rate, the risk of unexpected increases in general inflation is shifted to the __________, and therefore a _________ base rental rate will typically be required. A. Owner; higher B. Owner; lower C. Tenant; higher D. Tenant; lower
B
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 pre-specified 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: A. flat rent B. graduated rent C. indexed rent D. percentage rent
D
In contrast to rent for residential units, rent for U.S. commercial properties is typically quoted as: A. a dollar amount per month B. a dollar amount per year C. a monthly cost per square foot D. an annual cost per square foot
B
In discounted cash flow (DCF) analysis, the sale price of the property must be estimated at the end of the expected holding period. The most common method for determining the terminal value of the property is the: A. yield capitalization method B. direct capitalization method C. repeat-sales approach D. cost approach
C
In discounted cash flow analysis, the industry standard for pro forma cash flow projections of investment properties is typically: A. 3 years B. 5 years C. 10 years D. 15 years
C
In each stage of the development process, the developer faces risks that can have a profound impact on the success of the particular project. Which of the following risks is of primary concern after the construction phase has been completed? A. Environmental risk B. Title risk C. Market risk D. Permitting risk
C
In evaluating potential tenants for residential rental properties, a landlord may be interested in calculating the ratio of prospective rent to income for the applicant. Given the following information, calculate the rent to income ratio for the applicant. Applicant's Gross Annual Salary (Income): $45,000; Prospective Monthly Rent: $1,000; Applicant's Annual Income Tax and Benefit Payments: $7,650. A. 2.22% B. 2.68% C. 26.67% D. 32.13%
C
In more complex development projects, a developer may choose to combine the roles of the architect and general contractor into one in order to mitigate design-cost conflicts that otherwise must be negotiated when plans are revised. This arrangement is more commonly referred to as a: A. build-to-suit B. subordination agreement C. design-build D. fast-track
C
In retail property types, rents are quoted on the basis of which of the following? A. Usable area B. Gross floor area C. Gross leasable area D. Rentable area
A
It is common for investors in real estate to use mortgage debt to help finance capital investment. The use of debt can have a profound impact on the expected cash flows for a particular property. Which of the following terms refers to cash flows that represent the property's income after subtracting any payments due to the lender? A. Levered cash flows B. Unlevered cash flows C. Discounted cash flows D. Compounded cash flows
B
Just as it is important for an investor to consider the impact of financial leverage on her return, it is also necessary to account for the effect of income taxes. How would the presence of income taxes impact the levered going-in IRR? A. Income taxes increase the levered going-in-IRR. B. Income taxes reduce the levered going-in-IRR. C. Income taxes do not affect the going-in-IRR. D. Income taxes cause the levered going-in-IRR to become invalid as a measure of return.
A
Lenders may request that property owners of rental properties include a clause in their lease agreement that gives the lender the right to terminate the lease and evict the tenant, even if the tenant has fulfilled all of its responsibilities under the lease, in the case that the owner of the property defaults on her mortgage. This part of the lease agreement is more commonly referred to as a: A. Subordination clause B. Non-disturbance agreement C. Relocation option D. Expansion option
C
Many investors use mortgage debt to help finance capital investment for income-producing real estate. In doing so, the owner will receive income as long as the property produces enough income to cover all operating and capital expenditures, the mortgage payment, and all state and federal income taxes. Therefore, the owner's claim is commonly referred to as a: A. primary claim B. joint claim C. residual claim D. superior claim
property manager
Marketing the property, selecting tenants, signing leases, collecting rent & repairing/ maintaining property
Investment
Most RE decisions are made with an ______ theme
A
Once a specific use has been chosen for a site, the first stage in the development process, often considered the "entry ticket to development," is: A. establishing site control B. feasibility analysis C. financing D. construction
escrow clause
Property or money held by a third party until the agreed upon obligations of a contract are met.
