Chapter 21, 22, 23 MBA 8360
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
A. Mezzanine debt use is less expensive than normal construction financing
For all but the largest of developers, the marketing and leasing of the project will be through an external broker. Given their special knowledge of the target market, it would be most beneficial for the developer to bring the broker into the development process during which of the following stages? A. Design B. Financing C. Construction D. Operation
A.) Design
Based on your understanding of the relation between risk and the phases of an income producing property's life, which phase would you expect to entail the highest risk? A. Development and construction phase B. Lease-up stage C. Stable operation phase D. All three stages of a property's life have similar and equal risk
A.) Development and construction phase
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.) Financial feasibility
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
A.) Flat rent
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
A.) Freestanding retail outlet
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.) General contractor
A recent trend in commercial leases is for tenants to negotiate a cap on the amount of certain operating expenses they are required to reimburse the landlord. Such caps are usually negotiated on operating expenses thought to be at least partially controllable by the owner. Which of the following would typically be considered an operating expense controllable by the owner? A. General maintenance B. Property taxes C. Insurance payments D. Utility expenses
A.) General maintenance
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
A.) Net present value (NPV) analysis
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
A.) Property acquisitions and dispositions
Once possession and control are conveyed in a lease agreement, the owner must provide the tenant with uninterrupted use of the property without any interference from any entity that may threaten to impose upon the tenant's leasehold interest in the property. In other words, the tenant is entitled to which of the following? A. Quiet enjoyment B. Tenant improvement C. Concession D. Expansion option
A.) Quiet enjoyment
In contrast to maintenance and repair expenditures, which are operating expenses, the improvement decision generally involves a capital expenditure meant to increase the value of the structure. Which of the following classifications of improvements calls for the restoration of a property to satisfactory condition without changing the floor plan, form, or style of the structure? A. Rehabilitation B. Remodeling C. Adaptive reuse D. Conversion
A.) Rehabilitation
The expertise of several types of engineers must be coordinated by the architect in bringing together the final structure design. Which of the following types of engineers is responsible for specifications to achieve safety and stability for a structure's foundation? A. Soils engineer B. Structural engineer C. Mechanical engineer D. Civil engineer
A.) Soils engineer
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
A.) Subordination clause
When securing a new tenant for a commercial rental property, the owner of the property might incur an additional expense that amounts to the cost of refurbishing the rental space to meet the needs of the tenant's business. The allocation of money for this added expense is more commonly referred to as a(n): A. tenant improvement allowance B. concession C. sublease D. expense stop
A.) Tenant improvement allowance
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.) Trade Fixtures
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.) agency relationship
Some tenants who are subject to long-term leases may desire to transfer all of their tenant rights and obligations to another party. This is commonly referred to as a(n): A. assignment B. sublease C. concession D. lease option
A.) assignment
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
A.) establishing site control
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
A.) land planner
The developer will face a variety of costs throughout the project's life. Which of the following would be classified as a soft cost? A. Legal fees of the permitting process B. Costs of materials C. Labor cost of subcontractors for construction D. Cost of land
A.) legal fees of the permitting process
The lease is a contract between the owner and the tenant that transfers exclusive use and possession of the space to the tenant in return for rent or other consideration. In this arrangement, the owner is referred to as the: A. lessor B. lessee C. agent D. benchmark
A.) lessor
Since the architect can be involved in various stages of the development process, there are a number of methods used to compensate him for his services, each of which may depend on the particular phase of development. If the architect provides pre-design services or schematics early in the development process, he will typically be compensated: A. on an hourly basis B. as a percentage of construction expenses C. by a fixed fee plus expenses D. only if he stays on the project through completion of the construction phase
A.) on an hourly basis
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)
A.0 Certified Property Manager (CPM)
Leases are considered the engines that drive property values. Therefore, it should not be surprising that owners of commercial property may seek an independent leasing broker to focus on finding tenants to lease space. In exchange for their services, leasing brokers are paid a commission based on what percentage of the face amount of the lease? A. 0.5 to 1.5% B. 3 to 5% C. 7 to 10% D. 15 to 20%
