FIN323- Final
In 2018, you are considering purchasing a property for $2,000,000 which was certified "Historic" by the National Parks Service. The plan is to renovate the building and take the maximum tax credit allowed under the 2018 tax code. Assume a discount rate equal to the 5-year treasury (2%). Under the new changes in the tax code, what would the tax credit be worth in present value dollars?
$377,777
Who is Michael Porter?
A Harvard Professor who has published several books on the competitive advantage of nations
You are considering purchasing one of several office buildings. At this stage in your research, you only have been given the break-even ratio over a four year period as the basis for making this potential purchase. Which would you consider to be the best choice based on this metric? The series contains the year and break-even ratio in the following format: ( year 1, break-even ratio) ; ( year 2, break-even ratio) ; ( year 3, break-even ratio) ; ( year 4, break-even ratio)
(2015, .91) ; ( 2016 , .89) ; (2017 , .88); ( 2018,.86)
You are a residential construction contractor considering forming a partnership with two other individuals. This partnership would support a larger marketing program and the possibility of qualifying for larger government contracts. What might be a consideration(s) that would discourage you from forming this partnership?
-Decision making could be more complex, getting agreement on major financial decisions could be an issue -A financial loss incurred by one member of the partnership becomes a shared liability -Illegal activities conducted by one of the other partners could increase my legal exposure because a costly legal action is shared by all partners
Pittsburgh was able to recover from a loss of jobs in the steel industry in the 1960's. Which were factors in Pittsburgh's recovery?
-Government support for auto part manufacturing facilities in the region creating new demand for steel products. The result has had a positive impact on steel manufacturers in the Pittsburgh area -The emergence of a revitalized steel industry -The location of institutions of higher learning
A strong economy and a weak housing market is possible according to Neil Irwin in his article, "Why the Housing Market is slumping despite a Booming Economy" because in 2017. Which statement(s) is(are) TRUE?
-Housing sales are linked (dependent) on incomes -Even in communities where incomes have shown marked increases, housing costs have increased more on an annual basis -A survey of home buyers shows a lack of positive sentiment when it comes to home purchases
Which reasons support the acquisition of a historic property as a possible investment opportunity?
-If the property is an apartment building there is also an opportunity to qualify for the low-income housing credit -There may be state grants, credits and tax abatements that would offset the expense of renovation -if the property qualifies, there is a tax credit for rehabilitation of 20% over 5 years
Why is it difficult to buy a property when it is cheap and sell when property values are high? Consider a time horizon of 10-15 years. Which statements are TRUE?
-It is difficult to know when you are at the bottom of a trough in a business cycle -The Kondratieff cycle obscures the normal business cycle -It is difficult to know when you are at the top of a peak in a business cycle
Gravity models are often used to predict retail sales. Which statement would the model support?
-Larger shopping centers attract proportional more shoppers on a per capita basis than smaller shopping centers -Two shopping centers in close proximity, the larger shopping center will attract a proportionally great number of shoppers on a per capita basis than the smaller shopping centers
Which is true about a C-Corporation?
-Ownership is easily transferred -Limited liability for investors
San Francisco and the East Bay (Silicon Valley) have experience rapid growth since the 1960's. Which of the following are directly attributed to this growth.
-Public transit systems including BART (Bay Area Rapid Transit) are over stressed -Rental rates have increased over the last several decades -In recent years companies have considered relocating to other urban centers in the US -Home prices have increased dramatically since the 1960's
I just received a report that indicates that one of our building has a break-even ratio of .924. Which action should I take if I want to improve our financials? It is important that our profit & loss statement presents a positive picture. I am anticipating a sale of the property before the end of the year. Closing statements for the year are still eight months away, so it might be possible to make some changes and have an impact on the financial health of this operation.
-Renegotiate with the bank for a lower interest rate on the existing loans -Renegotiate with the bank for a lower interest rate on the existing loans
What actions could I take prior to the sale of an apartment building that might result in a higher selling price?
-Repair the lobby entrance, replacing broken floor tiles -Renegotiate leases, escalating the rents
Which statement(s) is(are) TRUE about GDP and the housing sector?
