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Real Estate
Q:
When evaluating the incremental costs of borrowing, if the interest rate is higher on the larger loan amount, the incremental cost of the additional funds borrowed tends to be lower than the rate on the larger loan.
Q:
If capital gains tax must be paid, opportunity cost of selling increases relative to the opportunity costs of keeping the property.
Q:
One disadvantage of refinancing a property instead of selling the property is that taxes have to be paid on funds received by additional borrowing, but no taxes would have to be paid if the property is sold.
Q:
A property should be sold when the marginal rate of return rises above the rate at which funds can be reinvested.
Q:
Increasing rents tend to increase the marginal rate of return on a property.
Q:
One factor an investor should consider when trying to decide whether to dispose of a property he or she has owned for several years is the expected IRR for holding versus sale of the property.
Q:
An investor is analyzing the risk of a possible investment by producing three different scenarios. Under a pessimistic scenario, the property would produce a BTIRRp of 8%; a most-likely scenario produces a BTIRRp of 12%. The investor assigns the pessimistic scenario a 25% chance of occurring, the most-likely case a 60% chance of occurring, and the optimistic scenario a 15% chance of occurring. What is the standard deviation of the returns?
(A) 0.01249
(B) 0.0090
(C) 0.000156
(D) 0.0949
Q:
Which of the following is an example of real options?
(A) Valuation of vacant land
(B) Valuation of projects with phases of development
(C) Valuation of a building that can be renovated
(D) All of the above
Q:
Which of the following best describes valuing land as a "real option"?
(A) The land value reflects the fact that the developer can wait to decide whether to construct a building on the site
(B) The seller provides the investor with an option to purchase the land at a specific price before a certain date
(C) The land is valued at its most probable use
(D) The seller has an option to repurchase the land from the buyer before construction takes place
Q:
The renewal probability is assumed to be 60% for a particular lease with 12 months vacant if the lease is not renewed. The expected vacancy at the end of the lease is:
(A) 4.8 months
(B) 7.2 months
(C) 9.0 months
(D) 12.0 months
Q:
Renewal probabilities related to a lease renewal can affect which of the following?
(A) Market rent paid after the existing lease ends
(B) Vacancy after the existing lease ends.
(C) Leasing commissions paid after the existing lease ends
(D) All of the above
Q:
When sales exceed a breakpoint sales volume in a retail lease with percentage rent, the additional rent is referred to as:
(A) Retail rent
(B) Participation rent
(C) Overage rent
(D) Sales rent
Q:
Which of the following BEST describes the process of "partitioning the IRR"?
(A) Dividing the IRR into income and appreciation components
(B) Using the IRR as a discount rate and determining how much of the present value comes from income and resale
(C) Dividing the IRR into before-tax and after-tax IRRs
(D) Determining how much of the IRR comes from each property in a portfolio
Q:
Which of the following refers to the risk real estate investors face stemming from changes in general economic conditions?
(A) Financial risk
(B) Liquidity risk
(C) Environmental risk
(D) Business risk
Q:
When an investor performs an investigation while considering acquisition of a property, this is referred to as:
(A) Investigation
(B) Risk analysis
(C) Due diligence
(D) Acquisition analysis
Q:
Risk due to potential tax law changes is referred to as:
(A) Business risk
(B) Financial risk
(C) Legislative risk
(D) Tax risk
Q:
Using the same information as the question above, what would the land value be under the real options approach?
(a) $120,000
(b) $200,000
(c) $300,000
(d) $833,333
(e) $1,000,000
Q:
Consider an investment in which a developer plans to begin construction of a building one year if, at that point, rent levels make construction feasible and the building will cost $1million to construct. There is a 50 percent chance that NOI will be $160,000 and a 50percent chance that NOI will be $80,000. Using the traditional approach, similar to the "highest and best use" approach, what would be the land value of the property assuming a cap rate of 10 percent (12 percent discount rate and an NOI growth rate of 2 percent)?
(a) $120,000
(b) $200,000
(c) $300,000
(d) $833,333
(e) $1,000,000
Q:
Which of the following is NOT a component of lease rollover risk?
