Q&A Hero

Q: A simple monocentric city (Roundville) has a population of 3,000,000 with a homogeneous density of 5 inhabitants per acre, and one person per household. Agricultural rents are $500/acre/yr, housing construction costs (including developer profit) can be paid for with a perpetual loan charging interest of $5000/house/yr, and transportation costs are $250/person/yr per mile of distance from the center of the city. (Recall that there are 640 acres per Mi2.) If Roundville's population increases by 10% but its density remains constant, approximately how much will its radius increase? (a) None. (b) 5%. (c) 10%. (d) 20%.

Q: A simple monocentric city (Roundville) has a population of 3,000,000 with a homogeneous density of 5 inhabitants per acre, and one person per household. Agricultural rents are $500/acre/yr, housing construction costs (including developer profit) can be paid for with a perpetual loan charging interest of $5000/house/yr, and transportation costs are $250/person/yr per mile of distance from the center of the city. (Recall that there are 640 acres per Mi2.) What is the annual location premium rent per household in the center of Roundville? (a) $4,320. (b) $5,740. (c) $21,600. (d) $25,500.

Q: A simple monocentric city (Roundville) has a population of 3,000,000 with a homogeneous density of 5 inhabitants per acre, and one person per household. Agricultural rents are $500/acre/yr, housing construction costs (including developer profit) can be paid for with a perpetual loan charging interest of $5000/house/yr, and transportation costs are $250/person/yr per mile of distance from the center of the city. (Recall that there are 640 acres per Mi2.) What is the annual transportation cost per household at the edge of Roundville? (a) $250. (b) $1,250. (c) $4,000. (d) $4,320.

Q: A simple monocentric city (Roundville) has a population of 3,000,000 with a homogeneous density of 5 inhabitants per acre, and one person per household. Agricultural rents are $500/acre/yr, housing construction costs (including developer profit) can be paid for with a perpetual loan charging interest of $5000/house/yr, and transportation costs are $250/person/yr per mile of distance from the center of the city. (Recall that there are 640 acres per Mi2.) What is the total annual property rent per acre of land in the center of Roundville? (a) $47,100. (b) $25,500. (c) $5,500. (d) $500.

Q: Silicon Valley is an example of: (a) Economies of agglomeration. (b) Economies of scale. (c) The rank-size rule. (d) A planned community.

Q: If the largest city in an economically integrated region has a population of 10,000,000, then according to the rank-size rule the fifth-largest city in that region should have a population of: (a) 100,000. (b) 1,000,000. (c) 2,000,000. (d) 5,000,000.

Q: The asking rent is $10/SF/yr. The landlord agrees to give the first year rent-free in a five-year lease, in return for a step-up in the rent to $12/SF/yr in the third year. What is the effective rent? (a) $8.00/SF/yr. (b) $9.20/SF/yr. (c) $11.20/SF/yr. (d) Insufficient information

Q: Rents will tend to trend upwards and new development will tend to occur in a particular city if: a) The natural vacancy rate is higher than the average of other cities b) The natural vacancy rate is lower than the average of other cities c) The natural vacancy rate is below the current vacancy rate d) The natural vacancy rate is above the current vacancy rate

Q: "Over the long run, the change in location value provides a theoretical ceiling to the average capital gain of the unlevered investor in already-built property"¦" This summarizes: a) The property principle b) The depreciation principle c) The investment principle d) The leverage principle

Q: As opposed to the concentric ring model of urban growth, the sector model dictates that similar land uses tend to: a) Mix naturally over time, leading to a more integrated city b) Lie at a similar distance from the center of the city c) Cluster along rays or in pie-shaped wedges emanating from the center d) Be dictated more by ephemeral political coincidence than by well considered plans

Q: The magnitude of the transportation costs in a production process of a given land use and the relative sensitivity of these transportation costs to distance from the city center determine: a) The slope of the bid-rent function b) The ease of transportation c) The cost of real estate taxes d) The optimal size of the buildings in the area

