Housing futures contracts allow investors to speculate on changes in home prices
without actually owning a home.
ARMs were developed because lenders were tired of offering a limited selection of loan
alternatives to borrowers.
Capital accounts are debited for cash contributed to the partnership and credited for
cash distributed to the partner.
Expense stops protect the lessee from unexpected changes in market rents.
Use of leverage always increases the amount of risk.
Because accounting depreciation charges often exceed the true economic depreciation
of real estate, the earnings of companies owning real estate typically understate the
level of operating cash flow.
Both levered and unlevered properties are included in the FRC Property Index.
For a loan with an LTV greater than 80 percent, the costs of mortgage insurance always
exceed the costs of second lien financing.
The CMO is a considered a marketing innovation as well as a financial innovation,
because the different it is the first security in the secondary mortgage market to have
run a prime-time television ad.
An investment may have more than one internal rate of return.
The issuer of a mortgage pass-through bond bears all of the prepayment risk of the
underlying mortgages.
In general, developers must get a construction loan before they can line up permanent
(long-term) financing that will be used once the project is complete and being operated
with tenants.
When market interest rates exceed the coupon rate of a MBB, the price of the bond will
be greater than its par value.
Unless stated otherwise, the borrower is personally liable for payment of all amounts
due under the terms of the note.
The secondary mortgage market enables mortgage banking companies to sell existing
mortgages and thereby replenish funds with which new loans can be originated.
An investor purchased a property expecting to receive a 14% rate of return. However,
the rate of return on the property over a 5 year holding period turned out to be only
11.5%. Therefore, the property should be sold.
Permanent loans provide the money for a single permanent mortgage loan and are
usually provided by commercial banks or mortgage banking companies.
If a debtor, under Chapter 7 bankruptcy, is not behind on his mortgage payments, he
does not have the give up the property.
Financial leverage is defined as the benefits that may result to an investor by borrowing
money at a rate of interest that is lower than the expected rate of return on total funds
invested in a property.
A limited partnership limits the general partners’ liability to the capital they originally
invested.
When the value of public goods exceeds their cost, the effect on house prices is called
the “capitalization effect.”
Net operating income is the income after deduction of mortgage payments.
In an inflationary environment where property values are also rising, a participation
loan may provide a lender with some protection against unanticipated inflation.
Because real estate is shown on the corporation’s books at its historical cost less book
depreciation, the value of corporate real estate is often considered “hidden” from
shareholders.
Construction loans provide the money to construct a building and are usually provided
by life insurance companies or pensions funds.
It is illegal to give a quitclaim deed if the grantor has no claim in the property.
Generally, as the cost of a site increases, so do the quality and the density of the
improvements constructed on it.
REITs are required to pay out 90 percent of their earnings as dividends.
When comparing investment alternatives, the standard deviation is deemed to be a
measure of risk.
In comparison to portfolios comprised entirely of corporate stocks and bonds,
investment portfolios which include some form of real estate investment (as indicated
by EREIT and FRC returns in the text) tend to offer lower levels of risk for equivalent
returns.
The NCREIF index measures the investment performance of real estate by using actual
sale prices.
One advantage of a sale-leaseback is that the lease payments are 100 percent tax
deductible.
Borrowers with fixed rate mortgages generally benefit if actual inflation is higher than
expected inflation.
The loan alternative with the highest ATIRR will always be preferable to the borrower.
Cluster analysis using location quotients and/or employment multipliers provide a
snapshot of employment at a point in time but do not provide a forecast of future
employment in a specific industry.
Which of the following developments assure mortgage investors they will receive
interest and principal payments at little or no risk?
(A) The availability of hazard and title insurance
(B) The availability of mortgage default insurance and loan guarantees
(C) The development of standardized loan underwriting, processing, and servicing
(D) All of the above
All other things being equal, which of the following best describes the effects of
leverage on an investment’s risk-return characteristics (assuming the expected return is
greater than the lending rate)?