-Residential construction will exaggerates the peaks and troughs of GDP -Though multi-family construction is smaller in size and lags residential construction, it will exaggerate the peaks and troughs shown in GDP over time -Residential construction will impact GDP indirectly, given new home construction is a stimulus for other sectors of the economy
As portfolio manager of real estate portfolio, why would you adopt the approach presented by Gabriel A- Peterson, in the article on the "Performance of hotel investment in a multi-property commercial real estate portfolio"?
-Selecting investments with returns that have a negative correlation have the potential for increasing the sharp ratio associated with a portfolio -The use of efficient frontiers can be a useful approach to minimizing risk and increasing return -Historical data can be used as a tool in creating investment portfolios that can offer greater returns without an increase in the level of risk
Which of the following statements are true about market timing?
-Selling properties is difficult in a recession -Purchasing a property at a premium will make it more difficult for the owners to make a profit in a bear market (depressed market) -Demand for rental space is less during a recession
Of those listen which provide bond rating services?
-Standard & Poors -Moody's
Which statement(s) is(are) TRUE?
-The housing supply in the short term is inelastic -With rising incomes there is a growing demand for housing forcing the price of housing higher -In the short term, single-family home construction will adjust more quickly to demand than multi-family home construction
In the article by, Roddewig Shales and J. Shales, J. (1983) Analyzing the Economic Feasibility of a development Project, An Investment Analysis Approach to Public Incentives for Private Development, Chapter 2, Which are reasons why a developer would borrow to finance a development project
-The tax code favors projects with debt -Many project benefit from positive leverage even when interest rates are high -Developers often lac sufficient capital to pay all the costs associated with a project
On page 3 of the prospectus for a project by Walton (see the section on Syndication under Lesson 6) it states: The Partnership's investment objectives are to: (a) preserve Limited Partners' capital; and (b) provide annual cash distributions to Limited Partners beginning in 2011 until the completion of the Project, which is anticipated to be in December of 2015, representing a Net IRR of 13.5% based on the $10.00 purchase price of the Units under this Offering. IRR seeks to establish the present value of anticipated cash distributions by using a discounted cash flow. The distributions for purposes of calculating the Net IRR herein is based on the revenues, costs and timing described under "The Property, Area and Investment Plan - Big Lake Investment Plan". Which statements are true about this offering. (Refer to the document "Walton Big Lake Development") Hint: See the section on risk
-There is the potential for the discovery of archaeological sites on the property, which may require the partnership to preserve the site at its expense and refrain from developing all or a portion of the Property -The state of sub-prime market in the US and Canada could impact the success of this project by impacting future residential property prices
Why is it difficult to measure the number of individuals who are currently unemployed? Which statement(s) is(are) TRUE?
-Those who have not workers for some time are considered unlikely to return to work -Government unemployment statistics are based on those who are currently collecting unemployment insurance -Many individuals work for cash and are therefore not counted by government statistics
Which is(are) TRUE about the technical analysis?
-Trends can be predicted from prior data series -First and foremost, analysis of a company's balance sheet can provide insight into a company's value -Financial metrics are key to an understanding of the market -The prices reflect the relevant information about the market
As the officer of an insurance company, you have only received a balance sheet and profit & loss statement as part of the loan application for an apartment building purchase. What additional information would you need before you approve the loan that you could NOT obtain from the balance sheet and P&L statement?
-When the current leases are due to expire -The physical condition of the building
The XBA Real Estate Group states in their prospectus that they buy buildings for cash and rent them out to tenants under a triple net lease. Which statement is generally TRUE about this strategy when compared with buildings that are financed with debt?
-Without debt payments to make on a mortgage, there is a greater potential for generating significant cash flows on an annual basis -For the owner who has bought a building with all cash, inflation is of less concern given the tenant must pay insurance, taxes and maintenance costs
In calculating GDP which two factor are the MOST difficult to account for?
-Work of part time employees working for cash -Illicit activities including the drug trade
Which are factors that impact the demand for new residential development?
-Zoning policy -Population growth -Availability of labor needed by the construction industry to build new projects
We asked our CFO to calculate the NPV for a cash flow stream for an investment under consideration. To be accepted it must produce a rate of return which is greater than 5.5%. The resulting NPV calculation gave a value of $8612. If the value for NPV is the only consideration in making this decision. What should be the decision?
