Real Estate Finance & Investments, 16e (Brueggeman)
Chapter 23 Real Estate Investment Funds: Structure, Performance, Benchmarking, and
Attribution Analysis
1) Investments that are held “in trust” on behalf of a pension plan’s beneficiaries cause the
fiduciary duties and responsibilities of pension plan sponsors to “carry over” to managers of
these real estate investment funds.
2) In a well-diversified investment portfolio, the allocation of real estate investments should not
exceed five percent.
3) Opportunity funds are designed for long-term investment and, accordingly, will generally
maintain ownership of acquired properties for several years.
4) A new real estate investment fund might feature a “lock-up period” that would prohibit
investors from exiting the fund during the fund’s first year or two in operation.
5) The investment strategy of a fund may exclude certain markets, submarkets, and/or property
categories from the fund manager’s investment options.
6) Compared to stock and bond funds, real estate investment funds are typically much easier to
value due to the availability of real estate appraisals.
7) In reporting on a fund’s investment performance, managers are generally permitted to provide
investors with internally performed appraisals at specific time intervals. Third-party, external
appraisals are required only when a property is sold.
8) 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.
9) Unrealized returns are important to investors in assessing the performance of their investments
and of their fund manager(s).
10) Investors may use attribution analysis to examine why the performance of an actively
managed real estate investment fund has exceeded its benchmark return.
11) Value-added funds take on less risk than core funds by purchasing only properties with very
low vacancies and stable tenants.
12) Large, private funds are typically created by real estate investment managers who develop an
investment strategy involving which of the following: (1) the types of properties to be acquired
and markets where acquisitions will be made, (2) how the fund will be operated, (3) when
properties are to be sold, and (4) how the fund strategy will align with the real estate investment
requirements of investors.
A) 1, 2, 3
B) 1, 2, 4
C) 2, 3, 4
D) All of the above
13) Which of the following documents is used to inform real estate fund investors of the
discretion that managers may exercise related to the acquisition, management, and sale of
properties in the fund?
A) fund agreement
B) prospectus
C) due diligence record
D) deed of trust
14) Which of the following is NOT one of the typical categories of real estate investment funds?
A) Core funds
B) Value-added funds
C) Growth funds
D) Opportunity funds
15) ________ funds take on risks by conducting ground up development projects that expose the
funds to additional construction risks, such as entitlements, construction delays, cost overruns,
complex JV management issues, and so on, and use a relatively high degree of financial
leverage.
A) Core
B) Opportunity
C) Value-add
D) Core Plus
16) 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.
A) commingled
B) separate
C) conjoined
D) adjacent
17) Which type of fund structure would investment managers be likely to use in order to raise a
specific amount of capital over a specific period of time?
A) open-end fund
B) closed-end fund
C) finite fund
D) liquidation fund
18) A core strategy typically uses the type of fund structure under which new investors may be
admitted after the initial offering and after the commencement of fund operations. These funds
are referred to as:
A) closed-end funds
B) finite funds
C) liquidation funds
D) open-end funds
19) Investors may be concerned if a fund manager deviates from the stated investment strategy
by purchasing properties that do not fall within the parameters of the stated objectives of the
firm. This practice is referred to as:
A) Overage
B) Plan deviation
C) Style drift
D) Eccentricity
20) Fund managers generally include a ________ policy in the fund documents specifying
conditions under which investors may exit the fund.
A) recovery
B) recuperative
C) reclamation
D) redemption
21) During the period before a fund manager begins to physically purchase properties, investors
are typically asked to make capital ________.
A) calls
B) commitments
C) contributions
D) assurances
22) Which of the following is NOT a type of fee commonly charged by a real estate investment
fund manager:
A) acquisition fees
B) disposition fees
C) commitment fees
D) performance fees
23) Given the following fee structure, what is the total amount of fees that would be paid to a
fund manager if the actual NOI was $45 million annually:
5.5% up to $20 million in annual NOI
5.0% for the next $35 million in annual NOI
4.5% for the next $45 million in annual NOI
4.0% for all over $45 million in annual NOI
A) $2.3 million
B) $1.1 million
C) $2.0 million
D) $1.8 million
24) If a fund manager has the opportunity to receive a fee as an added incentive to enhance the
performance of the fund, the amount of the fee may be based on the extent to which the
performance of the fund exceeds an agreed upon hurdle rate of return. Such a fee is referred to as a:
A) Bonus
B) Hurdle fee
C) Fiduciary fee
D) Promote
25) Fund flows that occur within a quarterly reporting period are referred to as ________ cash
flows.
A) inter-period
B) intra-period
C) regular
D) irregular
26) When comparing investment returns at the fund level against those at the property level, the
difference between them is referred to as ________.
A) fund drag
B) performance lag
C) leverage drag
D) administrative drag
27) ________ 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.
A) IRR
B) NPV
C) TWR
D) TVM
28) A property was acquired for $950,000 and then produced cash flows of $100,000, $120,000,
$135,000, $135,000, and $125,000 at the end of years one through five, respectively. The
property was then sold for $1,200,000 at the end of the fifth year. What was the internal rate of
return for this investment?
A) 16.0%
B) 16.5%
C) 15.5%
D) 12.8%
29) For real estate investment funds in which the manager has little control over the flow of cash
into and out of the fund, the preferred performance measure is ________.
A) NPV
B) IRR
C) TVM
D) TWR
30) Which of the following is NOT a measure of risk related to real estate investment funds?
A) Tracking error
B) Beta
C) TWR
D) Jensen’s Alpha
31) What is the expected return for a real estate investment fund with a Beta of 1.87, given a risk
free rate of 2.7% and an expected return of 11.2% for the market?
A) 18.6%
B) 11.2%
C) 15.9%
D) 2.7%
32) Well-known market indexes, that are adjusted by a margin, serve as which of the following
in relation to the expected returns of a fund:
A) Target return
B) Opportunity
C) Benchmark
D) TWR
33) ________ funds mostly invest in existing operating properties that are stable, with low
vacancy and current cash flows and are located in major metropolitan areas.
A) Core
B) Core plus
C) Value-Added
D) Opportunistic
34) An office complex was acquired for $1,500,000 in 2014. Cash flows to the investor were
received at the end of each year, as follows: 2014 – $250,000; 2015 – $400,000; 2016 – $600,000;
2017 – $600,000. The property was sold for $1,850,000 at the end of 2017. Calculate the IRR for
this property.
A) 7.8%
B) 27.7%
C) 31.6%
D) 34.3%