Fin 25149

Document Type
Test Prep
Book Title
Real Estate Finance & Investments (Real Estate Finance and Investments) 14th Edition
Jeffrey Fisher, William Brueggeman
Any contract, whether it is for the sale of real estate or some other entity, must contain
five basic elements. However, any contract for the sale of real estate must adhere to two
additional requirements. Which of the following contract elements is an additional
requirement that must be satisfied in a contract for sale of real estate that isn"t
necessarily a part of other contracts?
A. No defects to mutual assent
B. Consideration
C. Offer and acceptance
D. Written form
Concerned with a potential information asymmetry problem, state legislators have been
proactive in passing legislation that protects the rights and interests of tenants within
which of the following property types?
A. Office
B. Retail
C. Industrial
D. Apartment
In each stage of the development process, the developer faces risks that can have a
profound impact on the success of the particular project. Which of the following risks is
of primary concern after the construction phase has been completed?
A. Environmental risk
B. Title risk
C. Market risk
D. Permitting risk
In the late 1960's, Congress created a number of agencies designed to address a
struggling secondary market for residential mortgages. Which of the following
organizations was developed primarily to guarantee mortgage-backed securities based
on pools of FHA, VA and Rural Housing Service loans, rather than issue, buy or sell
A. Federal National Mortgage Association (Fannie Mae)
B. Government National Mortgage Association (Ginnie Mae)
C. Federal Home Loan Mortgage Corporation (Freddie Mac)
D. Federal Agricultural Mortgage Corporation (Farmer Mac)
Suppose the operating agreement of an LLC insists that all investors receive their pro
rata share of all cash flows when a property is liquidated from the portfolio. If all 15
investors contributed an equal amount of equity in establishing the LLC, each investor
should receive how much from the liquidation of a property valued at $3,500,000.
A. $233,333
B. $350,000
C. $3,500,000
D. $52,500,000
A primary determinant of the feasibility of new construction is the relationship between
the current level of property prices and the cost of new construction. We would expect
the supply of properties to:
A. increase if current property values are greater than the cost of construction
B. decrease if current property values are greater than the cost of construction
C. increase if current property values equal the cost of construction
D. decrease if current property values equal the cost of construction
Although nonrecourse loans dominate the commercial mortgage lending practices of
pension funds, life insurance companies, and commercial mortgage-backed security
(CMBS) originators, banks are likely to require some form of a guarantee by the
organizer/sponsor of the investment opportunity to make the lender whole in the event
the lender suffers a loss on the loan. This protection to the lender is more commonly
referred to as a:
A. Credit enhancement
B. Property externality
C. Joint venture
D. Mezzanine loan
There are a number of ways in which individual and institutional investors can hold
investments in commercial real estate as a part of their portfolio. One way is to
purchase and hold the title to the actual commercial property, which gives the owner
complete control of the asset. This type of transaction would be considered which of the
A. Direct investment in private commercial real estate equity
B. Indirect investment in private commercial real estate equity
C. Direct investment in private commercial real estate debt
D. Indirect investment in private commercial real estate debt
For all but the largest of developers, the marketing and leasing of the project will be
through an external broker. Given their special knowledge of the target market, it would
be most beneficial for the developer to bring the broker into the development process
during which of the following stages?
A. Design
B. Financing
C. Construction
D. Operation
Land acquisition, development, and construction loans used by developers differ
significantly from the "permanent" mortgages that traditionally are used to finance the
purchase of commercial properties. All of the statements listed below are true regarding
land acquisition, development, and construction loans EXCEPT:
A. Developers can never be held personally liable for such loans
B. These loans have floating interest rates tied to short-term interest rate indices
C. These loans are interest-only loans.
D. These loans can be prepaid at any time without penalty.
A new residential development will face competition from other new developments,
other builders, and sales of existing homes. To determine if demand in that market
segment will be sufficient to justify proceeding with the project, a developer would be
most interested in estimating a:
A. capture rate
B. capitalization rate
C. risk-free rate
D. risk premium
The size of a single family residential lot is typically:
A. less than one acre
B. between one and two acres
C. between two and three acres
D. greater than three acres
There are two major types of REITs: Equity REITs and Mortgage REITs. Each differs
in terms of what they invest in. Which of the following choices best describes the
investment focus of an Equity REIT?
A. Invests a significant percentage of their assets in both properties and mortgages
B. Invests primarily in and operates commercial properties
C. Purchases mortgage obligations
D. Purchases ownership interests in shares of pension funds and life insurance
Based on your understanding of the rules for determining when an object becomes a
fixture, which of the following items would most likely be considered a fixture at the
time of sale?
A. Custom (built-in) bookshelves
B. Refrigerator in a single-family residence being sold
C. Fence installed by the tenant of a rental property
D. Curtains
Given the following information, calculate the effective tax rate expressed in mills.
Market value of property: $280,000, Assessed value of property: 50 % of the market
value, Exemptions: $2,000, Annual tax liability: $4,685.10.