Buy the investment, it satisfies the test
Detriot experienced in the 1960's began to decline as a major manufacturing center. Which is NOT a major factor that contributed to this decline?
Cost of capital
What is true about lending rates for development projects?
If roads and services are completed, we should expect a lower interest rate on the next phase of the project
Which is the best illustration of how population centers distributed themselves across the landscape according to Walter Christaller's work on Central Place Theory?
Iowa
Match the term "Business Cycle" with one of the definitions listed below:
Period of growth and contraction generally lasting 4 to 7 years
If I am looking for an optimal balance in an investment fund that has a goal reducing risk (volatility), which of the following points is optimal (one that offers the greatest return at the least amount of risk)
Point D
Which trend would be possible to predict with the greatest certainty over the next 10 years?
Population growth of Hartford CT
In the US, which of the following is responsible for the largest share of new real estate development?
Private sector
The Concord Group, Inc. plans to apply for a mortgage with a local bank. The loan will be used to acquire an office building. Which is generally not a requirement for the loan application?
Proof of life insurance on the president of the company with a face amount equal to the new loan value
You are considering purchasing an office building in Boston for a pension fund. You plan to hold the property for 10 years. The properties under consideration are listed below. Based on this data which property would you purchase? Hint: what is the HPR for each case. Use Excel to solve this problem.
Property 103: Cap rate 5.48%, NOI is expected to be 15% higher in years 3-10
Which would not be a likely member of your team in the early stages of a developing real estate project?
Public Relations Consultant
If you are an investor in real estate who is risk-averse, which strategy would you NOT consider
Purchase of real estate with a variable rate mortgage
In which quadrant would you place a saving account at a bank
Quadrant 1
In which quadrant would you place an investment fund that focuses on a mutual fund that focuses on high tech startup companies
Quadrant 4
In conducting an appraisal of a residential property using the comparison method (Comparable) which part of the evaluation would be the most difficult to establish a dollar value?
Quality of local public schools
The distance to the center of the central business district is one variable often used to predict land values and rents. Other variables are commonly added to improve the predictability of the model. If this is a statistical model, which variables would be the most difficult to account for in this model.
Quality of the public schools
Which best describes incentive zoning?
A system of bonuses which rewards the developer for creating a building that provides public amenities
For the three investments, you have been given to following information. What is the Sharpe Ratio for each investment? Assume 3.5% for the risk-free rate.
ABC 4.77; XYZ 3.54; TYR 2.78
Which is not an asset on a balance sheet?
Accounts payable
Which is NOT a liability?
Accounts receivable
You are conducting an appraisal for a house located in East Providence. The house has the following attributes: lot size 14,100 sq. ft.,; floor area 2375 sq.ft.; 4 bedrooms; 2 baths; 2 car garage; appliances are original; year of construction 2016. In making this appraisal you plan to use a recent sale of a house ($485,000) that has the following attributes: Lot size 13,904sq. ft.; floor area above the basement 2445 sq. ft.; 3 bedrooms; 1 office space (den); 2 full baths; one half bath; 2 car garage; appliances were replaced in the last year and the year of construction was 1972. Which factor would you have to make the greatest dollar amount adjustment in making this comparison?
Age of the house
In using the income approach, which would be of least concern in making your valuation
Amortization of the mortgage on the property
Which statement is NOT TRUE about the yield curve?
An inverted yield curve signals a potential economic recovery
Appraisers are LEAST LIKELY to be found working for
Architectural design firms
According to Neil Irwin, in his article "The Economy Needs More Workers. Last Month, It Got Fewer". Which statement is NOT TRUE.
Average hourly earning have fallen 2.9 percent in the last year (2018)
What is the key difference that sets real estate apart from other financial assets?
Real estate is a fixed asset
As a property manager reviewing the profit and loss statement for a commercial building, which expense item is the hardest to predict over the next year? See: William Poorvu, "Financial Analysis of Real Property Investments"
Real estate taxes
You are the CFO for a real estate investment company. The Eastern Bank of New England has reviewed your loan application and there is concern about company's current ratio noted on the balance sheet and has not approved your loan. As the CFO for the company, which would be the best action to take over the next six months that would help you secure the loan with the Eastern Bank of New England?