(a) Commissions paid to a leasing agent to find a new tenant
(b) Costs of tenant improvements demanded by new tenants
(c) Liquidity risk
(d) Reduced revenues from vacancy until a new tenant is found
Q:
Consider two investments:Investment 1 has a 50% chance of producing a return of zero and a 50% chance of producing a return of 40%Investment 2 has a 50% chance of producing a return of 10% and a 50% chance of producing a return of 30%Which of the following statements regarding the investments is TRUE?(a) Investment 1 is riskier than Investment 2(b) Investment 2 is riskier than Investment 3(c) Investment 1 and Investment 2 have the same amount of risk(d) Investment 1 is a better investment because it has the potential to produce the highest returns
Q:
Consider risk-return characteristics of Investments A-D, given above. Which of the following statements is TRUE?
(a) Investment A is preferred over all other investments
(b) Investment D is preferred over all other investments
(c) Investment A is preferred to Investment B
(d) Investment B is preferred to Investment C
(e) Investment C is preferred to Investment D
Q:
In general, real estate is usually considered more risky than bonds but less risky than stocks.
Q:
The term "financial risk" refers to the probability of interest rates changing.
Q:
Percentage rent is common in office building leases.
Q:
Land can be viewed as having an "option" to develop the land.
Q:
The term "due diligence" refers to doing an investigation before buying a property.
Q:
The range of returns (highest to lowest) is the most common risk measure.
Q:
Use of leverage always increases the amount of risk.
Q:
Real estate has a lot of inflation risk.
Q:
Real estate that is not leveraged does not have interest rate risk.
Q:
Financial risk increases as the amount of debt increases.
Q:
In general, investors risk seekers and, therefore, must be compensated more for the higher risk of some investments.
Q:
Partitioning the internal rate of return is useful because it helps the investor to determine how much of the return is from annual operating cash flow and how much is from the projected resale cash flow.
Q:
Which of the following is FALSE regarding negative amortization?
(A) It can result in a decrease to the borrower's equity in the property
(B) It usually increases default risk
(C) It usually has a lower interest rate than a conventional loan
(D) It usually results in a lower DCR
Q:
Which of the following gives the lender an option to purchase a full or partial interest in the property at the end of some specified period of time?
(A) Convertible loan
(B) Sale-leaseback
(C) Accrual loan
(D) Interest only loan
Q:
Which of the following is FALSE regarding interest only loans?
(A) They usually have balloon payments
(B) They have greater amortization than conventional loans
(C) They may result in more cash flow to the investor
(D) They may allow for a lower DCR
Q:
Which of the following is NOT a benefit of a sale-leaseback of land for investors?
(A) It is a way of effectively obtaining 100% financing
(B) The lease payments are tax deductable
(C) Land can not be depreciated for tax purposes
(D) The land value may increase over the holding period
Q:
Which of the following typically would NOT be used as a basis for a participation loan?
(A) Increase in value over the holding period
(B) NOI in excess of a base amount
(C) Cash Flow after regular Debt Service
(D) Potential gross income
Q:
A property is financed with an 85% loan-to-value ratio at 10% interest over 25 years. What would the BTIRRE on equity be estimated at given that the BTIRRP is 10.75%?
(A) 10.1%
(B) 10.4%
(C) 15.0%
(D) 13.2%
Q:
If properly constructed and assuming everything but the structure of the interest payment is equal, which of the following loans would typically have the highest first-year debt service?
(A) Accrual loan
(B) Conventional loan
(C) Interest only loan
(D) Participation loan
Q:
A lender requires a 1.20 debt coverage ratio as a minimum. If the net operating income of a property is $45,000, what annual amount of debt service would provide the required debt coverage ratio?
(A) $37,500 or higher
(B) $37,500 or lower
(C) $54,000 or higher
(D) $54,000 or lower
Q:
Which of the following is also referred to as a negative amortization loan?