B. 3 to 5%
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. credit tenants
A developer's selection of an architect is a vital step in the development process as the architect fulfills a number of important roles throughout the life of the project. As compensation for contributions in the design phase, the architect is often given a percentage of the construction cost. For moderately complex designs, the average compensation will be: A. 1 to 2% B. 3 to 7% C. 7 to 10% D. greater than 10%
B.) 3 to 7%
The large and generally well-known retailers who draw the majority of customers to a shopping center are more commonly referred to as: A. Outlets B. Anchors C. Strips D. Chains
B.) Anchors
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
B.) Construction manager
Maintenance and repair of a property is an ongoing process that can be divided into four principal categories. Which of the following classifications includes ordinary repairs to a building on a day-to-day basis (e.g. repairing a broken window, fixing a leaking roof)? A. Custodial maintenance B. Corrective maintenance C. Preventive maintenance D. Deferred maintenance
B.) Corrective maintenance
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
B.) Effective gross income
In considering the main components of a construction budget, which costs would be expected to constitute the largest portion of a development project's expense? A. Land costs B. Hard construction costs C. Soft construction costs D. Marketing costs
B.) Hard construction costs
Both owners and managers must carefully designate their responsibilities in the management agreement. In a management agreement, all of the following would typically be responsibilities of the property manager EXCEPT: A. Maintenance of financial accounts for money collected from tenants B. Liability C. General property management D. Reports on property performance
B.) Liability
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.) Loss of $54,500
The majority of residential units in the U.S. are contained in multifamily structures, or apartment buildings that contain five or more housing units. Which of the following multifamily structures will range in height from four to nine stories and are typically found in both cities and suburbs? A. High-rise apartment buildings B. Midrise apartment buildings C. Garden apartments D. Condominiums
B.) Midrise apartment buildings
Real estate asset managers perform certain functions that would not be expected of asset managers who deal with stock and bond portfolios. Which of the following functions would you expect both asset managers in real estate as well as stocks / bonds to perform? A. Find specific assets in which the owners/client can invest B. Monitor asset performance C. Negotiate the acquisition price of assets D. Oversee due diligence and closing
B.) Monitor asset performance
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.) Net operating income
Of the following choices, which best describes the operating expenses that you would expect to be the paid by the tenant in a net lease agreement? A. No operating expenses B. Only property taxes C. Both property taxes and insurance D. All operating expenses
B.) Only property taxes
Suppose that a development group would like to determine if the local zoning and land-use ordinances will permit the type of development they desire. However, they do not want to be obligated to purchase the property if they find that their proposed development will not be permitted. To gain control of the site without being obligated to perform, the development group should purchase which of the following? A. Ground lease B. Option C. Fast-track D. Floor loan
B.) Option
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.) Ownership shares in the development entity
The lease is a contract between a property owner and tenant that transfers exclusive use and possession of space to the tenant, but allows the owner to retake possession of the property at the expiration of the lease. Which type of interest allows the owner to retake possession at the end of a lease? A. Remainder interest B. Reversion interest C. Spousal interest D. Co-ownership interest
B.) Reversion interest
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
B.) Sale-leaseback
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
B.) a relatively inelastic demand for space
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.) build-to-suit
When the supply of space exceeds the demand, it is common for owners to provide the tenant with a period of free or perhaps reduced rent. This is commonly referred to as a(n): A. tenant improvement allowance B. concession C. sublease D. expense stop
B.) concession
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
B.) graduated rent
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
B.) miniperm loan
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.) right of first refusal
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
B.) synergism
Unlike many publicly traded stock and bond investments, commercial real estate investments: A. can be bought and sold in highly liquid markets. B. yield maximized returns when assets are held for short periods of time. C. yield returns generated mostly from the asset's net operating income, rather than price appreciation. D. have going-in and going-out transaction costs that are low (as a proportion of asset value).