Reduce current liabilities through prudent management
Which statement is NOT TRUE regarding the least-cost model of Alfred Weber?
Server farms need to be located in the central business district of larger metropolitan centers
Which is not part of the definition of SWOT?
Shortfalls
Which statement is true concerning the distribution of income and wealth over the last century?
Since the 1970s, income and wealth inequality has increased in the US
According to Philips and Russel in their article "The Next Financial Calamity is Coming? Which statement is NOT TRUE?
Student loans is the largest category of consumer debt in the US larger than any other debt category
Which is NOT generally a step in building a model for economic prediction?
Submit any proposed model to the Bureau of Economic and Statistics for review
Which is NOT an assumption underlying the urban land use model described by Paul Wadell in "Modeling Urban Development for Land Use, Transportation and Environmental Planning"?
The model assumes that adjacent communities can influence development in the areas which are being modeled
In calculating the annualized holding period return (AHPR) which of the following is not need for this calculation?
Year of purchase
In calculating the NPV for a cash flow stream, which is true? (Hint: if you are unsure of the answer to this question, construct a simple spreadsheet in Excel using the NPV function).
-A lower discount rate will increase the value for NPV -A discount factor of 0 will result in an NPV equal to the sum of the cash flow stream -A higher discount rate will decrease the value for NPV
You are instructing your statistical consultant to create a model that will be used to predict the value of single family homes in the city of Hartford, Ct. Which would be a dummy variables in your model. (Select all that apply) Hint: A factor can be assigned than one dummy variable.
-A property on the historic registry -Fire Hydrants within the neighborhood -quality of the schools
In Archer's article on the Three Dimensions on Real Estate Markets: Linking Space, Capital and Property Markets, which is true?
-A two-market model doesn't account for the location of a property -In a three-market model, the location has an influence on the level of risk associated with real estate investments -Cap rates in a three-market model are influenced by the direction of local rents -Income taxation is largely an exogenous factor
Which features would have been important features in apartments built for upper income households around 1910?
-Air Conditioning -Stove -Refrigerator
According to Porter which strategy or strategies best apply to the home building industry?
-Being a low cost producer of housing for a large segment of the population -Differentiation- being a leader in one sector with quality product
If real estate investment is like a bond, which of the following statements is true?
-Both assets can generate a positive annual cash flow -Appreciation of both assets is possible over the holding period of the asset -A potential loss can be generated if the market value of the investment should fall
How does buying a bond at a discount or premium impact yields?
-Buying a bond at a discount will increase the yield over the holding period -Buying a bond at a premium will decrease the yield over the holding period
According to the article Real Estate Investment Trust Corner By James M. Lowy, Mark Fisher and Robert D. Schachat, which statement(s) are true concerning the 75% rule and REITS?
-Construction equipment, grading equipment and other equipment used to carry out the improvement of real property qualifies -Tangible personal property will not be treated as real property for the purposes of being considered a REIT -Foreign real property and security interests in foreign real property, which are the legal equivalents of U.S. mortgages or deeds of trust will qualify as a "Real Estate Asset"
Which is NOT a factor that will contribute to the next downturn in the economy according to Philips and Russel in their article "The Next Financial Calamity Is Coming? Here's What to Watch".
China's total accumulated national debt is 50% of what it was in 1989
How does debt impact the economy? Which is NOT TRUE?
Debt acquired in the purchase of a home as a long term investment does not benefit the individual nor does it ultimately benefit the economy because it increases debt levels
How can economic indicators be used to predict trends that are helpful in examining the real estate market? Which is NOT true?
During an economic recession, reductions in single family-home construction generally lags behind multi-family home construction
As a bank lending officer, which company would you favor for a loan based on the data below:
East Coast Realty: Current ratio 1.24, Debt to equity ratio 1.80
According to Robert Shiller in his article "The Housing Boom is Already Gigantic. How Long Can It Last?" Which statement is NOT true?
Economic models should make it possible to predict when the next bubble if and when it will occur. It will most likely occur in the next two to three years
In the formula for calculating GDP, which term is NOT part of the mathematical expression?
Employment
According to August Loesh, "Central Place Theory" would predict the relative concentration of activity based on population. Which is NOT TRUE?
