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Real Estate
Q:
Which of the following is NOT a major type of mortgage-related securities?
(a) Mortgage-backed bonds (MBBs)
(b) Mortgage pass-through securities (MPTs)
(c) American depositary receipts (ADRs)
(d) Collateralized mortgage obligations (CMOs)
(e) All of the above are mortgage-related securities
Q:
The standard PSA prepayment curve assumes prepayments of 2% and 4% in years 1 and 2, then 6% each year thereafter.
Q:
Generally, prices for zero coupon mortgage-backed bonds are more sensitive to interest rate changes than interest bearing MBBs.
Q:
When a pass-through security investor makes repetitive requests of a mortgagor it is referred to as a nuisance call.
Q:
A mortgage pass-through security represents an undivided ownership interest in a pool of mortgage held by a trustee.
Q:
Marking the mortgage to market is the process of accumulating mortgage pools and marketing them to individual investors as mortgage-backed bonds.
Q:
When market interest rates exceed the coupon rate of a MBB, the price of the bond will be greater than its par value.
Q:
When issuing mortgage-backed bonds, the issuer transfers ownership of the underlying mortgage to the investors/bondholders.
Q:
The Federal Home Loan Mortgage Corporation's (FHLMC) primary purpose is to provide liquidity for conventional mortgage originators just as FNMA and GNMA did for originators of FHA - VA mortgages.
Q:
Under the HUD Act of 1968, the assets, liabilities, and management of secondary market operations were transferred to a completely private corporation known as "Ginnie Mae" (GNMA).
Q:
An optional delivery commitment, gives Fannie Mae the right (but not the obligation) to purchase mortgage loans from originators.
Q:
One difference between mortgage securities and corporate bonds is that mortgage securities tend to be "overcollateralized."
Q:
The secondary mortgage market enables mortgage banking companies to sell existing mortgages and thereby replenish funds with which new loans can be originated.
Q:
In 2008, Fannie Mae was spun off in an initial public offering as a private company.
Q:
Which of the following is NOT one of the criteria used to decide corporation treatment? (A)
(A) Unlimited liability
(B) Continuity of life
(C) Centralization of management
(D) Free transferability of interests
Q:
Which of the following imposes certain ownership and minimum capital requirements to avoid "dummy" corporations acting as sole corporate general partners?
(A) Safe harbor rules
(B) Caveat rules
(C) Blind pool rules
(D) Regulation corporation rules
Q:
Interest and real estate tax incurred during construction of real property improvements must be:
(A) Deducted from the resale price of the property
(B) Included in depreciable basis of the property
(C) Expensed over the construction period
(D) Not be included as value of improvements
Q:
A syndicate that raises capital before identifying any or all of the properties it will eventually own is known as a(n):
(A) Safe harbor
(B) Accredited investor
(C) Caveat
(D) Blind pool
Q:
How should interest prepayments (including points) for income-producing real estate be handled for tax purposes?
(A) They should be expensed over the first year
(B) They should be amortized over a period of no less than 60 months
(C) They should be amortized over the life of the loan
(D) They should be capitalized and deducted once the loan is paid off
Q:
When one investor receives cash flow to achieve a certain IRR before splitting the remaining cash flow it is referred to as:
(A) IRR lookback
(B) IRR preference
(C) Preferred IRR
(D) Adjusted IRR
Q:
Sharing cash flow in a joint venture in proportion to the capital contribution is referred to as:
(A) Pari passu
(B) Equal sharing
(C) Preferred return
(D) Equity sharing
Q:
Which of the following does NOT need to occur for a partnership allocation to have substantial economic effect?
(A) An adjustment must be made in the partner's capital account
(B) Liquidation proceeds must be distributed in accordance with capital accounts
(C) Profits and losses must be allocated to different partners in proportion to their equity contribution
(D) Following the distribution of sale proceeds, partners must be liable to the partnership to restore any deficit in their capital account
Q:
In a syndication, when cash is distributed from an investor's partnership basis how is the new basis calculated?
(A) The cash distribution is added to the investor's capital gain
(B) The cash distribution is subtracted from the investor's capital gain
(C) The cash distribution is added to the investor's partnership basis
(D) The cash distribution is subtracted from the investor's partnership basis
Q:
Refer to the question above. What is the balance of Tom's capital account at the end of year 4?
