BUSI 422 Quiz 3 Incoming-Producing Property Investment & Financing solutions complete answers

BUSI 422 Quiz 3 Incoming-Producing Property Investment & Financing solutions complete answers 

 

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CPI adjustments are used to adjust rents by all or part of the increase in the Consumer Price Index.

 

Condominium complexes are considered to be nonresidential properties.

 

Which of the following leads to rent premiums?

 

Consider the figure above. Point D represents:

 

The price a potential tenant must pay to lease a specific type of real estate under the current economic conditions is:

 

Overage rent is rent that exceeds expenses.

 

The term  “usable area”  is typically synonymous with “leasable area,” in a building with multiple tenants.

 

Expenses for a 1,000 square foot office space are $6.00 per square foot. The lease specifies an expense stop of $5.40. What is the total expense paid by the landlord?

 

Which of the following tends to lower effective rents?

 

A building owner charges net rent of $20 in the first year, $21 in the second year, and $22 in the third year, but is providing six months of free rent in the first year as a concession. Using a 10 percent discount rate, what is the effective rent over the three years?

 

Which of the following would be considered as expense pass throughs in a lease?

 

A manufacturing business is contracting to lease a large, open building and is seeking to add partition walls and a large air conditioning unit in order to accommodate its specific needs. What type of lease is the building owner likely to want to agree to?

 

Consider the figure above. If the demand for units increases, what would happen in equilibrium, holding everything else constant?

 

A 1,500 square foot office space is leased at $12.00 square foot. The space is vacant one month out of the year. Office expenses are $6.50 per square foot and an expense stop is set at $6.00 per square foot. What is the annual net operating income?

 

A property is purchased for $350,000. Based on an annual growth rate of 3%, the resale value at the end of year 10 would be $456,671.

 

The assumption that a knowledgeable buyer would not pay more for property than what other buyers have recently paid for comparable properties, provides the rationale for the sales comparison approach.

 

Which of the following statements regarding the sales comparison approach to appraisal is TRUE?

 

Which of the following steps normally would be used in the cost approach to value?

 

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?

 

When using the gross income multiplier technique in conjunction with the income approach to valuation, potential gross income is preferred to effective gross income.

 

Return on investment and change in net operating income are essential factors for cost analysis.

 

Which lease has the LOWEST effective rent? 

 

Consider a property with NOI of $72,000 and a debt coverage ratio of 1.2 applied to first year NOI. What would be the estimated monthly mortgage payment?

 

Consider a building with a very long economic life. Assume at the end of year 6, NOI will be $80,000 and is expected to grow at a rate of 2 percent per year. Your company’s required rate of return is 12 percent. As part of your analysis, you must calculate the reversion value (REV) at the end of year 5, which would be:

 

Total possible income less any vacancy is ___.

 

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:

 

Consider the table for an income property that is under evaluation for purchase with a $455,000 loan. Using the principles of mortgage equity capitalization, what is the estimated total property value (rounded to the nearest $100)?

 

Consider the table. Assume that the subject property has effective gross income of $53,000 and a NOI of $27,500. What value would a GIM approach yield (rounded to the nearest $100)? 

 

Consider the table for an income property that is under evaluation for purchase with a $455,000 loan. What would be the equity dividend rate?

 

Debt coverage ratio measures the degree to which the NOI from the property is expected to exceed the mortgage payment.

 

Operating expenses associated with the maintenance and upkeep of a residential property are generally tax deductible.

 

Which of the following is FALSE regarding expense stops?

 

Which of the following is FALSE regarding an expense stop?

 

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:

 

Residential property is depreciated over 27.5 years where as non-residential property is depreciated over 31.5 years.

 

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.

 

During a recessionary period, it is possible the amount of space that is absorbed by the market will actually be negative.

 

The real estate industry:

 

The minimum lenders typically require for DCR in the first year is:

 

Which of the following is FALSE regarding DCR?

 

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 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?

 

Because real estate is shown on the corporation’s books at its historical cost less book depreciation, the value of corporate real estate is often considered "hidden" from shareholders.

 

If a company’s management is unsure of how long it will need access to a real estate asset, it is likely that the company will lease the property.

 

For which of the following reasons would a business prefer to own real estate rather than lease it?