Q: According to the rank/size rule (Zipf's Law), the rank of a city's population should be approximated by knowledge of the following two factors: a) The city's population and the population of the largest city in the system of cities b) The city's population and the city's growth component c) The city's growth component and the population of the largest city in the system of cities d) The city's population and the objective rank of how nice the city is

Q: Congestion, pollution, crime, and high transportation costs are all examples of: a) Centripetal forces b) Centrifugal forces c) Central Place Theory d) Export multiplier

Q: The primary centralizing (centripetal) forces acting on a city include the following, except: a) Economies of scale b) Economies of agglomeration c) High population density d) Positive locational externalities

Q: A certain market has 1,000,000 SF of vacant space, 500,000 SF under construction, and annual absorption of 750,000 SF. What is the "months supply" in this market? (a) 12 months. (b) 24 months. (c) 36 months. (d) With so little information the wise student would not hazard a guess about what might be the months supply in this market.

Q: The difference between gross absorption and net absorption is best described as follows: (a) Gross absorption indicates the total amount of movement in the market while net absorption indicates the growth in overall demand. (b) Gross absorption indicates the growth in overall demand while net absorption indicates the total amount of movement in the market. (c) Gross absorption indicates demand for both Class A and Class B space, while net absorption refers only to demand for Class A space. (d) The wise student realizes that, at a deep and fundamental level, gross absorption and net absorption are really the same thing!

Q: One major cause for the natural vacancy rate to be greater than zero in a stable market is: (a) The irreversibility of the leasing decision causes landlords to take time to search for a good leasing deal. (b) Bankers make money from construction loans whether the space is leased or not. (c) Developers are stupid. (d) Landlords have to repair the apartments after the students' wild parties.

Q: According to Property Life Cycle Theory, the two components of property value are: (a) Structure value plus land value. (b) Structure value plus agricultural opportunity value. (c) Construction cost plus land value. (d) Construction cost plus agricultural opportunity value.

Q: According to Neighborhood Succession Theory, in a mature (fully built up) neighborhood: (a) Location value tends to grow steadily over time in real terms (net of inflation). (b) Location value tends to decline steadily over time in real terms. (c) Location value tends to remain about constant in real terms unless there are substantial changes in the city, under which case value might go in either direction. (d) Location value is determined purely by the average income of the residents.

Q: Which are examples of incompatible adjacent land uses that display negative locational externalities? (a) Community shopping center and residential neighborhood. (b) Convention center and hotel. (c) Airport and industrial park. (d) Heavy industrial zone and up-scale residential neighborhood.

Q: Which of the following types of activity centers would you expect might have the highest land rent location premium in a polycentric city? (a) An "Edge City". (b) A Neighborhood Business District (NBD). (c) Land adjacent to the city's major airport. (d) A very upscale, low-density residential neighborhood in the suburbs.

Q: In most American cities, improvement in transport and telecommunications technology (transport cost reduction) tends to: (a) Increase land values throughout the metropolitan area. (b) Decrease land values throughout the metropolitan area. (c) Leave land values unchanged throughout the metropolitan area. (d) Decease land values in central locations and increase land values around the expanding periphery.

Q: Suppose the most productive use of a particular site is as a manufacturing plant that will generate revenues of $12,000,000 per year with raw material costs and operating expenses (other than net rent) of $7,000,000 per year, and construction costs (for the plant and equipment) that can be paid for with a perpetual loan with interest of $3,000,000 per year. According to the residual theory, how much is this site worth in terms of annual land rent? (a) $20,000,000. (b) $12,000,000. (c) $10,000,000. (d) $2,000,000.

Q: Industry Local Employment National EmploymentState & Federal Government 50,000 10,000,000Legal Services 13,000 2,000,000Computer Manufacturing & Repair 4,000 2,500,000Total All Employment 200,000 120,000,000Which of the three industries in the above table is not in the export sector of this locality?(a) State & Federal Government.(b) Legal Services.(c) Computer Manufacturing & Repair.(d) They all are in the export base.

