Q&A Hero

Q: After-tax cash flow will exceed before-tax cash flow whenever: a) Taxable income is negative. b) Capital expenditures exceed net operating income. c) The building is fully depreciated. d) Interest and depreciation expenses are less than net operating income.

Q: Interest tax shields have substantial positive value and therefore provide a major reason to finance property investment using debt, for which class of investor? a) Small individual investors in a low marginal income tax bracket. b) Large individual investors in a high marginal income tax bracket. c) REITs. d) Life insurance companies and pension funds. e) Profitable corporations subject to corporate income tax.

Q: If the Treasury Bond yield is 7% and the required return on property (unlevered) is 11%, then what is the required total return (riskfree rate plus risk premium) on the equity investment with a 50% Loan/Value Ratio? a) 7% b) 11% c) 15% d) 19%

Q: If there is 12% risk in a property investment with no leverage, then how much risk is there if the Leverage Ratio is 3? a) 6% b) 15% c) 20% d) 30% e) 36%

Q: According to the WACC Formula, if the Loan/Value Ratio is 50% and the appreciation on the Loan is 0%, and the appreciation in the equity value is 10%, then the appreciation in the property value is: a) 0% b) 5% c) 10% d) Cannot be determined from the information given.

Q: All of the following are strategic reasons to use financial leverage when investing in real estate, except: a) Leverage increases your expected total return b) You can lever your "human capital" as a property manager c) You can obtain valuable interest tax shields d) You can diversify by investing in a greater variety of risky assets

Q: If tax-exempt institutions pass on to borrowers in the real estate investment market a significant share of the tax shields they have, then what empirical evidence of this would we expect to see? a) Mortgage interest rates would be higher than municipal bond rates b) Mortgage interest rates would be about the same as municipal bond rates c) mortgage interest rates would be lower than municipal bond rates d) Insurance premiums on whole-life policies would be lower than premiums on comparable term insurance

Q: Use the following information and the APV decision rule to answer the following questions. A seller has offered you a $2,000,000 interest-only 6 year loan at 7% (annual payments), when market interest rates on such loans are 9%. You face a 37% marginal income tax rate.a) Basing your decision on market values, how much more should you be willing to pay for the property than you otherwise think it is worth, due to the financing offer?b) Answer the same question only now basing your answer on investment value rather than market value. You may assume that the investor is typical of the marginal investors in the property market, and faces a tax rate similar to that of marginal investors in the bond market.

Q: In the problem above, what is the after-tax cash flow to the equity investor if the income tax rate is 35%?

Q: The NOI is $850,000, the debt service is $600,000 of which $550,000 is interest, the depreciation expense is $350,000. What is the Before-tax Cash Flow to the equity investor (EBTCF) if there are no capital improvement expenditures or reversion items this period?

Q: If the market's required expected total return on equity is 9% with a 50% loan/value ratio, what is the required equity risk premium with a 70% loan/value ratio assuming the debt is riskless in both cases and has a 6% total yield. Show your work and answer to the nearest basis point.

Q: The NOI is $120,000, the debt service is $90,000 of which $85,000 is interest, the depreciation expense is $45,000. What is the Before-tax and After-tax Cash Flow to the equity investor (EBTCF, & EATCF) if there are no capital improvement expenditures or reversion items this period, and the income tax rate is 35%?

Q: The NOI is $40,000; there are $5,000 in tenant improvement expenditures paid for by the landlord; there is a $200,000 interest-only loan at 8 percent annual interest; the depreciable cost basis of this residential property is $300,000; the owner's tax bracket is 33 percent. What is the Equity After-Tax Cash Flow (EATCF)? a) $14,680 b) $27,800 c) $30,680 d) $35,000 e) Cannot be determined from the information given.

Q: A non-residential commercial property which cost $500,000 is considered to have 30 percent of its total value attributable to land. The annual depreciation expense chargeable against taxable income is: a) $18,182 b) $15,873 c) $13,967 d) $8,974

Q: In the market described in the previous question, what would be the investment value (IV) of a property whose initial PBTCF is $100/yr, for an intra-marginal investor who faces a 10% tax rate and who would use the same 50% LTV financing? a) $1000 b) $1250 c) $1328 d) $1406.