Higher concentration of internet traffic dollars (on a per capita basis) are associated with rural communities
The concentration of high tech workers potentially impacts urban life in cities like San Francisco, Austin, and New York. Which of the following would have the greatest consequences for lower-income residents who are not working in high tech industries?
Higher rents
Why do we sometimes demolish buildings that are still functional?
Higher returns can be achieved with newer building that potentially will generate better long term returns
What is NOT TRUE about the risk-free rate?
It never changes in value
Which is NOT an expense in NOI calculation?
Leasing commissions
I am looking for a new location for a car dealership in Hartford CT. Which would have the LEAST IMPACT on an initial search for a new site?
Lending rates for commercial real estate
Which investment would offer the greatest potential return and the most risk.
Limited partnership that acquires land to be sold to developers of residential developments
If I was looking for a location for a camera retailer for professional and serious amateur photographers in New York City. Which would be the MOST IMPORTANT factor to consider as part of the site selection?
Location of other camera outlets
The Malthusian trap or the principle elaborated in Robert Malthus' "Principles of Population" includes ALL BUT which proposition:
Marriage at an earlier age is a positive check on population
You have been asked to review three statistical models which will be used to calculate the appraised value for multi-family properties in Boston. Based on the statistics provided below which model would you select. (Bonus Question) Model 301: has an R Square of .154 and an adjusted R Square of .021 Model 710: has an R Square of .954 and an adjusted R Square of .921 Model 445: has an R Square of .025 and an adjusted R Square of .121 Model 221: has an R Square of .954 and an adjusted R Square of .923 Model 555: has an R Square of .525 and an adjusted R Square of .501
Model 221
An appraisal is being conducted for Parcel 16678, a wooded lot (4.1 acres) that has a slope on over 20% of the site. Comparable B, Parcel 128902 is a level wooded lot (4.05 acres) that sold recently for $530,000. There is also a small building on Parcel 128902) which has a value of $28,000. What can you say about the two properties in your appraisal?
Parcel 16678 should sell for less than $502,000
Which is not a leading economic indicator?
Number of unemployed
Given the four cash flow streams beginning in year 1 which is the best option if NPV is your test? Assume a discount rate of 6 for all cases.
Option 2: -90,000, 4000, 4000, 4000, 4000, 210,000
David Ricardo was an economist who wrote about land rents. Of the statements below, which is NOT TRUE?
Taxes on land cannot be passed down to tenants
In selecting comparables for an appraisal. Which would be of greatest concern.
That the comparable and subject are in the same or similar neighborhood
The determination of the "highest and best use" implies certain criteria should be met. Which is NOT a requirement in the determination of the "highest and best use" for a specific property.
That the current owner of the property may make improvements or repairs to the property sometime in the future
The market price for a property assumes that certain conditions are met. Which is NOT one of those assumptions?
The real estate market is trending upward
The sector theory of Homer Hoyt can be considered a variation of Burgess', "Concentric Ring Theory". What is the most important distinction between the two theories?
The sector theory considers historical development very important in the evolution of a city over time
A client has asked your help in making an investment decision. They would like to place their money in an investment that generates high rates of return with little associated risk. In preparing your report you plan to make a reference to the risk-reward matrix. Which statements would you NOT include in your report?
There are numerous investment choices that provide high returns and low risk
Match the term "Kondratiev Cycle" with one of the definitions listed below:
These cycles are associated with major periods of innovation that can often last decades
Which is generally true about appraisals in real estate?
They are estimates generally with an accuracy of a 5-10%
If the depreciation schedule for an investment property was changed from 27.5 to 23 years, which is true
This proposal will give us greater tax benefits based on NPV calculations
If I am Burger King (a fast-food chain) and I was interested in a new location for my next restaurant in Providence. Which would have the LEAST IMPACT on an initial search for a new location?
Utility rates
Von Thuen's research focused on land rents. Which statement is NOT TRUE?
Von Thunen's research assumes the farmer has only one option. They are NOT able to choose among a number of crops to plant
Which statement is FALSE about Wal-Mart, according to the article by Emek Basker, "The Causes and Consequences of Wal-Mart's Growth"
Wal-Mart's investment in information technology has not have increased its own productivity over the last several decades because labor costs are a large component of Wal-Mart's operations
