FINA 366 final exam
Suppose that you are able to generate an annual depreciation deduction of $34,000 that would otherwise have been taxed at a 30% rate each year for 5 years. Determine the present value of the annual tax savings using a 7.5% discount rate.
$41,268
Given the following information, calculate the balloon payment for a partially amortized mortgage. Loan amount: $84,000 Term to maturity: 7 years Amortization Term: 30 years Interest rate: 4.5% Monthly Payment: $425.62
$73,102
Which of the following types of loans are often used to provide short-term financing for "transitional" properties (e.g., properties that are currently experiencing heightened vacancies, or that need to be redeveloped or renovated before they can be stabilized)?
Bridge Loan
Which of the following pieces of legislation established the requirement for a lender to report the annual percentage rate (APR) on a mortgage loan to the borrower?
Truth-in-Lending Act (TILA)
Assume that a borrower has a choice between two comparable fixed-rate mortgage loans with the same interest rate, but different mortgage terms, one being a 30-year mortgage and the other a 15-year mortgage. Under financially unconstrained circumstances, which of the following statements best describes the borrower's preference?
The borrower would be indifferent between the two mortgages.
Construction loans are used to finance the costs associated with erecting the building or buildings on a site. All of the following would be typical of a construction loan EXCEPT:
LTV rations above 90 percent
In contrast to residential mortgage loans, most fixed-rate commercial mortgages do not allow borrowers to freely prepay the principal on their loan. Which of the following prepayment penalties ties the penalty that borrowers pay to how far interest rates have declined since origination?
Yield Maintenance agreements
Certain costs associated with a property's upkeep as well as the manner in which it was financed can be depreciated and therefore have a beneficial impact on the tax paid by the investor in a particular year. Which of the following cash outflows is deductible for income tax purposes in the year in which they are made?
operating expenses
Direct investment in private commercial real estate markets is a preferred means of ownership for the largest institutional market participants. Which of the following types of institutions rely on stable income from commercial real estate properties to pay out retirement benefits?
pension funds
For purposes of federal income tax consideration, the distinction between dealer property and investment property is:
property type specific
Sharon purchased a new photocopier for her business. According to her accountant, she can deduct 1/7th of its original cost each year for the next seven years from her taxable income. This depreciation method is commonly referred to as:
straight line method.
The initial short-term introductory rate offered on adjustable rate mortgages (ARMs) is more commonly referred to as a(n):
teaser rate
With the recent popularity of adjustable-rate mortgages (ARM), lenders have begun to offer ARMs with different adjustment periods. Which of the following ARM choices will most likely have the highest initial rate?
ten-year-one-year ARM
U.S. tax law is designed to raise revenues for the operations of the federal government and to promote certain socially desirable real estate-related activities. Tax legislation is combined into a single section of the federal statutory law commonly referred to as:
the Internal Revenue Code.
In making single-asset real estate investment decisions, the first pass often involves calculating a series of returns, ratios, and multipliers. Which of the following is often cited as a limitation associated with this type of analysis?
they fail to incorporate cash flows beyond the first year of the analysis
In considering a 3/1 adjustable-rate mortgage (ARM), the interest rate will be fixed for how many years?
three years
The potentially large amount of taxes due on sale of commercial property has caused investors and policy makers to seek ways to defer taxes on the disposition of a property. A popular option has become for investors to swap one eligible property for another in order to avoid or defer capital gains taxes. Which of the following methods for deferring taxes does this describe?
like-kind exchange
In recent years, a number of pooled ownership structures have emerged that have changed the analysis of ownership form selection for many investors. Which of the following ownership structures is generally used for small, local investments that are marketed to accredited, but non-institutional investors?
limited liability company
Based on your understanding of the relation between the construction of a capitalization rate and a net income multiplier, which of the following statements best describes what we would expect to observe when comparing first-tier (Class A) properties to other property quality classifications within an individual property type?
low capitalization rates and high net income multipliers
The monthly mortgage payment divided by the loan amount is commonly referred to as the:
monthly loan constant
For purposes of federal income taxes, real property is classified into four categories. With which of the following types of real estate is the investor able to reduce his taxable income to reflect the wear and tear of a property over time?
trade or business property
Homeowners receive preferential tax treatment under current federal income tax laws. The benefits that homeowners receive from this treatment include all of the following EXCEPT:
Losses on the sale of a personal residence can be deducted from federal taxable income.
When examining a REIT's financial statements, GAAP net income will:
understate the funds that are available to distribute to investors as dividends since most real estate assets are depreciable.