Q: In a certain real estate market the net cash flows are level perpetuities (no growth), the going-in IRR at the market price of the assets is 8% at the PBT level, and the marginal investors, who face an effective tax rate of 20% (with or without leverage), typically use perpetual 50% LTV loans (which are maintained perpetually at 50% LTV) that have a market interest rate of 6%. Ignoring depreciation, what is the market's levered after-tax opportunity cost of capital for these types of properties? a) 6.4% b) 8.0% c) 10.0% d) 12.0%

Q: Which statement is true ex ante? a) Leverage normally increases the owner's income return (cash yield) if you pay market value for the property. b) Leverage normally increases the owner's income return (cash yield) if you pay more than market value for the property. c) Leverage normally increases the owner's total return (including appreciation) if you pay market value for the property. d) Leverage normally increases the owner's total return (including appreciation) if you pay more than market value for the property.

Q: Assuming riskless debt, if the return risk is 10% with a 50% Loan/Value Ratio, then with a 75% Loan/Value Ratio the return risk is: a) 7.5% b) 10.0% c) 15.0% d) 17.5% e) 20.0%

Q: If the Loan/Value ratio is 75%, what is the "Leverage Ratio"? a) 0.25 b) 1.0 c) 2.0 d) 4.0 e) 5.0

Q: "Negative Leverage" implies: a) You are buying the property at a price below market value. b) The property cash flows cannot support the debt service payments. c) The return decreases the more you borrow. d) The return increases the more you borrow.

Q: The "Equity" in a real estate investment refers to: a) The legal "fairness" of the contract between the buyer and seller. b) The price at which the lender's and borrower's values are balanced. c) The lender's share of the property value. d) The borrower's or owner's share of the property value.

Q: All of the following are arguments against using leverage, except: a) You increase the volatility of your total returns b) You bring on the possibility of default and loss of your entire investment c) You lose flexibility or "financial slack" d) Lenders make you pay for inflation in the interest rate they charge

Q: Suppose the Net Operating Income (NOI) in a property is $5,000,000 and the market value cap rate is 9.00%. What is the market value of the property using direct capitalization? (a) $450,000 (b) $4,500,000 (c) $5,450,000 (d) $45,000,000 (e) $55,555,556

Q: Suppose the lease on a certain space will expire in one year (The end of Year 1). You believe that the probability of the existing tenant renewing is 50 percent. If he renews, you will need to spend only an estimated $5.00/SF to upgrade his space. If he does not renew, it will take $25.00/SF to modernize the space, plus $5.00/SF in leasing broker commissions to attract a new tenant, and even then you expect 6 months of vacancy. What expected cash flow forecast should you put in year 2 of your pro forma for this space, if you expect triple-net market rents on new leases in year 2 to be $20/SF? (a) $22.50/SF (b) $15.00/SF (c) - $2.50/SF (d) - $7.50/SF (e) - $20.00/SF

Q: If the market value cap rate (based on NOI) on a certain type of property is 11%, capital improvement expenditures are typically 1% of property value per year, and you expect the property to appreciate at 3% per year, what discount rate (total return) should be applied to determine the market value in a multi-year DCF analysis? (a) 3% (b) 10% (c) 11.5% (d) 13% (e) 11%

Q: Suppose an office building has a single tenant who pays $50,000 per year at the end of each year in a 5-year triple-net lease (annual payments). At the end of the sixth year you expect the rent to rise to $70,000 per year. At the end of 10 years, just after collecting the rent for that year, you expect to sell the building for 10 times the rent that year. What is the ex ante IRR of the investment if you pay $500,000 today for the property? (a) 1.13% (b) 10.00% (c) 12.00% (d) 13.51% (e) 54.00%

