FIN Midterm #2 - Sample Questions
83. Market value is determined by
a. Demand and supply conditions
25. Although there are multiple approaches to estimating market value, there is only __ true market value.
a. One
44. ¬¬¬___ adjustments focus on the terms of the deal and the motivation or bargaining ability of the participants.
a. Transactional
1. Future benefits are discounted because of ________
. a. Risk b. Opportunity costs
14. Assume that a piece of land is currently valued at $50,000. If this piece of land is expected to appreciate at an annual rate of 5% per year for the next 20 years, how much will the land be worth at the end of 20 years?
a. $132,665 (50,000) (1.05) ^20
54. Suppose an investor is interested in purchasing the following income producing property at a current price of $450,000. The prospective buyer has estimated the expected cash flows over the next four years to be as follows: Year 1 = $40,000, Year 2 = $45,000, Year 3 = $50,000, Year 4 = $55,000. The property will be sold at the end of Year 4, generating an additional $500,000 from the sale. Assuming that the required rate of return is 12%, what is the NPV of the project?
a.
27. Jeff is about to retire, and he wants to buy an annuity that will provide him with $90,000 of income a year for 20 years, with the first payment coming at the end of the first year. The going rate on such annuities is 6%. How much would it cost him to buy the annuity today?
a. $1,032,293
35. An apartment property has a projected net income of $15,000 per year, and its projected net sales price after five years is $300,000. Considering its risk, you require a 14% annual return on this investment. How much would you be willing to pay for it today?
a. $207, 306.81
10. 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 an above-line treatment of capital expenditures. The before-tax cash flow from
a. $253,272 (PGI-rest)
30. An office building has a projected net income of $45,000 per year, and its projected net sales price after five years is $250,000. Considering its risk, you require a 16% annual return on this investment. How much would you be willing to pay for it?
a. $266,371.47
20. You want to buy a new sports car 5 years from now, and you plan to save $5,800 per year, beginning one year from today. You will deposit your savings in an account that pays 6% interest. How much will you have just after you make the 5th deposit, 5 years from now
a. $32,695
12. The average annual return for the S&P 500 since its inception in 1928 through 2014 is approximately 10%. assume a person invested $1.00 in S&P 500 Index in the end of 1928. It would have grown to
a. $3628.87 (1) (1.1) ^86
34. Tom is offered a real estate investment that promises to pay $90,000 after 5 years. The annual rate of return on investments of equal risk is 15%, compounded quarterly. What price should he pay for the property?
a. $43,100.31
5. Mary currently has $5,000. How much will she have after 6 years if she leaves it invested at 5.5% with annual compounding?
a. $6894.21 b. (5000)(1+0.055)^6
50. An apartment requires an initial investment of $200,000 has a projected net income of $15,000 per year for five years. Its projected net sales price after five years is $300,000. Considering its risk, you require a 14% annual return on investments of this type/risk. What is the NPV of this project?
a. $7,306.81
33. What is the present value of an apartment building that generates an after-tax cash flow of $30,000 in year one, $32,000 in year two, $35,000 in year three, $20,000 in year four, and $21,000 in year five? Assume that the discount rate is 16%. (round to the nearest cent)
a. $93,110.50
58. What is the present value of an apartment building that generates an after-tax cash flow of $30,000 in year one, $32,000 in year two, $35,000 in year three, $20,000 in year four, and $21,000 in year five? Assume that the discount rate is 16%. (round to the nearest cent
a. $93,110.50
39. You sold a car and accepted a note (promise to pay) from the buyer that obligates the buyer to pay you $1,000 at the end of year one, $2,000 at the end of year two, $2,000 in year three, $2,000 in year four, and $2,000 at the end of year five. What was the effective price you received for the car, assuming an interest rate of 5.0%?
a. (1000/(1.05)^1)+ (2000/(1.05)^2)+ (2000/(1.05)^3)+(2000/(1.05)^4)+(2000/(1.05)^5) b. =7707
11. A coastal city has seen significant appreciation in housing prices over the last decade. Suppose Jacob bought a $250,000 condo in this city in 2006, and the require rate of return on condos with similar risk is 20%/year from 2006 to 2015 (10 years). How much would his condo be worth in 2015? (round to the nearest cent)
a. (250,000) (1.2) ^10
17. Ben Franklin invested 1,000 pounds (about $50,000 today) at the beginning of the year 1785. Assume the average annual return he earned from 1785 to the end of 1984 (200 years) was 2.4%. How much was Franklin's investment worth at the end of 1984? (Round your answer to the nearest cent).
a. (50,000) (1.024) ^20= $5,740,653.48
59. Assume an industrial building can be purchased for $1,500,000 today. The investment is expected to yield cash flows of $80,000 for each of the next five years (with the cash flows occurring at the end of each year), and can be sold at the end of the fifth year for $1,625,000. Calculate the internal rate of return (IRR) on this investment.
a. (=6.78%)
45. A house sold for $650,485 five months ago. A very comparable house sold yesterday for $670,000. The implied (non-compounded) monthly rate of increase in property prices is ______ percent.
