The U.S. is the only country that allows REITs (or similar investments).
The future value of a $1 annuity compounded at 5% annually is greater than the future
value of a $1 annuity compounded at 5% semi-annually.
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.
From the issuer’s perspective, the use of MBBs and MPTBs should be viewed as a
method of debt financing.
When a deed is given in lieu of foreclosure of the mortgage, the mortgagor no longer
has an obligation to pay the mortgage note.
The internal rate of return is the good feeling you get inside when you earn a return on
your investment.
Debt coverage ratio measures the degree to which the NOI from the property is
expected to exceed the mortgage payment.
A remainder cannot be mortgaged.
If a property encumbered by a mortgage is sold at a foreclosure sale for an amount less
than the value of the mortgage, the mortgagor is not obligated to pay the mortgagee the
remaining balance.
Financing costs are usually paid by the lender to either the borrower/buyer or the seller.
Residential property is depreciated over 27.5 years where as non-residential property is
depreciated over 31.5 years.
A mortgage default can result from failure to pay property taxes.
The annual percentage rate, disclosed at the loan closing, closely approximates the
borrower’s true cost of funds.
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.
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.
The process of confirming a plan of reorganization under Chapter 11, even if one or
more creditor classes dissent, is known as a “cramdown.”
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.
RESPA requires a lender to disclose good faith estimates of closing costs within three
days of loan application.
Use of construction costs is very important in the sales comparison approach to
valuation.
To protect themselves from loss due to default, most lenders require borrowers to
acquire hazard insurance policies.
In order to obtain a land development loan, the developer is required usually to
purchase title insurance.
Prepayment of a loan without penalty is a right of all borrowers.
When calculating the adjusted IRR the cash flows are always discounted to a present
value at a safe rate.
Population increases are usually associated with increases in demand and house price
appreciation.
A developer must sell all of the lots in a development project and repay the entire
development loan before any of the new property owners can receive a clear title.
The default risk of a FRM is higher than the default risk of an ARM.
A floater is a CMO tranche that has a variable interest rate.
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.
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.
The future value of $800 deposited today would be greater if that deposit earned 8%
rather than 7.75%.
The appraisal function is purely objective; an appraiser’s judgment is not part of the
decision process.
A calamity call, which allows the issuer to recall all securities for a specified time, can
be used in each of the following situations EXCEPT when:
(A) Investors want to cash out their positions
(B) Interest rates decline sharply
(C) Prepayments decline sharply
(D) Reinvestment rates are below what was promised to investors
Interest on a construction loan is usually paid:
(A) Up front at the beginning of the loan
(B) Periodically over the life of the loan
(C) In quarterly installments over the life of the loan
(D) At the end of the loan
A futures instrument, such as a T-bill, can be used to hedge a cash or a spot instrument
such as the prime rate, where the two instruments are not perfectly correlated. What
type of hedge is this referred to as?
(A) A perfect hedge
(B) A straight hedge
(C) A cross hedge
(D) None of the above
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
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
In comparison to the mortgage securities we have previously discussed, the unique
characteristic of CMOs is that:
(A) CMO issuers retain ownership of the underlying mortgage pool
(B) CMOs are issued in multiple security classes
(C) The CMO mortgage pool is not overcollateralized
(D) CMOs are a pay-through in which all amortization and prepayments flow through
to investors
RESPA has three specific objectives. Which of the following is NOT one of those
objectives?
(A) More effective advance disclosure of settlement costs
(B) More informative of the cost of credit
(C) Elimination of kickbacks and unearned fees
(D) A reduction in the amount of escrow placed in accounts for homeowners
When one investor receives cash flow to achieve a certain IRR before splitting the
remaining cash flow it is referred to as:
(A) IRR lookback
(B) IRR preference
(C) Preferred IRR
(D) Adjusted IRR
Ten years ago, you put $150,000 into an interest-earning account. Today it is worth
$275,000. What is the effective annual interest earned on the account?
(a) $225,000
(b) 6.00%
(c) 6.25%
(d) 8.33%
(e) 74.99%
Given that every other factor is equal, which of the following ARMs will have the
lowest expected cost?