Q: Suppose an office building has a single tenant who pays $50,000 per year at the end of each year in a 5-year triple-net lease (annual payments). At the end of the sixth year you expect the rent to rise to $70,000 per year. At the end of 10 years, just after collecting the rent for that year, you expect to sell the building for 10 times the rent that year. What is the value of the property if the required initial return is 12 percent per year? (a) $44,643 (b) $416,667 (c) $548,801 (d) $583,333 (e) $770,000

Q: In the Discounted Cash Flow (DCF) valuation procedure: (a) The cash flows should represent a conservative or pessimistic forecast, so as to make sure you don't encounter unexpected problems later on. (b) The cash flows should represent an aggressive or optimistic forecast, to help sell the property as quickly as possible. (c) The cash flows should be realistic best-guess forecasts, as risk always has both an "upside" and "downside". (d) The cash flow forecast should obey the "G.I.G.O" rule: "Get In and Get Out" before the market crashes.

Q: A property has a McDonald's restaurant on it, which can earn $50,000 per year. In any other use (including another brand of restaurant), the most it can earn is $40,000 per year. Assuming a discount rate of 10% and constant cash flow in perpetuity, what is the "investment value" of this property to McDonald's, and what is its "market value"? a) Both investment value and market value are $400,000. b) Both investment value and market value are $500,000. c) Investment value is $400,000 and market value is $500,000. d) Investment value is $500,000 and market value is $400,000.

Q: Normally, in a healthy rental market, one would expect what relationship between the "going-in" and "going-out" cap rate? (a) The going-in cap rate should be higher than the going out. (b) The going-out cap rate should be at least as high as the going-in rate. (c) There is no particular relation between the two. (d) The going-out cap rate is too far in the future, and should not be estimated.

Q: Suppose the Net Operating Income (NOI) in a property is $6,500,000 and the market value cap rate is 9.50%. What is the market value of the property using direct capitalization? (a) $2,622,842 (b) $5,936,073 (c) $61,750,000 (d) $65,000,000 (e) $68,421,000

Q: Suppose the lease on a certain space will expire at the beginning of this year. You believe that the probability of the existing tenant renewing is 50 percent. If he renews, you will need to spend only an estimated $5.00/SF to upgrade his space. If he does not renew, it will take $25.00/SF to modernize the space, even then you expect 6 months of vacancy. What expected cash flow forecast should you put in your pro forma for this space, if you expect triple-net market rents on new leases to be $20/SF? (a) $17.50/SF (b) $15.00/SF (c) Zero (d) - $10.00/SF (e) -$5.00

Q: If the market value cap rate (yield) on a certain type of property is 10%, and you expect the property to appreciate at 3% per year, what discount rate (total return) should be applied to determine the market value in a multi-year DCF analysis? (a) 3% (b) 10% (c) 11.5% (d) 13% (e) 7%

Q: You are the Landlord of a building with two tenants (A and B). Use the following information to calculate the (projected) Year 3 building operating expenses, assuming 100% gross leases for all tenants: Each tenant occupies 50% of net rentable space. Tenant A has a fixed lease for the next ten years, and Tenant B has a lease which expires at the end of year 2 (beginning of year 3). First year Operating Expenses are $1000, and are projected to increase 5% per year. Building expenses are 60% fixed, 40% variable. Assume that Tenant B has a 70% probability of exercising an extension option for year 3. If they do not renew, assume the space will be vacant for 3 months, and then occupied by a similar tenant (in terms of operating expenses). Show your work.

Q: The Corporez Development Co. recently acquired a developable land parcel for $3,000,000. Corporez has decided that the most lucrative development for this site would be a building that, upon completion, would be worth $10,000,000 (including the land). It will cost Corporez $6,000,000 of construction cost (excluding land), to build this project. Construction is instantaneous. What is the NPV to Corporez of building this project today:(a) If the best that the "typical" (or "second-best") developer of this site could do is to build a building worth $9,000,000 on completion (including land), at a construction cost (excluding land) of $7,000,000?

