Real Estate Principles Chapter 18

Use the following information: PGI: $600,000; vacancy and collection losses: $42,000; operating expenses: $88,000; capital expenditures: $10,000. Assume a below-line treatment of capital expenditures. Net operating income is equal to _______________.

$470,000

Which of the following statements is true?

-BTCF is a levered cash flow -NOI is an unlevered cash flow

Which of the following is/are generally true?

-Buyer are generally not willing to pay more than market value -Sellers are generally not willing to accept an offer that is less than market value -Investment value is the basis for economic transactions

The magnitude of the debt coverage ratio depends upon the:

-amortization period -amount of the loan -interest rate

Changes in local zoning, land use, and environmental controls:

-can have a dramatic impact on property values -are difficult to predict

The calculation of the debt yield ratio is affected by which of the following?

-net operating income -loan amount

Real estate investors often use financial leverage because:

-of limited savings (wealth) -of the desire to use "other people's money"

An operating expense ratio that is higher than the ratio of a typical property may signal that

-rental income is too low -operating expenses are too high

An estimated operating expense ratio for a potential investment that is higher than the OER on comparable properties may:

-signal a hidden problem with the property -indicate bad management

The use of mortgage financing by an investor directly affects:

-the required equity investment (down payment) -the before-tax cash flow from operations -the after-tax cash flow from operations

Use the following information: purchase price: $4,842,000; mortgage loan: $3,400,000; total up-front financing costs: $68,000; NOI: $460,000; mortgage payments total: $206,728 annually. The equity dividend rate is equal to_____________ percent.

16.77

Assume the following information: Net operating income: $41,600; Acquisition price: $520,000; Loan amount: $390,000; Annual debt service: $20,000; Up-front financing costs: $10,000. The debt coverage ratio is:

2.08

A going-in cap rate of 5% implies that the property had a purchase price that was

20 times greater than expected first-year NOI

The tradition in real estate appraisal is to refer to substantial nonrecurring expenses as:

reserves

Properties with lower going-in cap rates

sold for a higher multiple of expected first-year NOI

True or False: The debt coverage ratio is defined as net operating income divided by debt service.

true

Assume a small office building is purchased for $4,842,000. A loan of $3,400,000 is obtained from a local lender. There are no up-front financing costs associated with the mortgage. The required equity investment is _______________.

$1,442,000

Assume a small office building is purchased for $4,842,000. A loan of $3,400,000 is obtained from a local lender. Up-front financing costs associated with the mortgage total $68,000. The required equity investment is _________________.

$1,510,000

Use the following information: NOI: $460,000; no capital expenditures; mortgage payments total $206,728 annually. Estimated total income tax liability: $80,000. The after-tax cash flow from operations is equal to __________.

$173,272

Use the following information: NOI: $460,000; no capital expenditures; mortgage payments total $206,728 annually. Estimated total income tax liability: $80,000. The before-tax cash flow from operations is equal to _____________.

$253,272

Use the following information: PGI: $600,000; Vacancy and collection losses: $42,000; Operating expenses: $88,000; Capital expenditures: $10,000. Mortgage payments total $206,728 annually. Assume a below-line treatment of capital expenditures. The before-tax cash flow from operations is equal to ________________.

$253,272

Use the following information: PGI: $600,000; vacancy and collection losses: $42,000; operating expenses: $88,000; capital expenditures: $10,000. Assume an above-line treatment of capital expenditures. Net operating income is equal to _____________.

$460,000

Given the following information, calculate total operating expenses: Property taxes: $160,000; Hazard insurance: $80,000; Utilities: $120,000; Janitorial: $9,000; Annual debt service: $500,000; Repairs and maintenance: $100,000; Roof replacement: $80,000; Management expense: $60,000.

$529,000

Which of the following are typically classified as operating expenses?