 

When doing a sale versus lease analysis, how should the residual value of the property be estimated?

 

The real estate activities of firms that only use real estate as part of their business operations are commonly referred to as:

 

Non-recourse debt, such as a mortgage on a specific property, typically has a lower rate than the unsecured debt of companies with high credit ratings.

 

All other factors being equal, a company would prefer to own rather than lease under which of the following conditions?

 

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 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?

 

 

 

 Analysis of effective rents tends to be superior to analysis of total rents over the life of a lease.
 
 
 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.
 
 
 For a large corporation with a good credit rating seeking to finance corporate real estate, the cost of a mortgage loan may be greater than the cost of unsecured corporate debt.
 
 
 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.
 
 
 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.
 
 
 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.
 
 
 The sales comparison approach to appraisal is preferred because it is the only objective appraisal approach.
 
 
 CPI adjustments shift the risk of unexpected inflation to the lessor.
 
 
 Increasing rents tend to increase the marginal rate of return on a property.
 
 
 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.
 
 
 In general, investors are assumed to be risk seekers who must be compensated more for the higher risk of some investments.
 
 
 The existing stock of space cannot be adjusted in the short run, but can be increased or decreased in the long run.
 
 
 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.
 
 
 A bullet loan is a construction loan that, in effect, becomes permanent financing when construction is complete.
 
 
 A property should be sold when the marginal rate of return rises above the rate at which funds can be reinvested.
 
 
 Because real estate usually declines in value faster than accounting depreciation, it is reasonable to assume that the property has zero value at the end of the lease term.
 
 
 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.
 
 
 Financial risk increases as the amount of debt increases.
 
 
 One advantage of the gross income multiplier technique is that it is most suitable for properties in which operating expenses vary widely across the properties being surveyed.
 
 
 One benefit of leverage is that it reduces the variation in returns or losses.
 
 
 To attract anchor tenants, property owners tend to charge them lower rents. They make-up for the lower rents by charging the anchor tenant higher CAM charges.
 
 
 A company estimates that the incremental cost of owning a parcel of real estate vs. leasing will be 10%. The company expects a 12% rate of return on investments. Therefore, real estate should be owned and not leased.
 
 
 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.
 
 
 In making an investment decision, IRR analysis will lead to a different “go/no-go” decision than NPV analysis.
 
 
 One benefit of leverage is that it may allow an investor to diversify across several investment properties.
 
 
 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.
 
 
 Real estate that is not leveraged is not affected by interest rate risk.
 
 
 The rationale for using the cost approach to appraisal is that any informed buyer would not pay more for a property than what it would cost to buy the land and build the structure.
 
 
 If capital gains tax must be paid, the opportunity cost of selling increases relative to the opportunity costs of keeping the property.
 
 
 In general, if a company assumes that the residual value at the end of the holding period is always equal to the book value, the decision to own versus lease will be biased towards owning.
 
 
 One advantage of a sale-leaseback is that the lease payments are 100 percent tax deductible.
 
 
 Real estate is generally dramatically affected by inflation risk.
 
 
 The demand for retail space should be examined in terms of the characteristics of the tenant’s demand in a given market.
 
 
 The equity dividend rate is an accurate measure of investment yield because it takes into account future cash flows.
 
 
 The term “percentage rent” refers to rent paid as a percent of space leased.
 
 
 When conducting an appraisal, only one of three approaches should be selected to determine the property value.
 
 
 A gross lease is one in which the tenant only pays rent, and the owner of the property pays the operating expenses and provides all services.
 
 
 Construction loans provide the money to construct a building and are usually provided by life insurance companies or pensions funds.
 
 
 In the cost approach to valuation, land value can be estimated by comparing sales of vacant land that are similar to the subject land.
 
 
 One advantage of using leverage is that NOI increases with higher amounts of leverage.
 
 
 Similar to decisions about owning or leasing equipment, the decision to own or lease a property is basically just a choice between two financing alternatives.
 
 
 

 The use of a CPI index in a lease contract shifts risk to the tenant.
 
 
 Use of leverage always increases the amount of business risk.
 
 
 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.
 
 
 Expense stops protect the lessee from unexpected changes in market rents.
 