Q: An apartment complex has 100 units of which on average 5 are vacant at any given time. Per unit, the rent is $1000 per month, and the operating expenses paid by the landlord (including realistic capital reserve) average $5000 (per occupied unit) per year. Both rents and expenses are expected to grow at 1 percent per year in perpetuity, and the building value is expected to remain a constant multiple of its net income.(a) What is the projected potential gross income (PGI) for the property in the first year?(b) What is the projected effective gross income (EGI) for the property in the first year?(c) What is the projected net operating income (NOI) for the property in the first year?(d) Suppose historically properties like this have averaged total returns of 10% per year when T-bills have averaged returns of 7%. If T-bills are currently yielding 5%, what is the NPV of a deal to purchase this property for $7,000,000?

Q: A single-tenant building has the following expected future cash flows, all occurring at the ends of the years. The first three years reflect an existing in-place lease. The next six years are the expected rents under a subsequent 6-year lease, that is expected to be signed at the end of Year 3, but the amount of the rent in that subsequent lease is not certain in advance of the signing of that lease. The Year 10 cash flow includes reversion as well as subsequent operating cash flow beyond the second lease. The current T-bill yield is 6%. The risk premium appropriate for discounting contractual cash flows is 200 basis-points. The risk premium appropriate for discounting non-contractual cash flows is 600 basis-points. What is the value of this building? (Please show your work for possible partial credit.)Hypothetical office building net cash flows:Year12345678910CFt$2$2$2$2.20$2.20$2.20$2.20$2.20$2.20$25

Q: Consider two adjacent properties near the airport in the suburbs of a growing metropolis. Property A is a warehouse with a long-term tenant. Property B is a cornfield. The corn harvest just pays the property taxes, but the land is zoned for industrial (warehouse) development. Warehouses are currently selling at cap rates (cash yields) of around 10% in this market, and warehouse rents typically grow at 2% per year. You expect that the cornfield will grow in value at a rate of 10% per year for the next few years. Suppose you own the cornfield. Use what you know and can reasonably assume about risk and return, to tell me whether you should: (a) hold the corn field undeveloped as a speculative investment for the time being, or (b) immediately either sell or develop the corn field. Support your answer with a tight quantitative argument.

Q: Suppose you analyze a particular deal and it appears that for an investment of $1,000,000 your client can obtain a positive NPV of over $500,000. Your client is typical of the type of high tax bracket individual investors who commonly purchase and sell this type of property, and indeed typically determine equilibrium prices in the asset market in which these properties are sold. What should you do? a) Reject the deal out of hand because it costs twice as much as its NPV. b) Phone your client right away on your cell phone and urge her to pounce on this deal before it "gets away" - the seller must have made a mistake in their offering price! c) Buy the property with cash, take out an 80% loan-to-value ratio mortgage, and laugh all the way to the bank with $200,000 of arbitrage profits! d) Sharpen your pencil, double-check your assumptions and analysis, try to find what's unique about client.

Q: The difference between the net operating income (NOI) and the property before-tax cash flow (PBTCF) is: (a) Property Tax Expense (b) The debt service (c) Income taxes (d) Capital Improvement Expenditures

Q: All of the following are components of the operating expenses of a property except: (a) Property taxes (b) Management expenses (c) Electricity bill (d) Income taxes (e) Hazard insurance expense

Q: Suppose apartment rents are currently (Year 1) $300 per month per unit, all signed at various times. Rents are expected to grow at 2 percent per year. On average, tenants remain five years, and units are vacant 3 months between tenants. Operating expenses are $1500 per unit per year (100% fixed), also expected to increase 2 percent per year. What is the approximate forecasted Net Operating Income per unit for next year (after vacancy allowance)? (a) $1,920 (b) $1,929 (c) $2,034 (d) $2,047 (e) $2,100

Q: You need to borrow $100,000 for a down-payment on a house, and $900.00 per month is the most you can afford. How long a loan term must you get in your mortgage, if the interest rate is 9%? a) 15 years (180 months). b) 20 years (240 months). c) 30 years (360 months). d) No solution.