a. 0.6
3. For stabilized income producing properties, the industry standard is construct a ¬___ year pro forma
a. 10
36. A small office building has the following characteristics: net operating income, $65,000; operating expenses and capital expenditures, $33,000; vacancy and collection losses, $5,000. What is potential gross income assuming an above-line treatment of capital expenditures?
a. 103,000
29. You are estimating that the price of a trip around the world will be $30,000 10 years from now. How much should you put aside today in a lump sum in order to save for this trip? Assume the interest rate is 10%, compounded annually (round to the nearest cent).
a. 11,566.30
17. Assume the following annual cash inflows and outflows: year 0: ($80,000); year 1: $10,000; year 2: $20,000; year 3: $20,000; year 4: $75,000. The net present value (to the nearest dollar) if discounting at 10% is
a. 11,872.13
7. Value estimates using direct capitalization are based on a ratio or multiple of expected NOI over the next ¬¬¬¬____ months
a. 12
41. Suppose an investor is interested in purchasing the following income producing property at a price of $450,000. The investor has estimated the expected cash flows over the next four years to be as follows: Year 1 = $40,000, Year 2 = $45,000, Year 3 = $50,000, Year 4 = $55,000. Assuming that the estimated proceeds from selling the property at the end of year four is $500,000, what is the IRR of the project?
a. 12.69
57. X Realty Corporation is considering an investment that has the following expected cash flow. What is the investment's IRR?Year 0: - $1,500,000Year 1: $400,000Year 2: $400,000Year 3: $500,000Year 4: $800,000Year 5: $100,000
a. 14,61%
25. Assume the following annual cash inflows and outflows: year 0: ($80,000); year 1: $10,000; year 2: $20,000; year 3: $20,000; year 4: $75,000. The internal rate of return on this investment is
a. 14.93%
55. Tom is developing an apartment building in downtown Boston. He requires an 20% going-in IRR on equity on the expected 20-year investment. The current 20-year Treasury bond (T-bond) yield is 3%. What is the risk premium on Tom's investment?
a. 17% (20-3)
47. Maxwell Realty Corporation is considering an apartment investment that is expected to produce an after-tax cash flow of $2,000 at the end of year one, $2,025 in year two, $2,050 in year three, $2,075 in year four, and $2,100 in year five. If the company invests $9,500 today, what is the IRR of this investment?
a. 2.57%
30. A commercial real estate investment can be acquired for $100,000 in equity capital and is expected to produce a net cash flow to the equity investor of $33,439 at the end of each year for five years. The internal rate of return on equity is approximately equal to ______ percent.
a. 20
45. If the appropriate cap rate for valuation is 5%, then the subject property should sell for ____ times estimated NOI.
a. 20
53. Anderson Realty Trust is considering an apartment property investment that is expected to produce $500,000 in net cash flow at the end of each year for the coming three years. The investment requires a current down payment of $1,000,000. Assume the investor's required rate of return is 9%. What is the NPV of this investment? (Round to the nearest cent)
a. 265,647.33
44. An investor calculates that the levered, before-tax internal rate of return on a potential investment is 16%. The levered, after-tax return is estimated to be 11.2%. The effective tax rate of this investment is
a. 30
21. Noah wants to quit his job and return to school for a MBA degree at the end of two years. He plans to save and deposit $2,000 per month, beginning immediately from the beginning of first month. He will make monthly deposits in an account that pays 3% nominal interest (0.25% monthly). Under these assumptions, how much will he have accumulated at the end of two years?
a. 49,529
56. What was the sale price of the property if the effective gross income multiplier is 4.25, potential gross income is $125,000, and vacancy and collection losses are estimated at 2% of PGI?
a. 520,625
42. You are contemplating a commercial real estate investment. You believe your before-tax, levered, risk-adjusted opportunity cost of investing in this opportunity is 12%. If you believe the effective tax rate you will pay on this investment is 37%, what is the appropriate after-tax discount rate?
a. 7.6%
40. 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. 7.8%
44. What is the overall capitalization rate for a rental property if potential gross income is $180,000, vacancy and collection losses are 2%, operating expenses are 25% of effective gross income, capital expenditures are 5% of effective gross income, and the sale price of the property is $1,480,000? Assume an above-line treatment of capital expenditures.
a. 8.34%
16. Equity Real Estate Investment Trusts are REITs that invest in and operate commercial properties. From 2000 to 2006, equity REITs delivered an average annualized return of 22.9%. John invested $5,000 in equity REITs at the beginning of every year from 2000 to 2006. How much was his investment worth at the end of 2006?
a. 86,810.74
8. An investor originally paid $22,000 for a vacant lot 12 years ago. If the investor is able to sell the lot today for $63,000, what would be her annual rate of return (rounded to the nearest full percent)?
a. 9%
18. Suppose an industrial building can be purchased for $2,500,000 today and is expected to yield cash flows of $180,000 each of the next five years. (Note: assume cash flows are received at end of year.) If the building is expected to be sold at the end of the fifth year for $2,800,000, calculate the IRR for this investment over the five year holding period.