(A) Participation loan
(B) Accrual loan
(C) Convertible loan
(D) Interest only loan
Q:
Which of the following would NOT be considered an advantage that an investor might consider under a sale-leaseback of land?
(A) The sale-leaseback in effect provides 100% financing on the land
(B) Lease payments are tax deductible
(C) The sale-leaseback provides the same depreciation deductibility with a smaller equity investment
(D) The land may appreciate over the holding period
Q:
A loan in which the lender has an option to purchase an equity interest in a property is known as a(n):
(A) Participation loan
(B) Accrual loan
(C) Convertible loan
(D) Percentage loan
Q:
A loan in which the lender receives a percentage of the net operating income from the property is known as a(n):
(A) Participation loan
(B) Accrual loan
(C) Convertible loan
(D) Percentage loan
Q:
A property produces an 8.92% ATIRR on the total investment considering a tax rate of 28%. What is the maximum interest rate that could be paid on debt without causing the leverage to be negative?
(A) 12.39%
(B) 11.42%
(C) 6.42%
(D) 9.37%
Q:
A property is financed with a 75% loan at 11.5% over 25 years. The property produces an ATIRR on total investment of 7.34% based on a tax rate of 31%. What can be said about the leverage associated with the property?
(A) Negative leverage exists
(B) Positive leverage exits
(C) No leverage exists
(D) Can"t tell without knowing the ATIRR on equity
Q:
All other things being equal, which of the following best describes the effects of leverage on an investment's risk-return characteristics (assuming the expected return is greater than the lending rate)?
(a) Lower expected return, lower risk
(b) Lower expected return, higher risk
(c) Higher average return, higher risk
(d) Higher average return, lower risk
(e) Risk-return characteristics have no role in investment decision making
Q:
Under which conditions would one be MOST LIKELY to see an interest rate swap?
(a) A borrower wants a fixed rate loan, but the bank only offers floating rate loans; the borrower "swaps" loans with someone who has a fixed rate loan
(b) A borrower does not have enough equity for a conforming loan, so he or she takes out a "second" mortgage loan
(c) A borrower does not have enough equity for a conforming loan, so he or she "swaps" mortgage insurance for increased equity investment
(d) A bankruptcy court orders a lender to "swap" a debtors high interest rate for a lower interest rate
Q:
An investment has the following characteristics:
ATIRRP: After-tax IRR on total investment in the property: 9.0%
BTIRRE: Before-tax IRR on equity invested: 17%
BTIRRP: Before-tax IRR on total investment in the property: 12%
t: Marginal tax rate: 0.40
What would be the break-even interest rate (BEIR), at which the use of leverage neither favorable nor unfavorable? (A)
(a) 15.0%
(b) 20.0%
(c) 22.5%
(d) 28.3%
Q:
A loan in which the lender receives part of the proceeds from the sale of the property is known as a convertible loan.
Q:
If a property owner borrows money at a rate that is higher than the equity yield rate, negative leverage exists.
Q:
Properties with a higher ratio of debt are considered to also have a higher risk assuming everything else is equal.
Q:
The loan alternative with the highest ATIRR will always be preferable to the borrower.
Q:
When constructing a convertible mortgage, the lender will require a contract interest rate equal to or greater than the market rate on a similar mortgage without conversion option.
Q:
Everything else equal, the loan balance on a negative amortization loan will be less than that on an interest-only loan after the first year.
Q:
An interest only loan will provide a higher debt coverage ratio than an amortizing loan with the same interest rate.
Q:
In an inflationary environment where property values are also rising, a participation loan may provide a lender with some protection against unanticipated inflation.
Q:
If a property has positive leverage, the owner should borrow as much as possible.
Q:
When the internal rate of return on an investment increases as the loan-to-value ratio increases, positive leverage exists.
Q:
One advantage of using leverage is that NOI increases with higher amounts of leverage.
Q:
One advantage of a sale-leaseback is that the lease payments are 100 percent tax deductible.
Q:
One benefit of leverage is that it allows investors diversify across several investments
Q:
One benefit of leverage is that it reduces the variation in returns or losses.