Q: Consider the following period-by-period total returns: Year 1: 5.00% Year 2: 15.00% Year 3: 25.00% What is the geometric average total return per year for the Years 1-3 period? (a) 5.00% (b) 14.71% (c) 15.00% (d) 15.23% (e) 45.00%

Q: Consider the following period-by-period total returns: Year 1: 5.00% Year 2: 15.00% Year 3: 25.00% What is the arithmetic average total return per year for the Years 1-3 period? (a) 5.00% (b) 14.71% (c) 15.00% (d) 15.23% (e) 45.00%

Q: If a property will produce net cash flow that grows at a rate of 1.5% per year in perpetuity, and the opportunity cost of capital is 12%, then what is the "cap rate" (net cash flow / property value) for the property? a) 8%. b) 10%. c) 10.5%. d) 12%.

Q: What is the monthly payment on an $80,000, 9% interest-only mortgage? a) $600.00. b) $811.41. c) $1005.78. d) $7200.00.

Q: You want to take out a fully-amortizing 30-year mortgage. You can afford monthly payments of $600 each. The interest rate is 9%. How much money can you borrow? a) $6,667. b) $66,667. c) $74,569. d) $80,000.

Q: All are true, except: (a) The "Risk Premium" is the total expected return minus the risk-free rate. (b) "Risk" is the possibility the ex post return may differ from the ex ante expectation. (c) "Risk" is measured by the standard deviation of the distribution of returns. (d) Higher risk is associated with higher expected returns.

Q: Suppose an asset is worth $100,000 now and in one year it will either be worth $115,000 or $95,000 (with equal chance). The expected return and risk (as defined in Chapter 9) are: (a) 15% return, 20% risk (b) 15% return, 17.4% risk (c) 0% return, 5% risk (d) 0% return, 10% risk (e) 5% return, 10% risk

Q: Suppose you buy a property today for $100,000. One year later, you sell it for $105,000 after obtaining net rent of $10,000. Suppose inflation during this year was 5%. The real appreciation return was: (a) 0% (b) 5% (c) 10% (d 15% (e) 115%

Q: Suppose you buy a property today for $100,000. One year later, you sell it for $105,000 after obtaining net rent of $10,000. Suppose inflation during this year was 5%. The nominal appreciation return was: (a) 0% (b) 5% (c) 10% (d 15% (e) 115%

Q: Suppose you buy a property today for $100,000. One year later, you sell it for $105,000 after obtaining net rent of $10,000. Suppose inflation during this year was 5%. The nominal income return was: (a) 0% (b) 5% (c) 10% (d 15% (e) 115%

Q: All are ways to break up (or add up to) the total return except: (a) Income + Appreciation (b) Yield + Capital Gain (c) Riskfree Rate + Risk Premium (d) Real Return + Inflation Premium (e) Nominal Return + Real Return

Q: All of the following are examples of the "savings objective" of investment except: (a) A 25-year-old planning to be able to buy a house in 5 years. (b) A 30-year-old planning to be able to pay for her children's college in 15 years. (c) A 40-year-old planning for retirement in 25 years. (d) A 65-year-old planning how to use his wealth to support himself now that he is retired.

Q: Real estate is approximately what share of the total U.S. investable asset market universe: (a) 5% (b) 10% (c) around a quarter (d) 75%

Q: Professional money managers have traditionally divided the investment universe into three major long-run investment "asset classes" (plus "cash"). Which of the following is not one of these asset classes: (a) Stocks (b) Real Estate (c) Bonds (d) Mutual Funds

Q: On Dec.31 2006 you buy a property for $1,000,000. On Dec.31 2007 that property yields $100,000 of net cash flow which you take and spend on a New Year's Eve bash. Also on Dec.31 2007 the property is appraised at $1,010,000 in value, but you don"t sell it then. On Dec.31 2008 the property yields another $100,000 in net cash flow which you spend on another bash, in part to celebrate the fact that you sold the property that very day for $1,200,000. There are no other cash flows from this investment.(a) What is the simple HPR total return on your investment in this property for the calendar year 2007?(b) What is the simple HPR total return on your investment in this property for the calendar year 2008?(c) What is the annual time-weighted arithmetic mean periodic total return for this property during the two-year period from the beginning of 2007 through the end of 2008?(d) What is the annual time-weighted geometric mean periodic total return for this property during the two-year period from the beginning of 2007 through the end of 2008?(e) What is the IRR (per annum) on your investment in this property "cradle-to-grave" (that is, over the entire 2-year period you held the property, from purchase to sale)?