Q: Industry Local Employment National EmploymentState & Federal Government 50,000 10,000,000Legal Services 13,000 2,000,000Computer Manufacturing & Repair 4,000 2,500,000Total All Employment 200,000 120,000,000What is the Location Quotient for state and federal government activities in this city?(a) 0.005.(b) 0.25.(c) 0.33(d) 3.00

Q: According to Central Place Theory, concentrations of human activity (e.g., cities in a country, shopping centers in a metropolitan area) will tend to be located: (a) On major waterways. (b) All clustered together in the center of the region. (c) Where there are the most environmental amenities. (d) About evenly-spaced, with some territory around each concentration point.

Q: The "kink point" in the real estate space supply function occurs at: (a) The current quantity of built space and the "replacement cost" rent. (b) The maximum quantity of built space allowed by zoning laws and geographical constraints. (c) The current quantity of built space and the current rent. (d) The rent that provides a cap rate equal to the mortgage interest rate.

Q: If properties in a certain market are typically selling for prices of $100/SF and they are yielding current annual net income of $8/SF, then the typical "cap rate" prevailing in this market is: (a) $12.50. (b) $8/SF. (c) 8%. (d) Cannot be estimated from the information given.

Q: Real estate space markets are segmented for all of the following reasons except: (a) Space users require specific locations and types of buildings. (b) Built space is fungible. (c) Buildings cannot move. (d) It is difficult and expensive to change buildings from one usage type to another (e.g., from office to apartment).

Q: The basic geographic unit in real estate space markets is typically: (a) The country (b) The state (c) The county (d) The metropolitan area (MSA)

Q: Which statement below is true? (a) The supply side of the space market consists of investors. (b) The demand side of the space market consists of investors. (c) The supply side of the space market consists of potential tenants. (d) The demand side of the space market consists of potential tenants.

Q: Suppose demand for apartments in a metropolitan area is: #Apt.units=60,000 +(0.30)(# households)-(80)*($Rent/unit/mo.) In the question above, suppose the number of apartment units remained at 88,000 while the number of households grew from 200,000 to 220,000. To what level would real rents rise? (a) $500 (b) $475 (c) $450 (d) $425 (e) Cannot be determined from the information given.

Q: Suppose demand for apartments in a metropolitan area is: #Apt.units=60,000 +(0.30)(# households)-(80)*($Rent/unit/mo.) If developers increase the number of apartment units from 88,000 to 100,000, over a period of several years, to what level will real rent fall in the market below the original $400/mo level if the population remains stable at 200,000 households? (a) $350 (b) $300 (c) $250 (d) $200 (e) Cannot be determined from the information given.

Q: In the absence of foresight among asset market participants, a growth in demand for real estate assets in the capital market, holding demand in the space usage market constant, will produce which of the following short-run and long-run effects? (a) A short-run increase in property asset prices followed by a subsequent drop. (b) A short-run decrease in property asset prices followed by a subsequent rise. (c) A short-run increase in rents followed by a subsequent drop. (d) A short-run decrease in rents followed by a subsequent increase.

Q: Which of the following is an example of the private equity market? (a) The commercial real estate property asset market. (b) The stock market. (c) The commercial mortgage market. (d) The money market.

Q: In 2000 rents were $18/SF and 10 Million SF of space were occupied in a certain market. By 2006 12 Million SF of space were occupied, and rents were $19/SF, however, the CPI (inflation) had increased more than 20 percent over this period. In this market, it appears that: (a) Demand is growing while supply is constrained. (b) Demand and supply are both growing at about the same rate. (c) Demand is either not growing, or not growing as fast as supply. (d) Demand increased in response to higher real rents.

Q: What would be the "˜short-term" effect of an increase in demand for space usage on the following factors? 1) Rent____. 2) Price of real estate assets________. 3) New development______.

Q: If it costs $300/SF to develop a new class A office building and the annual net rent for office space is $22.5/SF, what is the cap rate that would make additional development feasible? Also, if office buildings are currently selling at an 8% cap rate, what would be the replacement cost rent level?

