Q&A Hero

Q: The primary risk to the purchaser of a MPT containing GNMA securities is: a) Early prepayment b) Default risk c) Over commitment of GNMA backstop funds d) Problems with sub prime loans

Q: Which of the following was not a factor in the early development of the secondary mortgage market? a) VA and FHA guarantees b) Deregulation of interest rates c) Standardized underwriting d) Availability of title insurance

Q: Does it ever make sense to give the "keys" back to a lender? If so, under what circumstances?

Q: Five years ago you invested in a brand new 100,000 square foot office building. The building was fully leased to great tenants with 10 year leases. You financed your purchase with a ten year mortgage at a rate that would be considered high in todays market. You can refinance today and get a new ten year loan at a lower rate. You will however be required to pay your current lender a steep prepayment penalty. You can also wait until the loan comes to term and repay the loan without any penalty. This was your plan until you recently read about a brand new office park being discussed for the old farm just a mile down the road. Coincidentally, this development, if built, could open just as your tenant leases are coming up for renewal. What are your thoughts?

Q: Refinancing of a sub-prime loan At the end of 2 years your income is now $55,000 per year. The value of your house is up to 300,000. Instead of accepting the new 9% interest rate, can you refinance with a traditional loan (terms as stated in example 13) in an amount sufficient to pay off your mortgage? What is the maximum amount you can qualify to refinance?

Q: Subprime loan underwriting as an alternative The bank in (13) offers you a sub prime adjustable rate loan with 30 year amortization and a teaser rate of 2% for the first two years, maximum LTV of 90%. At the end of that period you can refinance or the rate adjusts to 3% over then current 10 year treasury. The 10 year T at the end of two years is forecast to be 6%. (At that point the remaining principal balance will amortize over the next 28 years). Do you qualify for the teaser loan? How much will your monthly payment rise at the reset date?

Q: Home mortgage qualification You make $50,000 per year and you want to buy a home that costs $250,000. The bank says that you can qualify for a traditional 30 year 7% mortgage at 80% loan to value if the debt service is less than 25% of your monthly pre tax income. Do you qualify?

Q: Debt Service: Impact of Amortization Little John Investors owns a 30,000 square foot big box store on a triple net lease to King Size Lots. The property is subject to a ten year 7% interest only loan with an original principal amount of $5 million. This loan has 8 years to maturity. The bank has offered the group a new ten year loan with proceeds equal to the old loans outstanding balance at 5% requiring 25 year amortization. If maximizing annual cash flow for distribution is Little Johns only criteria should they take the new loan?

Q: Maximum Loan Size The maximum amount that the Stage Coach Bank and Trust will lend is determined by the bank credit committees loan underwriting standard. This standard looks at the property ability to support a minimum Debt Service Coverage ratio of 1.4x and a maximum 65% loan to value. The asset presented to committee has adjusted NOI of $ 5 million. The loan officer believes the property would trade at a cap rate of 8%. Loans on similar properties have ten year terms with interest rates of 7% and 25 year amortization schedules. How much will the bank lend?

Q: Structuring a workout You can no longer service your loan on Bluestone Park (9). You use your own cash to support the deficit on the property. At the end of year six you are out of cash and approach the bank for a workout. The bank offers to suspend amortization payments and lowering the interest rate by 1% to 6%. Does this help?

Q: A downdraft hits the real estate market and tenants start leaving Bluestone Park (8) at the end of year 3. Cash flow declines 15% year over year in each of years 4 thru 6. Does the property generate enough cash in year six to service the debt?

Q: Calculating amount available to borrow and amortization Bluestone Office Park generates net annual cash flow of $220,000 in year one. The net annual cash flow is estimated to grow at 5% per year over the next ten years. The bank offers a 7% interest rate on a ten year loan with 25 year amortization. The initial loan amount is subject to the tighter of a) 1.1x coverage test or b) 70% loan to value test. Assume the property is always valued at 12x net annual cash flow. How much can be borrowed? What is the actual loan to value at the end of year 5 and at the loans maturity at the end of year ten?

Q: Calculating Loan size (impact of LTV) The lenders credit committee believes that no loan should be made at a loan to value ratio above 65%. Assume that the bank values the property at 10 times cash flow. Can the borrower in number (6) borrow the full amount of proceeds available assuming the coverage test of 1.25%?