A
Retail establishments are found in a variety of forms, the simplest of which is: (Hint: fast-food franchise) A. Freestanding retail outlet B. Strip center C. Power center D. Regional mall
B
Since banks seldom loan 100 percent of construction costs, developers often turn to mezzanine financing to obtain necessary funds. With mezzanine debt, which of the following entities is typically pledged as collateral to the lender? A. Land B. Ownership shares in the development entity C. Personal assets of the developer D. Construction materials
B
Suppose an owner is trying to decide whether or not to make improvements to her property. Given the following information, what would be the value added or potential loss if the improvements are undertaken? Current rent per square foot: $8.75, Anticipated rent per square foot: $14.50, Cost of improvements: $250,000, Square feet: 34,000. A. Gain of $54,500 B. Loss of $54,500 C. Gain of $195,500 D. Loss of $195,500
B
Suppose that a developer pre-leases space to a financially strong, national tenant such as Home Depot, without having yet built the structure in which they will be leasing space. This is more commonly referred to as a: A. ground lease B. build-to-suit C. design-build D. contract for deed
B
The internal rate of return (IRR) on a proposed investment is the discount rate that makes the net present value of the investment: A. greater than zero B. equal to zero C. less than zero D. greater than the opportunity cost of not investing
D
The choice of which method to use in constructing the contracted rental rate can also be impacted by the type of property being leased. With which of the following property types would one most expect to see a percentage rent method used? A. Apartment B. Office C. Industrial D. Retail
A
The choice of which method to use in constructing the contracted rental rate can be impacted by the term of the lease. With a shorter lease term, which of the following methods is most likely to be observed? A. Flat rent B. Graduated rent C. Indexed rent D. Percentage rent
C
The majority of financing for the acquisition of land for development is most likely to come from which of the following parties? A. Developer B. Banks C. Pooled equity of a limited liability corporation (LLC) D. Insurance companies
B
The management agreement provides for a management fee that is usually in the range of 3 to 6% of which of the following measures of property income? A. Potential gross income B. Effective gross income C. Net operating income D. Income tax liability
A
The real estate industry applies which of the following labels to individuals who are responsible for the decisions that affect the physical, financial, or ownership structure of the property. A. Asset manager B. Property manager C. Leasing manager D. Regional manager
D
The rental income generated by a lease can depend significantly on the proportion of property-level operating expenses paid by the tenant. In which of the following types of leases is the tenant responsible for all operating expenses? A. Gross lease B. Net lease C. Net-net lease D. Triple net lease
A
The second stage of the development process requires an analysis of the project's feasibility. The developer will typically begin this stage of the development process with which of the following types of analysis? A. Financial feasibility B. Environmental feasibility C. Legal feasibility D. Political feasibility
A
The strength of a successful developer lies in his or her ability to select design professionals and engineers that play vital roles in the project's plan and completion. Which of the following individuals would be most concerned, on a general level, with the design aesthetics, optimal use and preservation of the site, traffic flows, utility systems and drainage systems? A. Land planner B. Landscape architect C. Mechanical engineer D. Environmental agent
C
The two most important determinants of the classification of an office property are age and obsolescence. Which of the following classes includes office buildings that are older and reasonably maintained, but are below current standards for one or more reasons? A. Class A office B. Class B office C. Class C office D. Investment grade property
A
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 to increase B. NPV to decrease, while going-in IRR increases C. NPV to increase, while going-in IRR decreases D. Both NPV and going-in IRR to decrease
B
The use of financial leverage when investing in real estate is a double-edged sword. While increased leverage may allow the investor to "purchase" higher expected returns, the "price" of doing so is an increase in which of the following risks? A. Liquidity risk B. Default risk C. Interest rate risk D. Pipeline risk
D
There are a number of ways that a developer can finance the establishment of site control, each with its own advantages and disadvantages. Which of the following methodologies calls for only the initial land rent to be paid out before development actually gets under way? A. Joint venture B. Option C. Contract for deed D. Ground lease
owners
These people make management decisions that affect the value of property & investors' return on equity
D
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 defensible cash flow estimates that incorporate appropriate measures of income and expenses, long-term trends, comparable properties, and social / legal environment conditions.
A
To the extent the tenant is permitted to alter the leased premises, the lease should clearly state when this may be done, and under what circumstances. The lease must also be clear about the ownership of such improvements once completed. Which of the following terms refers to items of personal property that are attached to the real property, are paid for and installed by the tenant, and may be removed by the tenant at the termination of the lease? A. Trade fixtures B. Anchors C. Concessions D. Expense stop
A
When construction costs exceed the amount of the construction loan, a developer may seek to cover the gap using mezzanine financing. All of the following statements regarding mezzanine debt are true EXCEPT: A. Mezzanine debt use is less expensive than normal construction financing B. Mezzanine debt use avoids dilution of equity returns C. Mezzanine debt use is less expensive than equity financing D. Mezzanine debt use avoids the foreclosure process in the case of default
B
When leasing nonresidential properties, owners would prefer to rent exclusively to high quality tenants. Such owners will tend to seek out companies whose general debt obligations are rated "investment grade" by one of more of the U.S. rating agencies. These potential tenants are more commonly referred to as: A. tenant reps B. credit tenants C. tenant mix D. in-house leasing agents
B
When property managers are looking to secure a mix of tenants for which "the whole is greater than the sum of its parts," or in other words a group of tenants that shares similar characteristics such that the experience of living together is mutually beneficial, they are seeking what is referred to as: A. permanence potential B. synergism C. rehabilitation D. adaptive reuse
A
While college-level courses are not widely available, a number of professional and trade organizations exist in the field of property management. Which of the following certifications awarded by the Institute of Real Estate Management is aimed at individuals who manage larger, residential, office, industrial, or retail properties? A. Certified Property Manager (CPM) B. Accredited Resident Manager (ARM) C. Real Property Administrator (RPA) D. Member of Appraisal Institute (MAI)
C
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.
A
While some property owners choose to perform both the property and asset manager functions themselves, many commercial property owners choose to employ professional property managers instead. The property manager works under a management contract in which the manager is empowered to serve as the owner's fiduciary. This type of relationship is more commonly referred to as a(n): A. agency relationship B. open listing relationship C. joint-venture D. correspondent relationship
A
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
With a multitude of players involved in the development process, it is important to understand where they participate within the various stages of development. Which of the following individuals is the least likely to be involved in the design stage of development? A. General contractor B. Landscape architect C. Civil engineer D. Land planner
A
With a site under control, the developer will begin to evaluate the feasibility of the project. The main tool that a developer will use in determining the financial feasibility of a project is: A. Net present value (NPV) analysis B. Cost approach to valuation C. Repeat-sales approach D. Direct capitalization
management contract
creates an agency relationship between owner & manager
tenant
obligation to preserve the premises
landlord
obligations to make repairs, right to inspect, right of entry and show the unit