-Repair and maintenance expenses -Property taxes

Annual depreciation deductions that are taken in the years after the purchase of the property generally

-cause taxable income to be less than the before-tax cash flow produced by the property -do not affect the property's before-tax cash flow

Ratio analysis (including single-year return measures) is sometimes considered superior to discounted cash flow analysis for making real estate investment decisions because:

-it is generally more easily understood by investors and lenders -it is easier to perform

The calculation of the debt yield ratio is affected by which of the following?

-loan amount -net operating income

Using only the effective gross income multiplier to choose between two alternative investment opportunities implicitly assumes that both properties have similar

-location -operating expenses -physical characteristics

Single-year ratios or "rules of thumb" include which of the following?

-profitability ratios -multipliers

When using historical information provided by the current owner to develop cash flow forecasts, which of the following should be considered in the investor's estimate of operating expenses?

-utility expenses -repair and maintenance expenditures -property taxes

Jennifer owns a 12-unit apartment complex. Potential gross income is projected to be $108,000. Vacancy and collection losses are estimated to be $9,750. Operating expenses and capital expenditures are estimated to be $40,000 and $5,900, respectively. Assume an above-line treatment of capital expenditures. The purchase price is $500,000, the loan amount is $400,000, and annual debt service is $44,000. The debt yield ratio is:

0.131

Assume a small office building is purchased for $4,842,000. A loan of $3,400,000 is obtained from a local lender. Up-front financing costs associated with the mortgage total $68,000. NOI is estimated at $460,000. The annual debt service will be $206,728. The debt yield ratio is equal to:

0.135

Jennifer owns a 12-unit apartment complex. Potential gross income is projects to be $108,000. Vacancy and collection losses are estimated to be $9,750. Operating expenses and capital expenditures are estimated to be $40,000 and $5,900, respectively. Assume an above-line treatment of capital expenditures. The purchase price is $500,000, the loan amount is $400,000, and annual debt service is $44,000. The debt coverage ratio is:

1.19

Given the following information, calculate the going-in capitalization rate. First-year NOI: $170,000; acquisition price: $1,650,000; operating expenses: $350,000; required equity investment: 20% of acquisition price.

10.3%

Use the following information: purchase price: $4,842,000; mortgage loan: $3,400,000; no up-front financing costs; NOI: $460,000; mortgage payments total $206,728 annually. The equity dividend rate is equal to __________ percent.

17.56

Assume a small office building is purchased for $4,842,000. A loan of $3,400,000 is obtained from a local lender. Up-front financing costs associated with the mortgage total $68,000. NOI is estimated at $460,000. The annual debt service will be $206,728. The debt coverage ratio is equal to

2.23

Use the following information: Acquisition price: $4,132,000; PGI: $600,000; Vacancy and collection losses: $42,000; Operating expenses: $167,400; Capital expenditures: $60,000. The operating expense ratio is equal to ______ percent.

30.00

Assume the following information: Potential gross income: $1,200,000; Vacancy rate: 9%; Net operating income: $579,000; Operating expenses: $491,400; Capital expenditures: $80,000. The operating expense ratio is equal to ______.

45.00

Assume the following information: Net operating income: $57,900; Acquisition price: $520,000; Loan amount: $338,000; Annual debt service: $20,000; Up-front financing costs: $10,000. The initial loan-to-value is ________________ percent.

65.00

A property has a potential gross income of $1,500,000; operating expenses of $700,000; vacancy and collection losses of $45,000; miscellaneous income of $9,000; and capital expenditures of $65,750. What is the net operating income in dollars?

698,250

Assume a small office building is purchased for $4,842,000. A loan of $3,400,000 is obtained from a local lender. Up-front financing costs associated with the mortgage total $68,000. The initial loan-to-value ratio is equal top ___________ percent.

70.22

Use the following information: acquisition price $4,132,000; effective gross income: $558,000; operating expenses: $167,400; capital expenditures: $60,000. Assume a below-line treatment of capital expenditures. The going-in capitalization rate is equal to __________ percent.