(A) - $9,900
(B) $24,000
(C) $69,000
(D) $70,100
Q:
Tom invested $20,000 in a limited partnership. His share of liabilities from mortgage debt was initially $45,000. The property suffered a loss in income during the first year, of which Tom's share was $5,000. However, in years two through four income allocated from the account equaled a total of $9,000 ($3,000 per year). The reduction in debt at the end of year 4 from amortization of the loan is equal to $1,100. What is Tom's basis in the partnership interest at the end of year 4?
(A) $67,900
(B) - $9,900
(C) $77,900
(D) $70,100
Q:
Which of the following BEST defines the term "real estate syndication?"
(A) A group of investors who have combined their financial resources with the expertise of a real estate professional to carry out a real estate project
(B) An organization that acts as a single legal entity and is held separate from the individual investors
(C) An organizational form of real estate ownership in which income and expenses are passed through to individuals
(D) A group of investors who have combined their financial resources to provide debt funding for a real estate project
Q:
A partnership agreement provides that, at sale, cash proceeds are distributed first to Mr. Smith in an amount equal to his original investment less any cash distributions previously received, then split 50-50 between Mr. Smith and Ms. Jones. Assume that the cash flows from sale are $1million. How much would Mr. Smith receive if his initial investment was $400,000 and he previously received $25,000 in distributions?
(a) $312,500
(b) $500,000
(c) $375,000
(d) $487,500
(e) $687,500
Q:
Noncumulative pari passu distribution refers to:
(a) The payment of dividends by S-corps
(b) A preferred payment received by money partners and operating partners
(c) Payments distributed when the enterprise has negative cash flows
(d) The difference in payments received by partners and the payments received by bondholders
Q:
Which of the following statements is TRUE regarding general partnerships?
(a) They usually are suggested for groups of individuals that are seeking to form a business entity to invest in real estate because of the unlimited liability of each partner.
(b) They usually are not suggested for groups of individuals that are seeking to form a business entity to invest in real estate because of the unlimited liability of each partner.
(c) They protect each of the partners from potential losses associated with the partnership's business activities
(d) They have assessed income taxes at a lower rate than corporations
Q:
Tax losses can not be allocated to partners in a syndication.
Q:
Joint ventures typically involve a large number of individual investors joining together to purchase real estate.
Q:
Deductions for payment to a developer or syndicator for their covenants not to compete with a specific project are never allowed according to IRS rules.
Q:
According to IRS rules, interest and real estate taxes incurred during construction of real property improvements must be included in the depreciable basis of the property.
Q:
Capital accounts are debited for cash contributed to the partnership and credited for cash distributed to the partner.
Q:
A limited partnership limits the general partners' liability to the capital they originally invested.
Q:
When a syndication is offered as a "blind pool" offering, the properties to be purchased are not identified before funds are raised.
Q:
Syndications can take the form of corporations, limited partnership, or other organizational forms.
Q:
C-corps have the advantage of providing a pass-through of income for tax purposes.
Q:
A general partner is personally liable for the debts of the partnership whereas a limited partner has "limited liability" like shareholders in a corporation.
Q:
A disadvantage of a limited partnership is that any tax losses can be allocated to the partners to reduce their personal taxable income.
Q:
An IRR preference will always give the investor a return that is equal to or better than what the return would be with an IRR lookback.
Q:
Which of the following is FALSE regarding the release price?
(A) It is usually calculated to pay off the loan when the last lot is sold
(B) It is usually calculated to pay off the loan before the last lot is sold
(C) Increasing the release price usually lowers the lender's risk
(D) Increasing the release price is likely to lower the investor's initial cash flow
Q:
Which of the following was NOT stated as contributing to the complication of estimating amount of interest carry?
(A) The loan is drawn and interest is calculated on drawn amount
(B) Revenue from each type of site varies
(C) The rate of repayment of a loan depends on when the parcel is sold
(D) Development loan interest rates are usually fixed while market rates fluctuate
Q:
The amount to be paid to the lender from each lot sale is included in the:
(A) Release schedule
(B) Development agreement
(C) Cost breakdowns
(D) Subcontracts
Q:
An analysis of whether land can be purchased and developed profitably is known as:
(A) Financial analysis
(B) Feasibility study
(C) Turnkey study
(D) Project profitability
Q:
Generally, which of the following is FALSE regarding interest rate risk management techniques?