Q: You need to borrow $80,000 for a down-payment on a house. You would like to pay the loan off in 15 years. With 9% interest on the loan, what will be your monthly payment?

Q: You buy a piece of land for $50,000. You think you will be able to sell it for three times this value in four years. Ignoring any net cash flow while you hold the land, what would be your return on this investment, stated in per annum terms with annual compounding?

Q: The present value of the future sum of $30,000 two years from now, if the opportunity cost of capital is 15% nominal annual rate of return compounded monthly is:

Q: If yields are quoted at 9.00% in the bond market (BEY), then what interest rate must you charge in a monthly-payment mortgage (MEY) in order to be able to sell the mortgage at par value in the bond market?

Q: You expect annual cash flows from a certain property as follows:Year 1 $20,000Year 2 $22,000Year 3 $30,000Year 4 $31,000Year 5 $40,000In addition, you expect that you can sell the property at the end of the 5th year for 10 times its expected cash flow that year. If the opportunity cost of capital is 10% per year, then what is the net present value (NPV) of a deal in which the investor has to pay $350,000 for the property (at the end of Year 0, one year prior to the first cash flow)?a) -$19297.b) +$3,282.c) +$38,610.d) None of the above.

Q: What is the present value of a 10-year lease with monthly rental payments of $2000 due at the beginning of each month, if the opportunity cost of capital is 8%? a) $161,042. b) $164,843. c) $165,942. d) Insufficient information to answer the question.

Q: You expect to have to make a capital improvement expenditure of $50,000 in a property in 5 years. If you can only set aside at most $800 at the end of each month in a sinking fund, and the annual interest in the sinking fund is 6%, then how many months in advance of the 5-year horizon must you begin saving the money? a) 35 months. b) 45 months. c) 55 months. d) Starting now (60 months in advance) is already too late.

Q: Suppose you pay $100,000 for a property today. The property appreciates 8% in the first year, and 12% in the second year. The third year yield was 7%. What was the income generated by the property in year 3? (a) $7,000 (b) $8,000 (c) $8,467 (d) $29,427 (e) Cannot be computed from the information given.

Q: If you have a perpetuity from T=0 valued at PV=$1,000, and the same cash flow stream results in a perpetuity starting from T=3 valued at $500, how much is the annuity from T=0 until T=3 worth, assuming r=10%? (a) $5,000 (b) $500 (c) $50 (d) Cannot be determined from given information

Q: What is the Present Value of property with has a current year NOI of $100,000, which will grow at 3% per year, and can be discounted at a rate of r=8%? (a) $2,000,000 (b) $909,091 (c) $1,250,000 (d) Cannot be determined from given information

Q: "Liquidity" refers to: (a) Location of real estate investment on a river or seashore. (b) Riskless cash investment such as Treasury Bills. (c) Ability to trade asset shares in a bar or pub. (d) Ability to sell without payment of capital gains taxes. (e) Ability to sell an asset quickly at full value.

Q: Which statement is most accurate? (a) Real Estate is a better inflation hedge than Treasury Bills. (b) Stocks are a better inflation hedge than Real Estate. (c) Long-Term Bonds are a better inflation hedge than real estate. (d) Real estate is a better inflation hedge than stocks.

Q: All of the following are examples of the "income objective" of investment except: (a) A 65-year-old planning how to use his wealth to support himself now that he is retired. (b) A pension fund trying to match revenues to its current pension payout needs. (c) A university endowment fund wanting to use gift assets to fund an annual scholarship program. (d) A 25-year-old planning to be able to buy a house in 5 years. (e) A bank investing assets so as to be able to pay interest on current savings deposits.

