Book Title
Real Estate Finance & Investments (Real Estate Finance and Investments) 14th Edition

FE 29314

March 13, 2017
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
Upon starting his first job after graduation, Jon has completed the necessary paperwork
to set up direct deposit of his paycheck into his savings account. After taxes, medical
benefits, and retirement account contributions have been taken out of John's gross
salary, he is left with a direct deposit of $4000 at the end of each month. If John started
with no other savings in his account, how much will John have in his savings account at
the end of 12 months if he is able to earn an annual interest rate of 3%, with interest
being compounded monthly?
A. $48, 665.53
B. $48,787.19
C. $56,768.12
D. $58,471.16
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
The estimated market value of investible commercial real estate in the United States at
the end of 2011 was approximately $6.5 trillion. In terms of market size, which of the
following asset categories is most closely related to commercial real estate?
A. Owner-occupied housing
B. Corporate equities
C. U.S. Treasury securities
D. Municipal securities
Using the following information, determine the location quotient for Motor City.
Employment in Motor Vehicle Manufacturing within Motor City: 12,643; Total
Employment in Motor City: 560,379; Employment in Motor Vehicle Manufacturing
(nationally): 152,750; Total Employment (nationally): 106,201,232
A. 0.1
B. 12.1
C. 15.7
D. 44.3
Suppose a homeowner is reluctant to refinance until he is reasonably sure that interest
rates are not going to fall appreciably from where they currently are. In this case,
the homeowner appears to be concerned about which of the following costs associated
with refinancing?
A. Opportunity cost
B. Tax consequences
C. Default risk
D. Upfront fees
Just as it is important for an investor to consider the impact of financial leverage on her
return, it is also necessary to account for the effect of income taxes. How would the
presence of income taxes impact the levered going-in IRR?
A. Income taxes increase the levered going-in-IRR
B. Income taxes reduce the levered going-in-IRR
C. Income taxes do not affect the going-in-IRR
D. Income taxes cause the levered going-in-IRR to become invalid as a measure of
State licensing laws generally prescribe two levels of real estate brokerage licensing:
the broker license and the salesperson license. Which of the following responsibilities is
an individual with a salesperson license permitted to do?
A. Own and operate a real estate brokerage business
B. Handle money in trust for clients
C. Negotiate listing contracts or contracts for sale
D. Complete legal documents used in sales and leases in their own name
An easement is the right to use land for a specific and limited purpose. Which of the
following easements involves a relationship between two parcels of land, is a
permanent feature of both parcels involved, and gives the dominant parcel some
intrusive use of the servient parcel?
A. Affirmative easement appurtenant
B. Negative easement appurtenant
C. Easement in gross
D. License
Suppose that a development group would like to determine if the local zoning and
land-use ordinances will permit the type of development they desire. However, they do
not want to be obligated to purchase the property if they find that their proposed
development will not be permitted. To gain control of the site without being obligated
to perform, the development group should purchase which of the following?
A. Ground lease
B. Option
C. Fast-track
D. Floor loan
Lenders may request that property owners of rental properties include a clause in their
lease agreement that gives the lender the right to terminate the lease and evict the
tenant, even if the tenant has fulfilled all of its responsibilities under the lease, in the
case that the owner of the property defaults on her mortgage. This part of the lease
agreement is more commonly referred to as a:
A. Subordination clause
B. Non-disturbance agreement
C. Relocation option
D. Expansion option
Accrued depreciation is the difference between the current market value of a building
and the total cost to reproduce it new. One reason for this difference is related to
changes in tastes, preferences, technical innovations, or market standards. This is
commonly referred to as:
A. physical deterioration
B. functional obsolescence
C. external obsolescence
D. tax depreciation
Although deeds can only deliver what a grantor actually owns, they can still vary in
"quality." Which of the following types of deeds is considered to be the "highest
quality" because it contains the full set of legal promises the grantor can make?
A. General warranty deed
B. Special warranty deed
C. Deed of bargain and sale
D. Quitclaim deed
Prospective borrowers often submit loan requests directly to lenders. However,
commercial loan requests can also be submitted through another channel in which a
permanent lender agrees to purchase loans or consider loan requests from a mortgage
banker or broker. This type of business relationship is more commonly referred to as
A. installment sale
B. joint venture
C. correspondent relationship
D. sale-leaseback
The two most important determinants of the classification of an office property are age
and obsolescence. Which of the following classes includes office buildings that are
older and reasonably maintained, but are below current standards for one or more
A. Class A office
B. Class B office
C. Class C office
D. Investment grade property
Which of the following clauses contained in a deed defines or limits the type of interest
being conveyed?