a. 9.2%
15. Given the following information, calculate the estimated before-tax cash flow from annual operations (BTCF): NOI: $89,100; Annual Debt Service: $58,444; Net Sale Proceeds: $974,700; Remaining Mortgage Balance: $631,026.
a. =NOI-Annual Debt Service
19. 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. =net sale proceeds-remaining mortgage balance
28. A good comparable property is a property that the typical buyer would consider
a. A close substitute
24. Appraiser are more likely to estimate actual capital expenditures in the period (year) they are expected to be incurred if the appraiser is using ____________ to estimate value.
a. A discounted cash flow model
47. All else the same, levered cash flows associated with a potential real estate investment should be discounted at ___________ unlevered cash flows.'
a. A higher rate
56. An adjustment for differences in economic characteristics is not usually required when valuing
a. A personal residence
30. Assume the appraiser believes that all of the appliances in a small apartment complex will have to be replaced at the end of five years. The appraiser determines that $5,000 will have to be put aside each year in an interest bearing account (at 3%) in order to have enough funds available at the end of five years to replace the appliances. If this $5,000 is included in the estimation of net operating income, it is typically referred to as
a. A reserve for capx
55. Which of the following are not considered representative sales; thus generally unusable as a comparable sale for a market value estimate?
a. A sale to a family member b. A voluntary sale in lieu of foreclosure c. A sale forced by a local property tax jurisdiction
66. Typically, reconciliation of final adjusted sale prices of the comparable properties involves the use of
a. A weighted average
43. Both the buyer and seller of a home that recently sold knew the house needed a new roof. The buyer replaced the roof immediately after purchasing the home. An appraiser using this sale as a comparable should
a. Adjust the comparable price upward by the cost of the new roof
50. Adjustments made to the sale price of comparable properties for expenditures made after purchase are
a. Always positive
67. The typical lease structure of ______ properties makes income multipliers a more appropriate valuation method than the lease structure of other property types.
a. Apartment
29. Which of the following items might be included in the "reserve for replacement" line item in a reconstructed operating statement?
a. Apartment appliances b. Carpeting c. Lobby furniture in an office building
12. In a market characterized by rising market rental rates, contract rental rates are generally "marked-to-market" (i.e., increased) by the owner when an existing lease expires. In general, leases are more frequently marked-to-market in
a. Apartment properties
10. The organization with independent authority over the generally accepted standards of appraisal is the
a. Appraisal foundation
48. Location adjustments to comparable sale prices
a. Are almost always required
13. What are the two values considered during a highest and best use (HABU) analysis?
a. As improved b. As though site is vacant
32. The equity dividend rate is equal to
a. BTCF in year 1 divided by the initial equity investment
64. Which of the following are true?
a. Cap rates are affected by required rates of return and expected growth rates
33. If an important characteristics of the comparable property is superior to the subject property, the sale price of the __________ property must be adjusted _______.
a. Comparable, downward
41. The sale of the comparable property included a clause that stated that legal title to the property would revert back to the seller in 20 years. If this comparable is used by the appraiser, the sale price of the __________ would have to be adjusted _________
a. Comparable, upward
51. A comparable property sold 5 months ago. Sales prices in the market have increased over those five months. The sale price of the ___________ must be adjusted ___________.
a. Comparable, upward
15. Calculation of the expected future value of a house in 5 years growing at an expected rate is called
a. Compounding
73. Reliable sources of construction cost estimates include:
a. Construction cost estimating firms b. Experienced builders
19. Conventional approaches to estimating the market value of real estate include the
a. Cost b. Sales comparison c. Income
9. Most appraisal assignments entail estimating
a. Current market value of a property
69. Which of the following property features (1) affects the effective gross income multiplier of a comparable sale and (2) is included in the calculation of the EGIM?
a. Current vacancies
12. Discounted cash flow analysis is sometimes considered to be superior to the use of single-year returns and ratios because:
a. DCF considers the time value of money b. DCF considers cash flows beyond the first year of operations
13. The increase in the value of a one time (lump sum) investment that grows at a given rate will be greatest with __________ compounding.
a. Daily
24. The increase in the value of a one time (lump sum) investment that grows at a given rate will be greatest with __________ compounding.
a. Daily
27. The value estimate reported in an appraisal report or restricted appraisal report is valid for one ______
a. Day
26. As the required internal rate of return increases, the calculated net present value will:
a. Decline
76. The income producing ability of properties generally
a. Declines over time
24. A borrower's current wealth is ___________ by the present value of future mortgage payments.
a. Decreased
36. As the opportunity cost of waiting for future cash flows increases, the present value of those future cash flows ___________.
a. Decreases
50. As the cap rate increases, the price (value) to NOI ratio
a. Decreases
9. In 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 (sale price)of the property is
a. Direct capitalization method
55. Which of the following is the most true?
a. Discount and expected growth rates rates drive cap rates
6. The main models or approaches to valuing real estate using income capitalization include
a. Discounted cash flow b. Direct capitalization
1. Relative to other valuation models, the assumptions required to perform ____________ appear to place the greatest analytical burden on the investor.
