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Real Estate
Q:
Lenders for income-producing properties refer to loans that are short term and require little or no amortization as:
A) Missile loans
B) Straight loans
C) ARM loans
D) Bullet loans
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 deductible
C) Land cannot 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:
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:
A lender requires a 1.20 debt coverage ratio as a minimum. If the net operating income of a property is $60,000, what is the maximum amount of debt service the lender would allow?
A) $30,000
B) $50,000
C) $60,000
D) $72,000
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 debtor's 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 is neither favorable nor unfavorable?
A) 15.0%
B) 20.0%
C) 22.5%
D) 28.3%
Q:
A decrease in financial leverage would be expected to magnify the risk and the potential return of an income-producing property.
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 a 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 benefit of leverage is that it may allow an investor to diversify across several investment properties.
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 the market rate of interest on mortgage loans.
Q:
Financial leverage is defined as 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:
The rate that causes the present value of all cash inflows to equal the initial investment of a project is referred to as:
A) NPV
B) Payback period
C) TVM
D) IRR
Q:
The general investment strategy based on a goal of acquiring existing, seasoned, relatively low-risk properties that are at least 80 percent leased to tenants with low credit risk, is:
A) Opportunistic investing
B) Core strategy
C) Core "Plus" strategy
D) Value added strategy
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 DCR in the first year 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 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 of a property is 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 at closing, 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. What is the investor's 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 ratio 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%
Q:
A property that produces a first year NOI of $80,000 is purchased for $750,000. The NOI is expected to increase by 15% in the sixth year when some of the leases turnover. The resale price in year 10 is expected to be $830,000. What is the net present value of the property based on the 10-year holding period and a discount rate of 9.5%?
A) $87,433
B) $87,221
C) $95,294
D) $116,490
Q:
A property produces a first year NOI of $100,000 which is expected to grow by 2% per year. If the property is expected to be sold in year 10, what is the expected sale price based on a terminal capitalization rate of 9.5% applied to the eleventh year NOI?
A) $1,308,815
B) $1,283,152
C) $1,263,158
D) $1,257,992
Q:
A restaurant is for sale for $200,000. It is estimated that the restaurant will earn $20,000 a year for the next 15 years. At the end of 15 years, it is estimated that the restaurant will sell for $350,000. Which of the following would be MOST LIKELY to occur if the investor's required rate of return is 15 percent?
A) Investor would pursue the project
B) Investor would not pursue the project
C) Investor would pursue the project if the holding period were longer than 15 years
D) Not enough information provided
Q:
The real estate industry:
A) Is highly competitive
B) Is a relatively small market
C) Is relatively concentrated, with a few owners controlling most of the market in most areas
D) All of the above
Q:
An effective tax rate:
A) Takes into account the effects of depreciation and time value of money
B) Measures the actual difference between the BTIRR and the ATIRR
C) Can be less than the actual marginal tax rate
D) All of the above
Q:
Which of the following statements regarding equity is TRUE?
A) The amount of equity an investor has in a property may change over time if the property value and loan balance changes
B) The amount of equity an investor has in a property depends on the value of the equity the investor has in his or her other investments
C) The outstanding loan balance on the property does not affect the amount of equity an investor has in the property
D) All of the above
Q:
Which of the following is NOT one of the primary benefits of investing in real estate income property?
A) Net IncomeDollars left over after collecting rent and paying expenses but before considering taxes and financing costs
B) Property SaleExpecting a price increase over a specified holding period increases investor return
C) DiversificationReducing overall risk to hold many types of investments
D) Business cyclesReal estate income properties tend to generate higher incomes when other investments are in decline
Q:
Operating expenses associated with the maintenance and upkeep of a residential property are generally tax deductible.
Q:
During a recessionary period, it is possible the amount of space that is absorbed by the market will actually be negative.
Q:
If an individual actively participates in the management of a rental property, he may deduct the full amount of the passive activity losses from active income, regardless of his adjusted gross income.
Q:
When the sale of a passive activity produces a capital loss and unused passive losses from previous years remain, the unused losses can be used to offset any other source of income.
Q:
The deductibility of depreciation in calculating taxable income will usually cause the effective tax rate to be lower than the actual tax rate.
Q:
Residential property is depreciated over 27.5 years where as non-residential property is depreciated over 31.5 years.
Q:
When calculating IRR, the projected cash flows are discounted such that they will equal the initial investment amount.
Q:
The debt coverage ratio is used by lenders to indicate the riskiness of a loan.
Q:
A gross lease is riskier for the lessor than a net lease.
Q:
The equity dividend rate is an accurate measure of investment yield because it takes into account future cash flows.
Q:
In making an investment decision, IRR analysis will lead to a different "go/no-go" decision than NPV analysis.
Q:
Expense stops shift the risk of increases in expenses to the lessee while allowing the lessor to retain the benefit of any decrease in expenses.
Q:
CPI adjustments shift the risk of unexpected inflation to the lessor.
Q:
Debt coverage ratio measures the degree to which the NOI from the property is expected to exceed the mortgage payment.
Q:
The principle that an informed purchaser would not spend more for a piece of real estate than the cost to purchase the land and the cost to construct a structure, provides the rationale for which of these valuation methods?
A) Sales comparison approach
B) Income approach
C) Cost approach
D) Direct capitalization approach
Q:
The difference between the total property value (accounting for rents and cash flows) and the cost of constructing an improvement on a given site is:
A) Residual land value
B) Highest and best use value
C) Land value differential
D) Excess land value
Q:
Which of the following income capitalization techniques is based on the principle that buyers will not pay more for a property than the present value (PV) of all future Net Operating Incomes (NOI)?
A) Direct capitalization method
B) Effective gross income method
C) Potential gross income method
D) Discounted cash flow method
Q:
Which lease has the LOWEST effective rent? Lease
Year 1
Year 2
Year 3
Year 4
Year 5 A 10 11 12 13 14 B 0 13 14 15 16 C 0 0 20 20 22 D 15 14 13 12 11 A) Lease A
B) Lease B
C) Lease C
D) Lease D
Q:
Which is of the following is NOT normally considered when conducting an appraisal using the cost approach?
A) Functional obsolescence
B) Effective age
C) Capitalization rate
D) Replacement cost
Q:
Capitalization rates will differ from yield rates when the income is expected to ________ over time.
A) Stay the same
B) Increase
C) Decrease
D) Both B and C.
Q:
Which of the following is TRUE concerning the capitalization rate?
A) It is an IRR
B) It explicitly considers projected future income and changes in property value over time
C) It expresses relationships between income and property value at a specific point in time
D) It is the rate of return that investors expect to earn on all capital invested
Q:
Total possible income less any vacancy is ________.
A) Effective gross income
B) Potential gross income
C) Net operating income
D) Gross income multiplier
Q:
The discount rate is a rate that a typical investor would normally require as a(n) ________ return over investment holding period.
A) Maximum
B) Risk free
C) Expected
D) Historical
Q:
A property is leased for $24,000 per year although market rents are currently $27,500 per year and are expected to increase by 2% per year. The property is expected to be sold at the end of year 10 based on a 10% terminal cap rate applied to the eleventh year NOI. The current lease on the property will expire at the end of year 10 so the property can be leased in the eleventh year at market rates. What is the value of the leased fee estate based on an 11.5% discount rate?
A) $362,489
B) $298,325
C) $251,298
D) $271,486