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Real Estate
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 known 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:
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:
Consider the table, which summarizes monthly construction draws and sales revenues. What is the percentage of lot sales revenue that needs to be used to repay the loan? 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 A) 4.0%
B) 75.0%
C) 76.6%
D) 33.3%
Q:
Consider the feasibility study shown in the table. 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: 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 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:
Consider the feasibility study shown in the table. What is the return on total cost for the proposed project? 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 A) 15.0%
B) 17.6%
C) 21.4%
D) 150.0%
Q:
While permitted for building projects, holdbacks are not permitted for land development projects.
Q:
The loan submission package for a land development project must include project information, market financial data, government and regulatory information, legal documentation and emergency contingency plans.
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 usually required 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:
A lender does not usually 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 of land 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 is 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:
In determining whether a project is commercially viable given the prevailing market rents, land prices, and construction and financing costs, a developer would be likely to conduct a(an):
A) Feasibility analysis
B) Submarket analysis
C) Economic analysis
D) Multivariate analysis
Q:
When commercial banks consider construction loans their analysis is generally based on which of the following:
A) Hard costs, soft costs
B) Hard costs, soft costs, site location
C) Hard costs, soft costs, appraised value
D) Hard costs, site location
Q:
ADL lenders recognize that too much of what may lead to significant overbuilding and an excess supply of space in a local market?
A) Speculative, closed-ended construction lending
B) Speculative, open-ended construction lending
C) Planned, closed-ended construction lending
D) Planned, open-ended construction lending
Q:
Developers usually hold back about ________ percent of each progress payment.
A) 1
B) 10
C) 25
D) 75
Q:
What term applies to third-party financing that is used between funds advanced by the permanent lender and funds needed to repay the construction loan?
A) Interim loan
B) Mini-perm financing
C) Gap financing
D) Partial financing
Q:
Which of the following common contingencies is NOT usually included with a permanent financing agreement?
A) Completion date for construction phase
B) Minimum rent-up requirements
C) Materials used in construction phase
D) Cleanliness of work area
Q:
Which of the following is FALSE regarding a construction loan?
A) It usually has a lower rate than does permanent financing
B) It is also known as an interim
C) Hard costs can usually be financed
D) The entire land cost cannot usually be financed
Q:
Which of the following is NOT one of the development strategies that may be used by developers?
A) Selling and leasing back the land for the development
B) Owning and managing the real estate after sale
C) Selling the real estate after lease-up phase
D) Developing the real estate for lease in master-planned development
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 charged 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) Two years of prior tax returns
B) Current financial statements
C) Pro Forma Operating Statements
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 Rate Interest Rate Variability (A)
High Steady (B)
High Fluctuating (C)
Low Steady (D)
Low Fluctuating A) Option A
B) Option B
C) Option C
D) Option D
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 the 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
Q:
Which of the following is a "soft cost" of construction?
A) The cost of the architectural drawings
B) The cost of pouring the foundation
C) The cost of erecting the building
D) The cost of finishing the interior space
Q:
Which of the following is the usual progression for a real estate development project?
A) Land acquisition, completion, management, sale, construction
B) Land acquisition, construction, completion, management, sale
C) Land acquisition, construction, completion, sale, management
D) Land acquisition, management, construction, completion, sale
Q:
Consider the table above. An investor-developer demands a return of at least 9 percent on cost. Which of the following statements is TRUE based on the information above?
A) Neither project produces a sufficient expected return
B) The 275 unit project produces a sufficient return, but the 300 unit project does not
C) The 300 unit project produces a sufficient return, but the 275 unit project does not
D) Both projects produce sufficient return, but the 275 unit project produces a higher return than the 300 unit project
Q:
Which of the following is one reason that construction lenders typically prefer the cost approach to valuation over the income approach?