(A) Borrowers can protect themselves from upward movements in interest rates by using interest rate caps
(B) Borrowers can protect themselves from upward movements in interest rates by using interest rate futures contracts
(C) Borrowers can benefit from downward movements in interest rates by using interest rate caps
(D) Borrowers can benefit from downward movements in interest rates by using interest rate futures contracts
Q:
A futures instrument, such as a T-bill, can be used to hedge a cash or a spot instrument such as the prime rate, where the two instruments are not perfectly correlated. What type of hedge is this referred to as?
(A) A perfect hedge
(B) A straight hedge
(C) A cross hedge
(D) None of the above
Q:
A transaction in which two firms trade individual financing advantages to produce more favorable borrowing terms for each is know as a(n):
(A) Interest rate swap
(B) Sequential short hedge
(C) Cross hedge
(D) All of the above
Q:
When financing land development, the lender generally requires the developer to submit which of the following?
(A) A detailed breakdown of project cost
(B) Required zoning changes
(C) Bank references for the general contractor to be used on the project
(D) All of the above
Q:
Which of the following costs should NOT be included in a net present value analysis of a land development project?
(A) Land purchase price
(B) Property tax
(C) General overhead such as personnel costs
(D) Developer's profit
Q:
Which of the following might impact the density of housing in a land development project?
(A) The price paid for the land by the developer
(B) The terrain of the land
(C) The target market's preferences regarding density
(D) All of the above
Q:
Each parcel of land in a new development is selling for $15,000 and the total project revenue is estimated to be $5,000,000. The project lender has stated that the loan should be paid off when 80% of the total project revenue has been earned. The total loan amount is $3,500,000. What is the release price for each parcel?
(A) $8,400
(B) $13,215
(C) $18,750
(D) None of the above
Q:
Generally, which of the following is FALSE regarding an option contract?
(A) An option contract allows the developer to perform a preliminary market study and feasibility analysis
(B) If the developer decides to purchase a property, the price of an option is applied towards the price of the property
(C) If the developer decides not to purchase the property, the landowner will refund any money paid for the option
(D) An option contract provides the developer with the assurance that a property will not be sold over the course of the option period
Q:
Which of the following is the MOST LIKELY sequence of events in the land development process?
(A) Inspect site, perform feasibility analysis, implement marketing program, purchase land and begin construction of improvements
(B) Inspect site, purchase land and begin construction of improvements, perform feasibility analysis, implement marketing program
(C) Inspect site, perform feasibility analysis, purchase land and begin construction of improvements, implement marketing program
(D) Purchase land, perform feasibility analysis, perform preliminary market study, begin construction of improvements, implement marketing program
Q:
The land development industry is best characterized by which of the following statements?
(A) The land development industry is dominated by relatively few national competitors
(B) The land development industry is highly fragmented, localized, and extremely competitive
(C) Land development and project development are synonymous
(D) The production technologies and market risks involved in land development are essentially the same as those in project development
Q:
Month
Construction
Draw
Sales
Revenue 1
$200,000 2
150,000 3
75,000 4
25,000
$600,000 Total
$450,000
$600,000 Present value @ 12%
$441,883
$576,588 Consider the table above, which summarizes monthly construction draws and sales revenues. What is the percent of lot sales revenue that needs to be used to repay the loan?
(a) 4.0%
(b) 75.0%
(c) 76.6%
(d) 33.3%
Q:
Total sales revenue
$10,000,000 Less: Development cost
6,000,000 Less: Land asking price
1,000,000 Potential gross profit
$3,000,000 Less: Admin., legal, commissions, etc.
1,500,000 Potential net profit
$1,500,000 Refer to the information in the previous question. You have been advised that sales revenues may be 10 percent lower and/or development costs may be 10 percent higher. Performing a sensitivity analysis, you conclude:
(a) A 10 percent decrease in sales revenues would have a bigger impact on returns than a 10 percent increase in development costs
(b) A 10 percent increase in development costs would have a bigger impact on returns than a 10 percent decrease in sales revenues
(c) A 10 percent increase in development costs and a 10 percent decrease in sales revenues would have opposite impacts on returns, canceling each other out and having no impact on returns
(d) Both factors would have such a small impact, that there is no reason to be concerned about either a 10 percent increase in development costs or a 10 percent decrease in sales revenues
Q:
Total sales revenue
$10,000,000 Less: Development cost
6,000,000 Less: Land asking price
1,000,000 Potential gross profit
$3,000,000 Less: Admin., legal, commissions, etc.