(A) An ARM with payment caps and negative amortization
(B) An ARM with interest rate caps
(C) An ARM with longer Adjustment interval
(D) An ARM with no caps or limitations
Ceteris paribus, the more seasoned a mortgage is:
(A) The greater the likelihood of prepayment
(B) The greater the likelihood of default
(C) The greater the likelihood that the mortgage will be carried to maturity
(D) All of the above
Payment to income ratio is BEST described as:
(a) The factor used to determine if interest on mortgage loans is tax deductible
(b) The only measure of a borrowers ability to fulfill his or her loan obligations
(c) The ratio of the estimated rental income to the expected payments on a rental
property
(d) The ratio of the expected payments on a property to the income of the borrower
Which of the following terms refers to an owner’s right to redeem a property after
foreclosure?
(A) Equity of redemption
(B) Statutory redemption
(C) Attachment
(D) Execution
A borrower has a 30-year mortgage loan for $200,000 with an interest rate of 6% and
monthly payments. If she wants to pay off the loan after 8 years, what would be the
outstanding balance on the loan?
(a) $84,886
(b) $91,246
(c) $146,667
(d) $175,545
(e) Not enough information
Which of the following is FALSE regarding cap rates?
(A) Excess supply tends to drive cap rates up
(B) Rising interest rates generally tends to lower cap rates
(C) Excess demand and falling interest rates results in lower cap rates
(D) Excess demand leads to lower cap rates
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
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
A company sells an office building that has appreciated in value and subsequently
leases the space. Which of the following scenarios represents an impact that
sale-leasebacks may have on corporate financial statements?
(A) Lower total income will be realized in the year of sale because of capital gains tax
(B) Higher taxable income will be realized in the year of sale because of a gain on sale
(C) Earnings per share increases because the mortgage has been paid off
(D) Higher taxable income will be realized because lease payments cannot be deducted
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
(e) Impossible to determine from the information provided
Which of the following is FALSE regarding a tax sale?
(A) An accurate and complete description of the property is required to be posted for
possible purchasers before the sale
(B) The property owner may not have had a court appearance through due process, thus
creating a cloud on the title
(C) The line of authority for the sale may not be clear
(D) The purchaser is usually expected to pay all delinquent taxes at the time of sale
Recovery of capital (ROC) results in:
(A) An increase in the dividend available to the investor
(B) An increase in the value of the stock
(C) A reduction in the cost basis of acquired stock
(D) A reduction in losses on the stock
Which of the following would NOT result in an increase in housing demand?
(A) Population growth
(B) Employment growth
(C) Higher interest rates
(D) Higher household income
The total interest collected from the pool is ______ if prepayment accelerates;
therefore, the dollar spread between interest inflow and outflow becomes ______.
(A) Lower, smaller
(B) Lower, wider
(C) Higher, smaller
(D) Higher, wider
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 balance on loan on the property does not affect the amount of
equity an investor has in the property
(d) All of the above
Which of the following is a disadvantage of PLAMs?
(A) Lenders face high levels of interest rate risk under PLAMs.
(B) Fewer homebuyers are likely to qualify for financing using PLAMs in comparison
to CPMs.
(C) The price level used to index PLAMs is measured on an ex post basis and historic
prices may not be an accurate reflection of future price.
(D) All of the above.
Consider the feasibility study shown in the table above. What is the return on total cost
for the proposed project?
(a) 15.0%
(b) 17.6%
(c) 21.4%
(d) 150.0%
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
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?
(A) $5,400
(B) $6,000
(C) $600
(D) $0
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
Which of the following is TRUE regarding the incremental cost of borrowing?
(A) It should be less than the rate for a first mortgage
(B) It should be compared to the cost of obtaining a second mortgage
(C) It is used to calculate the APR for the loan
(D) It is independent of loan-to-value ratio
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) Depreciation lives were lengthened
(B) The highest marginal tax rate for corporations is much lower than the highest
marginal tax rate for individuals
(C) Individuals are subject to limitations on “passive” losses used to offset other taxable
income
(D) Income from corporations are no longer double taxed
Your friend just won the lottery. He has a choice of receiving $50,000 a year for the
next 20 years or a lump sum today. The lottery uses a 15% discount rate. What would
be the lump sum your friend would receive?
(a) $312,967
(b) $316,426
(c) $500,000
(d) $1,000,000