Q: Briefly describe about the following term: MSA

Q: Briefly describe about the following term: segmented market

Q: Briefly describe about the following term: the "˜replacement cost" level of rent

Q: In order for the real estate system to function more efficiently and effectively, it is important for: (a) Investors to try to forecast the economy, the space market, development activity, and the capital market. (b) Potential tenants to make their space needs explicitly known to developers. (c) Government regulators not to place too strict requirements on real estate developers. (d) Landlords to treat tenants fairly.

Q: Other things being equal, which would have the lowest cap rate? (a) A building with short-term leases in a declining market. (b) A building with long-term leases in a declining market. (c) A building with short-term leases in a stable market. (d) A building with long-term leases in a growing market.

Q: If the cap rates prevailing in a given market are 10.5%, then how much would you expect a property to sell for in that market if its annual net income were $50,000? (a) $5,250. (b) $50,000. (c) $476,190. (d) $525,000.

Q: Which of the following statements is true about equilibrium real rents (net of inflation) in the space market over time? (a) An increase in demand will necessarily produce an increase in rents, but a decrease in demand will not necessarily produce a decrease in rents. (b) An increase in demand will not necessarily produce an increase in rents, but a decrease in demand will necessarily produce a decrease in rents. (c) An increase in supply will necessarily produce an increase in rents, but a decrease in supply will not necessarily produce a decrease in rents. (d) An increase in supply will not necessarily produce an increase in rents, but a decrease in supply will necessarily produce a decrease in rents.

Q: Equilibrium between current supply and demand in the space market is reflected by: (a) The prices (rents) and occupancy observed in the market. (b) The amount of new construction in process in the market. (c) The volume of properties bought and sold during the year. (d) A constant long-run marginal cost function.

Q: Long-run equilibrium in a DiPasquale-Wheaton "Four-Quadrant Model" (4QM) is found by: (a) The triangle connecting the current quantity of built space, the current price of property per square foot, and the current rent per square foot. (b) The square that equates supply and demand. (c) The rectangle with vertical sides and horizontal top & bottom whose four corners just touch the four binary relationship lines in each quadrant. (d) The diamond whose four corners are on the four axes at the current prices and quantities.

Q: The "real estate system" consists of the following three major components: (a) The space market, the capital market, and the mortgage industry. (b) The space market, the asset market, and the development industry. (c) The public equity market, the private equity market, and the debt market. (d) The capital market, the government, and land.

Q: In a real estate market. "constrained supply", or rising real Long-Run Marginal Cost (upward-sloping supply curve), is generally caused by: (a) Inflation. (b) Technological improvements in the construction industry. (c) Scarcity of buildable land due to geographic or regulatory constraints. (d) Tenant requirements for more lavish accommodations.

Q: The term "real property" refers to: (a) Financial capital as opposed to physical capital. (b) Long-lived personal property, such as automobiles, musical instruments, works of art. (c) Land or built space. (d) Property valued net of inflation.

Q: Which are the two fundamental markets in commercial real estate? (a) The space market and the asset market. (b) The space market and the money market. (c) The construction market and the land market. (d) The asset market and the stock market.

Q: A certain property market is characterized by 100,000 SF spaces that are expected to rent in 8-year fixed-rent leases, successively in perpetuity (annual payments at the ends of the years). Properties are typically sold just after a lease is signed (1 year prior to first rent payment). There is no vacancy down-time between the successive leases. The rent in each lease is constant, but between new lease signings the rent is expected to grow at a rate of 2% per year. The current market rent is $10/SF per year. In general, the rents are uncertain prior to lease signings. The opportunity cost of capital (OCC) for investments providing contractually-fixed cash flows is 6% per year, and the typical prevailing cap rate in this property market is 7%. (a) What is the market value of space per square foot? (b) What is the implied inter-lease discount rate applicable to risky cash flows that depend on the real estate market?