C. yield returns generated mostly from the asset's net operating income, rather than price appreciation
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
C.) $11,890
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.) $7,081
Given the following information, calculate the load factor for this office property. Total usable area: 20,000 sq. ft., Tenant's prorated share of common area: 5,000 sq. ft. A. 0.25 B. 0.80 C. 1.25 D. 4.00
C.) 1.25
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.) 26.67%
For residential properties, the ratio of prospective rent to gross monthly income is a valuable screening tool in judging a potential tenant's ability to fulfill rent obligations. Generally, this ratio should not exceed: A. 10% B. 20% C. 30% D. 40%
C.) 30%
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
C.) Class C office
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
C.) Effective communication between developer, architect, and engineer
Newer industrial parks have begun to specialize in providing space that can be configured to suit the diverse needs of various tenants. This type of industrial space is more commonly referred to as: A. Warehouse B. Plant and Factory C. Flex space D. Research and Development
C.) Flex space
For most commercial property types, lease lengths can vary considerably. Therefore, both parties must tradeoff between the advantages and disadvantages associated with particular leasing terms. Owners may prefer longer leases for all of the following reasons EXCEPT: A. Delay of re-leasing costs B. Reduction of risk associated with declining interest rates C. Gain flexibility D. Stability of future cash flows
C.) Gain flexibility
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
C.) Gross leasable area
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.) Market risk
With a performance-based management contract, an asset manager's fees are tied directly to the rate of return earned by investors on the portfolio of managed properties relative to a benchmark. In private commercial real estate, the choice of benchmarks for performance is limited in large part to return indices provided by which of the following organizations? A. Standard and Poor's B. National Association of Real Estate Investment Trusts C. National Council of Real Estate Investment Fiduciaries D. Wilshire Associates
C.) National council of real estate investment fiduciaries
As with any valid contract, enforceable leases must meet a number of requirements. One of these requirements is for each party to provide appropriate consideration. In a lease, which of the following constitutes the landlord's consideration? A. Promise to pay rent B. Passing on legal title to the property C. Permission to occupy the space or property D. Commission to the leasing agent
C.) Permission to occupy the space or property
While a sublease and an assignment are two distinct choices for a tenant who wishes to transfer his rights during the term of a lease, both agreements: A. transfer all of a tenant's rights to another party B. transfer only a subset of rights to another party C. grant another party the right to cancel the original lease before expiration D. maintain that the original tenant be held liable for fulfilling the original lease unless otherwise specified
D. maintain that the original tenant be held liable for fulfilling the original lease unless otherwise specified
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
D.) $18,000
The property manager works under a management agreement between the property owner and the property management firm. As compensation for his duties, the property manager will negotiate a management fee. Given the following information, calculate the dollar compensation to the property manager in year 1. Potential Gross Income of the property: $250,000; Vacancy and Collection Losses: 15%; Miscellaneous Income: $50,000; Management Fee: 3%. A. $4,875 B. $6,375 C. $7,500 D. $7,875
D.) $7500
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
D.) Apartment
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
D.) Ground lease
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
D.) Retail
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
D.) Tenant; lower
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
D.) Triple net lease
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
D.) an annual cost per square foot
The effective rent calculation is a common measure used to compare the true cost of one lease to another. While there are a number of limitations to this methodology, the effective rent calculation captures: A. interlease risk B. re-leasing costs C. the advantages associated with lease flexibility D. the time value of money
D.) the time value of money
While uncertainties involving the multitude of players and stages in the development process provide a great deal of risk, market cycles tend to compound these risks. Out of the four phases of a market cycle, which would be the most desirable point for a developer to enter the market? A. Trough B. Expansion C. Peak D. Decline
Expansion
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
A. Asset manager
Suppose that a property owner plans on spending $15,000 per year over the next 5 years on maintenance and repairs. However, if she does not spend this amount, she will not be able to keep rents at market levels, vacancies will increase, and the resale value of the property in 5 years will be lower. Assume that she would lose about $7,000 a year in net income and would realize a loss of $85,000 in lower property value at the time of sale if maintenance is not maintained on the property. Determine the difference between the present value of the cost of maintaining the property and the loss to the owner if the property is not maintained assuming that the owner could earn a 7 percent return on any funds not invested in maintenance and repairs? A. The present value of the maintenance costs is $27,802 less than the present value of the averted loss B. The present value of the maintenance costs is $27,802 greater than the present value of the averted loss C. The present value of the maintenance costs is $32,802 less than the present value of the averted loss D. The present value of the maintenance costs is $32,802 greater than the present value of the averted loss
A. The present value of the maintenance costs is $27,802 less than the present value of the averted loss
A lease option is a clause that grants an option holder the right, but not the obligation, to renew the lease, cancel the agreement, relocate within a property, or even expand to adjacent space. The existence of these options in a leasing agreement: A. reduces the expected present value of lease cash flows to the owner B. increases the expected present value of lease cash flows to the owner C. does not impact the expected present value of lease cash flows to the owner D. causes the expected present value of lease cash flows to equal zero
A. reduces the expected present value of lease cash flows to the owner
While the risks of construction lending may be less in a number of respects than those associated with land acquisition, banks still require a premium in their lending rate as compensation for the risks involved. For construction loans, banks typically require a premium above LIBOR that ranges from: A. 0-50 basis points B. 50-150 basis points C. 150-250 basis points D. 250-350 basis points
C. 150-250 basis points
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
C. Pooled equity of a limited liability corporation (LLC)
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. design-build