a. Discounted cash flow analysis
79. ______ is the process of converting future values into present values.
a. Discounting
60. If a comparable property sale included some valuable personal property, the sale price of the comparable is usually adjusted ______ by the ______ of the personal property
a. Downward, current market value
13. The rental income an existing, stabilized property is expected to generate, after allowances for vacancies and collection losses, is called
a. Effective gross income
54. What is the relation between capitalization rates and estimated property values?
a. Inverse
61. Dividing the sale price of a comparable property by its annual effective gross income results in a(n) ______ which can be used to estimate the value of a subject property.
a. Effective gross income multiplier
22. Opportunity cost is the return the investor is forgoing on an alternative investment of _______ risk in order to invest in the current opportunity.
a. Equal
10. A cash inflow or outflow that is forecasted to occur once over the analysis period, should be entered in the _________ register.
a. FV
23. Suppose a U.S. Treasury bond will pay a lump sum of $8,000 ten years from now. If the current required return on 10-year Treasury bonds is 6.5%, how much is the bond worth today?
a. FV=8000, I/Y=6.5, N=10, PMT=0 b. PV= 4261.81
27. True or false: Federal income taxes are a property operating expense.
a. False
3. True or false: The selling price always reflects the true market value of a property.
a. False
37. True or false: All else the same, a change in the discount rate affects the present value of a 15-year loan more than a 30-year loan.
a. False
46. True or false: The required adjustment for difference in legal estates is typically a relatively simple adjustment.
a. False
49. True or false: The fact that the last sale of a house was made by the seller to avoid an almost certain default and foreclosure likely had no effect on the sale price.
a. False
53. True or false: A location adjustment is not required when the comparable property has a superior location than the subject.
a. False
6. True or false: Theoretically, treasury bills (T-bills) are securities with a maturity less than 1 year. They are typically viewed as riskless securities, therefore the return on them should be zero.
a. False
71. True or false: The accurate valuation of income producing properties is primarily a number crunching exercise.
a. False
85. True or false: The appropriate discount rate for valuation of the subject property can usually be found on a publicly accessible website.
a. False
9. True or false: An ordinary annuity is defined as a fixed amount of money paid or received at the beginning of every period.
a. False
91. An ownership interest in a property that is considered a complete interest without regard to any leases is
a. Fee simple interest
92. The final number derived by the appraiser from all relevant approaches to value is known as the
a. Final estimate of value
40. Generally, when estimating market value, appraisers prefer to obtain the cap rate used to value the subject property
a. From comparable sales transactions
28. All else equal, the future value of an annuity due will be __________ the future value of a "regular" annuity.
a. Greater than
39. The effective borrowing cost of a mortgage loan is typically _________ the contract interest rate.
a. Greater than
84. Present values are ______ future values.
a. Greater than
86. The going-out (terminal) cap rate for a stabilized property is typically ______ the going-in cap rate.
a. Greater than
21. Net present value (NPV) involves the use of the following decision rule: The investor should purchase the property as long as the NPV is:
a. Greater than zero
57. If the property is expected to increase in value over the next year, the internal rate of return will be ______ the capitalization rate
a. Greater then
70. It is often necessary to value the site independent of the improvements to the site. Which of the following approach requires a separate site valuation?
a. HABU b. Cost approach
52. According to the RERC data displayed in Exhibit 14-2, mean required rates of return on high quality real estate investments
a. Have been trending downward since 2009
20. When analyzing the operating expenses of a small office building, which of the following is a relatively fixed operating expense?
a. Hazard and fire insurance premium
43. Assuming a 7% discount rate, the present value of the right to receive $10,000 at the end of 10 years is _________. If you must wait until the end of year 11 to receive the $10,000, the present value decreases by ________.
a. I/Y=7, N=10, FV=10,000, PMT=0 b. PV= 5083.49
24. Unless the characteristics of the comparable property are ______ to the subject property, adjustments must be made to the sale price of the comparable property.
a. Identical
5. The formal appraisal process involves eight steps, the first of which is to
a. Identify the appraisal problem
43. All else equal, how does the presence of income taxes impact the levered going-in IRR?
a. Income taxes reduce the levered going-in IRR
63. All else the same, higher purchase prices _________ cap rates
a. Increase
31. Holding everything else constant, increasing the amount of leverage used to finance an investment:
a. Increases the standard deviation of the equity return
19. The compounding of interest causes the value of an investment to grow at an ___ rate
a. Increasing
90. The final number produced by the direct capitalization approach is the
a. Indicated value
47. With direct capitalization, it is assumed that estimation of cash flows for an existing property beyond the next twelve months is performed by the
a. Investors who purchased the comparable properties
16. The text argues that successful market analysis and research
a. Is a process
8. The income approach to valuation
a. Is based on the concept of present value
56. The "total" yield on an investment opportunity
a. Is equal to the current yield plus the appreciation yield
89. An ownership interest in a property with existing leases is known as a
a. Leased fee estate
22. Form reports are generally requested by
a. Lenders making loans on single-family homes
81. Generally, investors are willing to pay ______ per dollar of current NOI for older properties than for new properties.