A. 1.69 mills
B. 3.35 mills
C. 16.73 mills
D. 33.95 mills
With most standard home loans, the lender can hold the borrower personally liable in
the event of a default. Such loans are commonly referred to as:
A. recourse loans
B. nonrecourse loans
C. conforming loans
D. nonconforming loans
Given the following information, calculate the debt yield ratio on the following
commercial property. Estimated Net Operating Income in the first year: $2,500,000,
Debt service in the first year: $960,000, Loan amount: $20,000,000, Purchase price:
A. 4.8%
B. 12.5%
C. 68.6 %
D. 75.2 %
For residential properties, the ratio of prospective rent to gross monthly income is a
valuable screening tool in judging a potential tenant's ability to fulfill rent obligations.
Generally, this ratio should not exceed:
A. 10%
B. 20%
C. 30%
D. 40%
With compound interest, the investor earns interest on the principal amount invested
plus interest on accumulated interest. Which of the following compounding frequencies
would yield the investor the greatest ending balance assuming all else is equal?
A. Daily
B. Monthly
C. Quarterly
D. Annually
Once a loan application is signed, the lender begins a process that typically includes
ordering the fee appraisal, the title report, and a number of third party inspection,
compliance, and engineering reports in an attempt to make sure the potential borrower
did not misrepresent the property in any way in the original loan submission package.
This process is more commonly referred to as:
A. Due diligence
B. Loan submission
C. Loan development
D. Defeasance
Suppose that a mortgage bank "locked in" an interest rate for a prospective borrower at
8.5%. However, prior to the loan closing, the market mortgage rate falls to 7.5 %. In
this scenario, the mortgage banker would be most concerned with which of the
following risks?
A. Interest rate risk.
B. Pipeline fallout risk.
C. Default risk.
D. Liquidity risk.
Unlike many publicly traded stock and bond investments, commercial real estate
A. can be bought and sold in highly liquid markets.
B. yield maximized returns when assets are held for short periods of time.
C. yield returns generated mostly from the asset's net operating income, rather than
price appreciation.
D. have going-in and going-out transaction costs that are low (as a proportion of asset
If property owners fail to pay their taxes in a timely fashion, this can create a first lien
on the mortgaged property. In order to protect against this, lenders often require that
borrowers add what fraction of their estimated tax bill to their required monthly
mortgage payments?
A. 1/12
B. 1/6
C. 1/4
D. 1/2
Once a document conveying an interest in real property is placed in the public records it
is binding on the public, whether or not they make an effort to learn of it. Based on the
common law tradition, this policy is known as the:
A. Statute of Frauds
B. doctrine of constructive notice
C. habendum clause
D. actual notice
Suppose that an industrial building can be purchased today for $2,500,000. If it is
expected to produce cash flows of $180,000 for each of the next five years (assume CFs
are received at the end of each year) and can be sold at the end of the fifth year for
$2,800,000, what is the internal rate of return (IRR) on this investment?
A. 0.09%
B. 4.57%
C. 9.20%
D. 10.37%
In contrast to rent for residential units, rent for U.S. commercial properties is typically
quoted as:
A. a dollar amount per month
B. a dollar amount per year
C. a monthly cost per square foot
D. an annual cost per square foot
The developer will face a variety of costs throughout the project's life. Which of the
following would be classified as a soft cost?
A. Legal fees of the permitting process
B. Costs of materials
C. Labor cost of subcontractors for construction
D. Cost of land
Mortgage loans made to borrowers with normal credit quality, but who lack the
necessary documentation of their financial circumstances typically needed to meet
conforming mortgage standards would most likely be considered:
A. subprime loans
B. option ARM loans
C. hybrid ARM loans
D. alt-A loans
Suppose that a landlord is interested in renting out a two-bedroom apartment for $1000
a month for the next year. The landlord requires rent to be paid at the beginning of the
month, at which point he will deposit the rental check into a local savings account. If
the annual interest that the tenant can earn on this account is 5% and interest is
compounded monthly, how much will the tenant have in his savings account at the end
of the year?
A. $12,278.86
B. $12,330.01
C. $13,330.02
D. $15,917.13
Suppose that you are attempting to value an income producing property using the direct
capitalization approach. Using data from comparable properties, you have determined
the overall capitalization rate to be 11.44%. If the projected first year net operating
income (NOI) for the subject property is $44,500, what is the indicated value of the
subject using direct capitalization?
A. $49,590.80
B. $50,225.73
C. $388,986.00
D. $509,080.00
In certain states, such as the state of Georgia, there is a temporary transfer of title to the
lender at the time the mortgage loan is made. The borrower then would obtain the rights
to the title once the loan has been repaid. These states are referred to as:
A. Title theory states
B. Lien theory states
C. Conforming states
D. Nonconforming states
Which of the following models of urban form is characterized by radial corridors or
wedges representing the pattern of residential land use in relation to the location of the
central business district (CBD)?
A. Bid-rent model
B. Concentric circle model
C. Sector model
D. Multi-nuclei model
Suppose you have just purchased your first home for $300,000. At the time of purchase
you could afford to commit 20% of the purchase price to a down-payment. Suppose
over time you paid down the principal of the loan to $220,000 and at that point in time
you can no longer make any mortgage payments (i.e., you default on the loan). If the
lender were to foreclose on your property and sell it for $190,000, determine the
amount of the loan's principal that the lender was unable to recover due to the default.
A. $30,000
B. $50,000
C. $240,000
D. $300,000

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