The APR can be a controversial measure of borrowing cost because it tends to:
understate the true borrowing cost by assuming we hold mortgage until maturity.
In recent years, lenders have been unwilling to relieve borrowers from personal liability in the event of fraud, environmental problems, or unpaid property tax obligations. Therefore, some lenders include a clause that pierces the single-purpose borrowing entity to hold the actual borrower liable in such instances. This clause is commonly referred to as a:
"Bad boy carve-out" Clause
Suppose that you are able to generate an annual depreciation deduction of $20,000 that would otherwise have been taxed at a 30% rate each year for 7 years. Suppose that your taxes due on sale in year 7 will be $32,000 greater than if the property had not been depreciated. Determine the net benefit of depreciation assuming a discount rate of 6.5%.
$12,315
Suppose you have taken out a $125,000 fully-amortizing fixed rate mortgage loan that has a term of 15 years and an interest rate of 6%. After your first mortgage payment, how much of the original loan balance is remaining?
$124,570.18
Given the following information on a 30-year fixed-payment fully-amortizing loan, determine the remaining balance that the borrower has at the end of seven years. Interest Rate: 7% Monthly Payment: $1,200
$164,402
Given the following information, determine the unrecovered depreciable basis: Depreciable Basis: $300,000 Declining Balance Depreciation: 200% Cost Recovery Period: 7 years
$214,286
Assume you have taken out a partially amortizing loan for $325,000 that has a term of 7 years, but amortizes over 30 years. Calculate the balloon payment at maturity (Year 7) if the interest rate on this loan is 4.5%.
$282,835.42
Given the following information, calculate the after tax-cash flow for this property: Debt Service: $45,000 First-year NOI: $91,750 Tax liability: 25% of Before Tax Cash Flow
$35,062.50
Given the following information regarding an income producing property, determine the after tax net present value (NPV): Expected Holding Period: 5 years 1st year Expected BTCF: $30,6562nd year Expected BTCF: $33,3293rd year Expected BTCF: $36,0824th year Expected BTCF: $38,9185th year Expected BTCF: $41,839 1st year Expected Tax Liability: $7,6452nd year Expected Tax Liability: $8,6583rd year Expected Tax Liability: $9,7084th year Expected Tax Liability: $10,7985th year Expected Tax Liability: $6,951 Estimated Before Tax Equity Reversion at the end of year 5: $343,674Expected Taxes Due on Sale at end of year 5: $32,032Required equity investment: $241,163After Tax Opportunity Cost: 11.2%
$40,858
In discounted cash flow analysis, the industry standard for pro forma cash flow projections of investment properties is typically:
10 years
The value of a property can be thought of as having two components, a land component and a building component. Since the land component of the original cost basis is not depreciable, it is important to understand how much of the property's value is typically attributed to the land for tax purposes. As a general rule, the value of land constitutes what percentage (expressed as a range) of the total value of a commercial property?
10% to 30%
Given the following information, calculate the accelerated rate of depreciation that can be applied to the unrecovered basis: Depreciable Basis: $100,000 Declining Balance Depreciation: 150% Cost Recovery Period: 15 years
10.0%
Given the following information, calculate the price-FFO multiple for the following REIT:Funds from Operation: $4,000,000 Stock Price: $40 Shares Outstanding: 1,000,000
10.00
Given the following information, calculate the equity dividend rate for this investment: First-year NOI: $18,750 Before-tax cash flow: $11,440 Acquisition price: $520,000 Equity Investment: 20%
11.0%
Given the following information, calculate the debt yield ratio on the following commercial property. Estimated Net Operating Income in the first year: $2,500,000 Debt service in the first year: $960,000 Loan amount: $20,000,000 Purchase price: $27,300,000
12.5%
Given the following information, calculate the going-in capitalization rate for the specific property: First-year NOI: $18,750 Acquisition price: $150,000 Equity Investment: 20%
12.5%
Assume you have taken out a balloon mortgage loan for $2,500,000 to finance the purchase of a commercial property. The loan has a term of 5 years, but amortizes over 25 years. Calculate the balloon payment at maturity (Year 5) if the interest rate on this loan is 4.5%.
2,196,447.59
Limited liability companies (LLCs) and limited partnerships are preferred to corporate ownership structures because these forms of ownership allow investors to obtain limited liability and avoid the double taxation faced by corporations. This tax benefit can be extremely important as the maximum capital gain rate for corporations remains at (as of 2019):
21%
Since many commercial properties are held by limited liability corporations or limited partnerships, it is important to understand the tax consequences at the individual investor level. Individuals face different tax rates depending on the level of their taxable income. As of 2019, an individual making between $84,201 and $160,725 would fall into which of the following tax brackets?