A. Recital of consideration
B. Words of conveyance
C. Covenant
D. Habendum clause
In order for the board of adjustment to approve a variance, all of the following
conditions must be met EXCEPT:
A. The owner must be unable to use the lot as zoned.
B. The condition is common to other parcels of land in the vicinity
C. The variance must not materially change the character of the neighborhood.
D. The condition is unique to the lot.
Throughout the process of originating and selling mortgages, mortgage companies face
a number of risks. Therefore, it is important for a lending institution to evaluate the
risks of mortgage loan default through a process commonly referred to as:
A. mortgage fallout
B. loan servicing
C. warehousing
D. loan underwriting
Estimating the market value of real estate is complicated by the unique characteristics
of real estate markets. In contrast to stock markets, real estate markets are characterized
by all of the following EXCEPT:
A. No two assets are considered perfect substitutes for one another.
B. Market prices are revealed almost instantaneously to prospective buyers.
C. Transactions occur infrequently.
D. The physical location of the asset being sold plays an important role in the pricing
The monthly mortgage payment divided by the loan amount is commonly referred to as
A. loan balance
B. effective borrowing cost
C. lender's yield
D. monthly loan constant
The sequence of adjustments to the transaction price of a comparable property would
make no difference if all adjustments were dollar adjustments. However, if percentage
adjustments are involved then the sequence does matter. In making adjustments to a
comparable property to arrive at a final adjusted sales price, the proper sequence for the
following adjustments would be:
A. Financing terms, market conditions, location.
B. Location, market conditions, financing terms.
C. Market conditions, location, financing terms.
D. Location, financing terms, market conditions.
According to the bid-rent model, which of the following individuals would be the one
most likely to live closest to the central business district (CBD)? (Hint: Assume that
work locations are located adjacent to each other at the center of the CBD)
A. A barista at the local coffee shop who uses a car to commute.
B. A doctor at the city hospital who uses a car to commute.
C. A barista at the local coffee shop who must walk to work.
D. A doctor at the city hospital who must walk to work.
In the initial round of market analysis, analysts will attempt to provide key numbers that
characterize the current condition and trend in the market. For rental retail space, the
key market parameters in question would most likely include all of the following
A. Projected occupancy growth
B. Projected rental rate growth
C. Current vacancy levels
D. Projected sales rates
Bill and Mike go in together to purchase 342 acres of land to use for hunting and family
vacations. Ten years later, Bill dies and Bill's wife wants to sell his half of the land.
Mike informs her that, unfortunately, she has no claim to the land and that upon Bill's
death, his ownership interest transferred to Mike. What type of co-ownership did Bill
and Mike have?
A. Tenancy by the entireties
B. Tenancy in common
C. Joint tenancy
D. Condominium
If a property transaction is scheduled to close on May 14th, calculate the individual tax
responsibility for the buyer if the total tax owed at the end of the year is $5,000. For this
problem, assume that we are dealing with a 365 day calendar year.
A. $0.00
B. $1,821.92
C. $3,178.08
D. $5,000.00
Capital markets can be divided into four main categories: private equity, public equity,
private debt, and public debt. An example of a real estate asset that trades in the private
equity market is:
A. real property
B. home mortgages
C. equity REITs
D. mortgage backed securities
Partially amortizing mortgage loans require periodic payments of principal, but are not
paid off completely over the loan's term to maturity. Instead, the balance of the principal
amount is paid at maturity in what is commonly referred to as a:
A. balloon payment
B. early payment
C. up-front payment
D. payment cap
Sharon purchased a new photocopier for her business. According to her accountant, she
can deduct 1/7th of its original cost each year for the next seven years from her taxable
income. This depreciation method is commonly referred to as:
A. declining balance method
B. straight line method
C. sum of the years' digits method
D. modified accelerated cost recovery system
Within the framework of the bid-rent model, as rents increase with proximity to the
central business district (CBD), the tendency is for development to:
A. spread to the outskirts of the city
B. build upward on lots within the CBD to allow multiple tenants
C. cease completely
D. focus on low-income housing projects.
When securing a new tenant for a commercial rental property, the owner of the property
might incur an additional expense that amounts to the cost of refurbishing the rental
space to meet the needs of the tenant's business. The allocation of money for this added
expense is more commonly referred to as a(n):
A. tenant improvement allowance
B. concession
C. sublease
D. expense stop
Given the following information, calculate the before-tax equity reversion (BTER).
NOI: $89,100, Annual Debt Service: $58,444, Net Sale Proceeds: $974,700, Remaining
Mortgage Balance: $631,026.
A. $30,656
B. $343,674
C. $572,582
D. $885,600
Real estate values derive from the interaction of three different sectors in the economy.
Which of the following sectors serves to allocate financial resources among households
and firms requiring funds?
A. User market
B. Capital market
C. Government
D. Property market
A developer of a new townhome community has gathered the following market
information for University City. The developer estimates that there will be 1,200 home
(all types) sales in University City over the next year. An analysis of demographic
information has revealed that the core market share for the townhome project within the
community is 10%. Assuming a capture rate of 20%, what is the developer's first year
projection of townhome sales in the new community?
A. 24 units
B. 120 units
C. 240 units
D. 600 units
Required by the Truth-in-Lending Act, the annual percentage rate (APR) is reported by
the lender to the borrower on virtually all U.S. home mortgage loans. The APR
accounts for all of the following EXCEPT:
A. All finance charges in connection with the loan, such as discount points, origination
fees, and underwriting fees.
B. All compensation to the originating brokers if one was used by the borrower.
C. Any prepayment of principal to be made on the loan.
D. Premiums for required forms of insurance