 
 In the income approach to valuation, replacement cost is reduced by costs such as those that are associated with curing deterioration of the property and the economic loss of value from incurable factors due to change in design or layout efficiency.
 
 
 Permanent loans generally provide the money to pay off the construction loan in segments, as the work progresses.
 
 
 The benefits of equity buildup in a property are lessened over time because with an amortizing mortgage, an investor will lose some tax benefits each year as the interest portion of the payments decreases.
 
 
 The range of returns (highest to lowest) is the most common risk measure.
 
 
 The residual value at the end of the holding period should be based on the market value of the real estate and not the book value.
 
 
 When the internal rate of return on an investment increases as the loan-to-value ratio increases, positive leverage exists.
 
 
 A building has 12 foot ceilings that cause the electric bill to be $1,200 higher per year than a conventional ceiling height. Depreciation caused by the ceilings can be estimated by calculating the present value of the $1,200 per year over the remaining economic life of building.
 
 
 A gross lease is riskier for the lessor than a net lease.
 
 
 An investor purchased a property expecting to receive a 14% rate of return. However, the rate of return on the property over a 5 year holding period turned out to be only 11.5%. Therefore, the property should be sold.
 
 
 Commitments for construction financing are usually contingent on commitments for permanent financing.
 
 
 If a property has positive leverage, the owner should borrow as much as possible.
 
 
 The term “due diligence” refers to conducting an investigation before buying a property.
 
 
 The use of a CPI index in a lease contract shifts risk to the tenant.
 
 
 A gross income multiplier can be calculated by dividing the gross income by the sales price.
 
 
 An operating lease does not affect a corporate balance sheet.
 
 
 Expense stops protect the lessee from unexpected changes in market rents.
 
 
 Given the same expectations for future rents and expenses, a new buyer may earn a different after-tax return than the current owner of the same property.
 
 
 In an inflationary environment where property values are also rising, a participation loan may provide a lender with some protection against unanticipated inflation.
 
 
 Land can be viewed as having an “option” to develop the land.
 
 
 Permanent financing commitments usually allow the lender to approve major leases.
 
 
 The debt coverage ratio is used by lenders to indicate the riskiness of a loan.
 
 
 A gross lease is riskier for the lessor than a net lease.
 
 
 An interest-only loan will provide a higher debt coverage ratio than an amortizing loan with the same interest rate.
 
 
 An overall capitalization rate can be calculated by dividing the net operating income by the property value.
 
 
 Because accounting depreciation charges often exceed the true economic depreciation of real estate, the earnings of companies owning real estate typically understate the level of operating cash flow.
 
 
 In general, equity buildup tends to lower the marginal rate of return of holding a property.
 
 
 Lenders typically finance the development of a project as a percentage of completed appraised value, including the price of the site.
 
 
 Percentage rent is common in office building leases.
 
 
 
 
 
 
 
 
 

 When calculating IRR, the projected cash flows are discounted such that they will equal the initial investment amount.
 
 
 A company can diversify its business activities by developing, owning and subsequently leasing real estate to other companies. Because of the diversification benefits, shareholder value is always increased.
 
 
 An investor calculates an incremental return of renovating a building of 14%. Other properties provide a 12.5% overall rate of return to equity investors. Therefore, the property is a good investment.
 
 
 Even after obtaining permanent financing, a developer still maintains the right to alter a project’s design or the level of expenditures.
 
 
 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.
 
 
 In projecting cash flows for an office property, net operating income is the income after deduction of mortgage payments.
 
 
 Property held as a personal residence cannot be depreciated.
 
 
 The capitalization rate is equal to the discount rate minus any expected annual growth in income and property value.
 
 
 The term “financial risk” refers to the probability of interest rates changing.
 
 
 Free rent is a concession that a building owner may offer.
 
 
 Generally, as the cost of a site increases, so do the quality and the density of the improvements constructed on it.
 
 
 If a real estate tax law becomes more favorable, this generally benefits existing investors over new investors.
 
 
 If the incremental cash flows from owning versus leasing are compared without explicitly considering debt financing, these returns should be compared to the firm’s cost of equity.
 
 
 In general, real estate is usually considered more risky than bonds but less risky than stocks.
 
 
 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.
 
 
 A property with a higher standard deviation and a higher return is preferable to a property with a lower standard deviation and a lower return.
 
