Q&A Hero

Q: Given the following information regarding an income producing property, determine the unlevered internal rate of return (IRR). Expected Holding Period: 5 years; 1st year Expected NOI: $89,100; 2nd year Expected NOI: $91,773; 3rd year Expected NOI: $94,526; 4th year Expected NOI: $97,362; 5th year Expected NOI: $100,283; Debt Service in each of the next five years: $58,444; Current Market Value: $885,000; Required equity investment: $221,250; Net Sale Proceeds of Property at end of year 5: $974,700; Remaining Mortgage Balance at end of year 5: $631,026. A. 10.6% B. 12.2% C. 22.9% D. 33.4%

Q: An important piece of criteria for investors to consider when deciding between real estate investment opportunities and investing in stocks or bonds is the effect of income taxes on their return. For most investors, the effective tax rate on commercial real estate is: A. greater than the effective tax rate on a stock or bond investment B. equal to the effective tax rate on a stock or bond investment C. less than the effective tax rate on a stock or bond investment D. cannot be compared across asset classes.

Q: Given the following information regarding an income producing property, determine the NPV using levered cash flows in your analysis. Required equity investment: $270,000; Expected NOI for each of the next five years: $150,000; Debt Service for each of the next five years: $125,000; Expected Holding Period: 5 years; Required yield on levered cash flows: 15%; Expected Sale Price at end of Year 5: $2,000,000; Expected Cost of Sale: $125,000; Expected Mortgage Balance at time of sale: $1,500,000 A. $245.15 B. $270,245.15 C. $419,264.54 D. $1,435,029.64

Q: The use of financial leverage when investing in real estate is a double-edged sword. While increased leverage may allow the investor to purchase higher expected returns, the price of doing so is an increase in which of the following risks? A. Liquidity risk B. Default risk C. Interest rate risk D. Pipeline risk

Q: Given the following expected cash flow stream, determine the NPV of the proposed investment in an income producing property and determine whether or not the investment should be pursued. Investment Horizon: 5 years; Expected Yearly Cash Flow in each of the next five years: $127,628. Expected Sale Price at end of 5 years: $1,595,350; Opportunity Cost of Investment 6%; Current Market Price of Property: $1,750,000 A. NPV is -$20,246; Decision is to invest B. NPV is -$20,246; Decision is not to invest C. NPV is $249,967; Decision is to invest D. NPV is $249,967; Decision is to not invest

Q: The use of financial leverage in purchasing an income-producing property can affect the amount of cash required at acquisition, the net cash flows from rental operations, the net cash flows from the eventual sale of the property, and the ultimate return on invested equity. Assuming the going-in IRR is greater than the effective borrowing cost, if an investor increases his leverage rate, say from 75% to 80%, we would expect which of the following to occur? A. Both NPV and going-in IRR increase B. NPV decreases, while going-in IRR increases C. NPV increases, while going-in IRR decreases D. Both NPV and going-in IRR decrease

Q: A client has requested advice on a potential investment opportunity involving an income producing property. She would like you to determine the internal rate of return of the investment opportunity based on the following information. Expected Holding Period: 5 years; End of first year NOI estimate: $113,900; NOI estimates in subsequent years will grow by 5% per year; Price at which the property is expected to be sold at the end of year 5: $1,615,205.22; Current market price of the property: $1,475,667.71. A. -15.30% B. 8.60% C. 9.86% D. 10.00%

Q: While net present value (NPV) and internal rate of return (IRR) analysis both may be used as investment decision criteria, there are some limitations to the IRR method that make its use as an investment criterion problematic in certain situations. All of the following are limitations of the IRR method EXCEPT: A. IRR calculations assume that cash flows are reinvested at the IRR, rather than at the actual rate that investors expected to earn on reinvested cash flows. B. With the IRR decision criterion multiple solutions may exist for investments where the sign of the cash flows changes more than once over the expected holding period. C. The IRR methodology cannot be used to make comparisons across different investment opportunities. D. The use of IRR as a decision criterion will not necessarily result in wealth maximization for the investor.

