A house that is financed with a below-market loan is available for sale. The value of the
house will be higher than similar properties regardless of the other terms of the loan.
One benefit of leverage is that it allows investors diversify across several investments
A fee simple estate is a type of freehold estate.
To determine whether leverage is positive or negative, the investor needs to determine
whether the IRR is greater than market rate of interest on mortgage loans.
The standard PSA prepayment curve assumes prepayments of 2% and 4% in years 1
and 2, then 6% each year thereafter.
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.
The investment strategy of a fund may exclude certain markets, submarkets, and/or
property categories from the fund manager’s investment options.
It is a federal law that a mortgage must be recorded to be valid.
CPI adjustments shift the risk of unexpected inflation is shifted to the lessor.
The term “percentage rent” refers to rent paid as a percent of space leased.
A property should be sold when the marginal rate of return falls below the rate at which
funds can be reinvested.
If the cost of rental housing increases relative to house prices, demand for purchased
housing tends to increase.
It is possible for two identical houses located in different school districts to sell for
different prices.
As compared to other types of deeds, a general warranty deed provides the most
comprehensive warranties about the quality of the title to the property.
If capital gains tax must be paid, opportunity cost of selling increases relative to the
opportunity costs of keeping the property.
ARMs help lenders combat unanticipated inflation changes, interest rate changes, and a
maturity gap.
The difference between EPS (earnings per share) and FFO (funds from operations) is
the interest deduction.
Prepayment penalties increase the lender’s mortgage yield and discount points decrease
it.
At 6%, the present value of a $1 payment in 12 months is .941905. At 7%, the present
value of a $1 payment in 12 months is .950342.
By using an option contract, a developer may profit from an appreciation in the
property’s value over the option period.
One difference between mortgage securities and corporate bonds is that mortgage
securities tend to be “overcollateralized.”
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.
FTL requires that the lender disclose an estimated cost of financing within three days of
loan application.
A mortgage is the same thing as a note.
Analysis of effective rents tends to be superior to analysis of total rents over the life of a
lease.
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.
Real estate refers to the physical land and improvements constructed on the land.
It is difficult to compare the investment performance of real estate with stocks and
bonds because when properties do sell, the sale price is generally not publicly available.
The deductibility of depreciation to calculate taxable income will usually cause the
effective tax rate to be lower than the actual tax rate.
In making an investment decision, IRR analysis will lead to a different “go/no-go”
decision than NPV analysis.
A gross lease is riskier for the lessor than a net lease.
If a property owner borrows money at a rate that is higher than the equity yield rate,
negative leverage exists.
One advantage of using leverage is that NOI increases with higher amounts of leverage.
Which of the following is NOT a requirement of REITs?
(A) A REIT must have at least 100 stockholders
(B) Not more than 50% of a REIT’s shares can be owned by five or fewer shareholders
(C) At least 90% of a REIT’s income must be distributed to shareholders
(D) All of the above are REIT requirements
Consider the figure above. Point D represents:
(a) Equilibrium occupancy
(b) Market rent
(c) Vacancy
(d) Shortage
(e) Market failure
A REIT has an NOI of $15 as share and currently pays a dividend of $10 a share. The
dividend is projected to increase by 4percent by next year and continue to increase by
4percent per year thereafter. Assuming that the blended cap rate is 9.75percent and the
required rate of return is 10.5percent, what value would the Gordon Dividend Discount
Model provide?
(a) $60.15
(b) $71.89
(c) $153.85
(d) $160.00
(e) $190.00
One of the most popular amortizing mortgages today is the constant payment mortgage.
Which of the following characterizes the components of the CPM payment over the life
of the loan?
Interest Amortization Payment
(A) Decreasing Decreasing Decreasing
(B) Increasing Decreasing Constant
(C) Decreasing Increasing Constant
(D) Constant Constant Constant
In a syndication, when cash is distributed from an investor’s partnership basis how is the
new basis calculated?
(A) The cash distribution is added to the investor’s capital gain
(B) The cash distribution is subtracted from the investor’s capital gain
(C) The cash distribution is added to the investor’s partnership basis
(D) The cash distribution is subtracted from the investor’s partnership basis
Renewal probabilities related to a lease renewal can affect which of the following?
(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
Which of the following is NOT characteristic of commercial-backed mortgage
securities?
(A) The underlying mortgage pool represents a variety of different property types
(retail, multifamily, etc.) and a specific geographical area
(B) The underlying mortgages have usually been outstanding for several years
(C) One of the primary issuers of such securities are insurance companies
(D) In general, the underlying mortgage pool for such securities contain fewer
mortgages than are included in residential-backed mortgage pools
Which of the following default is LEAST often used for foreclosure?
(A) Failure to fulfill financial obligation
(B) Failure to pay taxes
(C) Failure to pay insurance premiums when due
(D) Failure to keep the security in repair
The primary purpose of Freddie Mac (FHLMC) is to:
(A) Provide a secondary market for mortgage originators
(B) Provide investors with a guaranteed rate of return
(C) Create competition for Fannie Mae and Ginnie Mae
(D) Provide consumers with more options when deciding on a mortgage loan
The capitalization effect:
(a) Is one of the major factors leading to housing bubbles
(b) Has no impact on housing prices
(c) Relates the quality of public services that individuals receive relative to the taxes
that are paid for the services
(d) Relates the interest rate on mortgage loans to the value of residential real estate
The adjusted basis can be 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
Which of the following is the MOST LIKELY sequence of events in the land
development process?
