BUSI 422 Quiz 4 Financing RE Development, REITs, Investment Performance solutions complete answers

BUSI 422 Quiz 4 Financing RE Development, REITs, Investment Performance solutions complete answers 

 

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Review Concept Box 16.2. The investor-developer would not be comfortable with a 7.8 percent return on cost because the margin for error is too risky. If construction costs are higher or rents are lower than anticipated, the project may not be feasible. The asking price of the project is $15,400,000 and the construction cost per unit is $82,800. The current rent to justify the land acqusition is $2.5 per square foot.

 

Required:

a. Based on the fact that the project appears to have 9,360 square feet of surface area in excess of zoning requirements, the developer could make an argument to the planning department for an additional 10 units, 250 units in total, or 25 units per acre. What is the percentage return on total cost under the revised proposal? Is the revised proposal financially feasible?

b. Suppose the developer could build a 240-unit luxury apartment complex with a cost of $146,000 per unit. What would such a project have to rent for (per square foot) to make an 8 percent return on total cost?

 

Two 30-year maturity mortgage-backed bonds are issued. The first bond has a par value of $10,000 and promises to pay a 7.5 percent annual coupon, while the second is a zero coupon bond that promises to pay $10,000 (par) after 30 years, with interest accruing at 7.0 percent. At issue, bond market investors require a 9.0 percent interest rate on both bonds.

 

Required:

a. What is the initial price on each bond?

b. Now assume that both bonds promise interest at 7.5 percent, compounded semiannually. What will be the initial price for each bond?

c. If market interest rates fall to 6.5 percent at the end of the fifth year, what will be the value of each bond, assuming annual payments as in (a) (state both as a percentage of par value and actual dollar value)?

 

You have been presented with the following set of financial statements for National Property Trust, a REIT that is about to make an initial stock offering to the public. This REIT specializes in the acquisition and management of warehouses. Your firm, Blue Street Advisors, is an investment management company that is considering the purchase of National Property Trust shares. You have been asked to prepare a financial analysis of the REIT.

 

National Property Trust
Panel A. Operating Statement Summary
Net revenue
$ 113,000,000
Less:
 
Operating expenses
45,200,000
Depreciation and amortization
35,000,000
General and administrative expenses
7,300,000
Management expense
4,300,000
Income from operations
21,200,000
Less:
 
Interest expense*
6,400,000
Net income (loss)
$ 14,800,000
*At 8% interest only.

 

Panel B. Balance Sheet Summary
Assets
 
Cash
$ 52,800,000
Rents receivable
3,800,000
Properties @ cost
830,000,000
Less: Accumulated depreciation
463,000,000
Properties—net
367,000,000
Total net assets
$ 423,600,000
Liabilities
 
Short term
$ 118,600,000
Mortgage debt*
80,000,000
Total
198,600,000
Shareholder equity†
225,000,000
Total liabilities and equity
$ 423,600,000
*At 8% interest only.
†10,000,000 shares outstanding.

 

Required:

a. Develop a set of financial ratios that will provide Blue Street Advisors with useful information in the evaluation and comparison of National Property Trust with other REITs.

b. Your research also indicates that the shares of comparable REITs specializing in warehouse acquisitions in the same regions are selling at dividend yields in the range of 8 percent. Price multiples for these REITs are about 12 current FFO. What price range does this suggest for National shares?

c. What is the NAV for National Property Trust assuming that a blended capitalization rate of 10 percent would be applicable for the properties owned by Blue Street Advisors?

 

An institutional investor is comparing management fees for two competing real estate investment funds. Both funds expect to begin operations and are accepting capital commitments. When the funds begin acquiring properties, capital calls will be made for capital contributions during the investment period. Fund A will charge a fee of 45 BP on capital committed and 60 BP on capital invested after the investment period ends. Fund B will charge a fee of 50 BP on capital committed and 55 BP on capital invested after the investment period ends. Both funds expect to have $506,000,000 in capital commitments when the fund commences operations and both project a five-year cycle for startup and acquisitions. Capital flows are expected as follows:


Fund A

 
Contributed Capital
Capital Returned
Invested Capital
Year 1
$ 202,400,000
$ 0
$ 202,400,000
Year 2
303,600,000
0
506,000,000
Year 3
 
0
506,000,000
Year 4
 
101,200,000
404,800,000
Year 5
 
50,600,000
354,200,000

Fund B

 
Contributed Capital
Capital Returned
Invested Capital
Year 1
$ 303,600,000
$ 0
$ 303,600,000
Year 2
202,400,000
0
506,000,000
Year 3
 
0
506,000,000
Year 4
 
50,600,000
455,400,000
Year 5
 
101,200,000
354,200,000
 

Required:

a. What will total fees be for Fund (A)? For Fund (B)?

b. Would one of the fee structures cause the manager to want to hold the properties longer before selling than the other fee structure? if so, which one?