Q: Suppose you purchased an income producing property for $95,000 five years ago. In Year 1, you were able to negotiate a lease that paid $10,000 per year at the end of each year. If you are able to sell the property at the end of year 5 for $100,000 (after receiving our final lease payment), what was the internal rate of return (IRR) on this investment? A. -18.18% B. 1.03% C. 9.57% D. 11.37%

Q: The internal rate of return (IRR) on a proposed investment is the discount rate that makes the net present value of the investment: A. greater than zero B. equal to zero C. less than zero D. greater than the opportunity cost of not investing

Q: Given the following information, calculate the acquisition price of the property. First-year NOI: $57,750, capitalization rate: 8.5%, Equity Investment: 30%. A. $192,500 B. $203,824 C. $679,412 D. $2,264,706

Q: Given the following information, calculate the equity dividend rate for this investment. First-year NOI: $87,750, Acquisition price: $1,250,000, Equity Investment: 35%; Before-tax cash flow: $53,500. A. 4.3% B. 7.0% C. 12.2% D. 20.1%

Q: Given the following information, calculate the going-in capitalization rate for the specific property. First-year NOI: $87,750, Acquisition price: $1,250,000, Equity Investment: 35%; Before-tax cash flow: $53,500. A. 4.3% B. 7.0% C. 10.8% D. 20.1%

Q: Given the following information, calculate the total amount of annual operating expenses for this income-producing property. Minor Roof Repairs: $20,000, Property taxes: $30,000, Maintenance: $25,000, Janitorial: $15,000, Security: $10,000, Debt service: $175,000. A. $70,000 C. $80,000 C. $100,000 D. $275,000

Q: When a mortgage loan is obtained, the cash down payment (equity) required at property acquisition is a function of the acquisition price and the net loan proceeds. Given the following information, determine the required equity down payment on the property: Acquisition price: $1,500,000; Face amount of loan: $975,000; Up front financing costs: 2 points. A. $505,000 B. $525,000 C. $544,500 D. $2,494,500

Q: If the lender has agreed to offer you a loan with a loan-to-value ratio of 85%, what is the size of the loan if the purchase price of the home is $500,000? A. $75,000 B. $400,000 C. $425,000 D. $588,235

Q: Suppose you plan to put a 20% down payment on a house and obtain a mortgage loan that is less than the size limit on conforming loans ($417,000) to finance the remainder of the purchase. Based on your understanding of the loan-to-value ratio, what is the maximum price that you could pay for a home with these restrictions in mind? A. $333,600 B. $500,400 C. $521,250 D. $2,085,000

Q: Given the following information, calculate the capitalization rate for the following apartment complex. Number of apartments: 15; Market Rent (per month): $1,000; Vacancy and Collection Loss: 10% of potential gross income; Operating Expenses: 5% of effective gross income; Capital Expenditures: 10% of effective gross income; Acquisition Price: $1,710,000. A. 8.1% B. 9.0% C. 9.5% D. 10.5%

Q: Given the following information, calculate the debt yield ratio on the following commercial property. Estimated Net Operating Income in the first year: $250,000, Loan amount: $2,047,500, Purchase price: $2,730,000 A. 4.8% B. 12.2% C. 68.6 % D. 75.2 %

Q: Given the following information, calculate the after tax-cash flow for this property. Debt Service: $45,000; First-year NOI: $91,750; Tax liability: 25% of Before Tax Cash Flow. A. $23,812.50 B. $35,062.50 C. $68,812.50 D. $80,500.00

Q: Suppose the operating agreement of an LLC insists that all investors receive their pro rata share of all cash flows when a property is liquidated from the portfolio. If all 15 investors contributed an equal amount of equity in establishing the LLC, each investor should receive how much from the liquidation of a property valued at $3,500,000. A. $233,333 B. $350,000 C. $3,500,000 D. $52,500,000

Q: Given the following information, calculate the net income multiplier for this property. First-year NOI: $18,750, Acquisition price: $150,000, Equity Investment: 20%. A. 0.1 B. 1.6 C. 8.0 D. 12.5

Q: Given the following information, calculate the debt coverage ratio for this investment. Potential gross income: $120,000, Vacancy rate: 9%, Net operating income: $57,900, Operating expenses: $51,300, Acquisition Price: $520,000, Debt service: $40,000. A. 0.69 B. 1.45 C. 2.73 D. 8.29