Q: Calculating loan size (impact of amortization) The lender on the property in (5) also offers a 7.0% loan and requires that the loan follow a thirty-year self-amortization schedule during its ten year term. How much can be borrowed assuming the same 1.25 debt service coverage requirement. What will be the remaining principal balance at the end of the ten year term?

Q: Calculating loan size (interest only) A property generates $100,000 in net annual cash flow. The lender requires debt service coverage of 1.25 times on a ten year interest only loan at an 8% annual rate. How much can be borrowed on this property?

Q: Loan To Value Upmarket Builders, a builder of fine homes, owns twenty 2 acre lots in a subdivision outside of Princeton, New Jersey. The 5,000 square foot homes built on these lots will sell for $2 million. Appraisers value the lots at 30% of the final home price. Regent Bank is willing to make a land loan at a 50% Loan to Value. How much will they lend?

Q: Debt Service Coverage New Market Commons has adjusted NOI of $4 million. The bank is willing to make a ten year 6% $ 20 million loan with a 30 year amortization schedule. What is the debt service coverage ratio?

Q: Debt Service You just placed a ten year $15 million CMBS loan on your warehouse with an 8% rate and a 25 year amortization schedule. What is your annual debt service?

Q: Which is not a risk associated with mortgage lending? a) Obsolescence b) Interest rate change c) Default d) Prepayment

Q: The amount owed by a borrower minus the foreclosure proceeds equals: a) Equity of Redemption b) Deficiency Judgment c) Junior Lien d) Conveyance Proceeds

Q: Which is not an alternative to foreclosure? a) Workout b) Deed in Lieu c) Restructuring d) Acceleration

Q: A loan secured by property with a further guarantee of payment by the borrower is called: a) Release of Dower b) Non-Recourse c) Covenant of Seisin d) Recourse Loan

Q: Which clause allows a buyer to keep the sellers mortgage in place? a) Assignment Clause b) Assumption Clause c) Due on Sale Clause d) Acceleration Clause

Q: Many public real estate companies have the option of seeking either entity or property level debt to finance their capital requirements? Assuming that both markets are accessible to the company, what are the factors that require consideration when deciding which market to approach?

Q: What are some of the features of an investment in commercial real estate that makes it attractive to investors?

Q: General Match at least 5 correctly: A___ Direct Investment 1__ Fee Interest B___ Indirect Investment 2__Pension plan based on performance C___ Principal 3__Works on their own behalf D___ Agent 4__REIT Stock E___ Ground Lease 5__Works on behalf of another party F___ Defined Benefit Plan 6__Right to utilize land G___ Defined Contribution Plan 7__Set monthly pension payment

Q: Market size Which market is larger? a). US Commercial Property b). US Residential Property

Q: Sources of financing US Government Sponsored Agencies support lending to which of property types listed? a) Office buildings b) Retail centers c) Industrial and warehouse d) Multifamily

Q: Derivatives Which of the following are options? I. Future II. Put III. Swap IV. Call a) I b) II, III c) II, IV d) III

Q: Joint Ventures Which types of returns are not typically earned by the operating partner in a joint venture: a) Promoted interest b) Carried interest c) Pro rata interest d) Preferred interest

Q: Financing sourcesMatch the following with its most likely source a) Construction loanI. Investment bankb) Balance sheet loanII. CMBS underwriterc) REIT sharesIII. Commercial bankd) Stabilized property loanIV. Life insurance company

Q: Credit metrics Which two credit metrics are defined correctly: I. Loan to Value (debt /asset value) II. Loan to Value (debt service/ asset value) III. Debt Service Coverage (cash flow / interest and principal) IV. Debt Service Coverage (cash flow / interest) a) I, III b) I, IV c) II, III d) II, IV

Q: Securities Order these securities according to preference in a liquidation: I. Preference Stock II. Senior Debt III. Common Stock IV. Convertible Debt a) I, II, III, IV b) II, IV, I, III c) I, III, II, IV d) II, I, IV, III

Q: Entity structure Which of the following is not a tax pass through entity? a) Limited Partnership b) General Partnership c) C Corporation d) S Corporation

Q: Investment in Real Estate Which of the following is not a factor that supports investment in Real Estate? a) Real estate has low covariance with other asset classes. b) The real estate industry can facilitate large capital investments c) Debt capital is always available to finance property purchases d) Long term leases can provide low cash flow volatility e) Tenant credit risk can be mitigated by having real property collateral

Q: Which of the following is not an appraisal method? a) Sales comparison approach. b) Income capitalization approach. c) Distressed seller approach. d) Cost approach.