a. Less
78. The net sale proceeds (NSP) at the end of the assumed holding period is equal to the expected sale price
a. Less selling expenses
49. The effective tax rate on commercial real estate investment is typically:
a. Less than the tax rate on ordinary income
58. The seller of a comparable property purchased a new home just days after the sale of the comparable was completed. The seller needed cash from the sale of the comparable to purchase the new home. An appraiser using the comparable sale might need to be concerned that seller agreed to sell the comparable for ________ its market value, which would require _________ adjustment to the sale price of the comparable.
a. Less than, upward
5. It is common for investors in commercial real estate to use mortgage debt to help finance property acquisitions. The use of debt can have a profound impact on the expected cash flows received by the investor 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
38. For taxable investors, the appropriate rate to discount after-tax cash flows is ___________ the appropriate rate to before-tax cash flows.
a. Lower than
65. Which of the following steps in the evaluation of an appraisal is the most important?
a. Make sure the comparables used are appropriate
21. The rent that space in a property has the potential to generate in typical market conditions is called
a. Market rent
9. The rent that space in a property has the potential to generate in typical market conditions is called
a. Market rent
49. Which of the following characteristics describe(s) the type of properties that are the focus of the quarterly RERC survey?
a. Market values greater than $10 million b. Relatively new
10. Which of the following expenditures does not affect the calculation of net operating income?
a. Monthly mortgage payments
2. The value that real estate appraisers generally estimate is market value, which is synonymous to
a. Most probably selling price
74. When using discounted cash flow analysis, an appraiser will prepare a multi-year cash flow forecast, which is often referred to as a
a. Multi-year pro forma
38. MLS stands for
a. Multiple Listing Services
29. In order for positive financial leverage to be observed in the calculation of IRR, the effective borrowing cost:
a. Must be less than the unlevered IRR
40. You are estimating that the price of a trip around the world will be $30,000 10 years from now. How much should you put aside today in a lump sum in order to save for this trip? Assume the interest rate is 10%, compounded annually (round to the nearest cent).
a. N= 10 years, I/Y=10, PMT=0, FV=30,000 b. PV=11,566.30
32. What is the PV of an ordinary annuity (rounded to the nearest dollar) with 10 annual payments of $2,700 if the appropriate interest rate is 5.5%?
a. N=10, I/Y=5.5, PMT=2700, FV=0 b. PV= $20,352
25. Paul wants to buy a new condo six years from now and plans to save $8,000 per year for the down payment, beginning one year from today. He will invest in a fund that offers an 8% return. How much will Paul have accumulated after he makes the 6th deposit, 6 years from now?
a. N=6, I/Y=8, PV=0, PMT=8000 b. FV=58,687.43
4. Given the following information, calculate the terminal value of the property at the end of its estimated 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. NOI year 6/going out cap-rate (102,000/9%)=terminal value b. 1,133,333.33
42. The ____________ appraisal report is the longest and most formal report writing format
a. Narrative
39. When using direct capitalization, ______ income is capitalized to obtain an estimate of value.
a. Net operating
42. Generally, which of the following is the most difficult to obtain and substantiate when abstracting a cap rate from a comparable sale?
a. Net operating income
82. Given the following information, calculate the net sale proceeds. Sale price: $974,000, Selling Expenses: $40,000; Remaining Mortgage Balance: $630,000
a. Net sale proceeds: $934,000
30. USPAP standards require that, when using the sales comparison approach, appraisers use how many comparables?
a. No requirement
59. The sale of a single-family, detached home that is currently rented to a music studio should not be used as a comparable property if the subject property is a single-family, detached home
a. Occupied by the owner
68. The ________ the subject property the _______ difficult it is to estimate reproduction cost.
a. Older, more
43. Capitalization rates used to estimate the current market value of the subject property are sometimes referred to as the ______ cap rate.
a. Overall b. Going-in
4. A fixed (level) cash inflow or outflow (ex., monthly or annually) should be entered in the
a. PMT register
62. The text argues that the most significant errors in appraisal reports typically result from
a. Poor selection of comparables
14. Market rent can be defined as the property's
a. Potential gross rent
28. Capital expenditures generally
a. Prolong the economic life of the structure
48. Which of the following type of real estate investment is the generally considered the least risky?
a. Properties net leased to a high quality tenant
39. ______ adjustments focus primarily on the physical and locational differences between the subject and comparable properties.
a. Property
31. Which of the following should be accounted for in the calculation of net operating income?
a. Property maintenance b. Rental income c. Vacancies
4. When estimating the net operating income of a property, which of the following expenditures would be included?
a. Property taxes b. Hazard and fire insurance premiums
51. Cash flows beyond first year of rental operations and changes in the value of the stock can significantly affect the total ¬¬¬____ of ___over the life of an stock
a. Rate of return
26. To complete the sales comparison approach, the appraiser ______ the adjusted sale prices of the comparable properties to obtain a single indicated value for the subject.