Q: Given the following information, calculate the operating expense ratio for this property. Potential gross income: $120,000, Vacancy rate: 9%, Net operating income: $57,900, Operating expenses: $51,300. A. 34% B. 43% C. 47% D. 53%

Q: Given the following information, calculate the effective gross income multiplier for the specific investment. Effective gross income: $49,500, First-year NOI: $18,750, Acquisition price: $520,000, Equity Investment: 20%. A. 0.036 B. 0.095 C. 10.5 D. 27.7

Q: Given the following information, calculate the equity dividend rate for this investment. First-year NOI: $18,750, Before-tax cash flow: $11,440, Acquisition price: $520,000, Equity Investment: 20%. A. 2.2% B. 3.6% C. 11.0% D. 18.02%

Q: Given the following information, calculate the going-in capitalization rate for the specific property. First-year NOI: $18,750, Acquisition price: $150,000, Equity Investment: 20%. A. 2.5% B. 12.5% C. 15.6% D. 62.5%

Q: Given the following information, calculate the total amount of annual operating expenses for this income-producing property. Lawn care: $10,000, Property taxes: $24,000, Maintenance: $35,000, Janitorial: $25,000, Security: $32,000, Debt service: $145,000. A. $102,000 B. $126,000 C. $247,000 D. $271,000

Q: Given the following information, calculate the cash down payment required to purchase the specific property. Purchase Price: $500,000, Loan Amount: 80% of purchase price, Up-front financing costs: 2.5% of loan amount. A. $90,000 B. $110,000 C. $136,250 D. $200,000

Q: The going-in capitalization rate can vary significantly by property quality. Which of the following classes of properties within a particular property type would be expected to have the lowest cap rates? A. First tier properties B. Second tier properties C. Third tier properties D. Cap rates would be equal across all classes within the same property type

Q: The debt coverage ratio is used to indicate how much the NOI can decline before it will not cover the debt service on the property. While DCRs can vary based on competition within a particular market, lenders usually seek a minimum DCR of: A. 0.80 B. 1.00 C. 1.20 D. 1.40

Q: The placement of nonrecurring capital expenses in pro forma cash flow projections has not been standardized. The modern treatment of capital expenditures in investment analysis is to treat capital expenditures: A. above-line B. below-line C. in-line D. out-of-line

Q: Unlike the debt coverage ratio, the debt yield ratio (DYR) is not affected by the interest rate or amortization period of the loan; the DYR is simply a measure of how large the NOI is relative to the loan amount. Lenders who rely on this ratio are typically willing to accept a minimum DYR of A. 10% B. 20% C. 60% D. 80%

Q: The loan-to-value ratio measures the percentage of the acquisition price (or current market value) encumbered by debt. To protect their invested capital in the event that property values do fall, commercial mortgage lenders generally require that the senior mortgage not exceed approximately what percentage of the acquisition price? A. 60% B. 70% C. 80% D. 90%

Q: Helpful in assessing the risk of lending to investors for particular projects, which of the following calculations measures the income-producing ability of the property to meet operating and financial obligations? A. Profitability ratios B. Income multipliers C. Financial risk ratios D. Income tax multipliers

Q: Single year return measures and ratios can be categorized into three groups: profitability ratios, multipliers, and financial ratios. All of the following are considered financial ratios EXCEPT: A. Capitalization ratio B. Operating Expense ratio C. Loan-to-value ratio D. Debt yield ratio

Q: Profitability ratios, income multipliers, and financial risk ratios can be used to provide a quick assessment of a propertys relative value. Which of the following ratios measures the overall income-producing ability of the property? A. Capitalization rate B. Equity dividend rate C. Debt coverage ratio D. Operating expense ratio

Q: The going-in capitalization rate can vary significantly by property quality. Which of the following classes of properties within a particular property type would be expected to have the highest cap rates? A. First tier properties B. Second tier properties C. Third tier properties D. Cap rates would be equal across all classes within the same property type