Q: Which of the following is not an approach to property valuation based on income? a) Gross income multiplier method. b) Discounted present value method. c) Direct capitalization method. d) Future accretion method.

Q: What attributes of a property would influence the choice of valuation methods used and the accuracy of the resultant valuation? I. Future growth in rent. II. Current property occupancy and cost of lease up. III. Expected changes in major leases. IV. Prospect for overbuilding in the market. a) I, II, III b) II, IV c) I, III d) All of the above

Q: Which of the following is not a method typically used to value commercial property: a) Comparable property b) NPV c) Adjusted NOI / Cap Rate d) Multiple of after tax earnings

Q: Is a multi-tenant property with staggered lease expirations more or less risky than a single tenant property with a long term lease? What factors other than lease term inform your decision?

Q: When real estate companies rent to tenants they accept the tenants credit risk as well as the risk of operating real estate. When a tenant defaults on a lease the real estate company still has its property. When a tenant defaults on a loan a lender may have nothing. Should returns on real estate be higher or lower than returns on the tenant's debt securities?

Q: Valuation: Comparable Property Three major class A office properties have recently traded in Baltimore. Building A sold at $300 per square foot, Building B at $250 per square foot and Building C at $ 350 per square foot. You believe that your building, a 20 story class A office property with 20,000 square foot floor plates, has attributes of all three properties. What is your building worth?

Q: Valuation: NPV The owners of the Centre at New Hope purchased the property at the end of 2002. Adjusted NOI for 2003 was projected at $4 million and expected to rise at 5% per annum over a seven year hold period. The property was purchased at a 9% cap rate based on 2003 adjusted NOI. The owners expect that they will be able to sell it at the end of the holding period at an 8% cap rate. Can the owners achieve a 10% return? (Assume the owners are tax exempt)

Q: Valuation: Cap Rate The Crescent Arms is a 15 story luxury apartment building in New Orleans warehouse district. In 2009 the property had adjusted NOI of 2.5 million. The property was marketed to a broad range of investors and sold for 29.5 million. At what cap rate did the property sell?

Q: Valuation: Cap Rate A property has NOI of $10 million, depreciation of $ 1 million and similar properties trade at an 8% cap rates. What is the value of the property? a) $80.0 million b) $112.5 million c) $125.0 million d) $137.5 million

Q: Which is not a real estate valuation method? a) DCF b) Price-earnings c) Comparable sales d) Capped NOI

Q: In what interest rate environment are Terminal Value estimates most important a) High rate b) Low rate c) Declining market fundamentals d) None of the above

Q: NOI minus Debt Service equals: I) Cash Flow Before Taxes II) Equity Dividend III) DCF IV) NPV a) I, II b) III, IV c) I, III d) II, IV

Q: The cost approach to valuation is based on: a) Historical cost less depreciation. b) Historical cost. c) Replacement cost. d) Replacement cost less depreciation.

Q: The ROE on a levered property investment should be: a) ≤ ROA b) ≤Yield debt c) = R (cap rate) d) ≥ ROA

Q: A terminal or reversion value is: a) The tendency of property to decline in value over time. b) The tendency of return on investment in any industry to revert to the average of all industries. c) The resale price of a property at the end of a financial projection. d) Purchase price plus growth less depreciation.

Q: Which of the following are adjustments commonly made to NOI in a valuation exercise? I. Subtract Recurring Capital Expense II. Add Revenue Generating Capital Expense III. Subtract Mortgage Principal Payments IV. Add Management Fees V. Subtract Management Fees a) I, V b) II, III c) II, III, IV d) I, II, IV

Q: Under GAAP accounting commercial properties are depreciated over a 39 year life. Do you agree with this accounting treatment? Explain the basis for your answer. Can you suggest an alternative method?