Q: Suppose market rate apartments produce net cash flow of $10,000/yr in perpetuity, while affordable units provide only $5,000. However, if the developer commits that 25% of the units will be forever affordable, then she will qualify for a perpetual loan $4,375,000 at an interest rate 50 basis points (0.5%) below the market interest rate. (However, this is not a tax-exempt loan " its interest is taxable.) Also, the developer can receive perpetual (and transferable) annual LIHTC equal to $1,000/yr per low-income unit. If property yields (total returns, opportunity cost of capital) are 10% at the PBT level (assume same for market and affordable apartments), loan market interest rates before-tax are 5%, yields on otherwise similar municipal bonds (tax-exempt loans) are 4%, and the developer faces an income tax rate on investment returns of 20%, then should the developer make her 100-unit apartment complex a mixed-income affordable development or a 100% market development? Tell why, and how much difference it makes (i.e., evaluate the two alternatives). Answer this question from a market value (MV) perspective (but be careful: the LIHTCs are after-tax cash flows).

Q: You represent a REIT which is considering purchasing a certain lease. You are evaluating the potential transaction using the following given information:Lease term: Perpetual.Tenant: Investment grade commercial tenant. This tenant just issued a perpetual bond at a 6% yield (interest rate).No capital expenditures necessary, absolute triple net (NNN) lease.Rent is fixed at $1,000 per year, payable annually on 12/31.Your company has access to perpetual debt at 6%.Your company has a corporate WACC of 8% based on 50% debt/total value with 6% cost of debt and 10% target return on stockholder equity. (Recall that REITs are exempt from corporate-level income taxes.)The market yield is 4.5% in the municipal (tax-exempt) bond market for perpetual debt of similar risk to the lease and the REIT's debt.(a) What discount rate would you use to determine the market value (MV) of this lease (what your company would have to bid to obtain it)? What is the PV of the lease at that discount rate? (Show your work or calculator steps.) Why is it correct to use the discount rate you selected (1 short sentence answer)?(b) Suppose the marginal personal tax rate on investment earnings applicable to marginal investors in your REIT's equity shares (traded in the stock market) is 25%. (Note that REITs are not subject to the 15% limit on dividend taxes.) What discount rate would you use to determine the investment value (IV) of the lease for your REIT (i.e., the likely effect on your REIT's equity value in the stock market)? What is the PV of the lease at this discount rate? (Show your work or calculator steps.) Why did you select the cash flow level and the discount rate that you used (1 short sentence answer)?

Q: You are making a 10-year cash flow pro-forma for a lender, on a non-residential commercial building which you have just purchased (on January 1) and plan to own for 10 years (the maturity of the loan you are requesting). The building has a single tenant in a 20-year lease that commenced at the time of building purchase (January 1).Purchase Price: $3,000,000 including $500,000 in assessed land value.Tenant Improvement Expenditures (all spent on building made at time of purchase, beginning of lease): $1,000,000.Leasing Brokerage Commission (paid at time of purchase, beginning of lease): $300,000.Capital Gains Tax Rate (on economic gain): 15%.Recapture Tax Rate: 25%.Ordinary Income Tax Rate: 35%.Be completely realistic in your treatment of all sources of capital gains and recapture tax.By how much would the tax on the reversion increase (looking only for the increment here) if the projected net resale proceeds were $4,500,000 instead of the $4,000,000 of the previous question?(a) $75,000.(b) $105,000.(c) $175,000.(d) $225,000.(e) None of the above.

Q: You are making a 10-year cash flow pro-forma for a lender, on a non-residential commercial building which you have just purchased (on January 1) and plan to own for 10 years (the maturity of the loan you are requesting). The building has a single tenant in a 20-year lease that commenced at the time of building purchase (January 1).Purchase Price: $3,000,000 including $500,000 in assessed land value.Tenant Improvement Expenditures (all spent on building made at time of purchase, beginning of lease): $1,000,000.Leasing Brokerage Commission (paid at time of purchase, beginning of lease): $300,000.Capital Gains Tax Rate (on economic gain): 15%.Recapture Tax Rate: 25%.Ordinary Income Tax Rate: 35%.Be completely realistic in your treatment of all sources of capital gains and recapture tax.What is the difference between the before-tax and after-tax reversion cash flow at the end of Year 10 in the pro-forma if you project net property resale proceeds at that time of $4,000,000?(a) $186,859.(b) $261,859.(c) $314,103.(d) $355,682.(e) None of the above.