a. Reconciles
15. The property being appraised currently has no vacancy. What would you likely conclude if the typical vacancy rate for comparable properties in the market is 10%?
a. Rents at the subject property are too low
67. The estimated cost to build a structure with equal functionality (utility) as the existing structure using modern methods is generally referred to as the
a. Replacement cost
74. The estimated cost to build a structure with equal functionality (utility) as the existing structure using modern methods is generally referred to as the
a. Replacement cost
22. Which of the following is most likely to be classified as a capital expenditure?
a. Roof replacement
17. The most reliable approach to estimating land values is usually the
a. Sales comparison approach
31. The approach most relied on to value single-family homes is the
a. Sales comparison approach
59. All else equal, properties with riskier expected future cash flows
a. Sell at higher cap rates
26. Arbitrage means taking advantage of temporary differences in market prices to make a profit. Assume two real estate companies, A and B, both operate in New York area and focus on office properties. You have determined that Company A's shares have an intrinsic value of $20 per share but are trading at $22 per share, while Company B's shares are worth $25 per share but are trading at $22 per share. What would a rational investor (or an arbitrageur) do to take advantage of this price difference (no short-selling constraint and transaction fee)?
a. Sell short company A's shares, buy the same number of company B's shares.
54. Examples of physical differences that would require an adjustment to the sale price of the comparable include
a. Structure size b. Existence of a pool c. Lot size
29. The economic principle of ______ implies that the value of the subject property is determined by the sale prices of comparable properties.
a. Substitution
32. To calculate effective gross income in the presence of miscellaneous income, vacancy and collection losses are
a. Subtracted from potential gross income
16. To calculate effective gross income in the presence of miscellaneous income, vacancy and collection losses are
a. Subtracted from the potential gross income
34. Most appraisals of single-family homes are
a. Summary reports
3. Which of the following statements is correct?
a. The cash flows for an annuity due must all occur at the beginning of each period.
2. The average price-earnings multiples or ratios used to value the subject property come from
a. The sale prices of comparable properties
7. Which of the following statements about market value are true?
a. The specific bundle of rights associated with the property's ownership affects fair market value b. The fair market value is the most probable selling price
51. The expected (required) IRR of an investment is composed of a risk-free rate and the required risk premium. The risk-free component is compensation for
a. The time value of money
88. In ______, each approach to market value will produce identical estimates of value.
a. Theory
47. A comparable sale price should be adjusted for the terms of sale when
a. There was favorable seller-provided financing
2. Which of the following statements is correct?
a. Timelines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.
45. Which of the following investments is generally considered the least risky?
a. Total yield
8. Which of the following may be greater than market value for a given property that recently sold?
a. Transaction price b. Investment value to buyer
11. True or false: The goal of market analysis is generally to develop an understanding of the factors that affect demand and and supply in a particular market and use that knowledge to forecast how values in that market are likely to change over time.
a. True
12. True or false: Step 6 involves applying the three approaches to valuation.
a. True
14. True or false: The cash flow proceeds to the owner from the sale of the property is called the equity reversion.
a. True
22. True or false: Decisions based on net present value (NPV) will always be consistent with wealth maximization
a. True
23. True or false: Although most appraisal assignments involve the valuation of properties with improvement (buildings) on the land, appraisers often must separately value the land.
a. True
26. True or false: Effective gross income is affected by vacant space and by the extent to which current tenants have have lease rates that are below market
a. True
27. True or false: Although the use of financial leverage will usually increase an investments' expected rate of return on equity, it may also increase its risk
a. True
34. True or false: In the direct capitalization method, net operating income is divided by the capitalization rate to arrive at an estimated value.
a. True
36. True or false: Expected federal income taxes generally reduce the net cash flows realized by the investor(s) from annual operations.
a. True
4. True or false: USPAP addresses the ethical obligations of appraisers and provides the minimum appraisal standards that most be followed by all appraisers
a. True
42. True or false: The U.S. Federal Reserve ("The Fed") periodically increase interest rates when the risk of overheated economy is perceived. Rate hikes are viewed as bad for real estate investors because the present value of future cash flows is inversely related to the magnitude of the interest rate used for discounting.
a. True
45. True or false: Expected federal income taxes generally reduce the net cash flows realized by the investor(s) from annual operations.
a. True
46. True or false: The internal rate of return (IRR) is the discount rate that makes the present value of cash inflows from a particular investment equal to the present value of the cash outflows.
a. True
48. True or false: A typical commercial real estate pro forma contains the investor's point estimates or best guesses of income, expense, and future sale prices.
a. True
52. True or false: A comparable property having a different legal estate than the subject property should generally not be used as a comparable.
a. True
65. True or false: The use of an effective gross income multiplier is most popular in the valuation of apartment properties.