 
 If a company’s space requirements are far less than what is optimal to develop on a given site, leasing would tend to be more favorable.
 
 
 Loans made under the assumption that markets will turn around are referred to as spec loans.
 
 
 The capitalization rate for a leased fee estate should always be lower than the capitalization rate for a fee simple estate.
 
 
 The deductibility of depreciation in calculating taxable income will usually cause the effective tax rate to be lower than the actual tax rate.
 
 
 The loan alternative with the highest ATIRR will always be preferable to the borrower.
 
 
 The marginal rate of return on a property usually increases until the sale of the property. Equity buildup should always be avoided if possible.
 
 
 A property should be sold when the marginal rate of return falls below the rate at which funds can be reinvested.
 
 
 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.
 
 
 
 
 
 
 
 
 

 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 1
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
 
 
 Properties with a higher ratio of debt are considered to also have a higher risk assuming everything else is equal.
 
 
 The equity value can be estimated by subtracting debt service from net operating income and dividing this amount by the equity dividend rate.
 
 
 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.
 
 
 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
 
 
 For refinancing to be profitable, the effective cost of the debt must be less than the unlevered return on the projects being financed.
 
 
 If a company decides to lease a piece of real estate it will typically arrange for off-balance-sheet financing for the payments since they will be tracked on the income statement and not on the balance sheet.
 
 
 If a property owner borrows money at a rate that is higher than the equity yield rate, negative leverage exists.
 
 
 The great majority of businesses lease the space they occupy rather than purchasing it outright.
 
 
 The market method or direct sales comparison method of estimating site value is not the most reliable method available.
 
 
 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
 
 
 A loan in which the lender receives part of the proceeds from the sale of the property is known as a convertible loan.
 
 
 Appraisers use bracketing in order to estimate the upper and lower range of value.
 
 
 Risk due to potential tax law changes is referred to as:
A) Business risk
B) Financial risk
C) Legislative risk
D) Tax risk
 
 
 

 The investment foundation of a real estate investment is another name for the initial investment.
 
 
 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
 
 
 A decrease in financial leverage would be expected to magnify the risk and the potential return of an income-producing property.
 
 
 
Consider the figure above. The difference between the existing stock of space and Point D represents:
A) Equilibrium occupancy
B) Market rent
C) Vacancy
D) Shortage
 
 
 If an investor is deciding whether to sell a property, his equity buildup in the existing property should be considered as an opportunity cost.
 
 
 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
 
 
 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
 
 
 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%
 
 
 
Consider the figure above. If the demand for units increases, what would happen in equilibrium, holding everything else constant?
A) Market rent would decrease; equilibrium occupancy would decrease
B) Market rent would decrease; equilibrium occupancy would increase
C) Market rent would increase; equilibrium occupancy would decrease
D) Market rent would increase; equilibrium occupancy would increase
 
 
 The capitalization rate of a newly constructed apartment building will be more than that of a relatively old apartment building, which is comparable in all other aspects.
 
 
 

 The marginal rate of return for a property is:
A) The APR on an incremental amount of borrowing
B) The expected holding period return earned when the investor purchases the property
C) The return earned on subprime property relative to prime property
D) The return gained by holding the property for one additional year
 
 
 Which of the following is NOT one of the primary benefits of investing in real estate income property?
A) Net Income—Dollars left over after collecting rent and paying expenses but before considering taxes and financing costs
B) Property Sale—Expecting a price increase over a specified holding period increases investor return
C) Diversification—Reducing overall risk to hold many types of investments
D) Business cycles—Real estate income properties tend to generate higher incomes when other investments are in decline
 
 
 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
 
 
 For which of the following reasons would a business prefer to own space rather than lease it?
A) The business demands specialized or unique facilities
B) Owning allows the business to develop skills in operating, maintaining, and repairing 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
 
 
 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
 
 
 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
 
 
 Which of the following is NOT a typical benefit of renovating a property?
A) Increasing rents
B) Lowering vacancy
C) Increasing operating expenses
D) Increasing the future property value
 
 
 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
 
 
 A building owner charges net rent of $20 in the first year, $21 in the second year, and $22 in the third year. Using a 10 percent discount rate, what is the effective rent over the three years?
A) $20.00
B) $20.94
C) $21.73
D) $52.07
 
 
 
 
 
 
 
 

 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
 
 
 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
 
 
 The discount rate establishes the minimum return that an investor is willing to accept when evaluating the potential purchase of an income-producing property.
 