1,500,000 Potential net profit
$1,500,000 Consider the feasibility study shown in the table above. What is the return on total cost for the proposed project?
(a) 15.0%
(b) 17.6%
(c) 21.4%
(d) 150.0%
Q:
It is illegal for the lender to hold back funds from the developer.
Q:
It is common for a developer to hold back funds to be sure that subcontractors perform all work completely before making final payment.
Q:
In order to obtain a land development loan, the developer is required usually to purchase title insurance.
Q:
A developer must sell all of the lots in a development project and repay the entire development loan before any of the new property owners can receive a clear title.
Q:
Usually, a lender does not require a developer to submit a schedule of estimated cash flows prior to approving a land development loan.
Q:
It is proper to include an estimate for developer profit as a cost of development when projecting net cash flows and evaluating whether a required rate of return will be met.
Q:
In most instances, a developer's repayment rate is set so that the development loan will be repaid at the exact point that 100% of total project revenue is realized.
Q:
By using an option contract, a developer may profit from an appreciation in the property's value over the option period.
Q:
The release schedule refers to a schedule of expiring leases for existing tenants.
Q:
An option contract does not preclude the landowner from selling the property to someone else after the expiration date.
Q:
A feasibility study analyzes whether a tract can be purchased and developed profitably.
Q:
The release price is the dollar amount of a loan that must be repaid when a lot is sold.
Q:
Lenders typically insist on a loan repayment rate that equal to the rate for which parcels are expected to sell.
Q:
Option contracts are used to reserve a parcel of land so that it will not be sold to someone else, while the developer does preliminary analysis of the site.
Q:
Why would a developer be willing to manage a completed project even after it has been sold?
(A) The developer knows the project better than other management companies and, therefore, could manage the property more efficiently
(B) The developer could profit from the lucrative management fees being charges by management companies
(C) Knowledge of the tenant's needs and the current leasing market might give the developer better insight with respect to future developments
(D) All of the above
Q:
In the context of a lease, percentage rents generally indicate that:
(A) The tenant will pay a proportionate amount of rent for his space in comparison to the total net rentable area
(B) In addition to a base rent, the lessor will receive a percentage of the tenant's cash flow above some break even point
(C) The tenant will pay a rent that is a certain percentage of the national average
(D) None of the above
Q:
Besides an estimate of costs, a construction loan submission package includes many other components. Which of the following is NOT one of those components?
(A) Pro Forma Statement of Cash Flows for an investor's portfolio
(B) Pro Forma Statement of Cash Flows
(C) Pro Forma Operating Statement
(D) Ratio and Sensitivity Analysis
Q:
Interest on a construction loan is usually paid:
(A) Up front at the beginning of the loan
(B) Periodically over the life of the loan
(C) In quarterly installments over the life of the loan
(D) At the end of the loan
Q:
In comparison to permanent financing, the rates and rate variability for a construction loan would be: Interest Rates Interest Rate Variability(A) High Steady(B) High Fluctuating(C) Low Steady(D) Low Fluctuating
Q:
The MOST common method of distributing funds provided by a construction loan is a:
(A) Single lump sum of money at the closing of the loan
(B) Single lump sum of money at the end of the construction project to reimburse the developer for the project's expenses and profit
(C) Series of payments throughout the construction project to reimburse the developer for costs incurred since the previous payment
(D) Series of payments throughout the construction project to reimburse the developer for anticipated expenses in the upcoming period
Q:
Mini-perm loans usually refer to financing:
(A) At local coffers
(B) For lease-up period
(C) For construction and all subsequent periods
(D) For construction, lease-up, and one or two subsequent years
Q:
Permanent funding commitments usually contain many funding contingencies. Which of the following typically is NOT one of those contingencies?
(A) Approval of all prospective leases
(B) Approval of design changes or building material substitution
(C) Provisions for gap financing
(D) Minimum rent-up requirements