Q: The measure of cash flow most relevant to investors in income-producing real estate is the after-tax cash flow (ATCF) from property operations. Therefore, it is important to know that the maximum federal income tax rate on individuals as of 2016 is: A. 25% B. 30% C. 35% D. 39.6%

Q: The key to meaningful valuations in real estate is to use defensible cash flow estimates. All of the following statements are true in regards to generating accurate cash flow estimates EXCEPT: A. Investors should include only those sources of income and expenses that relate directly to the income producing ability of the property. B. Investors should only consider recent events, rather than long-term trends when evaluating revenue and expense items. C. Investors should obtain information about comparable properties whenever possible. D. Investors should take into consideration local zoning, land use, and environmental controls that may impact the future flow of funds.

Q: In determining a propertys before-tax cash flow from operations (BTCF) and net operating income (NOI), it is important to understand how each accounts for the use of financial leverage in its calculation. Which of the following statements is true in regards to how these two measures account for the use of financial leverage? A. BTCF and NOI are both levered cash flows B. BTCF is an unlevered cash flow, while NOI is a levered cash flow C. BTCF is a levered cash flow, while NOI is an unlevered cash flow D. BTCF and NOI are both unlevered cash flows

Q: Prior to determining the treatment of capital expenditures in the calculation of NOI, it is important to distinguish these costs from operating expenses. In contrast to operating expenses, capital expenditures: A. add to the market value of the property B. are deductible for tax purposes in the year in which they are paid. C. are necessary to keep the property operating and competitive in its local market. D. may include minor repairs that do not add to the propertys useful life.

Q: In calculating the net operating income (NOI) of a property, the above-line treatment of capital expenditures implies: A. capital expenditures are excluded from the calculation of NOI. B. capital expenditures are included in the calculation of NOI. C. capital expenditures are set equal to NOI. D. capital expenditures are divided by NOI.

Q: In an analogy to the stock market, the net operating income of a property can be viewed as which of the following? A. Annual dividend expected to be produced by the property B. Annual return on the value of the property C. Market value of the property D. Price-earnings ratio of the property

Q: In making single-asset real estate investment decisions, the first pass often involves calculating a series of returns, ratios, and multipliers. Which of the following is often cited as a limitation associated with this type of analysis? A. they are difficult to calculate B. they are complex to understand C. they fail to incorporate cash flows beyond the first year of the analysis D. they are rarely used by industry professionals

Q: Given the following information, calculate the price-FFO multiple for the following REIT. Funds from Operation: $75,555,000; Stock Price: $17.80; Shares Outstanding: 185,000,000 A. 0.03 B. 0.14 C. 7.27 D. 43.58

Q: Given the following information, calculate the funds from operation (FFO). Net income: $44,245,000; Gain/losses from infrequent and unusual events: $50,000; Amortization of tenant improvements: $575,000; Amortization of leasing expenses: $133,000; Depreciation (real property): $30,906,000. A. $12,581,000 B. $75,809,000 C. $75,859,000 D. $75,909,000

Q: Given the following information, calculate the price-FFO multiple for the following REIT. Net income: $1,200,000; Gain/losses from infrequent and unusual events: $0, Amortization of tenant improvements: $120,000; Amortization of leasing expenses: $75,000; Depreciation (real property): $2,675,000; Stock Price: $40; Market Capitalization: $40,000,000 A. 0.10 B. 4.07 C. 9.83 D. 393.12

Q: Given the following information, calculate the price-FFO multiple for the following REIT. Funds from Operation: $4,000,000; Stock Price: $40; Shares Outstanding: 1,000,000 A. 0.10 B. 0.25 C. 4.00 D. 10.00

Q: Given the following information, calculate the funds from operation (FFO). Net income: $1,200,000; Gain/losses from infrequent and unusual events: $0; Amortization of tenant improvements: $120,000; Amortization of leasing expenses: $75,000; Depreciation (real property): $2,675,000. A. $195,000 B. $1,395,000 C. $2,870,000 D. $4,070,000

Q: Investors in commercial real estate can hold ownership positions either directly or indirectly. An entity that invests in real estate and sells claims on those investments to the ultimate investors is more commonly referred to as a(n): A. Syndicate B. Intermediary C. Sole proprietorship D. Tenant