 
 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
 
 
 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
 
 
 Consider the table. Assume that the subject property has effective gross income of $53,000 and a NOI of $27,500. What value would a GIM approach yield (rounded to the nearest $100)?



A) $322,600
B) $325,600
C) $328,600
D) $330,000
 
 
 Which of the following may be used as a market leasing assumption (including a renewal probability) in an analysis related to a lease renewal?
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
 
 
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
 
 
 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
 
 
 
 
 
 
 
 

 Consider the table. Assume that the subject property has effective gross income of $53,000 and a NOI of $27,500. What value would a cap rate approach yield (rounded to the nearest $100)?



A) $322,600
B) $325,600
C) $328,600
D) $330,000
 
 
 Which of the following is NOT considered to be an office or retail property?
A) Single-tenant - build to suit
B) Regional shopping center
C) Warehouse
D) Community center
 
 
 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%
 
 
 The difference between the existing stock of space and the equilibrium occupancy is known as:
A) Supply
B) Demand
C) Equilibrium
D) Vacancy
 
 
 Which of the following statements regarding the sales comparison approach to appraisal is TRUE?
A) As a “rule of thumb” transactions involving foreclosures should be discounted by 10 percent
B) The comparable buildings’ characteristics are more important than the comparable properties’ location for performing the sales comparison
C) The comparable sales must involve transactions between unrelated individuals
D) The only factors important for comparable analysis are property size, building size, age of the building, and the condition of building
 
 
 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
 
 
 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
 
 
 The dollar amount by which total rent exceeds base rent under a percentage lease for retail is referred to as:
A) Overage rent
B) Excess rent
C) Percentage rent
D) Marginal rent
 
 
 Which of the following techniques is NOT associated with the income approach to valuation?
A) Capitalization rate
B) Discounted present value
C) Factor discounting rates
D) Gross income multiplier
 
 
 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
 
 
 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%
 
 
 

 The supply of space is:
A) Inelastic in both the short run and the long run
B) Elastic in both the short run and the long run
C) Relatively inelastic in the short run, and highly elastic in the long run
D) Relatively elastic in the short run, and highly inelastic in the long run
 
 
 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
 
 
 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
 
 
 Consider the table for an income property that is under evaluation for purchase with a $455,000 loan. Using the principles of mortgage equity capitalization, what is the estimated total property value (rounded to the nearest $100)?

Year 1 Year 2 Year 3 
NOI $ 72,000 $ 74,880 $ 77,875 
DS 60,000 60,000 60,000 
Cash flow $ 12,000 $ 14,880 $ 17,875 
Resale in year 3 900,000 
Less mortgage balance −435,000 
Total cash flow $ 12,000 $ 14,880 $ 482,875 
Present value of cash flow @ 15% $ 10,435 $ 11,251 $ 317,498 

A) $317,500
B) $482,900
C) $772,500
D) $794,200
 
 
 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
 
 
 A clause which requires a tenant in retail space to achieve a certain level of sales or the lease will be terminated is referred to as a:
A) Change clause
B) Termination clause
C) Option clause
D) Santa clause
 
 
 

 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
 
 
 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%
 
 
 A clause in a non-anchor tenant’s lease requiring the presence of an anchor tenant is referred to as a:
A) Non-compete clause
B) Co-tenancy clause
C) Joint tenancy clause
D) Anchor clause
 
 
 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
 
 
 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
 
 
 Which of the following factors is NOT part of the definition of market value?
A) Payment is made in terms of cash in U.S. dollars or a comparable financial arrangement
B) The property has been on the open market for less than a year
C) Buyer and seller are typically motivated
D) Price is not affected by special or creative financing
 
 
 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%
 
 
 Income after deducting loss of rents due to vacancy and nonpayment of rents, as well as any concessions, is referred to as:
A) Potential gross income
B) Effective gross income
C) Net operating income
D) Before-tax cash flow
 