(a) Lower expected return, lower risk
(b) Lower expected return, higher risk
(c) Higher average return, higher risk
(d) Higher average return, lower risk
(e) Risk-return characteristics have no role in investment decision making
The early growth of the REIT industry in the 1970s was mainly attributed to which of
the following?
(A) Popularity of mortgage trusts
(B) Deregulation of the industry
(C) Declined performance of other investments
(D) Increased value of real property throughout the country
A property produces an after tax internal rate of return of 12.24%. If the investor has a
marginal tax rate of 31%, what is the before-tax equivalent yield?
(A) 8.45%
(B) 11.39%
(C) 16.03%
(D) 17.74%
Which of the following would be considered when an investor is trying to decide
whether or not to renovate a property?
(A) After-tax operating income before renovation
(B) The difference between future operating income if renovated and if not renovated
(C) After-tax cash flow from sale the year of renovation
(D) The mortgage balance on the property the year before renovation
A mortgage company is issuing a CMO with three tranches, with the principal and
coupon rate given in the table above. What will be the weighted average coupon on the
CMO when issued?
(a) 9.25%
(b) 10.00%
(c) 10.08%
(d) 11.00%
What term BEST describes a person that owns a property and is conveying title to the
property to another person?
(A) Mortgagor
(B) Grantor
(C) Mortgagee
(D) Grantee
Consider the figure above. The difference between the existing stock of space and Point
D represents:
(a) Equilibrium occupancy
(b) Market rent
(c) Vacancy
(d) Shortage
(e) Market failure
A REIT with 100 shares outstanding earns $1,000 in rent and incurs operating expenses
of $400. In addition, the REIT owns property with an historic cost of $6,000 and
depreciates it over a15 year period using straight-line depreciation. What are the funds
from operations per share and the earnings per share for this REIT?
(A) $4 and $3, respectively
(B) $4 and $2, respectively
(C) $6 and $2, respectively
(D) $6 and $3, respectively
An investor who has $75,000 in taxable income purchases a building that produces
another $15,000 in taxable income. According to the table below, what is the marginal
tax rate?
Taxable Income Marginal Tax Rate
$0 – $34,000 15%
$34,001 – $82,150 28%
Over $82,150 31%
(A) 29.50%
(B) 29.57%
(C) 28.00%
(D) 31.00%
Which of the following includes income from real estate classified as capital assets?
(A) Passive income
(B) Active income
(C) Portfolio income
(D) Passive activity income
An investor is analyzing the risk of a possible investment by producing three different
scenarios. Under a pessimistic scenario, the property would produce a BTIRRp of 8%; a
most-likely scenario produces a BTIRRp of 12%. The investor assigns the pessimistic
scenario a 25% chance of occurring, the most-likely case a 60% chance of occurring,
and the optimistic scenario a 15% chance of occurring. What is the standard deviation
of the returns?
(A) 0.01249
(B) 0.0090
(C) 0.000156
(D) 0.0949
A property produces an 8.92% ATIRR on the total investment considering a tax rate of
28%. What is the maximum interest rate that could be paid on debt without causing the
leverage to be negative?
(A) 12.39%
(B) 11.42%
(C) 6.42%
(D) 9.37%
The future value compound factor given for period (n) at 15%:
(a) Would be less than the factor for period (n+1) at 15%
(b) Would be greater than the factor given for period (n+1) at 15%
(c) Would be the same as the factor given for period (n+1) at 15%
(d) Bears no relationship to the factor for period (n+1) at 15%
The real estate industry:
(a) Is highly competitive
(b) Is a relatively small market
(c) Is relatively concentrated, with a few owners controlling most of the market in most
markets
(d) All of the above
(e) None of the above
Which of the following is FALSE regarding expense stops?
(A) Expense stops protect owners against increases in expenses
(B) Expense stops are usually based on expenses during the first term of the lease
(C) Expense stops can pass through expense savings to tenants
(D) Expense stops provide some protection against inflation
Each parcel of land in a new development is selling for $15,000 and the total project
revenue is estimated to be $5,000,000. The project lender has stated that the loan should
be paid off when 80% of the total project revenue has been earned. The total loan
amount is $3,500,000. What is the release price for each parcel?