Q: All of the following constitute indirect ownership of real estate private equity EXCEPT: A. limited partnership B. limited liability company C. tenancy in common D. real estate investment trust

Q: A group of persons or legal entities who come together to carry out a particular activity are more commonly referred to as a: A. Syndicate B. Security C. Trust D. Broker

Q: Which of the following types of real estate private equity funds would you expect to invest in properties that have some lease-up risk and/or the need for moderate renovation or repositioning? A. Core B. Value Added C. Opportunistic D. Full platform

Q: Real estate private equity funds have been used to facilitate investment across the risk-return spectrum. All of the following are characteristics of investments by core funds EXCEPT: A. High quality property B. Properties located in large metropolitan areas C. Strong leases D. High expected returns

Q: Which of the following measures, equal to the estimated total market value of a REITs underlying assets, allows investors to compare the value of a publicly traded security to the value of the properties that it holds in the private market? A. Net income B. Net asset value C. Funds from operations D. Effective gross income

Q: If the per share stock price of a REIT is greater than its per share net asset value (NAV), the REIT is said to be selling at: A. par value B. a discount C. a premium D. an auction

Q: Since most real estate assets are depreciable, using accounting income to measure a REITs cash flow may actually understate the funds that are available to distribute to investors as dividends. Therefore, REITs utilize a measure that adds back depreciation and amortization expenses, more commonly referred to as: A. Net income B. Net asset value C. Funds from operations D. Effective gross income

Q: Most real estate investment trusts (REITs) are actively managed operating companies that typically focus their investments either by property type or geographic market. Which of the following commercial property types represents the largest proportion of REIT market value? A. Apartments B. Office C. Industrial D. Retail

Q: One measure of the importance of a publicly traded asset class in the U.S. economy can be calculated by multiplying the number of publicly traded shares by the current market price of the stock. The result of this calculation is more commonly referred to as: A. market capitalization B. capitalization rate C. price-earnings ratio D. earnings-per-share ratio

Q: Real estate private equity funds can focus investment on anything from Class A real estate to redevelopment in the urban center. On the risk-return spectrum, which of the following private equity fund categories tends to have a heavier development component and often involves investment in riskier property types and locations? A. Core B. Value Added C. Opportunistic D. Full platform

Q: When investing in commercial real estate through an intermediary, it is important to consider whether the fund has a finite or infinite life. By having a finite life, the fund manager is forced to eventually dispose of the assets and return the investors capital. With which of the following fund structures do you expect the issues associated with finite life to be least prevalent? A. Closed-end commingled real estate fund B. Open-end commingled real estate fund C. Real estate private equity fund D. Public, non-traded REIT

Q: Direct investment in private commercial real estate markets is a preferred means of ownership for the largest institutional market participants. Which of the following types of institutions rely on stable income from commercial real estate properties to pay out retirement benefits? A. Pension funds B. Life insurance companies C. Commercial Banks D. Investment Banks

Q: There are a number of ways in which individual and institutional investors can hold investments in commercial real estate as a part of their portfolio. One way is to purchase and hold the title to the actual commercial property, which gives the owner complete control of the asset. This type of transaction would be considered which of the following? A. Direct investment in private commercial real estate equity B. Indirect investment in private commercial real estate equity C. Direct investment in private commercial real estate debt D. Indirect investment in private commercial real estate debt

Q: In recent years, which of the following pooled ownership structures are used by private funds that are trying to attract capital from very high net worth and institutional investors? A. General partnership B. Limited partnership C. C corporation D. Limited liability company

Q: In recent years, a number of pooled ownership structures have emerged that have changed the analysis of ownership form selection for many investors. Which of the following ownership structures is generally used for small, local investments that are marketed to accredited, but non-institutional investors? A. General partnership B. Limited partnership C. C corporation D. Limited liability company

Q: In most pooled ownership forms a single partner is empowered to act on behalf of the investors in terms of making property investment decisions. Based on your understanding of the different types of pooled ownership, which of the following structures would we expect this issue to be the least prevalent? A. General partnership B. Limited partnership C. C corporation Ans: A