Q:
To determine whether leverage is positive or negative, the investor needs to determine whether the IRR is greater than market rate of interest on mortgage loans.
Q:
Financial leverage is defined as the benefits that may result to an investor by borrowing money at a rate of interest that is lower than the expected rate of return on total funds invested in a property.
Q:
Net sale proceeds less adjusted basis of the property determines which of the following?
(A) After-tax net present value of the property
(B) Depreciation allowance for the property
(C) Before-tax net present value of the property
(D) Capital gains or losses
Q:
Which of the following is FALSE regarding DCR?
(A) It indicates whether NOI is sufficient to cover mortgage payments
(B) It is not of concern to lenders when loan to value ratios are low
(C) It is an indication of risk for the lender
(D) It is derived from NOI / Mortgage Payment
Q:
The minimum lenders typically require for a DCR is:
(A) 0.8
(B) 1.0
(C) 1.2
(D) 1.5
Q:
Which of the following is FALSE regarding expense stops?
(A) Expense stops protect owners against increases in expenses
(B) Expense stops are usually based on expenses during the first term of the lease
(C) Expense stops can pass through expense savings to tenants
(D) Expense stops provide some protection against inflation
Q:
Which of the following is FALSE regarding an expense stop?
(A) All operating expenses are covered by the stop
(B) The passthrough is based on the tenant's percentage of total leasable area
(C) Expenses to be included must be agreed upon and included in the lease
(D) The stop is often based on the actual amount of operating expenses at the time the lease is signed
Q:
Which of the following includes income from real estate classified as capital assets?
(A) Passive income
(B) Active income
(C) Portfolio income
(D) Passive activity income
Q:
A property produces an after tax internal rate of return of 12.24%. If the investor has a marginal tax rate of 31%, what is the before-tax equivalent yield?
(A) 8.45%
(B) 11.39%
(C) 16.03%
(D) 17.74%
Q:
A property is sold for $5,100,000 with selling costs of 3% of the sales price. The mortgage balance at the time of sale is $3,600,000. The property was purchased 5 years ago for $4,820,000. Annual depreciation allowances of $153,016 have been taken. If the tax rate is 28%, what is the after-tax cash flow from sale of the property?
(A) $1,184,062
(B) $969,840
(C) $1,347,000
(D) $1,097,218
Q:
The adjusted basis can be defined as:
(A) Original cost + capital improvements - accumulated depreciation
(B) Sales price - mortgage balance - sales costs
(C) Sales price - accumulated depreciation
(D) Original cost - mortgage balance - sales costs
Q:
A small office building is purchased of $1,200,000 with a balloon mortgage that is due at the end of year 10. Payments are based on a 25 year amortization period. If one point was charged, what annual amount can be deducted for tax purposes?
(A) $1,200
(B) $480
(C) $0
(D) $800
Q:
An investor who has $75,000 in taxable income purchases a building that produces another $15,000 in taxable income. According to the table below, what is the marginal tax rate?Taxable Income Marginal Tax Rate$0 - $34,000 15%$34,001 - $82,150 28%Over $82,150 31%(A) 29.50%(B) 29.57%(C) 28.00%(D) 31.00%
Q:
A property that produces an annual NOI of $100,000 was purchased for $1,200,000. Debt service for the year was $95,000 of which $93,400 was interest and the remainder was principal. Annual depreciation is $38,095. What is the taxable income?
(A) $5,000
(B) $6,600
(C) - $31,495
(D) - $33,095
Q:
A property that produces a level of NOI of $200,000 per year is expected to be sold in year 5 for $2,000,000. If the property was purchased for $2,000,000, what percent of the IRR can be attributed to the operating income only?
(A) 10.0%
(B) 90.0%
(C) 37.9%
(D) 63.1%
Q:
A property is purchase for $15 million. Financing is obtained at a 75% loan-to-value ration with total annual payments of $1,179,000. The property produces an NOI of $1,400,000. What is the equity dividend rate (ratio of first year cash flow to equity)?
(A) 5.89%
(B) 9.33%
(C) 7.86%
(D) 8.64%