a. True
69. True or false: Replacement cost estimates are typically easier to obtain than reproduction cost estimates
a. True
72. True or false: A poor architectural design is an example of functional obsolescence.
a. True
77. True or false: DCF valuation is really a combination of DCF and direct capitalization.
a. True
80. True or false: Discount rates typically are determined by examining data on comparable property sales, evaluating the required returns on alternative investments of similar risk, talking to market participants, and reviewing investor survey information.
a. True
44. Which of the following investments is generally considered the least risky?
a. US Treasury securities
64. Generally, a current estimate of land value plus the reproduction or replacement cost of the building will set the ______ value of the property.
a. Upper limit to the
61. The rules for making adjustments to the sale prices of comparable properties include which of the following?
a. Use market-related adjustments b. make transactional adjustments in the proper order c. Adjust the sale price of the comparable toward the subject property
7. Timelines are useful because they allow us to ________ the time pattern of money returns.
a. Visualize
21. The final estimate of market value is usually a ______ average of the indicated values from the different approaches.
a. Weighted
23. Holding everything else constant, if the equity discount rate is greater than the effective borrowing cost, increasing the amount of financial leverage used to finance a real estate investment:
a. Will increase the calculated NPV
17. Tenants of specialized properties generally seek to sign leases
a. With longer lease terms
31. Assume an investment is expected to be worth $10,000 at the end of ten years and that you expect to earn 10% (annually) on investments of similar risk. The present value of this investment opportunity to you is therefore $3,855. Which of the following is true?
a. You're happy to pay $3,000 for this investment today. If you invested $3,000 for 10 yrs. at 10% you wouldn't accumulate $10,000 at the end of 10 yrs.
14. The concept of market value in formal appraisal practice includes
a. a competitive market b. most probable selling price c. buyer and seller acting prudently
41. In a "below-line" treatment of expected capital expenditures, capital expenditures
a. are subtracted from NOI to obtain the subject property's "net cash flow"
5. Potential gross income is defined as the total income the property would produce
a. assuming 100% occupancy and no collection losses
18. When you invest in a risky investment, you should expect to earn
a. at least what you could earn on an alternative investment of equal risk
11. The use of debt financing along with the investors' equity directly affects the property's estimated:
a. before-tax cash flow from rental operations
46. Cap rate information is often available from
a. brokerage firms b. data providers c. local research companies
72. The most common method used in DCF analysis to estimate the value of the subject property at the end of an expected 10-year holding period is to
a. capitalize NOI in year 11 into an estimated market value in year 10
32. Potential sources of data from public records include
a. cities and counties b. many agencies of the federal government c. local property tax assessors
40. The goal of the numerous required adjustments to comparable sale prices is to
a. convert each comparable sale into a closer approximation of the subject
66. If it is correctly estimated, the effective gross income multiplier reflects
a. current vacancy b. expected future vacancy c. expected rental growth
38. To abstract the cap rate from the sale of a comparable property, the appraiser
a. divides the NOI of the comparable property by the sale price of the comparable property
11. Potential gross income is equal to
a. effective gross income plus vacancy and collection losses
37. The projected amount of income that is "loss to lease" in a given year
a. equals what rental income would be if the property were fully leased at market rental rates, minus actual rental income
3. The use of a discounted cash flow valuation model requires the appraiser to
a. estimate NOI over the typical holding period b. determine the expected holding period of the typical investor
8. Projecting the cash flow performance of a potential investment opportunity beyond the investor's expected holding period:
a. forces the investor to consider all of the changes that could affect the property's long-term ability to produce cash flows
70. DCF analysis requires the appraiser to estimate
a. future cash flows from annual operations b. the holding period expected by the typical market participant c. the net cash generated by the sale of the property at the end of the expected holding period
68. DCF valuation models
a. generally are better able to account for differences in lease terms and features than direct capitalization models
51. Scenario analysis:
a. helps to evaluate the potential risk of the investment b. helps quantify the impact of important assumptions on NPV and IRR
18. The appraiser would only forecast renal income that is "loss to lease"
a. if market rental rates for some of the space in the property are above the contract rental rates being paid by tenants
33. The appraiser would only forecast renal income that is "loss to lease"
a. if market rental rates for some of the space in the property are above the contract rental rates being paid by tenants
36. he required number of comparable sales
a. increases as the reliability of comparable sale information decreases b. decreases if those comparables already selected are very similar to the subject property
46. ARGUS Enterprise:
a. is a software program for performing discounted cash flow analysis based on the assumptions of the analyst
20. The cost approach to valuation
a. is generally relied on most when data on comparable sales or the income producing ability of the subject property are not available
7. An observed transaction price:
a. is less than or equal to the buyer's investment value b. is greater than or equal to the seller's investment value
38. If the (going-in) IRR exceeds the investor's required rate of return, the investor
a. should accept the investment if she has the required equity investment available
1. "Income capitalization"
a. is the process of converting a forecast of net operating income into an estimate of current market value
49. A cap rate does not measure the expected total return because