 
 Regarding the value of a property, an appraisal:
A) Calculates value
B) Confirms value
C) Estimates value
D) Determines value
 
 
 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
 
 
 

 A 1,000 square foot office space is leased at $15.00 per square foot during the first year with $2.00 step-up provisions each of the following years. The lease is gross with an expense stop set at $6.65 per square foot, and yearly expenses per square foot are as follows: $6.00, $6.65, and $7.05. The lease provides for two months of free rent at the end of the lease term. If the lease term is three years and the discount rate is 10%, what is the effective rent per square foot?
A) $9.38
B) $9.50
C) $10.22
D) $10.46
 
 
 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
 
 
 Which of the following steps normally would be used in the cost approach to value?
A) Estimate net operating income of the property
B) Multiply accrued depreciation by the assessed cost
C) Add actual construction costs to the land value
D) Subtract accrued depreciation from the replacement cost
 
 
 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
 
 
 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%
 
 
 Which of the following choices represents the main categories of depreciation?
A) Physical, external, functional
B) Physical, economic, locational
C) External, structural, financial
D) Economic, physical, external
 
 
 Which of the following does the term “anchor tenant” usually refer to?
A) Someone who leases space
B) The largest tenant in an office building
C) A department store in a mall
D) The tenant who pays the highest rent in a mall
 
 
 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
 
 
 A comparable property has a feature that is superior to the subject property. What adjustment would be made in the sales comparison approach to value?
A) Value of the feature would be subtracted from the sales price of the comparable property
B) Value of the feature would be added to the sales price of the comparable property
C) Value of the feature would be subtracted from the value of the subject property
D) Value of the feature would be added to the value of the subject property
 
 
 Which of the following describes the function of an expense stop in a lease?
A) Expenses are stopped from increasing
B) Expenses above the stop are paid by the owner
C) Expenses above the stop are paid by the tenant
D) Expenses below the stop are paid for by the tenant
 
 
 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
 
 
 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
 
 
 

 Given the following sales adjustment grid, what adjustment would be made for size?

Characteristic Subject 1 2 3 4
Sales price 116,000 120,000 124,000 126,000 
Square feet 1,800 1,700 1,900 1,900 1,900 
Exterior Alum Brick Alum Alum Brick 
Age 16 20 20 18 20 

A) $23.65 psf.
B) $45.82 psf.
C) $65.74 psf.
D) $38.26 psf.
 
 
 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
 
 
 Which of the following is TRUE for a net lease?
A) All expenses are paid by the owner
B) All expenses are paid by the tenant
C) All expenses are paid by the lender
D) All expenses are paid by the investor
 
 
 Which of the following expenses would NOT be included in an operating statement used to calculate net operating income in the income approach to value?
A) Reserves for replacement
B) Maintenance
C) Real estate taxes
D) Capital additions
 
 
 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
 
 
 A property is sold for $200,000. Typical financing terms are an 85% loan with a 10% interest rate over 15 years. If the before-tax cash flow is $2,000, what is the overall capitalization rate?
A) 10.96%
B) 11.96%
C) 19.13%
D) 9.96%
 
 
 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
 
 
 Which of the following does the term “in-line tenants” refer to?
A) Smaller stores in a mall that are not anchor tenants
B) Tenants whose sales are in line with estimates
C) Tenants who pay their rents on a timely basis
D) All stores located inside the mall, including anchors
 
 
 A property produces a first-year net operating income of $24,000. Because of the long economic life of the building, the income is considered as a perpetuity that will grow by 2.5% per year. Using a discount rate of 9.5%, the property value is estimated at:
A) $276,968
B) $252,632
C) $200,000
D) $342,857
 
 
 

 The maximum interest rate that could be paid on a debt before the leverage becomes unfavorable is referred to as the:
A) Incremental cost of debt
B) Break-even interest rate
C) Favorable interest rate
D) Optimistic interest rate
 
 
 Which of the following is FALSE regarding cap rates?
A) Excess supply tends to drive cap rates up
B) Rising interest rates generally tend to lower cap rates
C) Excess demand and falling interest rates result in lower cap rates
D) Excess demand leads to lower cap rates
 
 
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
 
 
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
 
 
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
 
 
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
 
 
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
 
 
 

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.
 
 
 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
 
 
 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
 
 
 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