Q: In the problem above, what is the after-tax cash flow to the equity investor if the income tax rate is 35%?(a) $32,500.(b) $182,500.(c) $195,000.(d) $650,000(e) Insufficient information to answer this question.

Q: The NOI is $1,000,000, the debt service is $800,000 of which $700,000 is interest, the depreciation expense is $250,000. What is the Before-tax Cash Flow to the equity investor (EBTCF) if there are no capital improvement expenditures or reversion items this period?(a) $50,000(b) $200,000(c) $300,000(d) $750,000(e) Insufficient information to answer this question.

Q: Bob has $1,000,000 of his own equity capital available to make a real estate investment. He finds a bargain, a property with a market value of $1,100,000 that he can buy for $1,000,000. By how much can he enhance the market value of his net wealth by leveraging his purchase of this bargain property using borrowed money from a bank to finance 50% of his investment?(a) None.(b) $50,000.(c) $100,000.(d) $200,000.(e) By 50%.

Q: Suppose you expect that one year from now, a certain property's before-tax cash flow (PBTCF = NOI " CI) will equal only $15,000 per year under a plausible pessimistic scenario or as much as $25,000 per year under a plausible optimistic scenario. If you borrow an amount such that the loan payments will be $10,000 per year (for certain), then what is your range of expected income return component (equity yield) under the no-leverage and leverage alternatives, assuming that the property price is $200,000 and the loan amount is $100,000?(a) It goes from a range of between 7.5% and 12.5% with no leverage to a range of between 2.5% and 7.5% with leverage.(b) It goes from a range of between 15% and 25% with no leverage to a range of between 5% and 15% with leverage.(c) It goes from a range of between 2.5% and 7.5% with no leverage to a range of between 15% and 25% with leverage.(d) It goes from a range of between 7.5% and 12.5% with no leverage to a range of between 5% and 15% with leverage.No Levg: $15000/$200000 = 7.5%, $25000/$200000 = 12.5%. Levg: ($15000-$10000)/($200000-$100000) = 5/100 = 5%,($25000-$10000)/($200000-$100000)=15/100=15%.(e) Can"t be determined from the information given.

Q: What is wrong with the following statement: Only a fool would invest in real estate without financing most of the purchase with a mortgage; borrowing allows you to increase your expected return by using other people's money!(a) The money you borrow comes from a bank, not "other people".(b) The statement is insulting to fools: even people of just slightly below average intelligence might not borrow.(c) Some people can"t borrow due to poor credit rating, but that doesn"t mean they"re "fools".(d) The statement ignores the effect of borrowing on the investor's risk.(e) The statement is actually correct although stated in a too extreme form.

Q: A REIT has expected total return on equity of 15%, interest on their debt is 9%, and their debt-to-total-value ratio is 40%. What is the REIT's average cost of capital?(a) 9.0%(b) 10.4%(c) 12.6%(d) 15.0%(e) Insufficient information to answer this question.

Q: Assuming riskless debt, if the return risk is 15% with a 60% Loan/Value Ratio, then with a 80% Loan/Value Ratio the return risk is:(a) 11.25%(b) 15.0%(c) 20.0%(d) 30.0% (e) Cannot be determined from the information given.