a. it does not capture expected appreciation in the value of the property b. it does not capture cash flows beyond the first year of operations
52. Direct capitalization does not require the appraiser to estimate NOI for the subject property beyond the next 12 months because
a. it is assumed the buyers and sellers of the comparable properties had already done so
35. In order for the sale price of a property to be considered a good comparable for the subject,
a. it must be a property that typical buyers would consider a substitute b. it must have been an arms-length transaction
6. Valuation of real estate is complicated by the
a. lack of perfect substitutes b. lack of observable transactions c. immobility of real estate
18. The highest and best use of a property must be
a. legally permissible b. physically possible c. financially feasible
35. Holding everything but the loan-to-value (LTV) constant, the expected equity return (IRR) divided by the standard deviation of the equity return (IRR):
a. may actually decrease as as the LTV increases b. is a measure of expected return per unit of risk
2. Investment value:
a. may differ than market value b. is unique to the individual investor
33. Although increased financial leverage often increases the calculated IRR of an investment, this increase in the estimated IRR
a. may not be enough to offset the increased risk to the equity investor associated with increased leverage
58. Generally, the lower the capitalization rate used the
a. more certain the appraiser is of future net operating income
50. The Centre Point case example presented in this and prior chapters shows the general form of a real estate pro forma for an existing property. However, a typical "real world" pro forma contains:
a. more revenue detail than the Centre Point pro forma b. more expense detail than the Centre Point pro forma
34. In order for positive financial leverage to be observed in the calculation of NPV, the effective borrowing cost:
a. must be lower than the investor's discount rate
77. Physical deterioration may result from
a. neglect b. ordinary wear and tear c. weathering from the elements
48. To obtain a cap rate from the sale of a comparable property, the appraiser must obtain the comparable property's
a. net operating income at time of sale b. sale price
19. Appraisers generally forecast that a property's gross potential income will not be realized because
a. not all tenants pay rent in a timely fashion b. some tenants will vacate space before their lease term expires c. some tenants will vacate space after their lease term expire
1. If you know the value of one share of common stock in Simon Property Group (SPG), you know the value of all SPG shares because
a. one share is a prefect substitute for another b. SPG shares trade in a liquid public market c. the share price is continuously revealed throughout the trading day;
75. In the cost approach to valuation, which factors of "depreciation" are considered?
a. physical deterioration b. external obsolescence c. functional obsolescence
87. When there are differences in the indicated value from each approach, the appraiser should
a. place more weight on the approach that is the best indicator of value for the subject property type
25. In the presence of miscellaneous income, effective gross income is equal to
a. potential gross income, plus miscellaneous income, minus vacancy and collection losses
16. Net present value is equal to the:
a. present value of expected cash inflows, minus the present value of all expected cash outflows
62. Typically, higher expected growth rates in rental income
a. produce higher effective gross income multipliers
63. As the final step in arriving at the indicated value of the subject property based on the sales comparison approach, the appraiser must
a. reconcile the final adjusted sale prices of the comparable properties
53. Capitalization rates used to value the subject property are influenced by
a. returns available on alternative investments b. the risk of subject property c. expected appreciation rates of the property
35. In an "above-line" treatment of estimated capital expenditures, such expenditures are
a. subtracted from effective gross income in the calculation of net operating income
23. Effective gross income for the subject property is calculated by
a. subtracting estimated vacancies and collection losses from potential gross income
57. Each required transactional and property adjustment is made to
a. the adjusted sale price of the comparable after the prior adjustment
41. The investment cash flows most important to taxable equity investors are:
a. the after-tax cash flows from annual rental operations and sale
37. The subject property has a very nice pool. The comparable property does not have a pool. As a result,
a. the comparable's sale price would have to be adjusted upward
15. Which of the following should be included in the identification of the appraisal problem?
a. the intended use of the appraisal b. the effective date of the valuation c. the type of value to be estimated
73. Generally, the longer the lease terms associated with the subject property or the comparable properties,
a. the less reliable is direct capitalization relative to discounted cash flow
75. The accuracy of quantitative valuation techniques depends heavily on
a. the quality of the cap rate or discount rate assumptions employed b. the experience of the appraiser c. the quality of the appraiser's cash flow assumptions
6. A potential property acquisition with a higher going-in cap rate than comparable properties may signal:
a. the seller has delayed badly needed capital expenditures b. the seller's asking price is below market value
71. Reproduction cost is defined as the cost
a. to build an exact replica of the subject property
60. Cap rates
a. vary positively with expected returns on competing investment alternatives b. vary inversely with expected appreciation in the value of the subject property
76. Each approach to valuation has its strengths and weaknesses. In arriving at a final opinion of value, the appraiser should
a. weight the strengths and weaknesses of each approach, as well as the reliability of the data collected for each approach
37. Holding other assumptions constant, increasing the LTV will increase the equity dividend rate:
a. when the annual mortgage constant (annual payment divided by the net loan proceeds) is less than the going-in cap rate
28. Multiple IRRs are possible
a. when the signs of the cash flows (+ or -) change more than once over the expected holding period
20. The internal rate of return:
a. will exceed the discount rate used to calculate NPV when the NPV is positive