9.45

Use the following information: NOI: $460,000; no capital expenditures; mortgage payments total $206,728 annually. Acquisition price of property: $4,842,000. The going-in capitalization rate is equal to ____________.

9.5%

The "going-in" cap rate on a property acquisition is equal to the forecasted_________ over the next 12 months divided by the _____________.

NOI, acquisition price

The more modern treatment of capital expenditures in investment analysis is to treat CAPX as:

a "below-line" expense

If an expenditure increases the value of a property and extends its useful life, it is likely to be classified as

a capital expenditure

Lenders typically calculate several financial risk ratios because they are concerned:

about the ability of the property's net cash flow to service the debt

The measure of annual cash flow from a real estate investment most important to an investor is the:

after-tax cash flow from operations

In an analogy to the stock market, the net operating income of a property can be viewed as which of the following?

annual dividend expected to be produced by the property

Income multipliers:

are useful as preliminary screening tools to eliminate unacceptable investment opportunities

Upfront financing costs __________ net loan proceeds and __________ the cash down payment (equity) required when purchasing a property.

decrease, increase

An important limitation of single-year ratios and multipliers is that they

do not incorporate cash inflows and outflows beyond the first year of the analysis

The equity dividend rate:

does not incorporate the effects of income taxes on performance

The operating expense ratio:

expresses operating expenses as a percentage of effective gross income

True or false: The many factors that influence the cash inflows and outflows of a real estate investment are the focal point of this chapter.

false

A property type with a lower cap rate is selling for a ___________ price per dollar of current income.

higher

All else the same, lower quality properties sell for prices that produce

higher cap rates

The use of financial leverage generally ______ the expected rate of return on the equity investment and ______ risk.

increases, increases

A pro rata distribution of cash flows from a real estate investment:

is a distribution that reflects the percentage of equity contributed by each investor

All else equal,

lenders prefer the debt yield ratio to be as high as possible

If investors expect less growth in rental income in a particular market, relative to the growth expected in nearby markets, we would expect to observe effective gross income multipliers that are _______________ effective gross income multipliers in the nearby markets.

lower than

Passive (non-managing) investors in a commercial real estate investment generally expect to earn a return on their equity investment that is _________ the return expected to be earned by the sponsor/organizer of the investment opportunity.

lower than

All else the same, an above-line treatment of capital expenditures ________ NOI and thereby __________ the cap rate.

lowers, lowers

A tenant improvement allowance (TI) in a lease

obligates the owner to incur a prespecified dollar amount of expenditures to help the tenant get the space ready to use

The debt yield ratio is defines as _____________ divided by the _______

projected first-year NOI, loan amount

Single-year ratios or "rules of thumb" work best when applied to:

stabilized properties

The effective gross income multiplier is equal to:

the acquisition price divided by effective gross income

The equity dividend rate indicates what percentage of the investor's equity investment will be returned to them over

the next 12 months (ignoring income taxes)

In this chapter, the saying "garbage in, garbage out" refers to:

the quality of the cash flow assumptions

When forecasting rental income and expenses for the subject property, the appraiser should place the most weight on

trends in the income and expenses of comparable properties

Buyers do not wish to more, nor the seller take less, than the market value of the property.

true

Current and subsequent year NOI is the fundamental (primary) determinant of value.

true

Mortgage lenders have a claim on the cash flows of a property they have financed that is superior to the owner's claim.

true

True or False: An advantage of single-year return measures and ratios is that, relative to discounted cash flow analysis, they are easy to calculate and understand.

true

True or False: Single-year return measures and ratios calculated for a potential investment allow quick comparisons to comparable properties.

true

True or False: The use of single-year ratios in investment decision making requires fewer assumptions than the use of discounted cash flow models.

true

True or false: Based on its calculation of a financial risk ratio, a lender may approve a loan amount smaller than that requested by the borrower.

true