Q: If the Loan-to-Value ratio is 60%, what is the "Leverage Ratio"?(a) 0.4(b) 2.5 (c) 6.0(d) 4.0(e) 1.5

Q: Suppose the lease on a certain space will expire at the beginning of 2010. You believe that the probability of the existing tenant renewing is 75 percent. If they renew, you will need to spend only an estimated $5.00/SF to upgrade his space. If they do not renew, it will take $20.00/SF to modernize the space and there would be 4 months of expected vacancy in that case. What expected cash flow forecast should you put in year 2010 of your pro-forma for this space, if you expect triple-net market rents on new leases in 2010 to be $20/SF?(a) zero.(b) $7.92/SF.(c) $9.58/SF. (d) $11.25/SF.(e) $15.00/SF.

Q: Which of the following is not one of the three approaches discussed in Chapter 11 to determine the appropriate discount rate or opportunity cost of capital in property valuation?(a) Historical evidence (such as the NCREIF Index total return history).(b) Survey evidence (based on what market participants and brokers say investors are looking for).(c) The average WACC in the REIT industry determined from REIT share price capital returns in the stock market combined with typical commercial mortgage interest rates. (d) Empirical evidence of property cap rates plus typical rental growth minus depreciation, less typical capital expenditures as a fraction of property value.

Q: A tenant has a gross lease with an "˜"˜expense stop""of $2.75/SF. If the building has 200,000 square feet of leasable space, reimbursable operating expenses of $750,000, and the tenant rents 25,000 SF, then how much does the tenant owe the landlord in expense reimbursements (the total $ amount)?(a) $3.75/SF.(b) $25,000.(c) $68,750.(d) $93,750.(e) Can"t answer because it depends on the CPI adjustment in the lease.

Q: You are trying to apply a multi-year DCF analysis to evaluate an investment property with some long-term leases in it. You observe that other properties with similar lease structure and risk have been selling at cap rates around 8% (based on NOI with no capital reserve). You believe these other properties typically face capital expenditures on the order of 2% of property value per year in the long run, and that given such expenditures their net cash flows and values would reasonably be expected to grow in the long run at about 1% per year. What discount rate should you apply to your subject property in your DCF valuation?(a) 6%(b) 7%(c) 8%(d) 9%(e) 10%

Q: All of the following are true about the NPV and the IRR hurdle investment decision rules, except:(a) If the NPV and the IRR give a different decision recommendation, the IRR is more correct.(b) In most typical real estate circumstances the IRR hurdle rule will give the same investment recommendation as the NPV rule.(c) In comparing two mutually exclusive investments of different scale, the IRR rule can be misleading while the NPV rule will lead to a correct wealth-maximizing decision.(d) The IRR sometimes is indeterminate, whereas a unique NPV can always be calculated.

Q: The table below shows the projected net cash flows (including reversion) for Property A and Property B. If both properties sell at fair market value for a cap rate (initial and terminal net cash yields) of 7%, then which statement below correctly describes the relative investment risk in the two properties?Annual net cash flow projections for two properties ($1,000,000s):Year:12345678910A$1.0000$1.0000$1.0000$1.0000$1.0000$1.0000$1.0000$1.0000$1.0000$15.2857B$1.0000$1.0200$1.0404$1.0612$1.0824$1.1041$1.1262$1.1487$1.1717$18.6093(a) Property A is more risky.(b) Property B is more risky. (c) They both are equally risky.(d) Insufficient information to determine the answer.

Q: Projected Year 1 NOI: $100,000.Projected Year 11 NOI: $121,899.Projected Year 10 resale (reversion) value: $1,523,738.Current (going-in) market cap rate for similar properties: 7%.Which of the following should be true about the ex ante micro-level performance attribution (IRR parsing components) of this property investment?(a) The overall IRR will likely be negative due to a very large negative yield-change (YC) component.(b) The overall IRR will likely be positive due to positive components in all three performance attributes (IY, CFC, & YC).(c) The overall IRR will likely be negative, but at least the yield-change (YC) component will be positive.(d) The overall IRR will likely be positive due largely to the initial yield component (IY), but the yield-change (YC) component will be negative.(e) None of the above.

Q: Projected Year 1 NOI: $100,000.Projected Year 11 NOI: $121,899.Projected Year 10 resale (reversion) value: $1,523,738.Current (going-in) market cap rate for similar properties: 7%.What is the projected terminal (going-out) cap rate?(a) 6.56%.(b) 7.00%.(c) 8.00%. (d) 10%.(e) Insufficient information to determine answer.