24%
Given the following information, calculate the straight-line depreciation rate for the second year: Cost recovery period: 27 ½ years Date of purchase: June 12th
3.63%
Given the following information, calculate the Effective Borrowing Cost (EBC). Loan amount: $175,000 Term: 30 years Interest rate: 7% Payment: $1,164.28 Discount points: 1 point Origination fee: $3,250 Assume the loan is held until the end of year 10.
7.4%
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%
7.8%
The loan-to-value ratio measures the percentage of the acquisition price (or current market value) encumbered by debt. To protect their invested capital in the event that property values do fall, commercial mortgage lenders generally require that the senior mortgage not exceed approximately what percentage of the acquisition price?
80%
Suppose you are considering the purchase of an apartment building that has 12 units that can be rented out at $1,050 per month. You have estimated operating expenses and expected vacancy and collection losses for the first year to be $35,700 and $30,240, respectively. You also have estimated that you will be able to generate an additional $3,840 in the first year from garage rentals on the property. If the expected purchase price of the property is $1,100,000 and you are planning on making a 10% down payment, calculate the debt yield ratio.
9.00%
Given the following information, calculate the price-FFO multiple for the following REIT:Net income: $1,200,000 Gain/losses from infrequent and unusual events: $0 Amortization of tenant improvements: $120,000 Amortization of leasing expenses: $75,000 Depreciation (real property): $2,675,000 Stock Price: $40 Market Capitalization: $40,000,000
9.83
Which of the following statements best describes the relation between interest rates offered on comparable fixed-rate and adjustable rate mortgage (ARM) loans?
ARM interest rates are typically less than those on fixed-rate mortgages since interest rate risk is borne by both borrower and lender in an ARM.
If mortgage rates decline significantly, borrowers may decide to prepay the principal on their loan even if they face prepayment penalties. One way that lenders protect themselves from prepayments in such circumstances is by requiring the borrower who prepays to purchase for the lender a set of U.S. Treasury securities whose coupon payments replicate the cash flows the lender will lose as a result of the early retirement of the mortgage. This process is referred to as:
Defeasance
The direct ownership of commercial real estate produces cash flows from rental operations and, perhaps, cash flow from an eventual sale of the property. Since financial leverage and tax considerations play an important part in determining an investor's returns, the measure of investment value most relevant to investors is the present value of:
after-tax cash flows (ATCF).
Based on your understanding of the differences between levered and unlevered cash flows, which of the following is an example of a levered cash flow?
before-tax cash flow
The use of financial leverage in purchasing an income-producing property can affect the amount of cash required at acquisition, the net cash flows from rental operations, the net cash flows from the eventual sale of the property, and the ultimate return on invested equity. Assuming the going-in IRR is greater than the effective borrowing cost, if an investor increases his leverage rate, say from 75% to 80%, we would expect which of the following to occur?
both NPV and going-in IRR increase
For the purposes of estimating the effective borrowing cost (EBC), only those up-front expenses associated with obtaining the mortgage should be included, not the settlement costs associated with obtaining ownership of the property. With this in mind, which of the following costs should not be included in one's calculation of EBC?
buyer's title insurance
Profitability ratios, income multipliers, and financial risk ratios can be used to provide a quick assessment of a property's relative value. Which of the following ratios measures the overall income-producing ability of the property?
capitalization rate
Single year return measures and ratios can be categorized into three groups: profitability ratios, multipliers, and financial ratios. All of the following are considered financial ratios EXCEPT:
capitalization ratio.
From a federal tax perspective, properties that are held for sale to others (i.e., viewed as inventory) would be classified into which of the following categories?
dealer property
The use of financial leverage when investing in real estate is a double-edged sword. While increased leverage may allow the investor to "purchase" higher expected returns, the "price" of doing so is an increase in which of the following risks?
default risk
The internal rate of return on a mortgage loan calculated from the lender's perspective is more commonly referred to as the:
effective borrowing cost.
The choice of ownership form for pooled equity investments can also depend on the desire to avoid personal liability. Which of the following ownership structures suffers from the major disadvantage of unlimited liability for all investors?
general partnership
Net present value (NPV) is interpreted using the following decision rule: The investor will purchase the property as long as the NPV is:
greater than zero
Real estate private equity funds have been used to facilitate investment across the risk-return spectrum. All of the following are characteristics of investments by core funds EXCEPT:
high expected returns