Q: All of the following are advantages of direct ownership of property as a way of investing in real estate except: (a) Investor retains control over management (b) There is often a "pride of ownership" factor (c) There is still some tax shelter benefit through depreciation (d) The investment is very "liquid"

Q: The market indicator known as "months supply" is determined by all of the following except: a) Vacancy b) Construction c) Net absorption d) Point of time within the fiscal cycle

Q: Landowners demand a premium in the rent for developed property before they will be willing to develop agricultural land. According to Capozza and Helsley, this is know as the: a) Growth premium b) Land premium c) Agriculture premium d) Irreversibility premium

Q: Improvements in transportation infrastructure will tend to: a) Increase the value of geographical location centrality b) Reduce the value of geographical location centrality c) Have no effect on the value of geographical location centrality d) Cannot determine with the information given

Q: At site "A" the best current construction project is a retail plaza that would cost $3,000,000 to build (exclusive of land cost) and would then generate net rents of $400,000/yr, expected to grow at 2% per year indefinitely. At site "B" the best current construction project is an office building that would generate net rents of $500,000 per year, expected to remain constant. Construction of the office building would cost $4,000,000 (exclusive of land cost). Suppose investors require a cap rate (current net income as percent of investment) equal to 10% minus the expected annual growth rate in the net income. If the natural vacancy rate is 10% and the current vacancy rate is 15%, then you would expect: (a) Current rents are falling. (b) Current rents are rising. (c) Current rents are stable. (d) With so little information the wise student would not hazard a guess about what might be happening to current rents.

Q: At site "A" the best current construction project is a retail plaza that would cost $3,000,000 to build (exclusive of land cost) and would then generate net rents of $400,000/yr, expected to grow at 2% per year indefinitely. At site "B" the best current construction project is an office building that would generate net rents of $500,000 per year, expected to remain constant. Construction of the office building would cost $4,000,000 (exclusive of land cost). Suppose investors require a cap rate (current net income as percent of investment) equal to 10% minus the expected annual growth rate in the net income. If buildings are torn down and replaced on average every 75 years, and site acquisition costs are typically 25% of total development costs, then the average annual rate of property depreciation below the HBU value of the site is: (a) 0.0%/yr. (b) 1.1%/yr. (c) 1.8%/yr. (d) 2.2%/yr.

Q: At site "A" the best current construction project is a retail plaza that would cost $3,000,000 to build (exclusive of land cost) and would then generate net rents of $400,000/yr, expected to grow at 2% per year indefinitely. At site "B" the best current construction project is an office building that would generate net rents of $500,000 per year, expected to remain constant. Construction of the office building would cost $4,000,000 (exclusive of land cost). Suppose investors require a cap rate (current net income as percent of investment) equal to 10% minus the expected annual growth rate in the net income. An example of functional depreciation is: (a) Electrical conduits that are too small for modern computer-based wiring needs in an office building. (b) A leak in the roof. (c) A single-family home near a growing university, on a lot zoned for apartments. (d) Overgrown landscaping.

Q: At site "A" the best current construction project is a retail plaza that would cost $3,000,000 to build (exclusive of land cost) and would then generate net rents of $400,000/yr, expected to grow at 2% per year indefinitely. At site "B" the best current construction project is an office building that would generate net rents of $500,000 per year, expected to remain constant. Construction of the office building would cost $4,000,000 (exclusive of land cost). Suppose investors require a cap rate (current net income as percent of investment) equal to 10% minus the expected annual growth rate in the net income. Suppose the current market value of both undeveloped sites is $1,500,000 each. On which site or sites is it currently profitable to develop? (a) Site A. (b) Site B. (c) Both sites A and B. (d) Neither site A nor B.

Q: At site "A" the best current construction project is a retail plaza that would cost $3,000,000 to build (exclusive of land cost) and would then generate net rents of $400,000/yr, expected to grow at 2% per year indefinitely. At site "B" the best current construction project is an office building that would generate net rents of $500,000 per year, expected to remain constant. Construction of the office building would cost $4,000,000 (exclusive of land cost). Suppose investors require a cap rate (current net income as percent of investment) equal to 10% minus the expected annual growth rate in the net income. Based on the current best projects described above, which site is most valuable? (a) Site A. (b) Site B. (c) Both sites are equal in value. (d) Insufficient information to answer the question.