A) The cost approach provides a more conservative estimate of value
B) The cost approach provides a more optimistic estimate of value
C) The cost approach is a good indication of the expected value of an income-producing property once construction is complete and it has been leased-up
D) The cost approach is a better estimate of actual market value of the project
Q:
A permanent take-out commitment is:
A) A way to increase NOI for projects with large debt service obligations
B) An agreement by a lender to provide permanent financing for a property once construction is complete, provided all of the contingencies have been met.
C) Another term for a construction loan
D) The same thing as an acquisition and development loan
Q:
A standby commitment differs from a permanent take-out commitment in that neither party really expects the standby commitment to be used by the developer.
Q:
Loans made under the assumption that markets will turn around are referred to as spec loans.
Q:
Generally, as the cost of a site increases, so do the quality and the density of the improvements constructed on it.
Q:
Even after obtaining permanent financing, a developer still maintains the right to alter a project's design or the level of expenditures.
Q:
Lenders typically finance the development of a project as a percentage of completed appraised value, including the price of the site.
Q:
Commitments for construction financing are usually contingent on commitments for permanent financing.
Q:
Permanent loans generally provide the money to pay off the construction loan in segments, as the work progresses.
Q:
Construction loans provide the money to construct a building and are usually provided by life insurance companies or pensions funds.
Q:
The demand for retail space should be examined in terms of the characteristics of the tenant's demand in a given market.
Q:
Holdbacks are used by construction lenders to be sure that a developer has met all of his or her obligations before all of the funds from the construction loan are given to the developer.
Q:
A bullet loan is a construction loan that, in effect, becomes permanent financing when construction is complete.
Q:
In general, developers must get a construction loan before they can line up permanent (long-term) financing that will be used once the project is complete and being operated with tenants.
Q:
One of the risks of project development is "project risks," which are the result of unexpected changes in general market conditions affecting the supply and demand for space.
Q:
The real estate activities of firms that only use real estate as part of their business operations are commonly referred to as:
A) Corporate real estate
B) Real estate analysis
C) Business real estate
D) Real estate finance
Q:
Which of the following statements is FALSE regarding operating leases?
A) They are recorded as the present value of the lease on the balance sheet
B) They do not have any real effect on the balance sheet
C) They must not extend for more than 75 percent of the asset's life
D) They are usually the preferred form of accounting for leases
Q:
Which of the following statements is TRUE for a corporation with a high credit rating considering owning versus leasing corporate real estate?
A) The company should probably use a mortgage
B) The company may be able to issue corporate debt at a more favorable rate
C) The company is probably better off leasing the property from someone with a lower credit rating
D) The company's credit rating does not affect the own versus lease decision
Q:
When doing a sale versus lease analysis, how should the residual value of the property be estimated?
A) Assume it is worthless
B) Set it equal to the book value of the property
C) Assume it is equal to the original purchase price
D) Assume it is equal to the market value of the real estate
Q:
It is estimated that corporate users control as much as ________ percent of all commercial real estate.
A) 10
B) 25
C) 75
D) 100
Q:
Which of the following is likely to be affected if a corporation acquires a parcel of real estate?
A) Cash flow
B) Corporate liquidity
C) Corporate risk
D) All of the above
Q:
All other factors being equal, a company would prefer to own rather than lease under which of the following conditions?
A) The expected life of an asset far exceeds the company's projected period of use
B) The real estate investment represents a large proportion of the company's total capital
C) The corporate needs for the property are not highly sensitive to the level of maintenance
D) The corporation needs a specialized research and development building
Q:
The cash flows considered in a lease versus own analysis are:
A) Purchase price, difference in cash flow from operations over the holding period, and cash flow from sale
B) Purchase price, lease payments, and cash flow from future sale
C) Cash flow from sale, differences in future operating expenses, and cash flow from future sale
D) Cash flow from sale, future lease payments, and differences in future operating expenses
Q:
The cash flows considered in a sale-leaseback analysis are:
A) Purchase price, differences in operating expenses over the holding period, and cash flow from future sale
B) Purchase price, lease payments, and cash flow from future sale
C) Cash flow from sale, differences in future cash flow from operations, and potential cash flow from future sale
D) Cash flow from sale, future lease payments, and differences in future operating expenses
Q:
Which of the following does NOT represent a potential benefit of selling and leasing back a property?