(A) Inspect site, perform feasibility analysis, implement marketing program, purchase
land and begin construction of improvements
(B) Inspect site, purchase land and begin construction of improvements, perform
feasibility analysis, implement marketing program
(C) Inspect site, perform feasibility analysis, purchase land and begin construction of
improvements, implement marketing program
(D) Purchase land, perform feasibility analysis, perform preliminary market study,
begin construction of improvements, implement marketing program
When a homeowner improves some aspect of his property far in excess of comparable
properties in the neighborhood, he is said to have:
(A) Under-improved the property
(B) Over-improved the property
(C) Reached the point of increasing returns
(D) Exceeded the breakeven point
The market value of a loan is:
(A) The loan balance times one minus the market rate
(B) The loan balance times one minus the original rate
(C) The future value of the remaining payments
(D) The present value of the remaining payments
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 statements is TRUE for a corporation with a high credit rating
considering owning versus leasing corporate real estate?
(A) The company should probably use a mortgage
(B) The company can probably issue corporate debt at a more favorable rate
(C) The company is probably better off leasing the property from someone with a lower
credit rating
(D) The company’s credit rating does not effect the own versus lease decision
A falling rate of market interest would have which of the following impacts on a
mortgage pass-through security?
(a) Increase prepayments on loans in the pool
(b) Decrease prepayments on loans in the pool
(c) Decrease the market value of the MPT
(d) Both A and C
(e) Both B and C
Which of the following is NOT a benefit of refinancing?
(A) The investor can increase financial leverage
(B) It is an alternative to sale of the property
(C) Risk is decreased
(D) No taxes have to be paid on funds received by additional borrowing
The main purpose of the Term Asset-Backed Securities Loan Facility (TALF) is to:
(a) Buy mortgage backed securities owned by Freddie Mac, Fannie Mae, and Ginnie
Mae
(b) Issue CDOs and use the proceeds to fund infrastructure projects to stimulate the
economy
(c) Regulate hedge funds to reduce investments in risky assets
(d) Use residential loans as collateral to purchase U.S. Treasuries as a way to reduce
interest rates
Ms. Madison has an existing loan with payments of $782.34. The interest rate on the
loan is 10.5% and the remaining loan term is 10 years. The current balance of the loan
is $57,978.99. The home is now worth $120,000 and Ms. Madison would like to borrow
an additional $30,000 through a wraparound loan which would increase the debt to
487,978.99. Terms of the wraparound loan are 12.25% interest with monthly payments
for 10 years. What is the incremental cost of borrowing the extra $30,000 through a
wraparound loan?
(A) 15.47%
(B) 11.38%
(C) 12.96%
(D) 13.41%
RESPA requires lenders to disclose to buyers a good faith estimate of certain closing
costs within:
(A) One day before the real estate closing
(B) Three days before the real estate closing
(C) One day after loan application
(D) Three days after loan application
Which of the following types of bankruptcy is available to a business to reorganize and
rehabilitate the debtor?
(A) Chapter 7
(B) Chapter 11
(C) Chapter 13
(D) Chapter 17
When financing land development, the lender generally requires the developer to
submit which of the following?
(A) A detailed breakdown of project cost
(B) Required zoning changes
(C) Bank references for the general contractor to be used on the project
(D) All of the above
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
RESPA requires lenders to disclosure to buyers a uniform settlement statement detailing
all closing costs within:
(A) One day before the real estate closing
(B) Three days before the real estate closing
(C) One day after loan application
(D) Three days after loan application
Which of the following is NOT typically included in housing costs used to calculate a
borrower’s payment-to-income ratio?
(a) Principal and interest on the mortgage applied for
(b) Mortgage insurance
(c) Property taxes
(d) Utilities
(e) All of the above are included in the housing costs
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 neither
favorable nor unfavorable? (A)
(a) 15.0%
(b) 20.0%
(c) 22.5%
(d) 28.3%
A house is sold with an assumable $156,000 below-market loan at 8.5% for a remaining
term of 15 years. Current rates are 9.75% for 15 year mortgages. If the house sold for
$240,000, what is the cash-equivalent value of the house.
(A) $250,834.82
(B) $229,165.18
(C) $260,660.40
(D) $219,339.60
Which of the following is not a basic component of any compounding problem?
(a) An initial deposit
(b) An interest rate
(c) A period of time
(d) A net present value
REMICs were created in order to avoid taxes:
(A) Entirely
(B) At the investor level
(C) At the entity level
(D) No taxes can be avoided.
The variability on an asset’s returns represents:
(A) Flexibility
(B) Profitability
(C) Risk
(D) Default
Which of the following does NOT represent a potential benefit of selling and leasing
back a property?
(A) Provides a source of capital
(B) Returns excess capital to investors
(C) Demonstrates the value of the real estate to the marketplace
(D) Increases the firm’s depreciation deductions
The subject of an appraisal has only two bedrooms, but one of the comparables used in
the appraisal has three. If the adjustment for a third bedroom is $5,000, the adjustment
would be:
(A) A $5,000 increase to the comparable’s selling price
(B) A $5,000 decrease to the comparable’s selling price
(C) A $5,000 increase to the subject’s selling price
(D) A $5,000 decrease to the subject’s selling price.