Q: The syndication agreement generally creates a principal/agent relationship in which the syndicator (agent) is empowered to act on behalf of the investors (principals). In most principal/agent relationships, there is the concern that the agent will act in the agents best interest, not in the best interests of the principal. This issue is more commonly referred to as: A. adverse selection B. moral hazard C. dual agency D. signaling

Q: All of the following are responsibilities of the syndicator in the origination phase of a syndicates life EXCEPT: A. Develop the concept for the syndication B. Organize the legal entity C. Acquire or obtain control of the real estate D. Raise additional investment capital

Q: In most small to medium private real estate deals, syndicators play important roles within the origination, operation, and completion phases of a real estate syndicates life. All of the following are responsibilities of the syndicator in the operation phase of a syndicates life EXCEPT: A. Manage the syndication B. Manage properties C. Raise additional investment capital if required D. Prepare the properties for sale

Q: Up until the market for these instruments collapsed in 2008, which of the following was the fastest-growing source of long-term commercial mortgage funds from 2002-2007? A. Real estate investment trusts (REITs) B. Commercial mortgage backed securities (CMBS) C. Construction loans D. Residential mortgage backed securities (MBS)

Q: Of the $3.97 trillion in outstanding mortgage debt in the U.S., approximately $2.96 trillion is privately held by institutional and individual investors. Which of the following investor groups is the largest single source of private mortgage funds? A. Individual investors B. Life insurance companies C. Government Sponsored Enterprises D. Commercial banks

Q: The choice of ownership form for pooled equity investments can also depend on the desire to avoid personal liability. Which of the following ownership structures suffers from the major disadvantage of unlimited liability for all investors? A. C Corporation C. General Partnership D. Limited Partnership Ans: C

Q: Section 1031 of the Internal Revenue Code permits investors to defer some or all of the taxable gain that would ordinarily be due on the sale of a property if they exchange for like-kind property. In order to avoid income taxes, many investors attempted to make use of this tax code when disposing of commercial real estate assets. This led to the reemergence of which of the following forms of ownership in commercial real estate? A. General Partnership B. Limited Liability Company C. Tenancy-in-common D. Limited Partnership

Q: Ownership forms for pooled equity investment can differ in terms of how the entitys cash flows are distributed to its investors. Which of the following ownership structures requires cash flows to be allocated to each shareholder in proportion to his or her ownership of the entity, thereby preventing special allocations to multiple classes of investors? B. General Partnership C. Limited Partnership D. Limited Liability Company Ans: A

Q: The choice of ownership form for pooled equity investments depends heavily on federal tax considerations. Which of the following ownership structures suffers from the major disadvantage of double taxation? A. C Corporation C. General Partnership D. Limited Liability Company Ans: A

Q: At the end of 2015, commercial banks and other financial institutions collectively owned $15 billion in commercial real estate equity. The vast majority of these holding are the result of which of the following types of investment by these institutions? A. Direct equity investment through private market purchases B. Indirect investment through real estate securities C. Commingled real estate funds D. Real estate obtained as a result of borrower default and foreclosure.

Q: When fund managers collect contributions from multiple sources and commingle them to purchase properties, this is referred to as the use of commingled real estate funds. Which of the following institutional investors utilize commingled real estate funds for approximately one-half of their investments in real estate? A. Investment banks B. Life insurance companies C. Real estate advisory firms D. Pension funds

Q: Though difficult to accurately measure, the market value of U.S. real estate held by non-real estate corporations is estimated to exceed $12.5 trillion. All of the following are examples of noninvestible commercial real estate EXCEPT: A. Medical office buildings owned by the hospital B. Branch offices owned by the bank C. Plant and equipment owned by steel corporations D. Assembly plant building owned by a group of investors as part of an LLC

Q: There are two major types of REITs: Equity REITs and Mortgage REITs. Each differs in terms of what they invest in. Which of the following choices best describes the investment focus of an Equity REIT? A. Invests a significant percentage of their assets in both properties and mortgages B. Invests primarily in and operates commercial properties C. Purchases mortgage obligations D. Purchases ownership interests in shares of pension funds and life insurance companies