 

A closed-end, commingled opportunity fund is being created with an expected three-year life. It expects to acquire properties that it expects to turnaround and sell at the end of three years for a gain. It also plans a minimum target return of 10 percent to investors, which will be based on cash distributions from operations and from the sale of properties at the end of the life of the fund. The opportunity fund manager expects to receive a promote equal to 25 percent of cash flows remaining after sale of the assets and after equity investors receive their minimum 10 percent target return. Cash flows are expected as follows:

 

 
Equity Investment
Cash Distributions from Operations to Equity Investors (After Management Fees)
Expected Sale Proceeds
Year 0
$ 3,300,000
 
 
Year 1
 
$ 115,000
 
Year 2
 
115,000
 
Year 3
 
115,000
$ 4,300,000
 

Required:

a. What must be the cash flows to equity investors at the end of year 3 in order to achieve their total target 10 percent return on equity investment?

b. How much of the proceeds from property sales must the fund manager receive in order to earn its 25 percent promote?

c. After the equity investors earn their 10 percent target return (IRR) and the fund manager earns the 25 percent promote, how much will be distributed to equity investors?

 

The demand for retail space should be examined in terms of the characteristics of the tenant's demand in a given market.

 

Interest on a construction loan is usually paid:

 

Why would a developer be willing to manage a completed project even after it has been sold?

 

ADL lenders recognize that too much of which of the following may lead to significant overbuilding and an excess supply of space in a local market?

 

When commercial banks consider construction loans, their analysis is generally based on which of the following?

 

Loans made under the assumption that markets will turn around are referred to as spec loans.

 

In the context of a lease, percentage rents generally indicate that:

 

In determining whether a project is commercially viable given the prevailing market rents, land prices, and construction and financing costs, a developer would be likely to conduct a(n):

 

The Federal Home Loan Mortgage Corporation’s primary purpose is to provide liquidity for conventional mortgage originators just as FNMA and GNMA did for originators of FHA-VA mortgages.

 

Which of the following developments assure mortgage investors they will receive interest and principal payments at little or no risk?

 

The investment rating for mortgage-backed bonds depends on each of the following EXCEPT:

 

The practice that is implemented with MBBs to compensate for the likelihood that some borrowers will default or make delayed payments on mortgage loans that make up the pool is:

 

Generally, prices for zero coupon mortgage-backed bonds are more sensitive to interest rate changes than interest bearing MBBs.

 

Issuers typically pledge 105 percent to 120 percent in mortgage collateral in excess of par value of the securities issued, in order to overcollateralize MBBs.

 

The pass-through rate is the coupon rate of interest promised by the issuer of a pass-through security to the investor. In most instances, the pass-through rate is:

 

Marking the mortgage to market is the process of accumulating mortgage pools and marketing them to individual investors as mortgage-backed bonds.

 

A 25-year maturity mortgage-backed bond is issued. The bond has a par value of $10,000 and promises to pay an 8 percent annual coupon. At issue, bond market investors require a 12 percent interest rate on the bond. Assume that 20 years after the bond is issued, bond market investors require a 15 percent interest rate on the bond. What is the market price of the bond after 20 years?

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The process that a trustee would use in assessing whether the value of a mortgage pool is within the required overcollateralization levels is referred to as:

 

Usually ground leases are for relatively short periods of time.

 

A blended capitalization rate is an average of the capitalization rates that would be used for the individual properties in a portfolio if each was being valued separately.

 

Which of the following is NOT a current type of REIT?

 

A REIT must have at least 200 shareholders.

 

Consider the financial statements for a REIT, given above. Price multiples for comparable REITs are about 10 times current funds from operation (FFO). What price does this suggest for the REIT’s shares if 1,000,000 shares are issued?

 

An arrangement in which a REIT collects a stream of rents from a building owner, then makes a lower, and sometimes fixed, payment to the landowner is a:

 

The growth of the REIT industry in the early 1970s was mainly attributed to which of the following?

 

Which of the following regarding private (unlisted) REITs is TRUE?

 

As long as the coefficient of correlation between two stocks is less than +1, some reduction in risk can be obtained by combining the securities.

 

The optimal combination of securities that provides the greatest amount of return for each level of risk is known as:

 

One would see the greatest amount of diversification from two securities that are:

 

In comparison to investment portfolios comprised entirely of corporate stocks and bonds, portfolios which include some form of real estate investment tend to offer higher returns for the same level of risk.

 

The sources of data for real estate performance evaluation are security prices for REIT shares and the value of individual properties that are owned by pension plan sponsors.

 

The coefficient of variation, also known as the risk-to-reward ratio, is defined as:

 

Which of the following provides a measure of the extent to which returns tend to move together or have no relationships?

 

Which of the following is a major property category associated with the NCREIF Property Index?

 

Assume a portfolio is comprised of two securities, A and B, whose standard deviations are 0.0412 and 0.0721, respectively. If their covariance is 0.002, what is their coefficient of correlation?

 

Compared to stock and bond funds, real estate investment funds are typically much easier to value due to the availability of real estate appraisals.

 

Value-add funds take on less risk than core funds by purchasing only properties with very low vacancies and stable tenants.

 

__________ is the rate that causes the present value of all cash flows from a property (including its resale value) to be equal to the original purchase price of the property.

 

When reporting on a real estate investment fund, a manager may treat the financial information as an estimate of performance based on the assumption that all of the underlying properties could be sold at their appraised value.

 

A __________ fund structure is commonly used by managers of very large, open-end funds that are expected to hold a substantial number of properties in various locations.

 

Which of the following is NOT a type of fee commonly charged by a real estate investment fund manager?

 

An office complex was acquired for $1,500,000 in 2017. Cash flows to the investor were received at the end of each year, as follows: 2017 - $250,000; 2018 - $400,000; 2019 - $600,000; 2020 - $600,000. The property was sold for $1,850,000 at the end of 2020. Calculate the IRR for this property.