(A) $8,400
(B) $13,215
(C) $18,750
(D) None of the above
APR stands for which of the following?
(A) Annual percentage rate
(B) Amortized percentage regulator
(C) Accrued percentage rate
(D) Annual percentage regulator
A borrower takes out a 30-year adjustable rate mortgage loan for $200,000 with
monthly payments. The first two years of the loan have a “teaser” rate of 4%, after that,
the rate can reset with a 5% annual payment cap. On the reset date, the composite rate is
6%. What would the Year3 monthly payment be?
(a) $955
(b) $1,067
(c) $1,003
(d) $1,186
(e) Because of the payment cap, the payment would not change.
REIT dividends are considered ________ income and thus do not qualify as passive
income to offset passive losses.
(A) Portfolio
(B) Operating
(C) Trading
(D) Outside professional
A house is for sale for $250,000. You have a choice of two 20-year mortgage loans with
monthly payments: (1) if you make a down payment of $25,000, you can obtain a loan
with a 6% rate of interest or (2) if you make a down payment of $50,000, you can
obtain a loan with a 5% rate of interest. What is the effective annual rate of interest on
the additional $25,000 borrowed on the first loan?
(a) 1.00%
(b) 6.00%
(c) 12.95%
(d) 18.67%
(e) 20.10%
Which of the following clauses leads to higher risk for an ARMs lender?
(A) Negative amortization is not allowed when interest is not covered by the payment
due to a payment cap
(B) There is floor for payments
(C) Adjustment interval is longer than one year
(D) All of the above
A property that produces an annual NOI of $100,000 was purchased for $1,200,000.
Debt service for the year was $95,000 of which $93,400 was interest and the remainder
was principal. Annual depreciation is $38,095. What is the taxable income?
(A) $5,000
(B) $6,600
(C) – $31,495
(D) – $33,095
Which of the following is FALSE regarding DCR?
(A) It indicates whether NOI is sufficient to cover mortgage payments
(B) It is not of concern to lenders when loan to value ratios are low
(C) It is an indication of risk for the lender
(D) It is derived from NOI / Mortgage Payment
Consider risk-return characteristics of Investments A-D, given above. Which of the
following statements is TRUE?
(a) Investment A is preferred over all other investments
(b) Investment D is preferred over all other investments
(c) Investment A is preferred to Investment B
(d) Investment B is preferred to Investment C
(e) Investment C is preferred to Investment D
The optimal combination of securities that provides the greatest amount of return for
each level of risk is know as:
(A) The expected frontier
(B) The economic frontier
(C) The efficient frontier
(D) None of the above
When calculating the cash equivalent value of an assumable loan, you find the present
value of the payments using the:
(A) Contract interest rate
(B) Incremental borrowing cost
(C) Market interest rate
(D) Discount rate
Which of the following is NOT tax deductible for homeowners?
(A) Points in mortgage loans
(B) Mortgage interest
(C) Property taxes
(D) Maintenance expenses
Currently, MOST REITs are:
(a) Equity trusts
(b) Mortgage trusts
(c) Hybrid trusts
(d) Partnership trusts
Which of the following is NOT one of the criteria used to decide corporation treatment?
(A)
(A) Unlimited liability
(B) Continuity of life
(C) Centralization of management
(D) Free transferability of interests
Which of the following is typically NOT one of the financing costs associated with the
financing of real estate?
(A) Closing fees
(B) Loan application and credit report fees
(C) Property inspection and appraisal fees
(D) Loan discount and prepaid interest fees
Risk due to potential tax law changes is referred to as:
(A) Business risk
(B) Financial risk
(C) Legislative risk
(D) Tax risk
Convexity is a gage for which of the following?
(A) Profitability
(B) Return
(C) Sensitivity
(D) Duration