Q: Under what circumstances are financial models prepared using the cash method more useful than those prepared using GAAP accounting?

Q: General An office building has 10,000 square feet. Average rent is $20 per foot. Average operating expenses are $10 per foot. The average expense stop is $6 per foot. Every fifth year a 5,000 square foot tenant comes up for renewal and it costs $25 per foot to replace the tenant (leasing commissions and tenant allowance). Non revenue generating capital expenditures is $1 per foot per year. What is the stabilized pre tax cash flow? a) $105,000 b) $65,000 c) $25,000 d) $5,000

Q: Recapture The Green Family had owned the Stormy Ridge Lodge for 15 years prior to selling it in 2009. They purchased the property for $45 million and then sold it for $42.5 million. Allocate 20% of the purchase price to land. Were the Greens liable for paying recapture tax and if so for what amount?

Q: Capital Gain: The new owners of Oak Ridge Mall purchased the asset on June 30th 2005 for $ 30 million. They sold the property for $37.5 million exactly three years later. What amount of the sale proceeds were subject to the capital gains tax?

Q: Taxation: The Gramercy, a 25 story office building in Houston, Texas was purchased in December, 1999 for $25 million. The property was sold on December 31, 2009 for $30 million. Assume 30% of the purchase price was allocated to land. What taxes were due as a result of the sale?

Q: Depreciation Stoney Creek, a 300 unit apartment complex in New Jersey was purchased in 1999 for $ 12 million. Thirty percent of the purchase price was allocated to land. How much depreciation should have been taken in 2010?

Q: Interest Peabody Park is a 200 unit apartment complex in Waltham, Massachusetts. The owners of the property have just refinanced their previous ten year mortgage with a 20 year 5% interest only $10 million on January 1st. What will be the deductible interest expense for the first year of the mortgage?

Q: Adjustments to NOI: Recurring Capital Expenditures Science City Industrial Park has 2,000,000 square feet of flex space. NOI for the asset has averaged $20,000,000 per annum. In each of the next five years management expects to spend $0.50 per square foot on non-revenue generating capital expenditures. What is our forecast for adjusted NOI.

Q: Adjustments to NOI: Tenant Allowance Over the next four years, Gateway Towers has 40,000 square feet of leases rolling at flat rents. The owners predict that tenant allowances on new leases will total $25 per square foot. The property expects to have NOI of $3,000,000. What is adjusted NOI for this asset?

Q: Adjustments to NOI: Management Fee Sleepy Hollow Green is a 500 unit multifamily complex in Harrison, New York. Units rent at an average of $1,000 per month. The propertys operating expenses run at 40% of revenues. The complex is typically 90% occupied. The owners pay a management fee equal to 3% of revenue to Rye Management Company for running the property. How much is the annual management fee? Calculate Adjusted NOI for this asset.

Q: Adjustments to NOI: Vacancy Loss Marvin Gardens a 200 unit B grade apartment complex in Scottsdale Arizona is currently 97% occupied and has Rent Revenue of $2,328,000 per year. Net Operating Income for the period is $1,500,000. Next year the propertys rents will not increase, expenses will remain constant. Vacancy Loss will be 5% of Gross Potential Rent. Estimate the Gross Potential Rent, Vacancy Loss and NOI for next year.

Q: A discounted cash flow analysis based on NOI is used to determine which value? a) Land allocation b) Asset value c) Equity value d) Leverage

Q: Which of the following is not subtracted when calculating taxable income? a) Operating Expenses. b) Depreciation. c) Interest. d) Principal.

Q: Depreciation does not impact which of the following? a) Recapture Tax b) Taxable Income. c) Cash Flow. d) NOI.

Q: Which of the following measures is best utilized to compare leasing alternatives? a) Base Rent. b) Minimum Rent. c) Average Rent. d) Effective Rent.

Q: Which of the following increases the tenants cost of occupying space? a) Free rent. b) Expenses in a gross lease. c) Percentage rent. d) Allowance for tenant improvements.

Q: Real estate investors generally seek to delay payment of capital gains taxes. In today's world is this the correct strategy? What analysis would you suggest to prove your conclusion?

Q: The US government taxes depreciation recapture at a higher rate than capital gains. What do you think the governments rationale is for this tax policy? Do you think the rate should be higher or lower, if so why?