Q: Projected Year 1 NOI: $100,000.Projected Year 11 NOI: $121,899.Projected Year 10 resale (reversion) value: $1,523,738.Current (going-in) market cap rate for similar properties: 7%.What is the current market value of the property?(a) $7,000.(b) $1,000,000.(c) $1,428,571.(d) $1,741,414.(e) Insufficient information to determine answer.

Q: All of the following are typical "GIGO" mistakes in common application of the DCF method to real estate investment analysis except:(a) The growth rate in the rents is projected too high.(b) The level of required capital improvement expenditures, or the going-out cap rate, are projected too low.(c) The discount rate or going-in IRR is too high.(d) The going-in cap rate is projected too low.

Q: a) Consider the following fully-amortizing 5-year ARM (contract interest rate can change once every 60 months) with 15-year maturity, monthly payments. The ARM has initial interest rate 6.5% with 2 points, caps are 2% per jump, 5% lifetime, margin is 300 basis points, index is Treasury Bonds that are currently yielding 6.0%. The loan amount is $100,000. Under the "straight line" assumption about future interest rates (i.e., assuming the market rate on the index remains constant), what is the yield to maturity? (Show your work if you want to possibly get partial credit.)b) Consider a $4,000,000, 7%, 25-year mortgage with monthly payments and a 7-year maturity with balloon. If the market yield is 7.5% (BEY), how many disbursement discount points must the lender charge to avoid doing a negative NPV deal from a market value perspective?

Q: (a) Fully explain and clarify the following statement: "There are two types of tax shields available to investors in property equity: deprecation tax shields (DTS) and interest tax shields (ITS), but only one of these types of tax shields generally adds to the investment value of the investment no matter what the investor's marginal tax rate." (b) As part of your answer, quantify the NPV to two different borrowers, from an after-tax investment value perspective, of a perpetual loan of $1,000,000 at 6% interest when the market yield on corporate bonds is 6% and on otherwise identical municipal bonds is 4%, and Borrower A faces a marginal tax rate of 30% while Borrower B faces a marginal tax rate of 35%. (c) Also, compare the NPV to Borrower B to the PV of that borrower's interest tax shields (the PV of the borrower's tax deductions associated with the loan).

Q: Suppose you own a vacant but developable land parcel on the outskirts of the metropolitan area. This land produces no income but owes 2% of its value per year in property taxes. Meanwhile, typical income properties are yielding 9% (that is, they have a current cash yield, or "cap rate", of 9%). If inflation is expected to be around 3% per year, and you expect your land will appreciate at 10% per year, what should you do with this land parcel? (Be specific and please explain why you should do what you say.)

Q: Consider an 8.5% loan amortizing at a 25-year rate with monthly payments. What is the maximum amount that can be loaned on a property whose net operating income (NOI) is $500,000 per year, if the underwriting criteria specify a debt service coverage ratio (DCR) no less than 125%?(a) $2,789,406(b) $3,409,091(c) $3,844,614(d) $4,000,000(e) $4,139,619.

Q: In comparing an adjustable rate mortgage (ARM) with a fixed rate mortgage (FRM):(a) Both the borrower and lender bear more interest rate risk with the ARM than with the FRM.(b) Both the borrower and the lender bear less interest rate risk with the ARM than with the FRM.(c) The ARM borrower bears more interest rate risk, but the ARM lender bears less interest rate risk, than with the FRM.(d) The ARM borrower bears less interest rate risk, but the ARM lender bears more interest rate risk, than with the FRM.

Q: Consider a 20-year (monthly-payment), 8%, $80,000 mortgage with 2 points prepaid interest up front. What is the "effective interest rate" or yield over the borrower's expected holding period if the borrower expects to hold the loan for 12 years?(a) 8.00%(b) 8.25%(c) 8.31% (d) 8.56%