A) Provides a source of capital
B) Returns excess capital to investors
C) Demonstrates the value of the real estate to the marketplace
D) Increases the firm's depreciation deductions
Q:
A company sells an office building that has appreciated in value and subsequently leases the space. Which of the following scenarios represents an impact that sale-leasebacks may have on corporate financial statements?
A) Lower total income will be realized in the year of sale because of capital gains tax
B) Higher taxable income will be realized in the year of sale because of a gain on sale
C) Earnings per share increases because the mortgage has been paid off
D) Higher taxable income will be realized because lease payments cannot be deducted
Q:
Which of the following conditions will NOT cause a lease to be categorized as a capital lease?
A) It extends for at least 90 percent of the asset's life
B) It transfers ownership to the lessee at the end of the lease term
C) It seems likely that ownership will be transferred to the lessee at the end of the lease term because of a "bargain purchase" option
D) The present value of the contractual lease payments equals or exceeds 90 percent of the fair market value of the asset at the time the lease is signed
Q:
Which of the following factors does NOT represent an effect of corporate real estate ownership on corporate financial statements?
A) The unrealized source of potential gain from the sale of property is not represented on annual income statements
B) Income represented on accounting statements may underestimate the actual cash flows provided by property
C) The book value of property on the balance sheet may not represent the actual market value
D) The corporation's overall debt ratio may be reduced, and property is carried at book value but financed at market value
Q:
Which of the following tax law changes has reduced the incentive for individuals to lease to corporations as a part of the Tax Reform Act of 1986?
A) Depreciation lives were lengthened
B) The highest marginal tax rate for corporations is much lower than the highest marginal tax rate for individuals
C) Individuals are subject to limitations on "passive" losses used to offset other taxable income
D) Income from corporations is no longer double taxed
Q:
A company is planning to move to a larger office and is trying to decide if the new office should be owned or leased. Cash flows for owning versus leasing are estimated as follows. Assume that the cash flows from operations will remain level over a 10 year holding period. If purchased, the company will invest $385,000 in equity and finance the remainder with an interest-only loan that has a balloon payment due in year 10. The after-tax cash flow from sale of the property at the end of year 10 is expected to be $750,000. What is the incremental rate of return on equity to the company, if the property is owned instead of leased? Own
Lease Sales
1,000,000
1,000,000 Cost of goods sold
500,000
500,000 Gross income
500,000
500,000 Operating expenses: Business
130,000
130,000 Real estate
60,000
60,000 Lease payments
0
120,000 Interest
90,000
0 Depreciation
35,000
0 Taxable income
185,000
190,000 Tax
55,500
57,000 Income after tax
129,500
133,000 Plus: Depreciation
35,000
0 After-tax cash flow
164,500
133,000 A) 17.99%
B) 13.26%
C) 10.32%
D) 12.62%
Q:
Why might it be argued that corporations do not have a comparative advantage when investing in real estate as a means of diversification from the core business?
A) Corporations cannot react as quickly as individual investors to changes in market conditions
B) Corporations do not typically hold real estate in a large number of geographic areas and may not hold a variety of different types of properties
C) Corporations often use property managers who do not understand financial markets
D) Diversification dilutes a corporations risk-return profile and does not provide an advantage to corporations
Q:
For which of the following reasons would a business prefer to own real estate rather than lease it?
A) If the business demands specialized or unique facilities
B) Owning allows the business to develop skills in operating, maintaining, and repair of real estate and the associated facilities
C) Owning reduces operating flexibility
D) The capital commitments with owning are lower than the capital commitments associated with leasing