Q: A real estate development company expends large sums to identify properties for future development. Should these costs be expensed in the period incurred or capitalized into a Development Property asset account?

Q: Expense: CAM Harolds Video Hideaway sells movies and Hollywood memorabilia in a 1,000 square foot store at the Starlite Mall in an urban location on the West Coast. The mall has 1,000,000 feet of total gross leasable area including 450,000 feet of inline space and 550,000 feet of anchor space. Expenses this year are expected to total $20,000,000. In total, the three anchor tenants contribute $2,000,000 to expenses. Assuming Harolds pays full pro rata CAM charges, what is Harolds expected total annual CAM contribution? Harold has negotiated a CAM cap of $25 per square foot. Does the cap lower Harolds costs in the current year?

Q: Expense: Stop Jon has just moved his law firm into new space in Highrise 100 a relatively new class A office building. Jon has agreed to a five year $50 per square foot rent with a $10 expense stop (set at expected expense level for year one). In the recent past, expenses at the property have been increasing at 6% per annum. If future expenses continue at the same rate of increase what will Jons total cost of occupancy per square foot be in the last year of his lease? Yr. 1 Yr. 2 Yr. 3 Yr. 4 Yr. 5 Cash Rent $50.00 $50.00 $50.00 $50.00 $50.00 Expense $10.00 $10.60 $11.24 $11.91 $12.62 Expense Stop $10.00 $10.00 $10.00 $10.00 $10.00 Expense Due $ 0.60 $ 1.24 $ 1.91 $ 2.62 Cost / sq. ft. $50.00 $50.60 $51.24 $51.91 ?

Q: Expense: Calculation Newco Real Estate owns a 100,000 square foot strip shopping center in New Jersey. The center is valued at $20,000,000. Security expenses are $50,000 per year; maintenance costs average $300,000 depending on snow fall. Insurance is $50,000 and administration is $20,000. Next year the center will need a new roof at an expected cost of $1,000,000. Annual Real Estate taxes are currently 2% of value. What are the annual operating expenses for the center per square foot.

Q: Rent: Renew versus Releasing Abes Furniture Store, a long term tenant is at the end of its lease term. Abe currently pays $15 per square foot on 20,000 feet and pays pro rata CAM of $4 per square foot. You offered Abe a five year renewal at $25 per foot, with a $5 per foot allowance for brightening up the store. Abe accepted your tenant allowance offer but has come back with a $20 per square foot rent counter offer, last and final, threatening to close after Christmas when his current term expires. You believe that if Abe closes, the store will remain vacant for 12 months and you will need to give a new tenant $25 per square foot as a tenant allowance. What rent would the new tenant have to pay on a four year lease, with pro rata CAM, for you to reject Abes offer? Assume interest rates are zero.

Q: Rent: Net Effective New Shoes Inc. has negotiated a new ten year lease at the Three Rivers Mall. The lease calls for a gross rent of $ 30 per square foot on a 10,000 square foot lease. The tenant has negotiated for one years free rent and a $50 per square foot tenant allowance. Leasing commissions are $5 per square foot. Expenses for the property are $10 per foot per year. What is the net effective rent for the space?

Q: Rent: Straight Line Rent Receivable A retail tenant has a ten year lease with three rent steps: Year 1,2,3 $30 per foot Year 4,5,6 $40 per foot Year 7,8,9,10 $50 per foot What is the straight line rent and what will be the balance in the straight line receivable account at the end of year 5 (per foot)? SL Rent SL Receivable A) 50 80 B) 41 0 C) 35 45 D) 41 35

Q: Rent: Straight Line Dr. Pearl E. White DDS is opening a new dental office on the first floor of Mayberry Mall. Dr. White has agreed to a ten year lease with a $25 per square foot starting rent. The rent steps to $30 at the end of the third year and to $35 at the end of the sixth year. What is the straight line rent per foot for Dr. Whites office?

Q: Rent: Incentives The replacement for DCH is Bobs Account Temps (BAT). BAT has agreed to a $18 per foot lease on 10,000 square feet. In order to induce the tenant to sign a ten year lease we have agreed to $5 per foot work letter for tenant specified lighting and a one time allowance for moving expenses of $20,000. What will these inducements cost us in total?